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4000 - Advisory Opinions
Deposits Used to Secure Loans to Foreign Customers Are Subject to
Brokered Deposit Interest Rate Restrictions
FDIC--93--4
January 26, 1993
Valerie J. Best, Counsel
This letter confirms our telephone conversation of January 6, 1993
and addresses the legal issues you raised in your letters dated July 1,
1992, August 12, 1992, and August 13, 1992 addressed to the Dallas
Regional Office. These issues arose in connection with the application
of *** (the "Bank") for a brokered deposit waiver. As you know,
the application for a waiver is being separately handled by the FDIC
Dallas Regional Office.
CONCLUSION
The deposits at issue are subject to the interest rate restrictions
imposed by section 29 of the Federal Deposit Insurance Act ("FDI
Act"). The fact that the deposits secure loans to foreign customers
does not exempt them from the restrictions imposed by section 29.
Moreover, the 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.
I agree with your initial conclusion (subsequently rescinded through
your letter dated August 13th) that the Bank may apply for a waiver. A
waiver will give the Bank some additional leeway in setting its rates.
Even with a waiver, however, the Bank may not pay a rate of interest on
directly solicited funds which, at the time that such funds are
accepted, significantly exceeds the effective yield paid on deposits of
comparable size and maturity in such institution's normal market area
for deposits accepted in the institution's normal market area.
See 12 U.S.C. 1831f(e) and (g)(3); 12 C.F.R.
337.6(a)(5)(iii) and (b)(2)(ii). Based upon available facts, it is my
view that the Bank must compare its rates to rates offered in its
market area.
DISCUSSION
The Program
The Bank is apparently paying more than 75 basis points in excess of
local rates on certain time deposits. The deposits in question belong
to Mexican nationals who use the deposits to collateralize loans. The
Bank's controlling owners are citizens of Mexico who obtained this
clientele via personal and business contacts. The customers often are
domiciled or have second residences in the *** area, including ***. The
borrower and CD pledgor may be different entities. The loans are often
for family members and related interests. The deposits are priced to
provide a 175-200 basis point spread between the cost of the deposits
and the yield on the loans secured thereby. The loans may be made at
any rate of interest desired by the customer up to the legal limits for
rates governed by usury and any other regulations which may apply,
though the loans rates are usually below the applicable usury rates. As
a result, the effective interest margin to the Bank is the same
regardless of the rates paid. CDs not pledged to a loan are priced at
the Bank's offering rates which, the Bank asserts, are well within the
Bank's market area offering rates.
{{6-28-93 p.4715}}
Bank Arguments
By letter dated August 13, 1992, you advised that the Bank had
reconsidered its position and determined that the regulation did not
apply to the deposits and that a waiver was not required. Their key
argument is that the deposits are unique and should only be compared to
CDs that secure loans to foreign customers. When so compared, they
contend, the interest rate paid on the deposits would not be
significantly higher. The second argument advanced by the Bank is that
the FDIC should offset the amount paid on the deposit against the
amount paid on the loan, and look at the interest margin as opposed to
the interest rate.
Additional Issues
This case raises the issue of what, if anything, may be accomplished
through the grant of a waiver to an adequately capitalized institution
that does not obtain deposits from a third-party intermediary. We must
also determine the significance of the "charter type" language
found in the definition of "deposit broker" at section 29(g)(3)
of the FDI Act and section 337.6(a)(5)(iii) of the FDIC's regulations.
Statutory Provisions
Subsection 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 subsection 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:
{{6-28-93 p.4716}}
(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).
While some might argue that the more specific prohibition contained
in section 29(e) of the FDI Act has superseded subsection 29(g)(3), we
disagree. Absent subsection 29(g)(3), adequately capitalized
institutions that were not operating under a waiver granted by the FDIC
(or depository institutions in conservatorship) could evade the
interest rate restrictions set forth in section 29(e) by direct
solicitation of deposits through money desk operations or general
newspaper advertising of high rates. This was the very purpose for
which subsection 29(g)(3) was enacted to proscribe.
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 subsection 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 subsection 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, subsection 29(g)(3) refers only to an
institution's "normal market area."
Having determined to give substantive effect to that portion of
subsection 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 subsection 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 subsection
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.
{{6-28-93 p.4717}}
Those who wish to void the "same type of charter" language can
only contend that the drafters erred when they failed to conform
subsection 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.
Admittedly, the differences make application of the statute
cumbersome: subsection 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 that have already been determined to be
brokered funds (either because the funds are obtained through a
third-party intermediary 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).
As noted above, the requirements of subsection 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.
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 subsection 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). The
only effect of the waiver in this case is to allow the Bank to
disregard the charter-by-charter comparisons set out in subsection
29(g)(3) of the FDI Act.
Offset Not Available
The Bank suggests that there should be some sort of offset mechanism
for insured depository institutions offering significantly higher rates
of interest on certain deposited funds. However, 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).
Basis for Comparison of Rates
The Bank argues that the deposits are unique and should only be
compared to CDs that secure loans to foreign customers. In support of
this argument, the Bank cited to the following statement made in the
preamble to the final rule: "The FDIC has, however, clarified
matters by defining "prevailing rate' as the average yields paid on
comparable
{{6-28-93 p.4718}}deposits in the relevant market at
the time." 57 Fed. Reg. 23933, 23939 (June 5, 1992)
(emphasis added).
In fact, the regulation provides, in relevant 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)(A) and (B).
The statement quoted by the Bank does not authorize financial
institutions to compare rates based upon the characteristics of the
depositors. Rather, the phrase "comparable size and maturity" was
added to permit institutions to compare rates on the basis of
denomination and maturity.
The Bank should compare its rates to those offered by banks in its
normal market area. The fact that the individuals reside in Mexico does
not persuade me that Mexico is the Bank's market area (or,
alternatively, that the FDIC should permit the Bank to use the national
rate). The fact that these deposits are not available to the man on the
street does not persuade me that Mexico is the Bank's market area. The
facts indicate that some of the potential customers reside in the
Bank's geographic area. This indicates to me that the Bank is competing
with other banks in its local market for these deposits.
I hope this information is helpful to you. Please call me at (202)
898-3812 if you have any questions.
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. 1231f(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. 12 U.S.C. 1813(c). Go Back to Text
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