Federal Deposit Insurance Corp

Chairman Sheila Bair To Leave FDIC Next Month

Sheila Bair has won bipartisan support and praise for her work as head of the Federal Deposit Insurance Corporation. Her five-year term ends next month, and she has said she doesn't want to be reappointed. Bair talks to Renee Montagne about leading the FDIC through the financial crisis, and what she sees as the biggest challenges for the banking industry going forward.

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RENEE MONTAGNE, host:

This is MORNING EDITION, from NPR News. I'm Renee Montagne.

And we're going to hear now from a woman who has overseen the takeover of hundreds of failed banks. Sheila Bair has also butted heads with other regulators over bailouts to financial giants like Citigroup, and she won support from lawmakers for trying to help struggling homeowners with a loan modification program.

After five years of some of the biggest ups and downs in the banking industry, the chairman of the Federal Deposit Insurance Corporation is stepping down. Sheila Bair is leaving the FDIC next month. She joined us from her office in Washington, D.C. to talk about what she's learned from the financial crisis.

Good morning.

Ms. SHEILA BAIR (Chairman, FDIC): Good morning.

MONTAGNE: I'd like to start with a concept that we've heard an awful lot about since he start of this crisis, that banks were simply too big to fail, some of them, and that would be because their failure would mean the collapse of the financial system. At this point, do you have faith that too-big-to-fail won't happen again, that the U.S. taxpayer won't be bailing out big banks in the future?

Ms. BAIR: Well, I certainly feel confident that we have the tools to insulate taxpayers and make sure that if these large institutions get into trouble coming forward, there will be an alternative mechanism so that they can be what we call resolved in an orderly way without resort to taxpayer funding, but without the disruptive impacts you can have with bankruptcy, as we saw with the Lehman Brothers bankruptcy.

MONTAGNE: Well, a lot of the issues with the banking stemmed from companies that were actually not banks.

Ms. BAIR: That's correct. That's quite true.

MONTAGNE: And may I say I think people will know a name they would've never known before this crisis: AIG. But the whole question of banks that are too big to fail, the biggest banks have only gotten bigger over the past couple of years.

Exceptions to FDIC Protection from the Claims Against Failed Banks ...

As stated in a previous article, it might be really tough for homeowners facing foreclosure to lift specific claims in court when the bank holding their loan has failed and been taken over by the Federal Deposit Insurance Corporation. Case law and federal statute give the FDIC broad immunity against a number of claims that might be raised by borrowers in regards to loans held by the failed institution.

However, you’ll find also quite a few exemptions to the broad immunity the FDIC enjoys. Four of them are significant and worth examining here, as homeowners in foreclosure may possibly be able to use them to bring claims against the FDIC or successor financial institutions.

The very first is referred to as fraud in the factum, and is the word for any case when one party to a transaction reasonably relies on a misrepresentation by an additional party. The misrepresentation will likely be as to the character or necessary terms of the contract. Examples incorporate alteration of a document or forgery. The FDIC nor its successor institutions are immune to claims of fraud within the factum, so homeowners may be able to bring these issues into court.

Second, Truth in Lending rescission claims are still allowed regardless of the FDIC’s immunity protection. In truth, the Truth in Lending Act states that a borrower’s rescission rights continue regardless of assignment of the loan or to whom the loan is assigned. This means that, even if the lender fails as well as the note is taken over by the government, rescission may still be an alternative if the other requirements under the statute are met. FDIC receivership of the bank’s assets won’t impact the claim.

Also, the FDIC doesn’t have immunity defense against any transaction that is void. The federal statute granting FDIC immunity is intended to safeguard the government’s interests in assets is acquires from the failed banks. A void transaction, although, doesn’t develop an interest in an asset, along with the immunity protection can not be extended to assets in which the FDIC has no valid interest. In cases such as fraud within the factum, the transaction may well be declared void, for instance.

Finally, there is a rule referred to as the FTC Holder Rule that was developed to protect credit consumers from holder-in-due-course immunity, for example the FDIC has been granted. For this rule to apply, though, an FTC Holder Notice need to be included within the consumer credit contract. It will be included in several transactions relating to a sales transaction. This could be a residence improvement contract or other similar agreement. If the notice is included in the contract, the FDIC’s immunity may not apply.

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