4000 - Advisory Opinions
Renewal or Rollover of Deposit is Prohibited by 12 U.S.C. § 1831f(a) Only if Deposit Broker Continues to be Involved in Transaction; Brokered Deposits Accepted at Rates Significantly Higher Than Prevailing Rate But Renewed for Less Does Not Constitute Prohibited Renewal
October 23, 1992
Valerie J. Best, Counsel
You have requested an opinion concerning the above-referenced subject bank. *** ("[Bank]") is currently undercapitalized and has a large volume of brokered deposits. Examiners have determined that if the bank is prohibited from renewing or rolling over all of its brokered deposits, it will cause an immediate liquidity crisis.
You pose the following three scenarios and ask whether, in each instance, the facts constitute a prohibited renewal of brokered deposits:
(1) Certificates of deposit ("CDs") were acquired through a broker and are now up for renewal. Our examiners have determined that the broker is no longer involved in the transaction. The customer must request or acquiesce to the renewal directly without any intervention by the original broker. We understand that the broker did not place the original deposit directly with the bank. Rather, the broker's customers wired their funds directly to the bank at the direction of the broker.1 Both before and after the renewal, the CDs will be styled in the name of the customer; the CD is not carried in the name of the broker as agent/trustee.
(2) Funds were acquired through direct solicitation of customer before the effective date of the new brokered deposit regulation (June 16, 1992) and [Bank] is currently paying interest in excess of 50 basis points on these CDs. This practice violated the FDIC's previous rule on brokered deposits, which prohibited insured institutions from paying more than 50 basis points above the prevailing rate. Under the new regulation, however, insured institutions may not pay interest in excess of 75 basis points above the prevailing rate. The bank wishes to renew these CDs at a rate less than 75 basis points.
(3) Funds were acquired through direct solicitation of customers after the effective date of the new brokered deposit regulation (June 16, 1992) and [Bank] is currently paying interest in excess of 75 basis points on these CDs. The bank wishes to renew these CDs at a rate less than 75 basis points.
Based upon the facts presented, it is our opinion that a renewal of a deposit account under any of one of the above-described scenarios, is not prohibited.
Funds Obtained By or Through a Deposit Broker (First Scenario)
As to the first scenario, the relevant statutory provisions appear at sections 29(a) and (b) of the Federal Deposit Insurance Act ("FDI Act"). Those sections provide:
(a) IN GENERAL.--An insured depository institution that is not well capitalized may not accept funds obtained, directly or indirectly, by or through any deposit broker for deposit into 1 or more deposit accounts.
(b) RENEWALS AND ROLLOVERS TREATED AS ACCEPTANCE OF FUNDS.--Any renewal of an account in any troubled institution and any rollover of any amount on deposit in any such account shall be treated as an acceptance of funds by such troubled institution for purposes of subsection (a).
12 U.S.C. § 1831f(a) and (b) (emphasis added).2
Interest Rate Restrictions (Second and Third Scenarios)
Section 337.6(b)(3)(ii) prohibits any undercapitalized institution from soliciting 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. 12 C.F.R. § 337.6(b)(3)(ii).3 An interest rate is deemed to be "significantly higher" than the prevailing rate if it exceeds the applicable benchmark (i.e., the local rate or national rate) by more than 75 basis points.
Although a rollover or a renewal is treated as if it were an "acceptance," the term acceptance in section 29(a) is modified by the phrase "obtained . . . by or through any deposit broker." Consequently, we believe that a renewal or rollover is prohibited by section 29(a) only if the deposit broker continues to be involved in the transaction in some manner.4 Whether or not the deposit broker continues to be involved in the transaction is a question of fact. In this instance, the examiners have determined that the deposit broker is no longer involved in the transaction.
In this case, we would look to the new rate being offered, not the illegal rate that was previously paid on the original CD. Since no third party is involved and the rate is no longer illegal, we would not consider this a prohibited renewal. This interpretation does not affect the pre-existing violations; the bank may still be cited for those earlier violations.
Like Scenario 2, the new rate being offered controls. This would not be a prohibited renewal since no third party is involved and the new rate is not illegal.
Should you have further questions, please feel free to contact me (202-898-3812).
1For a discussion of when an intermediary is a "deposit broker" even though the intermediary does not directly place his or her customer's funds with the bank, see my letter dated August 3, 1992 to *** and my letter dated August 3, 1992 to ***. Go back to Text
2Implementing regulations are at 12 C.F.R. § 337.6. FDIC regulations prohibit any undercapitalized insured depository institution from accepting, renewing or rolling over any brokered deposit. 12 C.F.R. § 337.6(b)(3)(i). A "brokered deposits'' is "any deposit that is obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker." 12 C.F.R. § 337.6(a)(3). Similar restrictions apply to adequately capitalized institutions except that they may apply to the FDIC for a waiver. 12 C.F.R. § 337.6(b)(2)(i). Go back to Text
3This regulation implements section 29(h) of the FDI Act. 12 U.S.C. § 1831f(h). Go back to Text
4See the above-referenced *** letter for a description of activities carried out by a deposit broker who did not directly place funds with the bank. Go back to Text