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FDIC Provides Some Clarity on Brokered Deposits

The FDIC recently issued its new final rule on the definition of “deposit broker” and “brokered deposit”. With PPP and other issues facing banks, it’s easy enough to not pay attention to this rule. The final rule will take effect on April 1, 2021, with some delayed compliance permitted to January 1, 2022.  The final rule simplified somewhat the definition of a deposit broker and clarified the primary purpose exception to the deposit broker definition.  While the new rule still requires an application or notice to the FDIC for exemption from the deposit broker requirement by some entities wishing to utilize the primary purpose exception, many other entities will no longer be required to apply or give notice to the FDIC to take advantage of the “primary purpose’ exception to the deposit broker rule. 

1. How can you tell if an entity is a deposit broker? Generally, unless an exception can be found, an entity is a deposit broker if it places deposits at financial institutions or facilitates the placement of  deposits at financial institutions for one or more depositors.  Here is the first exception to the rule: if an entity has an exclusive deposit placement arrangement with your institution then it is not a deposit broker and the deposits that the entity places with your institution are not brokered deposits.

2. What does it mean to facilitate a deposit transaction? The FDIC says three actions, anyone of which makes the entity a deposit broker. They are:

  1. The entity has the legal authority, contractual or otherwise, to close the account or move the funds to another institution; or
  2. The entity is involved in setting rates, fees, terms or conditions for the deposit; or
  3. The entity is engaged in “matchmaking.”

3. What does “matchmaking” mean? This is a new term the FDIC has come up with to describe the process by which an entity may propose a deposit allocation between one or more financial institutions based on the particular deposit objectives of a particular depositor and the particular deposit objectives of the institution(s).  An example given by the FDIC is a deposit sweep program between a depositor, broker dealer and various unaffiliated deposit institutions.  Generally the facilitation definition is meant to apply when the flow of funds from a depositor to an institution involves a third party and the third party proposes where deposits should go. This is the complicated part of the rule and will require close analysis of the role of the third party entity in transaction(s) between your depositor and your institution.

4. Are there any exceptions to the deposit broker rule?  The main exception is the primary purpose exception. The statute states that if the primary purpose of the entity is not the placement of deposits but some other purpose then the entity is not a deposit broker and the deposit is not considered brokered.  The FDIC has historically read this exception narrowly. But, in this new final rule the FDIC has listed eleven kinds of relationships that meet the primary purpose exception automatically without notice or application to the FDIC and two others that may with notice or application to the FDIC meet the exception.

5.  What kind of deposits meet the primary purpose exception to the brokered deposit rule without notice or application to the FDIC? The following deposits if placed by an agent or nominee with your institution would not be considered brokered deposits:

  1. Property management;
  2. Cross-border clearing services;
  3. Mortgage servicing;
  4. Title company deposits;
  5. 1031 exchanges;
  6. Certain broker dealer or future commissions placement of deposits for certain statutory purposes (not all broker dealer deposits);
  7. Collateral for secured credit card loans;
  8. HSA accounts;
  9. Section 529 education accounts;
  10. IRA, Simple IRA and Roth IRA accounts;
  11. Government benefits;
  12. Any others that the FDIC may subsequently list.

6. What primary purpose exceptions require to the FDIC?  The FDIC has come up with two additional primary purpose exceptions that require notice to the FDIC. They are:

  1. Deposit placements of less than 25% of customer assets under administration for a particular business line. That is, if less than 25% of an entity’s total assets under administration in a particular business line are placed with insured depository institutions then it is not acting as deposit broker.
  2. Enabling transactions. If the entity places 100% of funds in transactional deposit accounts that earn no or minimal interest or fees because such deposits are necessary to enable other transactions then those deposits are not brokered deposits.

7. Who is required to give the notice to the FDIC? The entity can provide the notice or the financial institution receiving the deposits can provide the notice. The 25% notice requirement will have to be updated quarterly.

8. What is the application process? The FDIC has set up an application mechanism for any entity that believes its actions fit within the primary purpose exception but do not fit into any category that would allow them to give notice to the FDIC or is not listed as one of the designated exceptions.  The FDIC promises to act quickly and with transparency so everyone can see the kinds of activities that will be considered a primary purpose exception.  Trust companies or marketing companies may be able to use this application process. 

9. What about brokered CDs?  They are still considered “brokered deposits.” The FDIC has emphasized that regardless of how the CDs are structured or any new innovations, the “FDIC intends that third parties that assist in the placement of brokered CDs, or any similar deposit placement arrangement with a similar purpose, will continue to be considered deposit brokers …” Notably, though, the FDIC did not change the recent rule on reciprocal deposits.

10. Are there any traps for financial institutions? Of course. The FDIC has pointed out:

  1. If an entity is found to have set up their transactions simply to evade the brokered deposit rule the FDIC has given itself the authority to find that those deposits are brokered, although the FDIC has stated that it intends to use this authority sparingly;
  2. Financial institutions are cautioned to have in their files any copies of notices, applications etc. that the entity has relied on to not be considered a deposit broker;
  3. The FDIC has cautioned that even though deposits may no longer be considered brokered deposits the FDIC will still consider safety and soundness issues with deposit taking activity, including funding concentrations and correct reporting on Call Reports. So, be aware of potential safety and soundness issues with deposit activity, even though certain deposits are no longer considered brokered deposits.

DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.

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