4000 - Advisory Opinions
Clarification of Brokered Deposit Interest Restrictions Imposed by 12 U.S.C. 1831f
March 11, 1993
Valerie J. Best, Counsel
This is in response to your letters dated January 20 and 21, 1993. You advise that your Bank is currently deemed "adequately capitalized" and has received a waiver for the acceptance of brokered deposits within certain parameters. You ask for clarification of the interest rate restrictions imposed by the brokered deposit statute (12 U.S.C. 1831f).
Enclosed for your review are two letters concerning the interest rate restrictions applicable to adequately capitalized institutions. The letter dated January 28, 1993, discusses the impact of 12 U.S.C. 1831f(g)(3) on adequately capitalized institutions. The effect of 12 U.S.C. 1831f(g)(3) is to limit the interest rate adequately capitalized institutions may pay on directly solicited funds (i.e., those obtained without the intervention of a third party intermediary). Slightly different restrictions apply to adequately capitalized institutions that obtain a waiver from the FDIC. These restrictions are discussed in the letter dated March 11, 1993. These letters should answer many of your questions concerning the impact of the interest rate restrictions on adequately capitalized institutions.
I have set forth below the questions posed in your letters and our answers.
Question 1. "Does an adequately capitalized institution require a waiver to go outside its market area on a direct basis if the rates offered do not exceed the out of area formula of similar U.S. Treasury yield times 1.20 plus .75? To put it differently, if we do go directly outside our market area and offer a rate below the formula, is it then deemed brokered?"
Answer 1. Pursuant to 12 U.S.C. 1831f(g)(3), an adequately capitalized institution that does not have a waiver cannot offer rates that are more than 75 basis points over the prevailing rates offered by other insured depository institutions having the same type of charter in such depository institution's normal market area. If your bank did not have a waiver, it could not offer--to its customers in its normal market area, or to customers outside of its normal market area--rates that were more than 75 basis points over the prevailing rates offered by other insured banks in your bank's normal market area.
Since your bank does have a waiver, however, it is subject to the requirements of 12 U.S.C. 1831f(e). This means that your bank cannot offer customers outside of its normal market area a rate that is more than 75 basis points over the "national rate." With regard to customers residing in its normal market area, your bank cannot offer rates that are more than 75 basis points over the effective yield paid on deposits of comparable size and maturity in the normal market area.
Question 2. "[T]he prevailing rate plus .75 basis points might be less than the current yield on a like U.S. Treasury obligation. As a suggestion, might the rate appropriate in the normal market area be the greater of the average plus .75 basis points or the actual yield on a like Treasury obligation? This becomes significant, not so much in terms of other banks, but the fact that we're not just competing with other banks, that there are other financial intermediaries, involved which may not be under the same regulations and/or purpose of community reinvestment."
Answer 2. No. The statute does not permit an institution to select the greater of the "normal market rate" or the "national rate." I appreciate your concerns that your institution competes with institutions other than insured banks and thrifts for funds. Nonetheless, the statute does not permit adequately capitalized institutions operating under a waiver to include institutions, other than FDIC-insured banks and thrifts, when calculating the local rate (i.e., the normal market area rate). Moreover, adequately capitalized institutions that are not operating under a waiver must calculate their normal market rate with regard to insured depository institutions having the same type of charter.
Question 3. You refer to your bank's "back-to-back" program wherein funds belonging to citizens of Mexico are deposited with your bank into a certificate of deposit ("CD"), and the CD is used to collateralize loans. Your bank is located in a border town. The deposits are priced to provide a spread between the cost of the deposits and the yield on the loans securing the deposit. As a result, the effective interest margin to the bank is the same regardless of the rates paid. It is my understanding that the program generates tax advantages for the customer and the bank. You ask: "Inasmuch as this deposit arrangement is more of a loan funding mechanism, can we pay a rate which is significantly higher than the out of area rates even utilizing the national rate as a base?"
Answer 2. No. 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).
As explained above, because your bank has a waiver, it cannot offer customers outside of its normal market area a rate that is more than 75 basis points over the "national rate." With regard to customers residing in its normal market area, your bank cannot offer rates that are more than 75 basis points over the effective yield paid on deposits of comparable size and maturity in the normal market area.
The question then becomes whether customers participating in this program reside inside or outside the bank's normal market area. Based upon the information available, it is my view that participants in this program reside inside the bank's normal market area. Consequently, when calculating the maximum rate of interest payable, the bank should calculate the rate by reference to rates paid by other banks and thrifts in its normal market area. The bank should not use the national rate. The basis for my opinion is that the bank has an office in a border area, and draws customers from across the border. It appears that the bank's market extends into Mexico. It also appears that the bank is competing with other banks in its local market for these deposits.
Please call me at (202) 898-3812 if you have any additional questions.