I. GENERAL PROHIBITIONS
The FDIC adopted a final rule (12 C.F.R. Section 337.6), effective June 16, 1992, implementing Section 301 of the FDIC Improvement Act of 1991 (“FDICIA”). Section 301 contains restrictions on brokered deposits and interest rates on such deposits for certain financial institutions. Specifically, a “well capitalized” insured depository institution may accept brokered deposits without restriction. An “adequately capitalized” insured depository institution is prohibited from accepting brokered deposits unless it first obtains a waiver from the FDIC. An “undercapitalized” institution is prohibited from accepting brokered deposits.
II. KEY DEFINITIONS
The term “brokered deposit” means “any deposit that is obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker.” (Section 337.6(a)(3)).
A “deposit broker” is:
A. Any person engaged in the business of placing deposits of third parties with insured depository institutions; B. Any person engaged in the business of facilitating the placement of deposits of third parties with insured depository institutions; C. Any person engaged in the business of placing deposits with insured depository institutions for the purpose of selling those deposits or interests in those deposits to third parties; and C. An agent or trustee who establishes a deposit account to facilitate a business arrangement with an insured depository institution to use the proceeds of the account to fund a prearranged loan.
Engaged in the Business of Placing Deposits: A person is engaged in the business of placing deposits of third parties if that person receives third-party funds and deposits those funds at more than one insured depository institution.
Engaged in the Business of Facilitating the Placement of Deposits: A person is engaged in the business of facilitating the placement of deposits of third parties with insured depository institutions, by, while engaged in business, with respect to deposits placed at more than one insured depository institution, engaging in one or more of the following activities:
1. A person is engaged in matchmaking activities, if the person proposes deposit allocations at, or between, more than one bank based upon both the particular deposit objectives, depository, or depositor’s agent, and the particular deposit objectives of specific banks, except in the case of deposits placed by a depositor’s agent with the bank affiliated with the depositor’s agent.
Engaged in the Business: A person is engaged in the business of placing, or facilitating the placement of, deposits as described above, when that person has a business relationship with third parties, and as part of that relationship, places, or facilitates the placement of, deposits with insured depository institutions on behalf of the third parties.
A. Primary Purpose Exception
Excluded from the definition of deposit broker is an “agent or nominee” whose primary purpose is not the placement of funds with depository institutions. The regulation includes a list of 13 business relationships, or Designated Business Exceptions, that automatically qualify for the primary purpose exception. Among the business relationships qualifying for the exception are the placement of deposits in an amount equal to less than 25 percent of customer assets under management and placement of 100 percent of depositors’ funds in transactional accounts that do not pay any remuneration to the depositor. For an agent or nominee to rely on either of these Designated Business Exceptions, the agent or nominee must provide an initial notice to the FDIC and make certain periodic filings with the FDIC.
An agent or nominee may rely on the remaining 11 designated business exceptions without having to provide any notice to the FDIC. These Designated Business Exceptions include the placement of funds (i) in connection with property management services, cross–border clearing services, mortgage servicing, (ii) by title companies in connection with real estate transactions, (iii) by qualified intermediaries to facilitate exchanges of property (iv) by broker-dealers or futures commission merchants and compliance with certain securities regulations, (v) to secure credit–card loans, (vi) for pain for or reimbursing qualified medical expenses, (vii) for investing in qualified “529" tuition plans, (viii) to enable participation in certain tax–advantage programs, such as IRAs, and (ix) by federal, state, or local agencies to deliver funds to beneficiaries of government programs.
Section 337.6(a)(3) defines the capital categories: The terms well capitalized, adequately capitalized, and undercapitalized shall have the same meaning as to each institution as provided under regulations implementing Section 38 of the Federal Deposit Insurance Act issued by the appropriate federal banking agency for that institution
If the appropriate federal banking agency reclassifies a well-capitalized institution as adequately capitalized pursuant to Section 38 of the Federal Deposit Insurance Act, the institution will be subject to the provisions applicable to such lower capital category.
An institution shall be designed to be within a given capital category as of the date the institution is notified of, or is deemed to have notice of, its capital category, under regulations implementing Section 38 of the Federal Deposit Insurance Act issued by the appropriate federal banking agency for that institution.
The term undercapitalized includes any institution that is significantly underclassified under regulations implementing Section 38 of the Federal Deposit Insurance Act and issued by the appropriate federal banking agency for that institution. For the most part, the capital measure terms are defined in the following regulations: FDIC–12 C.F.R. pt. 325, subpart B; Board of Governors of the Federal Reserve System – 12 C.F.R. pt. 208; Office of the Comptroller of the Currency – 12 C.F.R. pt. 6. The regulations implementing Section 38 of the Federal Deposit Insurance Act and issued by the federal banking agencies generally provide that an institution is deemed to have been notified of its capital levels and its capital category as of the most recent date: (1) A Consolidated Report of Condition and Income or Thrift Financial Report is required to be filed with the appropriate federal banking agency; (2) A final report of examination is delivered to the institution; or (3) Written notice is provided by the appropriate federal banking agency to the institution of its capital category for purposes of Section 38 of the Federal Deposit Insurance Act and implementing regulations or that the institution’s capital category has changed.
III. INTEREST RATE RESTRICTIONS
An undercapitalized institution may not solicit deposits by offering interest rates that are significantly higher than the prevailing rates of interest on insured deposits in its normal market area or in the market area in which such deposits would otherwise be accepted.
Currently, under Part 337.6 of the FDIC Rules and Regulations, a less than well-capitalized insured depository institution may not pay a rate of interest that significantly exceeds the prevailing rate in the institution’s market area or the prevailing rate in the market area from which the deposit is accepted. For out-of-area deposits, the national rate, currently defined as 120 percent of the current yield on similar maturity U.S. Treasury obligations, determines conformance with the regulation. The current low yields on U.S. Treasury securities are compressing the national rate caps computed under the FDIC’s regulation. Therefore, the national rates fall well short of the national average rates paid on certificates of deposit by depository institutions.
In response to these factors, the FDIC issued a final rule amending its regulations relating to the interest rate restrictions that apply to insured depository institutions that are not well capitalized. Under the amended regulations, effective January 1, 2010, such insured depository institutions generally will be permitted to offer the “national rate” plus 75 basis points. The “national rate” will be defined, for deposits of similar size and maturity, as a simple average of rates paid by all insured depository institutions and branches for which data are available. For those cases in which the FDIC determines that the national rate as published on the FDIC’s Website does not represent the prevailing rate in a particular market, as indicated by available evidence, the depository institution will be permitted to offer the prevailing rate in that market plus 75 basis points.
The final rule also allows any depository institution to use the national rate as a proxy for the prevailing rate in an institution’s local market area. This approach recognizes that with the increasing prevalence of Internet deposits and Internet advertising of deposit rates, price competition for deposits is increasingly national in scope. This approach also recognizes and avoids the considerable practical difficulties in ascertaining the origin of the deposit and calculating the prevailing rates paid within that area. If the institution does not want to use the national rate as a safe harbor, the burden will be on the depository institution to define its market area and support its belief to the FDIC that the prevailing rates in that area exceed the national average.
In implementing the final rule, the FDIC will monitor and publish a schedule of national rates by maturity and the rate caps for such deposits. Separate national rates and rate caps will be posted for NOW accounts, Money Market Deposit Accounts (MMDAs) and savings accounts (other than MMDAs). The rate cap will be the national rate plus 75 basis points. The national rates and national rate caps will be posted weekly and can be viewed at http://www.fdic.gov/regulations/resources/rates/index.html.
The FDIC will post the national average rates on its Web site immediately, and insured depository institutions that are not well capitalized may, but are not required to, use these national rates during the adjustment period.
IV. PROCESS FOR DETERMINING IF AN INSTITUTION SUBJECT TO INTEREST-RATE RESTRICTIONS IS OPERATING IN A HIGH-RATE AREA
A. Background
Effective January 1, 2010, institutions subject to the interest-rate restrictions under Part 337.6 of the FDIC Rules and Regulations (“restrictions”) are required to use the “national rate” to determine conformance with the restrictions. The “national rate” is defined as a simple average of rates paid by insured depository institutions and branches for which data are available. The “national rate” is posted weekly at http://www.fdic.gov/regulations/resources/rates/index.html. Institutions subject to the restrictions that believe they are operating in an area where the rates paid on deposits are higher than the “national rate” can use the local market to determine the prevailing rate if they seek and receive a determination from the FDIC that it is operating in a high-rate area. Regardless of the determination, institutions must use the national rate to determine conformance for all deposits outside the market area.
B. Determination Requests
Institutions can request a determination that they are operating in a high-rate area by sending a letter to the applicable FDIC regional office. The letter should state the institution is seeking a determination under Part 337.6, interest-rate restrictions. The FDIC will base its decision on average rates for the geographic area in which the institution is operating, using state(s), metropolitan statistical area(s), and micropolitan statistical area(s) data; therefore, the institution should specify its market area(s) in the determination request letter. Specific data supporting the methodology for calculating the institution’s prevailing rate for its local market area will not be considered.
C. Timing of Requests
Institutions that submitted determination requests by December 31, 2009, will receive a response by January 30, 2010. FDIC response letters sent to institutions that are not operating in high-rate areas will instruct the institutions to begin using the national rate caps by March 1, 2010. The national rate caps must be used by institutions that submit determination requests after December 31, 2009, until they have received notice they are operating in a high-rate area. With or without the determination, institutions must use the national rate to determine conformance for all deposits from outside the market area beginning January 1, 2010. Institutions can submit one determination request to the FDIC each quarter.
D. Duration of Determination
The determination received by the institution is effective for the calendar year in which it is granted, but will be rescinded by written notice from the FDIC if, during the calendar year, the institution’s market area no longer meets the requirements for being a high-rate area. Institutions operating in high-rate areas must apply for determinations annually.
E. Overview of Determination Process
An overview of the determination process is provided in the chart below:
DETERMINATION PROCESS – AN OVERVIEW
Institutions subject to the interest-rate restrictions
Less than well-capitalized institutions are subject to the interest-rate restrictions. Well-capitalized institutions are not subject to the interest-rate restrictions. However, a quantitatively well-capitalized bank subject to a capital maintenance provision within a formal written agreement is reclassified as adequately capitalized for Section 337.6 purposes.
The interest rate restrictions
Institutions subject to the interest-rate restrictions must not pay deposit rates that exceed the national rate caps, which are posted on the FDIC Web site. An institution that believes it is operating in a high-rate area can use the prevailing rates in its market area to determine conformance only if it seeks and receives a determination from the FDIC that the institution is operating in a high-rate area. Regardless of the determination, an institution must use the national rate to determine conformance for all deposits outside the market area.
National rate caps
Institutions that submit their determination request letter to the applicable FDIC regional office by 12/31/09, will received a response by 1/30/10. Those that are determined to not be operating in a high-rate area will have until 3/1/10 to start using the national rate for local deposits. Institutions that submit a determination request after 12/31/09 must begin using the national rate on 1/1/10. Regardless of the determination, institutions must begin using the national rate for non-local deposits beginning 1/1/10.
Determining high-rate areas
The FDIC will use standardized data (average rates by state, metropolitan statistical area, and micropolitan statistical area) for the market area in which the bank is operating to determine if the institution is operating in a high-rate area. If the standardized rate data for the bank’s market area exceed the national average for a minimum of three of the four deposit products reviewed by at least 10 percent, it can be determined the institution is operating in a high-rate area. These non-jumbo (less than $100,000) product types will be reviewed: money market deposit account, 12-month CD, 24-month CD, and 36-month CD.
V. DEPOSIT BROKER RECORDKEEPING REQUIREMENTS
A deposit broker must register with the FDIC before it may solicit or place deposits with an insured depository institution. The notice may be in letter form and should describe the history, nature and volume of its deposit brokerage operations, including the sources and placement of such funds. The notice should be submitted to: FDIC, Office of Compliance and Special Activities, Division of Supervision, Washington, D.C. 20429.
A deposit broker also must maintain records showing the volume of brokered deposits placed with any insured depository institution over the preceding 12 months. Such records must also show the maturities, rates and costs associated with these deposits. Upon request from the FDIC, a deposit broker must file quarterly written reports showing the volume, maturities, rates and costs of brokered deposits placed with each depository institution during the application quarter. It is the FDIC’s view that a company may file a single notice on behalf of all of its employees and/or agents, although the FDIC reserves the right to require individual information at any time.
VI. QUESTIONS AND ANSWERS RELATED TO BROKERED DEPOSITS RULE
Answers to a collection of questions about the FDIC’s Brokered Deposits rule may be found at https://www.fdic.gov/resources/bankers/brokered-deposits/brokered-deposits-qa.pdf.