4000 - Advisory Opinions
Funds Invested in Federally Insured Minority- or Women-Owned Depository Institutions by Fannie Mae Pursuant to an Irrevocable Trust Are Not Considered Brokered Deposits
February 24, 1993
Adrienne George, Attorney
I am writing in response to your letters requesting clarification of the FDIC's brokered deposit and deposit insurance regulations.
In your letters, you ask whether the funds which Fannie Mae wishes to invest in certain federally-insured minority- or women-owned depository institutions ("IMWDIs"), pursuant to certain irrevocable trusts, would be considered brokered deposits by the FDIC. You also want to know whether the investments so held by each IMWDI would be entitled to pass-through insurance coverage under section 7(i) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. 1817(i). For the reasons that follow, such funds would not be considered brokered deposits, and such funds would receive pass-through insurance, provided that such investments were made through and controlled by valid irrevocable trusts.
Fannie, Mae, a federally-chartered and stockholder-owned corporation, has been given the public mission of providing funds to finance housing for low- moderate-, and middle-income Americans. One way that it plans to carry out this mission is by investing in various IMWDIs. The vehicle for each investment would be an irrevocable trust whereby the settlor, Fannie Mae, would name a depository institution as trustee, and direct the trustee institution to deposit the trust funds in a given IMWDI for a fixed period of time (approximately five years). The trust document would also define the conditions under which the IMWDI could use the funds during that period, stipulating, however, that the trust principal (and in some cases, the principal and interest) must be returned to Fannie Mae upon the trust's termination.
Each trustee institution would administer over $100,000 in Fannie Mae funds, but no one trustee would deposit more than $100,000 in a given IMWDI. However, it is expected that the same IMWDI could receive well over $100,000 in Fannie Mae funds through various trustees under this plan. For example, if each of ten trustees deposited Fannie Mae funds of $100,000 apiece in a single IMWDI, that IMWDI would be holding $1,000,000 in Fannie Mae funds. If the IMWDI failed, the question would be whether the $100,000 administered by each trustee institution and held by the IMWDI would be fully and separately insured from the other Fannie Mae funds administered by similar trustees and held by the same IMWDI (i.e., "pass-through insurance"), or whether the entire $1,000,000 in Fannie Mae funds would be added together and the total amount insured for $100,000 only.
Section 7(i) of the FDI Act formerly guaranteed pass-through insurance coverage to trust funds held by an insured depository institution in any fiduciary capacity. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), however, amended the FDI Act to limit such coverage to "[t]rust funds held on deposit by an insured depository institution in a fiduciary capacity as trustee pursuant to any irrevocable trust." FDICIA, § 311(b)(3) (1991) (to be codified at 12 U.S.C. 1817(i)). Although this change does not become effective until December 19, 1993, it is important that Fannie Mae have its trust documents drafted so that they are truly irrevocable as defined in each case by applicable state law. We are concerned that Fannie Mae may not be giving up enough of its control over the funds to allow for a valid irrevocable trust, but, because we do not know all of the details of Fannie Mae's plan, we are reserving our judgment on this point. If, however, a valid irrevocable trust is created, the FDIC will provide pass-through insurance coverage, as described above, to the trust funds deposited by each trustee institution in the same IMWDI.
Your other question involves whether each trustee institution under the irrevocable trust plan would be considered a deposit broker. As you know, according to the current brokered deposit regulation, undercapitalized institutions are prohibited from accepting funds obtained, directly or indirectly, by or through any deposit broker for deposit into one or more deposit accounts. Adequately capitalized institutions may accept such funds only if they first obtain a waiver from the FDIC. Well capitalized institutions may accept such funds without restriction. It is important, then, to decide whether the trustee institution in the Fannie Mae plan is a "deposit broker" according to the regulation's definition:
(A) Any person [which includes a "trustee institution"] engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties [e.g., Fannie Mae] with insured depository institutions [e.g., the IMWDIs], or the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties; and
(B) An agent or trustee who establishes a deposit account to facilitate a business arrangement with an insured depository institution to use the proceeds of the account to fund a prearranged loan.
57 Fed. Reg. 23942 (June 5, 1992) (to be codified at 12 C.F.R. 337.6(a)(5)(i)(A)--(B)). Without more, it is arguable that the trustee institution in the Fannie Mae plan would qualify as a "deposit broker" and that the trust funds placed with the IMWDIs would be considered brokered deposits. However, there is an exception to the definition of "deposit broker" which seems broad enough to apply to the trustee institution:
(J) An insured depository institution acting as an intermediary or agent of a U.S. government department or agency [e.g., possibly Fannie Mae] for a government sponsored minority or women-owned depository institution deposit program.
Id. (to be codified at 12 C.F.R. 337.6(a)(5)(ii)(J). From the information you provided us, it appears that Fannie Mae, while a privately-held corporation for some purposes, does qualify as a "government . . . agency" for many other purposes, and that it should also qualify as an "agency" for purposes of its plan to invest in IMWDIs through irrevocable trusts, at least insofar as the above-quoted exception to the definition of "deposit broker" is concerned.
Thus, always assuming the presence of valid irrevocable trusts, the trust funds in the Fannie Mae plan would not be considered brokered deposits, and such funds would be entitled to pass-through insurance coverage should an IMWDI fail.
In your December 14 letter, you also ask for assurance that "there would be no further limitations on the IMWDI's ability to accept Fannie Mae deposits under the proposed deposit structure." Unfortunately, I am unable to give you such a blanket assurance.
I hope that this information will prove useful to you. If I can be of any further help, I can be reached at (202) 898-3859.