4000 - Advisory Opinions
Earnings-Based Accounts Paying Fixed Rate of Interest Plus Contingent Rate of Interest Based Upon Real Estate Loan Index as "Insured Deposits"
November 26, 1986
Gerald J. Gervino, Senior Attorney
You have requested a determination that earnings-based accounts, which pay a fixed rate of interest plus a contingent rate of interest based upon an index determined by the returns earned on real estate secured loans made by an FDIC-insured bank, are "insured deposits" for purposes of the Federal Deposit Insurance Act, 12 U.S.C. 1811 et seq. (the "Act").
For purposes of your request, you anticipate that any such earnings-based accounts will have substantially similar terms to those authorized by the Federal Home Loan Bank Board ("FHLBB") and insured by the Federal Savings and Loan Insurance Corporation ("FSLIC") pursuant to 12 C.F.R. §§ 563.103, 564.1(b) (1986). You have enclosed a copy of FHLBB Rel. No. 84-717, 49 F.R. 50019 (December 26, 1984), relating to earnings-based accounts.
You indicate that the instruments for which our opinion is sought would have the following characteristics:
1. The fixed or guaranteed interest rate on the deposit will be not less than two-thirds of the average yield for AAA-rated corporate bonds ("Moody's Seasoned") published in the issue of the Federal Reserve Board publication H15 (519) most recently preceding the date of issuance of such instruments;
2. The bank will not grant the depositor an ownership interest of any kind in any assets upon which the index rate is computed;
3. Depositors' funds will not be placed at risk by providing for negative interest or by limiting the obligation to repay principal on the basis of asset performance; and
4. The insured bank will exercise control over the selection and disposition of assets upon which the index is based.
All earnings-based accounts will be issued for cash or for checks, drafts, or other instruments or for charges against deposit accounts, and therefore will, in your opinion, evidence the receipt of "money" or its equivalent as used in section 3(l) of the Act. The issuing bank will be obligated to give credit for such money. Deposits will be accepted in the usual course of business to fund real estate loans which will be made in compliance with applicable rules and regulations. The base rate of the principal amount and the principal amount of such certificates of deposit will represent unconditional obligations of the bank. You feel section 3(l)(1) of the Act contemplates conditional interest of the type offered by the index rate. In your opinion, the accounts and the interest paid thereon are "deposits" and should also be "insured deposits" for purposes of section 3(m) of the Act.
We treat your letter as asking that we confirm your judgment that earnings-based accounts as set forth above, are "insured deposits" for purposes of sections 3(m), 7(b), and 11 of the Act, when issued by any "insured bank", as defined in 12 C.F.R. § 330.0 (1986). You further request that the amount of the insured deposit be computed as provided in 12 C.F.R. § 330.15 (1986). You wish confirmation that this would result in insurance in both the principal amount of the earnings-based account plus any amount which the insured deposit-holder would have been entitled to withdraw at the date of default. It would exclude any accrual or payment which is in any way contingent at the date of default.
Based upon the information you have provided above, the accounts you have described appear to be "insured deposits" for purposes of our Act. Similarly, it would appear that the amounts insured would include those to which the depositor is entitled to withdraw at the date of the bank's closing, but would exclude any accrual or payment which is in any way contingent at the date of default. This opinion with respect to insurance coverage does not preclude supervisory action on our part for any unsafe or unsound practice or violation of law that might accompany transactions of the character described above.