FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Company that Assist and Advises Mortgage Loan Servicer in Placing Funds Must Register as Deposit Broker
November 20, 1992
Valerie J. Best, Counsel
This is in response to your letter dated October 26, 1992 concerning deposit brokers. You ask if your company and its employees are "deposit brokers" as that term is defined in the Federal Deposit Insurance ("FDI") Act. Based upon the information provided, your company and its employees are "deposit brokers." Please consider the following.
Activities of ***
Your company is a Pennsylvania corporation registered with the Pennsylvania Securities Commission, the United States Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc. Your company's clients are the owners and managers of Housing and Urban Development ("HUD"), Federal Housing Authority ("FHA") insured properties. Your company assists and advises its clients in placing the cash balances in their "mortgage reserve for replacement/residual receipt escrows" in FDIC-insured depository institutions.
The "Mortgagor" (i.e., your client) and the Secretary of HUD ("Secretary") may enter into an Investment Agreement for the purpose of investing funds from the Mortgagor's reserve for replacements and/or residual receipts accounts with a federally-insured depository institution. The Mortgagor periodically directs the Secretary to transfer funds, limited to the maximum insurable amount, to the depository institution designated in the agreement. The Mortgagor may request that the Secretary withdraw and disburse funds, and the Secretary has the authority to make withdrawals as he deems appropriate. The Mortgagor pays any costs or service charges imposed by the depository institution in connection with the establishment and maintenance of the account, and any costs incurred through the use of a broker. The Mortgagor designates the depository institution and the type of account to be established. In consideration for effecting the Agreement, the Secretary charges the Mortgagor fees for opening the account, additional deposits, renewals, partial redemptions, and closing the account. Your company assists and advises the "Mortgagors" in the placement of funds under the Investment Agreement.
Definition of ``Deposit Broker''
The term "brokered deposit" is defined in section 337.6(a)(3) of the FDIC's regulations as "any deposit that is obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker." The term "deposit broker" is defined in section 29 of the FDI Act to mean, in relevant part:
(A) any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions. . . .
12 U.S.C. § 1831f(g)(1)(A).
In other words, the FDI Act covers scenarios where the broker "facilitates the placement" of deposits, as well as scenarios where the broker places deposits in its name as nominee or agent for others. In common usage, the term "facilitate" means "to free from difficulty or impediment; to make easy or less difficult."1 Several exceptions to the definition of "deposit broker" are set out in the statute; most of them concern depositors acting in certain, specifically described, fiduciary relationships (e.g., the trust department of an insured depository institution, the trustee of a pension plan, etc.).
Analysis and Opinion
The definition of "deposit broker" is quite broad and, unless the activity in question comes within one of the statutory or regulatory exclusions, the FDIC must and will consider the activity deposit brokering. The activities of your company clearly bring your company within the definition of "deposit broker." Assisting the owners and managers of the properties in placing their cash balances, or advising the owners and managers of the properties as to the placement of their cash balances, certainly can be viewed as facilitating the placement of deposits with insured depository institutions. Further, we do not find that your company qualifies for any of the exclusions from the definition of deposit broker.
FDIC staff has taken the position that a mortgage loan servicer holding funds as a FHA trustee on behalf of HUD is not a deposit broker when the mortgage loan servicer (without the involvement of a deposit broker) directly places funds with an insured depository institution. A mortgage loan servicer collects mortgage payments, secures escrow funds, pays property taxes and insurance from the escrow funds, monitors delinquencies, accounts for and remits principal and interest payments to the investor. In that case, the depository bank did not pay a fee, directly or indirectly, for the deposits. In your case, however, your company is assisting and advising the mortgage loan servicer in placing its funds, and that brings your company within the definition of "deposit broker." The funds placed by the mortgage loan servicer with your assistance would be considered "brokered deposits."
We believe that Congress' intent in defining "deposit broker" so broadly was to control the flow of brokered funds to all but the best capitalized depository institutions insured by the FDIC. If, for example, the depository institutions to which your company directs the deposits of your client investors are "well capitalized," then treating your company as a deposit broker would not impede the placement of those funds with those depository institutions. Conversely, if the depository institutions are not well capitalized, then the other limiting provisions of the statute and regulation would apply. We believe this interpretation is consistent with the literal and intended meaning of section 29 of the FDI Act.
FDI Act Requirements Applicable to Deposit Brokers
Deposit brokers are prohibited from soliciting or placing any deposit with an insured depository institution unless the deposit broker has provided the FDIC with written notice that it is a deposit broker. A company may file a single notice on behalf of all of its employees and/or agents. However, the FDIC reserves the right to require individual information at any time. The information that must be included in the notice is described in the attached financial institutions letter. The financial institutions letter also sets out the restrictions applicable to insured depository institutions that are not well capitalized.
I hope this information is helpful to you. Please contact me at the above address or call me at (202) 898-3812 if you have any additional questions.
1Black's Law Dictionary 591 (6th ed. 1990). Go back to Text