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Important Update: Changes in FDIC Deposit Insurance Coverage

The FDIC deposit insurance rules have undergone a series of changes starting in the fall of 2008. As a result, certain previously published information related to FDIC insurance coverage may not reflect the current rules. For details about the changes, visit Changes in FDIC Deposit Insurance Coverage. For more information about FDIC insurance, go to www.fdic.gov/deposit/deposits/index.html or call toll-free 1-877-ASK-FDIC (1-877-275-3342). For the hearing-impaired, the number is 1-800-925-4618.

Spring 2010

Using an Agent or Broker to Place a Bank Deposit?
Ask These Questions First

Most consumers put money in checking, savings and certificate of deposit (CD) accounts by going directly to FDIC-insured banks. However, some people turn to a variety of “agents” to place deposits on their behalf. Those may include financial companies, such as brokerage firms, that help customers deposit funds at banks. In addition, organizations ranging from consumer groups to alumni and professional associations sometimes “endorse” the deposit-placing services of these companies on their Web site or elsewhere.

The FDIC wants to help consumers make an informed decision before entrusting an agent with their deposits. As noted in an FDIC consumer alert issued on April 7, 2010, “When you purchase a deposit product through an agent, you are relying on that agent to tell you all the important things you need to know about your account. For example, the agent should tell you what will happen to your money, the terms and conditions that apply, and whether your funds are eligible for FDIC insurance coverage.”

Here are questions you’ll want answers to, either from the account documentation you receive or from the agent.

What is the name of the bank where my deposit will be placed? Is it an FDIC-insured institution? Knowing this information is important for several reasons.

  • Not all companies with bank-sounding names are actually banks or are insured by the FDIC. That’s why you should verify that the institution is FDIC-insured. You can use our Bank Find service at www2.fdic.gov/idasp/main_bankfind.asp or by calling the FDIC toll-free at 1-877-275-3342.

  • You’ll want to know if the agent plans to put your money into a bank where you already have deposits. If the institution fails, the FDIC will determine your insurance coverage by adding together the accounts opened by the agent and the account you opened directly with the bank. And if the combination of the agent-placed deposits and your existing accounts could push your total deposits over the current $250,000 federal insurance limit per bank, you should know that in advance, so you can take action to avoid having uninsured funds at that bank.

    For help or information, contact the FDIC using the Web site or the phone number at the end of this article.

  • You should consider taking your business elsewhere if the agent can’t or won’t identify the bank, or if the name of the bank in the materials provided by the agent doesn’t match what you’re being told otherwise. That’s because there have been cases reported of unscrupulous brokers allegedly misleading or defrauding investors with CD offers. “It’s important that consumers feel confident that the agent or company they select to place their money with is worthy of their trust,” said FDIC attorney Joe DiNuzzo.

Will my funds be placed in an insured deposit account? The FDIC only insures deposit products, such as checking accounts, savings accounts, money market deposit accounts and CDs. The FDIC does NOT insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities or municipal securities, even if you purchased these investments at an FDIC-insured bank.

"You’ll want to know if the agent plans to put your money into a bank where you already have deposits. If the agent-placed deposits could put you over the federal insurance limit, you can take action to avoid having uninsured funds."

What is the interest rate and maturity being promised by the agent? Is that rate significantly higher than what is being offered by other banks? As previously reported in FDIC Consumer News, some non-bank companies have advertised above-market rates on CDs. These advertisements, according to FDIC attorney Richard M. Schwartz, “are schemes devised by finance companies and insurance agents eager to get consumers in the door” to eventually purchase a non-insured investment.

In one example, a non-bank company boasted about offering a higher rate on a short-term, FDIC-insured CD by adding a little of its own money, as a “bonus,” to raise the consumer’s total return above the bank’s interest rate. Once that CD matured a few months later, no similar high-rate offer was made, and the company steered the consumer into purchasing a non-insured investment that was a poor choice for the customer but lucrative for the sellers.

“We believe that these sorts of high-rate advertisements are in violation of federal law, and perhaps state law,” said Schwartz. He advised consumers to “research the going interest rates from banks locally and around the country, and if you find an offer that sounds too good to be true, be aware that there will definitely be strings attached.”

Other Precautions

How else can you protect yourself before depositing money through an agent?

James Deveney, Chief of the FDIC’s Deposit Insurance Outreach Section, cautioned consumers to be aware that deposits sold by brokers and other agents sometimes can be complex and may carry more risks than traditional CDs sold directly by banks, especially in terms of your ability to lock in an attractive interest rate or get your money back early. “Ask yourself if the maturity on a CD is something you are willing to live with,” he said, “because with some agent-sold CDs, you could lose the interest you’ve earned if you liquidate early.”

You also may want to ask your agent whether the FDIC’s requirements for the titling of deposit accounts placed by agents will be met. For example, if the account is titled in the name of the agent, and not in your name, you want the account records to indicate that the money is held by the agent on behalf of others, and that the records maintained by the bank or the agent identify the actual owner or owners of the funds. That way, each depositor can qualify for up to $250,000 of FDIC coverage.

The FDIC also is encouraging consumers to carefully review all the account documentation. “Before you consider purchasing a CD, whether it’s directly from your bank or indirectly from an agent such as a brokerage firm, make sure you fully understand all of its terms and conditions,” said Deveney. “Carefully read the disclosure statements, including any fine print.”

Finally, make sure you are dealing with an agent or broker you can trust. That’s a common thread in much of what we have discussed here.

“When you elect to use a third party to place a deposit instead of going to the bank directly, you are taking a chance,” commented Martin Becker, an FDIC Senior Deposit Insurance Specialist. “If the agent is dishonest and steals the money, your only recourse is against the agent — not the FDIC insurance fund or the bank where the agent said the money was deposited.”

For additional information about FDIC deposit insurance coverage, go to www.fdic.gov/deposit/deposits or call 1-877-275-3342 to talk to an FDIC Deposit Insurance Specialist. Also, see “Certificates of Deposit: Tips for Savers” at www.fdic.gov/deposit/deposits/certificate.

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Last Updated 5/19/2010