4000 - Advisory Opinions
Deposits Used to Secure Loans to Foreign Customers Are Subject to Brokered Deposit Interest Rate Restrictions
January 26, 1993
Valerie J. Best, Counsel
This letter confirms our telephone conversation of January 6, 1993 and addresses the legal issues you raised in your letters dated July 1, 1992, August 12, 1992, and August 13, 1992 addressed to the Dallas Regional Office. These issues arose in connection with the application of *** (the "Bank") for a brokered deposit waiver. As you know, the application for a waiver is being separately handled by the FDIC Dallas Regional Office.
The deposits at issue are subject to the interest rate restrictions imposed by section 29 of the Federal Deposit Insurance Act ("FDI Act"). The fact that the deposits secure loans to foreign customers does not exempt them from the restrictions imposed by section 29. Moreover, the regulation does not provide for consideration of any offset mechanism and looks solely at the rate of interest being paid when the deposits are accepted, renewed or rolled over.
I agree with your initial conclusion (subsequently rescinded through your letter dated August 13th) that the Bank may apply for a waiver. A waiver will give the Bank some additional leeway in setting its rates. Even with a waiver, however, the Bank may not pay a rate of interest on directly solicited funds which, at the time that such funds are accepted, significantly exceeds the effective yield paid on deposits of comparable size and maturity in such institution's normal market area for deposits accepted in the institution's normal market area. See 12 U.S.C. 1831f(e) and (g)(3); 12 C.F.R. 337.6(a)(5)(iii) and (b)(2)(ii). Based upon available facts, it is my view that the Bank must compare its rates to rates offered in its market area.
The Bank is apparently paying more than 75 basis points in excess of local rates on certain time deposits. The deposits in question belong to Mexican nationals who use the deposits to collateralize loans. The Bank's controlling owners are citizens of Mexico who obtained this clientele via personal and business contacts. The customers often are domiciled or have second residences in the *** area, including ***. The borrower and CD pledgor may be different entities. The loans are often for family members and related interests. The deposits are priced to provide a 175-200 basis point spread between the cost of the deposits and the yield on the loans secured thereby. The loans may be made at any rate of interest desired by the customer up to the legal limits for rates governed by usury and any other regulations which may apply, though the loans rates are usually below the applicable usury rates. As a result, the effective interest margin to the Bank is the same regardless of the rates paid. CDs not pledged to a loan are priced at the Bank's offering rates which, the Bank asserts, are well within the Bank's market area offering rates.
By letter dated August 13, 1992, you advised that the Bank had reconsidered its position and determined that the regulation did not apply to the deposits and that a waiver was not required. Their key argument is that the deposits are unique and should only be compared to CDs that secure loans to foreign customers. When so compared, they contend, the interest rate paid on the deposits would not be significantly higher. The second argument advanced by the Bank is that the FDIC should offset the amount paid on the deposit against the amount paid on the loan, and look at the interest margin as opposed to the interest rate.
This case raises the issue of what, if anything, may be accomplished through the grant of a waiver to an adequately capitalized institution that does not obtain deposits from a third-party intermediary. We must also determine the significance of the "charter type" language found in the definition of "deposit broker" at section 29(g)(3) of the FDI Act and section 337.6(a)(5)(iii) of the FDIC's regulations.
Subsection 29(g)(3) of the FDI Act provides:
(3) Inclusion of depository institutions engaging in certain activities. Notwithstanding paragraph (2), the term "deposit broker" includes any insured depository institution, and any employee of any insured depository institution, which engages, directly or indirectly, in the solicitation of deposits by offering rates of interest (with respect to such deposits) which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institution's normal market area.
12 U.S.C. 1831f(g)(3) (emphasis added).1
Pursuant to the above-quoted provision, a depository institution and its employees are deemed to be "deposit brokers" if they offer rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institution's normal market area. This provision was originally enacted as part of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). It was intended to prevent circumvention of the brokered deposit prohibitions through the solicitation of deposits by in-house salaried employees through so-called "money desk operations."2 It addressed a concern that emerged during various hearings--namely, that brokered deposit restrictions could be easily circumvented by in-house solicitation or general newspaper advertising of high rates.3
The FDIC Improvement Act of 1991 ("FDICIA") implemented two new interest rate restrictions on brokered deposits. FDICIA did not disturb the subsection 29(g)(3) definitional provision quoted above. The first restriction created by FDICIA applies only to undercapitalized institutions and is not relevant to this discussion.4 The second restriction, under section 29(e), provides:
(e) Restriction on interest rate paid.
Any insured depository institution which, under subsection (c) [i.e., under color of a waiver] or (d) [i.e., institutions in conservatorship] of this section accepts funds obtained, directly or indirectly, by or through a deposit broker, may not pay a rate of interest on such funds which, at the time that such funds are accepted, significantly exceeds--
(1) the rate paid on deposits of similar maturity in such institution's normal market area for deposits accepted in the institution's normal market area; or
(2) the "national rate" paid on deposits of comparable maturity for deposits accepted outside the institution's normal market area.
12 U.S.C. 1831f(e).
While some might argue that the more specific prohibition contained in section 29(e) of the FDI Act has superseded subsection 29(g)(3), we disagree. Absent subsection 29(g)(3), adequately capitalized institutions that were not operating under a waiver granted by the FDIC (or depository institutions in conservatorship) could evade the interest rate restrictions set forth in section 29(e) by direct solicitation of deposits through money desk operations or general newspaper advertising of high rates. This was the very purpose for which subsection 29(g)(3) was enacted to proscribe.
We recognize the circularity of the law that says solicitation of deposits by offering significantly above market rates of interest makes those deposits brokered funds, and an adequately capitalized institution, even with an FDIC waiver, cannot pay a rate of interest on brokered funds that significantly exceeds market rates. This, however, seems to be the clear result of the statutory language. Construing the statute as a whole, we must give that portion of subsection 29(g)(3) relating to funds directly solicited by an insured depository institution substantive effect.
``Same Type of Charter'' Language
You will note from the above-quoted provisions that the standards applied to funds obtained through a third-party intermediary (such as a brokerage house) differ slightly from the standards applied to funds that are directly solicited by the depository institution (that is, without the intervention of a third-party). Section 29(e) does not require a charter-by-charter comparison but subsection 29(g)(3) does require a charter-by-charter comparison. Section 29(e) distinguishes between deposits accepted in an institution's "normal market area" and deposits accepted "outside the institution's normal market area." In contrast, subsection 29(g)(3) refers only to an institution's "normal market area."
Having determined to give substantive effect to that portion of subsection 29(g)(3) relating to funds directly solicited by an insured depository institution, the question then arises whether the charter-by-charter language in that subsection should also be given effect. General rules of statutory interpretation require that each word in a statute should be given effect.
It is an elementary rule of construction that effect must be given, if possible, to every word, clause and sentence of a statute. A statute should be construed so that effect is given to all its provisions, so that no part will be inoperative or superfluous, void or insignificant, and so that one section will not destroy another unless the provision is the result of obvious mistake or error. But it has been said that words and clauses which are present in a statute only through inadvertence can be disregarded if they are repugnant to what is found, on the basis of other indicia, to be the legislative intent.5
In this case, the language of the statute is clear on a purely linguistic level. When read in context, we cannot say that subsection 29(g)(3) conflicts with section 29(e), although the provisions admittedly differ. It is possible to give proper weight to the phrase "same type of charter" without doing violence to the remainder of the statute.
Those who wish to void the "same type of charter" language can only contend that the drafters erred when they failed to conform subsection 29(g)(3) to section 29(f). On balance, we are not persuaded that the "same type of charter" language should be read out of the statute. The language does not frustrate the purpose of section 29 nor does it produce an absurd or unreasonable result.
Admittedly, the differences make application of the statute cumbersome: subsection 29(g)(3) imposes one methodology for determining whether or not an institution is a deposit broker; section 29(e) imposes another method for determining the maximum rate of interest that may be offered on funds that have already been determined to be brokered funds (either because the funds are obtained through a third-party intermediary or through direct solicitation). This means that all insured depository institutions that are not well capitalized must track the rates of institutions having the same type of charter in their normal market area in order to determine whether or not they are a deposit broker. This is true even if they have received a waiver from the FDIC. The waiver does not cleanse the funds of their "brokered deposits" status--it merely permits institutions to take advantage of the slightly less restrictive ceiling imposed through section 29(e).
As noted above, the requirements of subsection 29(g)(3) have been in existence since the enactment of FIRREA in 1989. It therefore seems reasonable to assume that the drafters were aware of this provision when they added the new requirements of section 29(e) in 1991.
Interest Rate Limitations on Directly Solicited Deposits
Based on the foregoing, any insured depository institution that solicits deposits by offering rates of interest which are significantly higher (i.e. more than 75 basis points) than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institution's normal market area, is deemed to be a "deposit broker" pursuant to subsection 29(g)(3).
If an institution believes that it would be to its advantage to compare its rate to the rate paid on deposits of similar maturity in the institution's normal market area, regardless of charter (or if the institution is offering rates in the national market), then the institution may wish to apply for a waiver in order to bring itself under the broader limits imposed by section 29(e).6
Even with a waiver, however, an adequately capitalized institution may not pay a rate that significantly exceeds the applicable benchmark (i.e., the normal market area or the national rate). The only effect of the waiver in this case is to allow the Bank to disregard the charter-by-charter comparisons set out in subsection 29(g)(3) of the FDI Act.
Offset Not Available
The Bank suggests that there should be some sort of offset mechanism for insured depository institutions offering significantly higher rates of interest on certain deposited funds. However, the language of the statute and regulation does not provide for consideration of any offset mechanism and looks solely at the rate of interest being paid when the deposits are accepted, renewed or rolled over. 12 U.S.C. 1831f(b) and (e); 12 C.F.R. 337.6(b)(2)(ii).
Basis for Comparison of Rates
The Bank argues that the deposits are unique and should only be compared to CDs that secure loans to foreign customers. In support of this argument, the Bank cited to the following statement made in the preamble to the final rule: "The FDIC has, however, clarified matters by defining "prevailing rate' as the average yields paid on comparable deposits in the relevant market at the time." 57 Fed. Reg. 23933, 23939 (June 5, 1992) (emphasis added).
In fact, the regulation provides, in relevant part:
(ii) Any adequately capitalized insured depository institution that has been granted a waiver to accept, renew or roll over a brokered deposit may not pay an effective yield on any such deposit which, at the time that such deposit is accepted, renewed or rolled over, exceeds by more than 75 basis points:
(A) The effective yield paid on deposits of comparable size and maturity in such institution's normal market area for deposits accepted from within its normal market area; or
(B) The national rate paid on deposits of comparable size and maturity for deposits accepted outside the institution's normal market area. . . .
12 C.F.R. 337.6(b)(2)(ii)(A) and (B).
The statement quoted by the Bank does not authorize financial institutions to compare rates based upon the characteristics of the depositors. Rather, the phrase "comparable size and maturity" was added to permit institutions to compare rates on the basis of denomination and maturity.
The Bank should compare its rates to those offered by banks in its normal market area. The fact that the individuals reside in Mexico does not persuade me that Mexico is the Bank's market area (or, alternatively, that the FDIC should permit the Bank to use the national rate). The fact that these deposits are not available to the man on the street does not persuade me that Mexico is the Bank's market area. The facts indicate that some of the potential customers reside in the Bank's geographic area. This indicates to me that the Bank is competing with other banks in its local market for these deposits.
I hope this information is helpful to you. Please call me at (202) 898-3812 if you have any questions.
1Consistent with the statute, the definition of "deposit broker" under the FDIC's final regulation continues to include insured depository institutions and their employees which solicit funds by offering significantly higher rates of interest. 12 C.F.R. 337.6(a)(5)(iii). Go back to Text
2H.R. Conf. Rep. No. 101--222, 101st Cong., 1st Sess. 402 (1989). Go back to Text
3See "Problems of the Federal Savings and Loan Insurance Corporation: Hearings Before the Committee on Banking, Housing, and Urban Affairs of the United States Senate," (part II) 101st Cong., 1st Sess. 230--231 (1989) (statement of Mr. Seidman); "Insured Brokered Deposits and Federal Depository Institutions: Hearing Before the Subcommittee on General Oversight and Investigations of the Committee on Banking, Finance, and Urban Affairs of the House of Representatives," 101st Cong., 1st Sess. 17 (1989) (statement of Mr. Murkowski), id. at 60-61 (statement of Mr. Fleischer). Go back to Text
4Section 29(h) of the FDI Act, 12 U.S.C. 1231f(h). Go back to Text
52A Sutherland Statutes and Statutory Construction § 46.06 (Norman J. Singer, 5th ed. 1992) (citations deleted). Go back to Text
6Although insured depository institutions should compare their rates to those of their marketplace competitors regardless of charter, they may only compare themselves to other FDIC-insured banks and savings associations. The interest rate restrictions imposed through section 29 apply to "insured depository institutions." The term "insured depository institution" means any bank or savings association insured by the FDIC. 12 U.S.C. 1813(c). Go back to Text