The Federal Deposit Insurance Corporation (FDIC) recently amended the Brokered Deposit Rule in order to clarify the deposit broker definition while simultaneously incorporating several previous FDIC staff interpretations.
The new rule became effective on April 1, 2021 with a phase in for certain provisions to be completed as of January 1, 2022. The rule change clarified both the definition of a “Deposit Broker” as well as making clear rules for exceptions to the definition. The rule change also addressed interest rate changes for less than well capitalized financial institutions.
The Federal Deposit Insurance Act defines a “Deposit Broker” as (1) a person engaged in the business of placing deposits or facilitating deposits of third parties with insured institutions, (2) an agent or trustee who establishes a deposit account to use the proceeds of the account to fund a prearranged loan, (3) any person placing deposits with insured institutions to sell those deposits or interests in those deposits to third parties, and (4) any less than well capitalized insured institution soliciting deposits by offering significantly higher interest rates. A person is not a “Deposit Broker” if they are placing or facilitating the placement of deposits to only one insured institution.
The FDIC included in the definition of “facilitating the placement of deposits” the concept of “matchmaking.” Matchmaking activities are also defined in the rule as proposing deposit allocations at, or between, more than one bank based upon deposit objectives of the depositor or based upon deposit objectives of the banks. In order to avoid companies attempting to structure their business to avoid the “matchmaking” definition, the FDIC also included an anti-evasion section to include in “matchmaking” a person who plays an ongoing role in determination of where to place deposits.
The final rule did not change the ten (10) exceptions from the “Deposit Broker” definition, but it did clarify the Primary Purpose Exception. Previously qualification for the Primary Purpose Exception from classification as a “Deposit Broker” relied primarily on staff opinions issued by the FDIC. The updated rule outlines fourteen (14) categories recognized as meeting the Primary Purpose Exception. Two (2) of the categories will continue to require notice to the FDIC for Qualification. The categories for the Primary Purpose Exception include:
- Less than 25% of the total assets the agent has under administration for its customers are deposited with insured institutions (FDIC Notice Required)
- 100% of the depositors’ funds that the agent places in insured institutions are in transaction accounts that do not pay fees, interest, or other remuneration to the depositor (FDIC Notice Required)
- Property management services
- Cross-border clearing services
- Mortgage servicing
- Real estate transaction services
- 1031 exchanges
- Certain reserve accounts under CFTC and SEC rules
- Collateral securing credit card loans
- Programs to pay for qualified medical expenses
- 529 plans
- Tax-advantaged retirement programs
- Programs for government beneficiaries
- Other relationships FDIC recognizes for the Primary Purpose Exception
Either the insured institution or the third party must notify the FDIC for the first two categories, but once notice is given to the FDIC the third party may rely on the Primary Purpose Exception unless otherwise notified by the FDIC. Notices are sent by secure email. Instructions are located at https://www.fdic.gov/secureemail/.
The rule also added a section with guidance on calculating the maximum interest rate less than well-capitalized institutions my offer on any brokered deposit. The national rate cap on these rates is the higher of (1) the national rate plus 75 basis points, (2) 120% of the current yield on similar maturity US Treasury obligations plus 75 basis points or (3) for any non-maturity deposit, the federal funds rate plus 75 basis points. Institutions may also request permission from the FDIC to pay interest rates up to the local rate cap in any local market area where the local rate cap exceeds the national rate cap. Local rate caps are equal to 90% of the highest rate paid on a particular deposit product in the institution’s local market area.
Community banks have increasingly looked to brokered deposits as a potential source of funding in recent years. All institutions should consider the risk involved with brokered deposits before altering their sources of capital, but particular attention should be paid by any less than well-funded institution to avoid running afoul of the updated brokered deposits rule and the related interest rate limits.
Attorney David Gonzales assists individuals and business clients in a variety of matters, including immigration and employment issues, trusts and estate law, banking law, and banking regulation. He also serves bank trust departments, helping resolve trust administration issues. For more information on his practice, click here.