4000 - Advisory Opinions
Brokered Deposits: Clarification of "Deposit Broker" Definition and Interest Rate Restrictions
July 21, 1993
Valerie J. Best, Counsel
Your letter addressed to the Federal Financial Institutions Examination Council concerning brokered deposits has been forwarded to me for a response. I apologize for the delay in responding to your letter.
You are an outside Director for a federal savings and loan association regulated by the Office of Thrift Supervision ("OTS"). Your Thrift Financial Report ("TFR") requires your institution to report the amount of brokered deposits held by your institution. In order to properly report this information, you ask for clarification of the definition of "deposit broker." Listed below are the questions posed in your letter and our responses.
I. DEFINITION OF "DEPOSIT BROKER."
Question A. A lawyer who specializes in estate and tax planning after calling to check the rates we pay, advises the customer to open an account with us and gives the customer our name and address.
Answer A. I do not consider the lawyer a "deposit broker." The facts are sketchy, but it appears that it is not the lawyer's primary purpose to place funds with depository institutions. Consequently, the lawyer would be excepted from the definition of "deposit broker" pursuant to 12 U.S.C. 1831f(g)(2)(I).
Question B. A "financial planner" (which, in Florida, need not be licensed) after calling to check the rates we pay, advises the customer to open an account with us and gives the customer our name and address. The financial planner advertises his services in the yellow pages and collects a service fee for his information.
Answer B. Here again the facts are limited, but based upon the information provided and our experience to date with similar businesses, the financial planner is a "deposit broker" as that term is defined in the statute. The financial planner is a deposit broker because the planner facilitates the placement of deposits belonging to third parties with insured depository institutions, and the planner does not qualify for any of the exceptions provided in the statute.
Question C. A customer subscribes to a publication which lists the names and addresses of "big interest payors" and our Association is listed in it. Using the information furnished, the customer opens the account.
Answer C. FDIC staff believes that where the only function of a deposit listing service is to provide information on the availability and terms of accounts, then the listing service is not a deposit broker. Based upon our experience to date, we have identified several characteristics that staff believes serve to distinguish a service that operates solely as an information-provider from a service that facilitates the placement of deposits (and consequently is a deposit broker). Assuming the publication you describe satisfies the requirements we have identified, the publication would not be a deposit broker. Enclosed is a letter discussing listing services in further detail.
Question D. A person who is a broker registered with the FDIC calls and assists in the opening transaction, but does not identify himself as being a broker.
Answer D. The funds would be brokered deposits. We consider a firm to be a "deposit broker" where the firm, acting on its own or at the request of an institution or institutions, solicits deposits from its customers, and the customer sends funds directly to the receiving depository institution which has been given notice by the firm of the impending purchase. Even where the depositor, after having been contacted by the firm, calls the depository institution directly to establish an account, the firm would be considered to be a deposit broker because the broker is "facilitating the placement" of deposit; the definition of "deposit broker" used in the statute encompasses such "match-making" or "finder" activities.
The key here is whether the depository institution knows or has reason to know that the funds are being placed by a broker. If so, then the depository institution will be subject to any applicable restrictions on acceptance of brokered deposits based on its capital category. If the institution is undercapitalized, it must refuse the funds. If the institution is adequately capitalized, then it must obtain a waiver from the FDIC before accepting, renewing or rolling over any such deposits.
II. INTEREST RATE RESTRICTIONS.
In your letter you posed several questions concerning the interest rate restrictions imposed by 12 U.S.C. 1831f.
The definition of "deposit broker" used in the Reports of Condition and Income (Call Reports) was revised at the end of 1993 to incorporate 12 U.S.C. 1831f(g)(3) (section 29(g)(3) of the Federal Deposit Insurance Act). This is the section of the law that, generally stated, "deems" institutions paying significantly higher rates to be "deposit brokers." Institutions were not required to report significantly higher rates in their call reports and TFRs prior to 1993 because 12 U.S.C. 1831f(g)(3) had not been incorporated into the call report definition of "deposit broker."1
This provision has not been added to the definition of "deposit broker" used in the call reports. The revised definition is in effect for quarterly reports for the period ending March 31, 1993. As revised, the call report instructions set out the statutory definition of "deposit broker" and the exclusions to that definition, and then go on to state:
Notwithstanding these nine exclusions, 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. For further information, see Section 337.6(b) of the FDIC's Rules and Regulations.
It is important that you refer to the instructions and the glossary that accompany the TFR in order to determine whether or not the above-quoted language has been included in the definition of "deposit broker."
You also asked for clarification as to when it would be appropriate for an adequately capitalized depository institution to use the "national rate" as opposed to the "normal market rate." Enclosed for your review is a letter dated March 11, 1993. That letter summarizes 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.
Listed below are the questions posed in your letter concerning the interest rate restrictions and our responses.
Question 1. FDIC does not require that investments in non-includable subsidiaries be "charged" against capital as required by FIRREA. If an institution falls within the definition of well-capitalized except for the FIRREA mandated adjustment for subsidiaries, is it considered by FDIC to be well-capitalized for the brokered deposit regulation?
Answer 1. The terms "Tier 1 capital," "risk-weighted assets," "total capital," and "total book assets," have the respective meanings prescribed in regulations issued by the appropriate Federal banking agency. In your case, the appropriate Federal banking agency is the OTS. In order to determine whether or not your institution is calculating these items in accordance with OTS requirements, I suggest you contact the OTS office in your region.
Question 2. Assume that an institution is only adequately capitalized and also assume that its rate on a particular CD is within 25 basis points of its local competitors, but that rate is more than 120% of the corresponding Treasury obligation.
A. Please answer the question of brokered deposits for the above numbered situations for accounts where the owner of the account is from another state and well out of the Association's designated service area.
Answer 2A. An adequately capitalized bank that does not have a waiver cannot offer rates that are more than 75 basis points over the prevailing rates offered by other insured banks in its normal market area. This is true even if the deposits originate from outside the bank's normal market area.
An adequately capitalized bank that does have a waiver may calculate the maximum rate of interest it may offer customers residing outside of its normal market area by reference to the "national rate." With regard to customers residing within its normal market area, however, the bank should continue to calculate the maximum rate of interest it may offer those customers by reference to its normal market rate. More specifically, an adequately capitalized bank operating under a waiver cannot offer rates that are more than 75 basis points over the national rate to customers residing outside of the bank's normal market area. As to customers residing within its normal market area, however, the bank cannot offer a rate more than 75 basis points over the effective yield paid on insured deposits (bank or thrift) of comparable size and maturity in its normal market area.
B. If they are, in fact, brokered deposits and the institution is only adequately capitalized, would that mean that there must be two posted rates; one for local customers and one for out-of-area customer?
Answer 2B. If the institution is adequately capitalized and does not have a waiver, there is one benchmark: 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. If, on the other hand, the institution does have a waiver, then the maximum rate of allowable interest must be calculated by reference to either: (i) the national rate for deposits obtained from customers residing outside of the institution's normal market area, or (ii) a rate calculated by reference to its local rate for deposits obtained from customers residing within the institution's normal market area.
C. Florida is a state with many seasonal residents; would a person who lives here less than 50% of the year be a local customer or an out-of-area customer?
Answer 2C. I believe that a customer of your bank who resides in the bank's normal market area for part of the year should be treated as a local customer. This is because the customer was most likely drawn to your bank as a result of the customer's residing in your normal market area, even if temporarily.
D. Our Association's computer system has the ability to maintain seasonal addresses. Does this change the answer?
Answer 2D. No.
E. Suppose the account is with a seasonal resident who opens the account from his home up north, but moves back here for the winter. Does it go from being a brokered deposit to a non-brokered deposit (for report purposes) when the customer moves? Would the reverse be true?
Answer 2E. No. I would consistently treat an account established by a customer who temporarily resides in an institution's normal market area as a local customer. This is true even if the customer established the account while living outside of the bank's normal market area and preparatory to moving to Florida. It may not always be possible for an institution to identify customers who temporarily move to Florida for parts of the year, however.
Please be aware that the interest rate restrictions for undercapitalized institutions are different from the restrictions for adequately capitalized institutions.
1Even though covered institutions were not required to report this data in their call report or TFR, they were otherwise subject to the restriction. Go back to Text