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4000 - Advisory Opinions
Brokered Deposits: Clarification of "Deposit Broker"
Definition and Interest Rate Restrictions
FDIC--93--46
July 21, 1993
Valerie J. Best, Counsel
Your letter addressed to the Federal Financial Institutions
Examination Council concerning brokered deposits has been forwarded to
me for a response. I apologize for the delay in responding to your
letter.
You are an outside Director for a federal savings and loan
association regulated by the Office of Thrift Supervision
("OTS"). Your Thrift Financial Report ("TFR") requires your
institution to report the amount of brokered deposits held by your
institution. In order to properly report this information, you ask for
clarification of the definition of "deposit broker." Listed below
are the questions posed in your letter and our responses.
I. DEFINITION OF "DEPOSIT BROKER."
Question A. A lawyer who specializes in estate and
tax planning after calling to check the rates we pay, advises the
customer to open an account with us and gives the customer our name and
address.
Answer A. I do not consider the lawyer a "deposit
broker." The facts are sketchy, but it appears that it is not the
lawyer's primary purpose to place funds with depository institutions.
Consequently, the lawyer would be excepted from the definition of
"deposit broker" pursuant to 12 U.S.C. 1831f(g)(2)(I).
Question B. A "financial planner" (which, in
Florida, need not be licensed) after calling to check the rates we pay,
advises the customer to open an account with us and gives the customer
our name and address. The financial planner advertises his services in
the yellow pages and collects a service fee for his information.
Answer B. Here again the facts are limited, but based
upon the information provided and our experience to date with similar
businesses, the financial planner is a "deposit broker" as that
term is defined in the statute. The financial planner is a deposit
broker because the planner facilitates the placement of deposits
belonging to third parties with insured depository institutions, and
the planner does not qualify for any of the exceptions provided in the
statute.
{{4-29-94 p.4782}}
Question C. A customer subscribes to a publication
which lists the names and addresses of "big interest payors" and
our Association is listed in it. Using the information furnished, the
customer opens the account.
Answer C. FDIC staff believes that where the only
function of a deposit listing service is to provide information on the
availability and terms of accounts, then the listing service is not a
deposit broker. Based upon our experience to date, we have identified
several characteristics that staff believes serve to distinguish a
service that operates solely as an information-provider from a service
that facilitates the placement of deposits (and consequently is a
deposit broker). Assuming the publication you describe satisfies the
requirements we have identified, the publication would not be a deposit
broker. Enclosed is a letter discussing listing services in further
detail.
Question D. A person who is a broker registered
with the FDIC calls and assists in the opening transaction, but does
not identify himself as being a broker.
Answer D. The funds would be brokered deposits. We
consider a firm to be a "deposit broker" where the firm, acting
on its own or at the request of an institution or institutions,
solicits deposits from its customers, and the customer sends funds
directly to the receiving depository institution which has been given
notice by the firm of the impending purchase. Even where the depositor,
after having been contacted by the firm, calls the depository
institution directly to establish an account, the firm would be
considered to be a deposit broker because the broker is
"facilitating the placement" of deposit; the definition of
"deposit broker" used in the statute encompasses such
"match-making" or "finder" activities.
The key here is whether the depository institution knows or
has reason to know that the funds are being placed by a broker. If
so, then the depository institution will be subject to any applicable
restrictions on acceptance of brokered deposits based on its capital
category. If the institution is undercapitalized, it must refuse the
funds. If the institution is adequately capitalized, then it must
obtain a waiver from the FDIC before accepting, renewing or rolling
over any such deposits.
II. INTEREST RATE RESTRICTIONS.
In your letter you posed several questions concerning the interest
rate restrictions imposed by 12 U.S.C. 1831f.
The definition of "deposit broker" used in the Reports of
Condition and Income (Call Reports) was revised at the end of 1993 to
incorporate 12 U.S.C. 1831f(g)(3) (section 29(g)(3) of the Federal
Deposit Insurance Act). This is the section of the law that, generally
stated, "deems" institutions paying significantly higher rates to
be "deposit brokers." Institutions were not required to report
significantly higher rates in their call reports and TFRs prior to 1993
because 12 U.S.C. 1831f(g)(3) had not been incorporated into the call
report definition of "deposit
broker." 1
This provision has not been added to the definition of "deposit
broker" used in the call reports. The revised definition is in
effect for quarterly reports for the period ending March 31, 1993. As
revised, the call report instructions set out the statutory definition
of "deposit broker" and the exclusions to that definition, and
then go on to state:
Notwithstanding these nine exclusions, 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. For further information,
see Section 337.6(b) of the FDIC's Rules and Regulations.
{{4-29-94 p.4783}}
It is important that you refer to the instructions and the glossary
that accompany the TFR in order to determine whether or not the
above-quoted language has been included in the definition of
"deposit broker."
You also asked for clarification as to when it would be appropriate
for an adequately capitalized depository institution to use the
"national rate" as opposed to the "normal market rate."
Enclosed for your review is a letter dated March 11, 1993. That letter
summarizes those situations where it would be appropriate for an
adequately capitalized institution operating under a waiver to use the
national rate as opposed to the normal market rate.
Listed below are the questions posed in your letter concerning the
interest rate restrictions and our responses.
Question 1. FDIC does not require that investments
in non-includable subsidiaries be "charged" against capital as
required by FIRREA. If an institution falls within the definition of
well-capitalized except for the FIRREA mandated adjustment for
subsidiaries, is it considered by FDIC to be well-capitalized for the
brokered deposit regulation?
Answer 1. The terms "Tier 1 capital,"
"risk-weighted assets," "total capital," and "total book
assets," have the respective meanings prescribed in regulations
issued by the appropriate Federal banking agency. In your case, the
appropriate Federal banking agency is the OTS. In order to determine
whether or not your institution is calculating these items in
accordance with OTS requirements, I suggest you contact the OTS office
in your region.
Question 2. Assume that an institution is only
adequately capitalized and also assume that its rate on a particular CD
is within 25 basis points of its local competitors, but that rate is
more than 120% of the corresponding Treasury obligation.
A. Please answer the question of brokered deposits
for the above numbered situations for accounts where the owner of the
account is from another state and well out of the Association's
designated service area.
Answer 2A. An adequately capitalized bank that
does not have a waiver cannot offer rates that are more than
75 basis points over the prevailing rates offered by other insured
banks in its normal market area. This is true even if the deposits
originate from outside the bank's normal market area.
An adequately capitalized bank that does have a waiver
may calculate the maximum rate of interest it may offer customers
residing outside of its normal market area by reference to the
"national rate." With regard to customers residing within its
normal market area, however, the bank should continue to calculate the
maximum rate of interest it may offer those customers by reference to
its normal market rate. More specifically, an adequately capitalized
bank operating under a waiver cannot offer rates that are more than 75
basis points over the national rate to customers residing outside of
the bank's normal market area. As to customers residing within its
normal market area, however, the bank cannot offer a rate more than 75
basis points over the effective yield paid on insured deposits (bank or
thrift) of comparable size and maturity in its normal market area.
B. If they are, in fact, brokered deposits and the
institution is only adequately capitalized, would that mean that there
must be two posted rates; one for local customers and one for
out-of-area customer?
Answer 2B. If the institution is adequately capitalized
and does not have a waiver, there is one benchmark: 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. If, on the other hand, the
institution does have a waiver, then the maximum rate of allowable
interest must be calculated by reference to either: (i) the national
rate for deposits obtained from customers residing outside of the
institution's normal market area, or (ii) a rate calculated by
reference to its local rate for deposits obtained from customers
residing within the institution's normal market area.
{{4-29-94 p.4784}}
C. Florida is a state with many seasonal residents; would a
person who lives here less than 50% of the year be a local customer or
an out-of-area customer?
Answer 2C. I believe that a customer of your bank who
resides in the bank's normal market area for part of the year should be
treated as a local customer. This is because the customer was most
likely drawn to your bank as a result of the customer's residing in
your normal market area, even if temporarily.
D. Our Association's computer system has the ability
to maintain seasonal addresses. Does this change the answer?
Answer 2D. No.
E. Suppose the account is with a seasonal resident
who opens the account from his home up north, but moves back here for
the winter. Does it go from being a brokered deposit to a non-brokered
deposit (for report purposes) when the customer moves? Would the
reverse be true?
Answer 2E. No. I would consistently treat an account
established by a customer who temporarily resides in an institution's
normal market area as a local customer. This is true even if the
customer established the account while living outside of the bank's
normal market area and preparatory to moving to Florida. It may not
always be possible for an institution to identify customers who
temporarily move to Florida for parts of the year, however.
Please be aware that the interest rate restrictions for
undercapitalized institutions are different from the restrictions for
adequately capitalized
institutions.
1Even though covered institutions were not required to report
this data in their call report or TFR, they were otherwise subject to
the restriction. Go Back to Text
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