Late last year, the FDIC released guidance on brokered deposits in the form of a series of frequently asked questions and answers (FAQs).  The guidance is available here: https://www.fdic.gov/news/news/financial/2015/fil15002a.pdf

The ostensible purpose of the guidance is to collect previously scattered views on various questions related to two primary subjects: what are brokered deposits and how they should be reflected on bank call reports. Brokered deposits impact assessments for deposit insurance.  For some institutions, the FAQs may have little impact but for others the FAQs will be important and required reading.

Although the FDIC called the release “guidance,” some commentators have suggested the material contains the first expression by the agency on a number of issues, including in particular further discussion on an important exception to the definition of deposit broker, the so-called “primary purpose exception” discussed below.

The basic regulation of brokered deposits has been clear for some time. Under Section 29 of the Federal Deposit Insurance Act, a brokered deposit is any deposit obtained through a deposit broker. So the definition of deposit broker is critical.  Essentially, the term means any person engaged in the business of placing or facilitating the placement of deposits of third parties with insured depository institutions. There are a number of specific exceptions however.

Under the current deposit broker regulatory scheme, only a bank that is “well capitalized” may accept, renew or rollover broker deposits. See 12 C.F.R. §337.6. “Adequately capitalized” financial institutions can do so if they have been granted a waiver by the FDIC. “Undercapitalized” banks may not do so and the FDIC is not authorized to grant waivers. Accordingly, a change from well capitalized to adequately capitalized, means that brokered deposits, if present in the insured financial institution, may not be increased.

The FAQs address to a number of frequently emphasized points: 1) the definition of deposit broker is broad; 2) the overuse of brokered deposits and the improper management of broker deposits have contributed to bank failures; 3) the term “placing deposits” and “facilitating the placement of deposits,” which are key to the definition of deposit broker, must be considered carefully in light of the rise of deposit design firms and reciprocal deposit placement firms; and 4) referring clients to a bank, activities common for insurance agents, lawyers and accountants, makes those referral sources potentially deposit brokers if they are facilitating the placement of deposits.

One exception to the definition of deposit broker discussed at length in the FAQs is the so-called “primary purpose exception.” Under the applicable regulation, an entity is not a deposit broker if its primary purpose is not the “placement of funds with depository institutions.” The FDIC has noted this exception is governed by the intent of the third party. If its primary purpose is to promote another goal than the placement of deposits, then that entity is not a deposit broker. The distinction is sometimes hard to fathom. For example, a retail store that sells and distributes general purpose pre-paid cards are not covered by the primary purpose exception even though they are obviously engaged in a business activity (retail sales) other than the placement of insured deposits.

Consider your nearby college.  If a college identification card provides access to funds in a bank account, is the card distributor, i.e. the college, a deposit broker? The answer is maybe. The FAQs indicate the FDIC will consider three factors: 1) the stated purpose of the college in distributing and marketing the debit cards, 2) features of the card, such as whether the card is reloadable and whether the card will provide access to a permanent account at an insured depository institution and 3) the compensation received by the college from the bank for distributing the cards. If these three conditions are present, the FAQs indicate the college would be a deposit broker, and accordingly, the deposits would be brokered deposits.

On the other hand, corporations that distribute pre-paid cards to part of a rebate program are not considered to be deposit brokers. In this case, the access device, the pre-paid card, is considered by the FDIC to be no different than the distribution of rebate checks.

The depth and detail of the FAQs make it required reading for those bankers who have – and those who may have — brokered deposit positions.