NEW FDIC BROKERED DEPOSIT FAQs
Mike Lochmann, Stinson Leonard Street LLP
September 27, 2016
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Brokered Deposits FAQs
• On June 30, 2016, the FDIC issued revised
guidance in the form of Frequently Asked
Questions (the "2016 FAQs") on what constitutes
a "brokered deposit"
• Previously released FAQs raised considerable
card industry concerns regarding the FDIC's
reinterpretation of the definition of "brokered
deposit"
• Previously issued "brokered deposit" FAQs:
− January 2015, alarmed prepaid card issuers
− November 2015, updated FAQs and FDIC
made request for comments
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What are Brokered Deposits
• "Brokered Deposit" is any deposit that is obtained,
directly or indirectly, from or through the mediation or
assistance of a deposit broker. 12 CFR § 337.6(a)(2)
• "Deposit broker" means any person engaged in the
business of:
− placing deposits, or facilitating the placement of
deposits, of third parties with insured depository
institutions; or
− placing deposits with insured depository institutions
for purpose of selling interests in the deposits to
third parties.
12 U.S.C. § 1831f(g)(1)(A).
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Restrictions on Brokered Deposits
• A "well capitalized" insured depository institution may
accept and renew brokered deposits
−
any bank that is subject to a written agreement, order or
PCA directive to meet or maintain a specific capital level
is NOT "well capitalized"
• An "adequately capitalized" insured depository institution
may not accept, renew or rollover any brokered deposit,
− but the FDIC may grant a waiver if acceptance does not
constitute an unsafe and unsound practice
• An "undercapitalized" insured depository institution may not
accept, renew or rollover any brokered deposit
• An insured depository institution that is not well capitalized
may not offer deposit rates more than 75 basis points above
average market rates.
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Adverse Impact of Accounts Being
Classified as "Brokered Deposits"
• May increase FDIC deposit insurance premiums for
− any bank that is either not well capitalized or has a
composite CAMELS rating below 2, and has a ratio of
brokered deposits to domestic deposits greater than
10%; and
− banks under $10 billion that have grown more than
40% over four years.
• Other adverse consequences for very large banks (over
$50 billion or globally systematically important banks)
− effects liquidity coverage ratio
− may increase risk based capital
surcharges
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"Deposit Broker" Definition Is Broad
• any third party who places deposits with an insured
depository institution
− actually delivers funds to the bank
• any third party facilitating the placement of deposits with an
insured depository institution
− takes any action that connects insured depository
institution with depositors
• may be a deposit broker even if third party receives no fees
or other direct compensation
• Examples of potential brokered deposits:
− Prepaid Cards
− Brokerage Sweeps
− Payroll Cards
− CEDARS
− Gift Cards
− HSA Accounts
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Exceptions – The following are
Not Deposit Brokers:
DB
• an insured depository institution, its
employees and its trust department
• pension and employees benefit plan trustees,
administrators and custodians
• trustee of an irrevocable trust or a
testamentary account.
• an agent or nominee whose "primary
purpose" is not the placement of funds with
insured depository institutions
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The "Primary Purpose" Exception
•
•
•
•
•
Prepaid card industry relied upon the Primary Purpose exemption for
most prepaid card programs
But the January 2015 and November 15 FAQs stated:
−
"the primary purpose exemption applies only infrequently"
−
"typically requires a specific request for a determination from the
FDIC".
The prepaid card industry strongly objected noting that none of the
brokered deposit statute, FDIC regulations or prior FDIC advisory
opinions mentioned or applied this extremely narrow interpretation of
the "primary purpose" exception
Widespread industry divergence in call reports, SEC filings, and capital
calculations
Front line bank examiners from OCC, Federal Reserve and FDIC did
not follow this construction
−
many informally advised their regulated banks to continue current
classification and reporting of card program deposits
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General Purpose Prepaid Card Programs Not
Covered by the "Primary Purpose" Exemption
• FAQ E11: "Selling or distributing general purpose prepaid
cards, accompanied by placement of the cardholder's funds
into a deposit account, is not secondary or incidental to the
accomplishment of some other objective."
• FAQ E11: "The general purpose prepaid card and the
deposit account are inseparable, in that the card is not a
device that provides access to the funds in the underlying
deposit account."
• Therefore, prepaid card companies
qualify as deposit brokers, and prepaid
card accounts are brokered deposits.
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Government Agencies
Disbursing Funds through
Pre-Paid Cards
• Many federal, state and local government agencies deliver
funds to beneficiaries of government programs by debit cards
and prepaid cards
• Under the 2016 FAQs, such governmental agencies will not
be "deposit brokers" if:
− the agency is required by law to disburse funds to
beneficiaries
− government is the sole source of funding for the deposit
accounts
− do not receive fees from the insured depository institution
(other than fees necessary to help cover the agencies
administration costs).
• Logically inconsistent with treatment of private prepaid card
programs
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Employee Exception
•
•
•
"Employee" means a person:
−
who is employed exclusively by the insured depository
institution
−
whose compensation is primarily in the form of salary
−
who does not share such employee’s compensation
with a deposit broker
−
whose office space or place of business is used
exclusively for the benefit of the insured depository
institution
The "bank employee" exemption will apply to "dual-hatted"
employees (who are also licensed to sell securities and
financial products of affiliates, but are not dual employees)
Dual employees of bank and affiliated broker-dealer may or
may not be deposit brokers. FDIC will analyze:
−
if the program is designed to drive growth in bank
deposits
−
if incentive package small and fees de minimus
−
does the dual employee have ongoing involvement
after opening the deposit account
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Call Center Employees
• Most call center employees will not be classified as
deposit brokers
• Dual employees or contractors (who do not meet
the bank employee exception) will not be deposit
brokers if:
− they merely provide general information and
transfer calls; and
− compensation is not based upon number of
accounts opened or volume of deposits opened
or retained.
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Reclassification of Deposits
as Non-Brokered
• a brokered deposit that is not a CD (i.e., a demand deposit)
may be reclassified as a non-brokered deposit after 12
months if:
− no third party is involved with the account.
• intended to create parity with 1-year CDs that are frequently
renewed without involvement of third party
• third-party involvement (which would continue the brokereddeposit classification) would include:
− holding the account in the name of the deposit broker as
agent for its customers
− the deposit broker continuing to receive fees after the
account is opened
− the deposit broker having authority to make withdrawals
− the deposit broker having access to account information
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Insured Depository Institution
that Ceases to be
Well Capitalized
• brokered deposit restrictions apply to an insured depository
institution that ceases to be well capitalized
• Such an institution "should contact its primary federal regulator to
establish an appropriate supervisory plan for how brokered demand
deposit accounts can comply with Section 29"
• primary federal regulator and the FDIC "should consider how
brokered deposits could impact the banks liquidity bank operations
and other factors"
• "goal of supervisory plan for brokered deposits should be not to
disrupt the bank’s operations"
• FDIC backed away from previous guidance that a less than well
capitalized bank must immediately close its brokered deposit
demand accounts
− e.g. shut down its prepaid card programs
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Congressional Action Initiated
To Reverse FDIC’s Position
•
On June 27, 2016, House Subcommittee on Financial Institutions and
Consumer Credit introduced the "Protect Prepaid Accounts Act of 2016"
(H.R. 6162).
•
Bill would create a rebuttable presumption that prepaid card deposits are
not brokered deposits, thus reversing the FDIC’s position.
•
U.S. Representative Scott Tipton (R-CO) stated:
− the FDIC inaccurately describes prepaid card deposits as inherently
brokered
− the practical impact of the FDIC’s conclusion is an increase in deposit
insurance costs for banks that operate prepaid card programs
− inevitably, this leads to increased costs and less choice for consumers
− such banks will have to commit additional resources for regulatory
compliance, rather than their customers
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MIKE W. LOCHMANN
PARTNER
STINSON LEONARD STREET LLP
816.691.3208
[email protected]
www.sti nson.com
© 2 0 1 6 S T I NS O N L E O N A R D S T R E E T L L P
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