Why it matters

The Federal Deposit Insurance Corporation (FDIC) started 2015 by releasing new FAQs for brokered deposits, which address issues such as the definition of a “deposit broker” and when the “primary purpose” exception applies. The FDIC reiterated its view on brokered deposits, stating that they “can be a suitable funding source when properly managed as part of an overall, prudent funding strategy.” However, the agency expressed concern about the overuse and improper management of brokered deposits, particularly when banks use them to fund “unsound or rapid expansion of loan and investment portfolios.” Banks should review the FAQs in light of the updated, broadened scope of the standards to determine whether they are accepting brokered deposits and adjust their policies accordingly.

Detailed discussion

The new FAQs start by addressing what constitutes a “brokered deposit.” Because FDIC regulations define a brokered deposit as “any deposit that is obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker,” the FAQs clarify that one must look to the definition of “deposit broker” in order to determine whether there is a “brokered deposit.” The FAQs state that subject to certain exceptions, the broad definition of deposit broker includes “any person, company or organization engaged in ‘placing deposits’ belonging to others, or ‘facilitating the placement of deposits’ belonging to others, at an insured depository institution.” The FAQs then clarify that as a result of this broad definition, a brokered deposit may be “any deposit accepted by an insured depository institution from or through a third party, such as a person or company or organization other than the owner of the deposit.”

A third party may qualify as a deposit broker even if it receives no fees or other direct compensation, the FDIC said, and fee structure is just one of several factors – such as the nature of the fees, the purported purpose of the fees, and the degree of involvement by the third party in placing the deposits – used when considering the issue.

The regulator also adopted an expansive perspective on what constitutes “facilitating the placement of deposits,” which the FAQs said can include companies that provide marketing for an insured depository institution in exchange for volume-based fees; insurance agents, lawyers, or accountants that refer clients to a bank; and even other banks that are part of a bank network.

For example, where a customer deposits $1 million into his or her institution and the customer’s bank moves $750,000 to three other banks in its network to maximize the deposit insurance limits, the bank acts as a deposit broker, the FDIC explained.

Several exceptions are delineated in the FAQs, ranging from employees of the insured depository institution that place funds with their employer (although not a contractor or dual employee) to the trustee of a pension or other employee benefit plan handling the plan’s funds.

The “primary purpose” exception to the definition of deposit broker applies to “[a]n agent or nominee whose primary purpose is not the placement of funds with depository institutions.” This exception applies only infrequently, the FDIC said, and typically requires a specific request for a determination by the regulator.

Companies that sell or distribute general-purpose prepaid cards do not fall under the exception, while companies that distribute debit cards with multiple purposes (a debit card that also functions as a college ID card, for example) may be classified as a deposit broker, depending on the specific circumstances. A company that does receive the exemption: a distributor of prepaid cards as part of a rebate program, according to the FAQs.

A deposit is “accepted” when the insured depository institution receives the funds and the renewal or rollover of an account qualifies as an acceptance of deposit. So if an institution ceases to be well capitalized, it must close brokered deposit accounts that never mature or renew or refuse to roll over or renew a brokered CD, the FDIC said.

The FAQs also address interest rate restrictions and how the prevailing rate is calculated for a local market area, as well as the application process to obtain a waiver from the FDIC to accept brokered deposits.

To read the new FAQs issued by the FDIC, click here.