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4000 - Advisory Opinions
Renewal or Rollover of Deposit is Prohibited by 12 U.S.C.
§ 1831f(a) Only if Deposit Broker Continues to be Involved in
Transaction; Brokered Deposits Accepted at Rates Significantly Higher
Than Prevailing Rate But Renewed for Less Does Not Constitute
Prohibited Renewal
FDIC--92--69
October 23, 1992
Valerie J. Best, Counsel
You have requested an opinion concerning the above-referenced
subject bank. *** ("[Bank]") is currently undercapitalized and
has a large volume of brokered deposits. Examiners have determined that
if the bank is prohibited from renewing or rolling over all of its
brokered deposits, it will cause an immediate liquidity crisis.
You pose the following three scenarios and ask whether, in each
instance, the facts constitute a prohibited renewal of brokered
deposits:
(1) Certificates of deposit ("CDs") were acquired
through a broker and are now up for renewal. Our examiners have
determined that the broker is no longer involved in the transaction.
The customer must request or acquiesce to the renewal directly without
any intervention by the original broker. We understand that the broker
did not place the original deposit directly with the bank. Rather, the
broker's customers wired their funds directly to the bank at the
direction of the broker. 1
Both before and after the renewal, the CDs will be styled in the name
of the customer; the CD is not carried in the name of the broker as
agent/trustee.
{{12-31-92 p.4680}}
(2) Funds were acquired through direct solicitation of
customer before the effective date of the new brokered
deposit regulation (June 16, 1992) and [Bank] is currently paying
interest in excess of 50 basis points on these CDs. This practice
violated the FDIC's previous rule on brokered deposits, which
prohibited insured institutions from paying more than 50 basis points
above the prevailing rate. Under the new regulation, however, insured
institutions may not pay interest in excess of 75 basis points above
the prevailing rate. The bank wishes to renew these CDs at a rate less
than 75 basis points.
(3) Funds were acquired through direct solicitation of
customers after the effective date of the new brokered
deposit regulation (June 16, 1992) and [Bank] is currently paying
interest in excess of 75 basis points on these CDs. The bank wishes to
renew these CDs at a rate less than 75 basis points.
Based upon the facts presented, it is our opinion that a renewal of
a deposit account under any of one of the above-described scenarios, is
not prohibited.
Funds Obtained By or Through a Deposit Broker (First
Scenario)
As to the first scenario, the relevant statutory provisions appear
at sections 29(a) and (b) of the Federal Deposit Insurance Act ("FDI
Act"). Those sections provide:
(a) IN GENERAL.--An insured depository institution that is
not well capitalized may not accept funds obtained, directly or
indirectly, by or through any deposit broker for deposit
into 1 or more deposit accounts.
(b) RENEWALS AND ROLLOVERS TREATED AS ACCEPTANCE OF
FUNDS.--Any renewal of an account in any troubled institution and any
rollover of any amount on deposit in any such account shall be treated
as an acceptance of funds by such troubled institution for purposes of
subsection (a).
12 U.S.C. § 1831f(a) and (b) (emphasis
added). 2
Interest Rate Restrictions (Second and Third Scenarios)
Section 337.6(b)(3)(ii) prohibits any undercapitalized institution
from soliciting deposits by offering interest rates that are
significantly higher than the prevailing rates of interest on insured
deposits in its normal market area or in the market area in which such
deposits would otherwise be accepted. 12 C.F.R.
§ 337.6(b)(3)(ii). 3
An interest rate is deemed to be "significantly higher" than the
prevailing rate if it exceeds the applicable benchmark (i.e.,
the local rate or national rate) by more than 75 basis points.
Scenario 1
Although a rollover or a renewal is treated as if it were an
"acceptance," the term acceptance in section 29(a) is modified by
the phrase "obtained . . . by or through any deposit broker."
Consequently, we believe that a renewal or rollover is prohibited by
section 29(a) only if the deposit broker continues to be involved in
the transaction in some manner. 4
Whether or not the deposit broker continues to be involved in the
transaction is a question of fact. In this instance, the examiners have
determined that the deposit broker is no longer involved in the
transaction.
Scenario 2
In this case, we would look to the new rate being offered, not the
illegal rate that was previously paid on the original CD. Since no
third party is involved and the rate is no
{{12-31-92 p.4681}}longer illegal, we would not
consider this a prohibited renewal. This interpretation does not
affect the pre-existing violations; the bank may still be cited for
those earlier violations.
Scenario 3
Like Scenario 2, the new rate being offered controls. This would not
be a prohibited renewal since no third party is involved and the new
rate is not illegal.
Should you have further questions, please feel free to contact me
(202-898-3812).
1For a discussion of when an intermediary is a "deposit
broker" even though the intermediary does not directly place his or
her customer's funds with the bank, see my letter dated August 3, 1992
to *** and my letter dated August 3, 1992 to ***. Go Back to Text
2Implementing regulations are at 12 C.F.R. § 337.6. FDIC
regulations prohibit any undercapitalized insured depository
institution from accepting, renewing or rolling over any brokered
deposit. 12 C.F.R. § 337.6(b)(3)(i). A "brokered deposits'' is
"any deposit that is obtained, directly or indirectly, from or
through the mediation or assistance of a deposit broker." 12 C.F.R.
§ 337.6(a)(3). Similar restrictions apply to adequately capitalized
institutions except that they may apply to the FDIC for a waiver. 12
C.F.R. § 337.6(b)(2)(i). Go Back to Text
3This regulation implements section 29(h) of the FDI Act. 12
U.S.C. § 1831f(h). Go Back to Text
4See the above-referenced *** letter for a description of
activities carried out by a deposit broker who did not directly place
funds with the bank. Go Back to Text
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