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4000 - Advisory Opinions


Circumstances Under Which an Adequately Capitalized Institution Operating Under Brokered Deposit Waiver May Use National Rate Instead of Normal Market Rate

FDIC--93--19

March 11, 1993

Valerie J. Best, Counsel

This responds to your letters dated December 11, 1992 and January 7, 1993. You asked for clarification of the interest rate restrictions imposed by 12 U.S.C. 1831f on adequately capitalized institutions operating under a waiver. More specifically, you asked when it would be appropriate for such an institution to use the national rate as opposed to the normal market rate.

I have summarized below those situations where it would be appropriate for an adequately capitalized institution operating under a waiver to use the national rate as opposed to the normal market rate. This is not meant to be an exhaustive list. Rather, I have attempted to address only those situations described in your letter. The relevant statutory and regulatory provisions are also summarized below.

USE OF ``NATIONAL RATE'' VERSUS ``NORMAL MARKET RATE.''

An adequately capitalized institution operating under a waiver may pay a rate of interest calculated by reference to the "national rate" for:

(1)  Deposits obtained through a third-party intermediary (e.g., brokerage house) which solicited the deposits on a national basis.

(2)  Deposits obtained through a third-party intermediary which solicited the deposits on a regional basis provided that the region is not coextensive with the institution's "normal market area."

(3)  Deposits obtained from customers (i.e, owners of the funds) residing in areas where the institution (or someone acting on the institution's behalf) does not solicit deposits.

(4)  Deposits obtained from customers residing in areas where the institution (or someone acting on the institution's behalf) solicits deposits but:

(a)  the institution has not attracted a significant dollar amount of its deposits from the area (as measured against other deposits of similar amount and maturity attracted by the institution from all other areas during the same relevant time period); and

(b)  the institution has not obtained a significant market share of the insured deposits in the area.

For purposes of this paragraph (4), the word "significant" means "important." It must be determined on a case-by-case basis. For example, a 5% share of insured deposits in an area that has only two insured institutions may not be significant. But in a market with a large number of insured institutions, 5% may be a significant portion of the market. Similarly, if 5% of an institution's deposit base is attracted from an area over a few weeks time, that 5% may be significant. Conversely, if 5% of an institution's deposit base is attracted from an area over an extended period of time, that 5% may not be significant.

An adequately capitalized institution operating under a waiver may not pay a rate of interest calculated by reference to the "national rate"--it must pay a rate of interest calculated by reference to its "normal market area"--for:

(1)  Deposits obtained from customers residing within the institution's normal market area.

--A "normal market area" is any readily defined geographical area where the subject institution:

(a)  has an office or branch in the area; or

(b)  usually solicits deposits in the area; or

(c)  periodically, or with a certain degree of frequency, solicits deposits in the area; or

(d)  compensates, directly or indirectly, an individual or entity who usually or periodically, or with a certain degree of frequency, solicits deposits from the area on behalf of the institution; or

(e)  does not satisfy the criteria in paragraphs (1)(a) through (d), but the institution:

(i)  has initiated a concerted advertising campaign in the area; and

(ii)  has obtained a significant dollar amount of its deposits from the area (as measured against other deposits of similar amount and maturity attracted by the institution from all other areas during the same relevant time period); or

(iii)  has obtained a significant share of insured deposits in the area.

RELEVANT STATUTE—ADEQUATELY CAPITALIZED INSTITUTIONS.

The guidelines described above are based upon the requirements of 12 U.S.C. 1831f. The statute provides, in part:

(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).

FDIC regulations implementing the interest rate restrictions imposed by 12 U.S.C. 1831f, provide, in 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).

FDIC regulations provide that a "market area" is

any readily defined geographical area in which the rates offered by any one insured depository institution soliciting deposits in that area may affect the rates offered by other insured depository institutions operating in the same area.

12 C.F.R. 337.6(b)(4).

Further clarification was provided in the preamble to the final rule wherein it was stated:

Under the final rule, the market area will be determined pragmatically, on a case-by-case basis, based on the evident or likely impact of a depository institution's solicitation of deposits in a particular area, taking into account the means and media used and volume and sources of deposits resulting from such solicitation.

57 Fed. Reg. 23933, 23939 (June 5, 1992).

ADEQUATELY CAPITALIZED INSTITUTIONS NOT OPERATING UNDER A WAIVER

In your letter you also asked how the interest rate restrictions would be applied to an adequately capitalized institution that is not operating under a waiver.

Enclosed for your review is a letter dated January 28, 1993 that sets forth our interpretation of 12 U.S.C. 1831f(g)(3). Pursuant to 12 U.S.C. 1831f(g)(3), adequately capitalized institutions that are directly soliciting deposits--that is, without the intervention of a third party intermediary--are subject to certain interest rate ceilings.

Unlike 12 U.S.C. 1831f(e) however, 12 U.S.C. 1831f(g)(3) does not refer to the "national rate." In addition, 12 U.S.C. 1831f(g)(3) requires a charter-by-charter comparison when calculating the prevailing rate. More specifically, this section provides that any insured depository institution that solicits deposits by offering rates of interest which are significantly higher (i.e., over 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." 12 U.S.C. 1831f(g)(3). I understand this provision to mean that an institution cannot offer rates that are significantly higher than the prevailing rates offered by other insured depository institutions having the same type of charter in such depository institution's normal market area, regardless of where the funds originate.

QUESTIONS POSED IN YOUR LETTER

Summarized below are the questions posed in your December letter and our responses.

Question 1:  Assume a savings association ("S&L") is adequately capitalized but it does not have a waiver. Its market is generally New York. Approximately 10% of its customers live outside of New York, however, and are located throughout the USA. There is no defined concentration of customers outside of New York. You ask whether the S&L's normal market area is New York, or if it is each market area where it has customers. You also ask whether the institution may pay a rate of interest calculated by reference to the New York market or the Florida market, when the S&L calls a customer in Florida to solicit funds.

Answer 1:  Since the S&L does not have a waiver, it cannot offer rates that are more than 75 basis points over the prevailing rates offered by other insured savings associations in its normal market area, regardless of where the funds originate. In this case, the S&L's normal market area is New York. Therefore, it cannot offer rates that are more than 75 basis points over the prevailing rates offered by other insured savings associations in New York to its customers in New York or to its customers throughout the USA, including Florida.

Question 2:  Assume the S&L obtains a waiver from the FDIC. Its market continues to be New York, with approximately 10% of its customers living outside of New York and located throughout the USA. There is no defined concentration of customers outside of New York. You ask whether the institution may pay a rate of interest calculated by reference to the national rate for deposits obtained from its Florida customers.

Answer 2:  Yes. Because the S&L appears to satisfy the criteria set forth in paragraph number 4 above, I do not consider Florida to be part of its "normal market area." Since the S&L has a waiver, the appropriate benchmark for calculating the maximum rate of interest it may offer to its Florida customers is the "national rate." This means that it cannot offer its Florida customers rates that are more than 75 basis points over the national rate. New York continues to be part of the S&L's normal market area, however. Consequently, the S&L cannot offer its New York customers rates that are more than 75 basis points over the effective yield paid on deposits of comparable size and maturity in New York.

With regard to your letter dated January 7, 1993, please note the following.

First. As noted above, 12 U.S.C. 1831f(g)(3) requires institutions to compare their rates to other insured depository institutions having the same type of charter in their normal market area. The term "insured depository institution" means any bank or savings association insured by the FDIC (i.e., not a credit union). 12 U.S.C. 1813(c). However, an institution need not distinguish between federally chartered institutions and state chartered institutions. Since your institution is a savings association, it may compare its rates to all other savings associations in its normal market area, whether such savings associations are federally or state chartered.

Second. Because it appears to be a hypothetical situation for your institution, we have not addressed whether an institution without a waiver may use the "national rate" created by FDIC regulations. Consequently, I offer no comment on the examples presented in your letter. If you need further clarification on this issue, please let us know.

Also be advised that the restrictions applicable to undercapitalized institutions are governed by different statutory and regulatory provisions. If you need information on the restrictions applicable to undercapitalized institutions, please let us know.

Please call me at (202) 898-3812 if you have any additional questions.


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