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4000 - Advisory Opinions
Brokered Deposits: Insured Depository Institutions Must Compare
Their Interest Rates to Other Insured Depository Institution With Same
Type of Charter
FDIC--93--6
January 28, 1993
Valerie J. Best, Counsel
I am writing in response to your letter confirming our telephone
conversation concerning the interest rate restrictions imposed on
insured depository institutions that are not well capitalized. You
asked for an interpretation of the "charter type" language in the
definition of "deposit broker" found in section 29(g)(3) of the
Federal Deposit Insurance Act ("FDI Act") and section
337.6(a)(5)(iii) of the FDIC's regulations. More specifically, you
asked if insured depository institutions are required to compare their
rates of interest to other insured depository institutions having the
same type of charter. During our telephone
{{6-28-93 p.4720}}conversation, I expressed the view that
the "same type of charter" language could be disregarded. Upon
further review, however, I have concluded that my initial opinion was
incorrect. Please consider the following.
Statutory Provisions
Section 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originally enacted as part of the Financial Institutions Reform,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 section 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 section (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).
{{6-28-93 p.4721}}
While some might argue that the more specific prohibition contained
in section 29(e) of the FDI Act has superseded section 29(g)(3), we
disagree. Absent section 29(g)(3), adequately capitalized institutions
that are not operating under a waiver granted by the FDIC (or
depository institutions in conservatorship) could evade the brokered
deposit restrictions by direct solicitation of deposits through money
desk operations or general newspaper advertising of high rates. Section
29(g)(3) was enacted to proscribe this very activity.
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 section 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 section 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, section 29(g)(3) refers only to an
institution's "normal market area."
Having determined to give substantive effect to that portion of
section 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 section 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 section
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
section 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. As noted above,
the requirements of section 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.
Admittedly, the differences make application of the statute
cumbersome: section 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 (under color of a waiver) that have
already been determined to be brokered funds (either because the funds
are obtained through a third-party intermediary
{{6-28-93 p.4722}}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).
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 section 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).
I apologize for any inconvenience I may have caused you. As outlined
above, however, I found little support for my initial views. Hopefully,
the difference between rates calculated on a charter-by-charter basis
and rates calculated without regard to charter will not be significant
as far as your clients are concerned. Please call me at (202) 898-3812
or write to me at the above address if you have any questions or
comments.
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. 1831f(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. (i.e., not a credit union).
12 U.S.C. 1813(c). Go Back to Text
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