4000 - Advisory Opinions
Brokered Deposits: Insured Depository Institutions Must Compare Their Interest Rates to Other Insured Depository Institution With Same Type of Charter
January 28, 1993
Valerie J. Best, Counsel
I am writing in response to your letter confirming our telephone conversation concerning the interest rate restrictions imposed on insured depository institutions that are not well capitalized. You asked for an interpretation of the "charter type" language in the definition of "deposit broker" found in section 29(g)(3) of the Federal Deposit Insurance Act ("FDI Act") and section 337.6(a)(5)(iii) of the FDIC's regulations. More specifically, you asked if insured depository institutions are required to compare their rates of interest to other insured depository institutions having the same type of charter. During our telephone conversation, I expressed the view that the "same type of charter" language could be disregarded. Upon further review, however, I have concluded that my initial opinion was incorrect. Please consider the following.
Section 29(g)(3) of the FDI Act provides:
(3) Inclusion of depository institutions engaging in certain activities. Notwithstanding paragraph (2), the term "deposit broker" includes any insured depository institution, and any employee of any insured depository institution, which engages, directly or indirectly, in the solicitation of deposits by offering rates of interest (with respect to such deposits) which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institution's normal market area.
12 U.S.C. 1831f(g)(3) (emphasis added).1
Pursuant to the above-quoted provision, a depository institution and its employees are deemed to be "deposit brokers" if they offer rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institution's normal market area. This provision was originally enacted as part of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). It was intended to prevent circumvention of the brokered deposit prohibitions through the solicitation of deposits by in-house salaried employees through so-called "money desk operations."2 It addressed a concern that emerged during various hearings--namely, that brokered deposit restrictions could be easily circumvented by in-house solicitation or general newspaper advertising of high rates.3
The FDIC Improvement Act of 1991 ("FDICIA") implemented two new interest rate restrictions on brokered deposits. FDICIA did not disturb the section 29(g)(3) definitional provision quoted above. The first restriction created by FDICIA applies only to undercapitalized institutions and is not relevant to this discussion.4 The second restriction, under section 29(e), provides:
(e) Restriction on interest rate paid.
Any insured depository institution which, under section (c) [i.e., under color of a waiver] or (d) [i.e., institutions in conservatorship] of this section accepts funds obtained, directly or indirectly, by or through a deposit broker, may not pay a rate of interest on such funds which, at the time that such funds are accepted, significantly exceeds--
(1) the rate paid on deposits of similar maturity in such institution's normal market area for deposits accepted in the institution's normal market area; or
(2) the "national rate" paid on deposits of comparable maturity for deposits accepted outside the institution's normal market area.
While some might argue that the more specific prohibition contained in section 29(e) of the FDI Act has superseded section 29(g)(3), we disagree. Absent section 29(g)(3), adequately capitalized institutions that are not operating under a waiver granted by the FDIC (or depository institutions in conservatorship) could evade the brokered deposit restrictions by direct solicitation of deposits through money desk operations or general newspaper advertising of high rates. Section 29(g)(3) was enacted to proscribe this very activity.
We recognize the circularity of the law that says solicitation of deposits by offering significantly above market rates of interest makes those deposits brokered funds, and an adequately capitalized institution, even with an FDIC waiver, cannot pay a rate of interest on brokered funds that significantly exceeds market rates. This, however, seems to be the clear result of the statutory language. Construing the statute as a whole, we must give that portion of section 29(g)(3) relating to funds directly solicited by an insured depository institution substantive effect.
``Same Type of Charter'' Language
You will note from the above-quoted provisions that the standards applied to funds obtained through a third-party intermediary (such as a brokerage house) differ slightly from the standards applied to funds that are directly solicited by the depository institution (that is, without the intervention of a third-party). Section 29(e) does not require a charter-by-charter comparison but section 29(g)(3) does require a charter-by-charter comparison. Section 29(e) distinguishes between deposits accepted in an institution's "normal market area" and deposits accepted "outside the institution's normal market area." In contrast, section 29(g)(3) refers only to an institution's "normal market area."
Having determined to give substantive effect to that portion of section 29(g)(3) relating to funds directly solicited by an insured depository institution, the question then arises whether the charter-by-charter language in that section should also be given effect. General rules of statutory interpretation require that each word in a statute should be given effect.
It is an elementary rule of construction that effect must be given, if possible, to every word, clause and sentence of a statute. A statute should be construed so that effect is given to all its provisions, so that no part will be inoperative or superfluous, void or insignificant, and so that one section will not destroy another unless the provision is the result of obvious mistake or error. But it has been said that words and clauses which are present in a statute only through inadvertence can be disregarded if they are repugnant to what is found, on the basis of other indicia, to be the legislative intent.5
In this case, the language of the statute is clear on a purely linguistic level. When read in context, we cannot say that section 29(g)(3) conflicts with section 29(e), although the provisions admittedly differ. It is possible to give proper weight to the phrase "same type of charter" without doing violence to the remainder of the statute.
Those who wish to void the "same type of charter" language can only contend that the drafters erred when they failed to conform section 29(g)(3) to section 29(f). On balance, we are not persuaded that the "same type of charter" language should be read out of the statute. The language does not frustrate the purpose of section 29 nor does it produce an absurd or unreasonable result. As noted above, the requirements of section 29(g)(3) have been in existence since the enactment of FIRREA in 1989. It therefore seems reasonable to assume that the drafters were aware of this provision when they added the new requirements of section 29(e) in 1991.
Admittedly, the differences make application of the statute cumbersome: section 29(g)(3) imposes one methodology for determining whether or not an institution is a deposit broker; section 29(e) imposes another method for determining the maximum rate of interest that may be offered on funds (under color of a waiver) that have already been determined to be brokered funds (either because the funds are obtained through a third-party intermediary or through direct solicitation). This means that all insured depository institutions that are not well capitalized must track the rates of institutions having the same type of charter in their normal market area in order to determine whether or not they are a deposit broker. This is true even if they have received a waiver from the FDIC. The waiver does not cleanse the funds of their "brokered deposits" status--it merely permits institutions to take advantage of the slightly less restrictive ceiling imposed through section 29(e).
Interest Rate Limitations on Directly Solicited Deposits
Based on the foregoing, any insured depository institution that solicits deposits by offering rates of interest which are significantly higher (i.e. more than 75 basis points) than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institution's normal market area, is deemed to be a "deposit broker" pursuant to section 29(g)(3).
If an institution believes that it would be to its advantage to compare its rate to the rate paid on deposits of similar maturity in the institution's normal market area, regardless of charter (or if the institution is offering rates in the national market), then the institution may wish to apply for a waiver in order to bring itself under the broader limits imposed by section 29(e).6
Even with a waiver, however, an adequately capitalized institution may not pay a rate that significantly exceeds the applicable benchmark (i.e., the normal market area or the national rate).
I apologize for any inconvenience I may have caused you. As outlined above, however, I found little support for my initial views. Hopefully, the difference between rates calculated on a charter-by-charter basis and rates calculated without regard to charter will not be significant as far as your clients are concerned. Please call me at (202) 898-3812 or write to me at the above address if you have any questions or comments.
1Consistent with the statute, the definition of "deposit broker" under the FDIC's final regulation continues to include insured depository institutions and their employees which solicit funds by offering significantly higher rates of interest. 12 C.F.R. 337.6(a)(5)(iii). Go back to Text
2H.R.Conf. Rep. No. 101--222, 101st Cong., 1st Sess. 402 (1989). Go back to Text
3See "Problems of the Federal Savings and Loan Insurance Corporation: Hearings Before the Committee on Banking, Housing, and Urban Affairs of the United States Senate," (part II) 101st Cong., 1st Sess. 230--231 (1989) (statement of Mr. Seidman); "Insured Brokered Deposits and Federal Depository Institutions: Hearing Before the Subcommittee on General Oversight and Investigations of the Committee on Banking, Finance, and Urban Affairs of the House of Representatives," 101st Cong., 1st Sess. 17 (1989) (statement of Mr. Murkowski), id. at 60--61 (statement of Mr. Fleischer). Go back to Text
4Section 29(h) of the FDI Act, 12 U.S.C. 1831f(h). Go back to Text
52A Sutherland Statutes and Statutory Construction § 46.06 (Norman J. Singer, 5th ed. 1992) (citations deleted). Go back to Text
6Although insured depository institutions should compare their rates to those of their marketplace competitors regardless of charter, they may only compare themselves to other FDIC-insured banks and savings associations. The interest rate restrictions imposed through section 29 apply to "insured depository institutions." The term "insured depository institution" means any bank or savings association insured by the FDIC. (i.e., not a credit union). 12 U.S.C. 1813(c). Go back to Text