4000 - Advisory Opinions
Whether Certain Affinity Groups that Endorse the Marketing of Consumer Credit and Deposit Products of a National Bank are Considered Deposit Brokers
October 1, 1993
Alan J. Kaplan, Assistant General Counsel
This responds to your letter of August 12, 1993, on behalf of your client, a national bank (the "Bank"), which markets its deposit products in part with the endorsement of certain affinity groups.
Your question, generally, is whether the activities described in your letter would cause the Federal Deposit Insurance Corporation ("FDIC") to conclude that certain affinity groups are "deposit brokers" within the meaning of sections 29 and 29A of the Federal Deposit Insurance Act ("FDI Act") and section 337.6(a) of the FDIC's regulations.
Section 29(g) of the FDI Act defines "deposit broker" to include "any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions." You specifically request that we confirm your conclusion that the affinity groups are not "engaged in the business" of placing deposits and, accordingly, are not deposit brokers as defined in section 29.
In response to your prior letter, dated July 20, 1993, on this issue, the Legal Division issued a letter dated November 10, 1992, concluding that the associations with which the Bank has marketing agreements, as described in your prior letter, were acting as "deposit brokers" under section 29 of the FDI Act ("FDIC Legal Advisory Opinion 92--79"). In a letter dated June 15, 1993, the FDIC issued an opinion (signed by General Counsel Alfred J. T. Byrne) ("June 1993 Opinion Letter") that certain affinity groups with which another depository institution had a business relationship were not "deposit brokers" under section 29 of the FDI Act. Based on your view that the fact pattern addressed in the June 1993 Opinion Letter is very similar to your "updated factual statement" regarding the Bank's relationship with the applicable affinity groups, you have submitted this new request to us.
As described in your letter, the Bank was formed to market consumer credit and deposit products to members of associations and other affinity groups. The overwhelming majority of deposits received by the Bank from members of associations or affinity groups have been from members of various ("Clubs"). There are three basic categories of relationships between the Bank and the various Clubs. One category of Club [("CLUB GROUP 1")] endorses the credit and deposit products of the Bank and otherwise cooperates and assists in the marketing of the products to Club members by: selling advertising space to the Bank in their membership publications (at standard rates), permitting the Bank to include deposit solicitations in credit product statements and other direct mailings to Club members, permitting the Bank to place poster and brochure racks relating to the Bank's credit and deposit products in Club offices, and including information about the Bank's products in packets given to new members that include information about a variety of services available through the Club. Each [CLUB GROUP 1] earns a fee when a member of the Club maintains a credit or deposit relationship with the Bank. Fees for deposit products are 8 basis points with respect to time deposits and 10 basis points with respect to most checking and savings accounts.
As described in your letter, agreements between the Bank and the second category of Club ["CLUB GROUP 2"] are focused almost exclusively on credit products. This category of Club does not receive fees from the Bank on deposit products but only receives fees on the credit products offered to Club members. The Clubs have no role at all in marketing the deposit products. Deposits are solicited and received by the Bank from Club members through personal cross-selling by Bank representatives who have contact with the Club members through product relationships with the members.
The third category of Club [("CLUB GROUP 3")] described in your letter is similar to the first category except that the relationship does not include credit card products.
Neither [CLUB GROUP 1 NOR CLUB GROUP 3] accept deposits directly on behalf of the Bank or process them in any fashion, or have access to individual depositor information. Club members mail deposit applications and funds directly to the Bank.
You represent in the letter that all the Clubs are non-financial institutions and that, in your understanding, all are non-profit organizations. You also note that the Bank is "well capitalized," as that term is defined in section 337.6(a) (10) of the FDIC's regulations.
The statutory definition of "deposit broker" is broad. The FDIC has interpreted the definition to encompass numerous activities in an effort to discourage the flow of deposits to undercapitalized institutions.
In determining whether an entity is a "deposit broker" within the meaning of the statute, we analyze whether it is "engaged in the business" of placing deposits or "facilitating" the placement of deposits with insured depository institutions. These broad statutory parameters require the FDIC to consider on a case-by-case basis whether an activity is deposit brokering within the meaning and purpose of the statute.
In the June 1993 Legal Opinion we identified the following facts and factors as relevant in determining whether an affinity group was a "deposit broker" within the meaning of section 29: all of the groups were non-financial institutions, and the vast majority were non-profit organizations; none of the groups directly marketed the deposit products for the depository institution; group members placed deposits with the institution directly (the groups did not receive funds from their members for deposit with the institution or otherwise process any member deposits); the groups had exclusive relationships with the institution and did not endorse deposit products of other institutions; most, but not all, of the groups received royalties for endorsing the institution's deposit products, the amount of which represented a small fraction of the market rates paid to others who are considered deposit brokers within the meaning of section 29 of the FDI Act; deposits obtained from the affinity groups were regarded by the institution as core deposits of the institution and were not used to replace core deposit run-off; and the groups did not know which members made deposits with the institution, nor did they keep any records of the amounts, rates or maturities of the deposits.
The opinion noted that, when considered together, those facts tended to support the conclusion that the groups were neither "engaged in the business of placing deposits" nor "facilitating the placement of deposits" with the institution, as contemplated by section 29. It concluded that such activity and the nature of the particular arrangement could reasonably be characterized as "passive and indirect" and, therefore, outside the scope of the brokered deposits statute and the FDIC's regulations.
As detailed in your letter, for the most part, the relationship between the Bank and the Clubs is similar to that considered in the June 1993 Opinion Letter: all the Clubs are non-financial institutions and, in your understanding, all are non-profit organizations; the Clubs do not accept deposits directly on behalf of the Bank or process them in any fashion, or have access to individual depositor information (Club members mail deposit applications and funds directly to the Bank); [CLUB GROUP 2 MEMBERS] do not directly market the Bank's deposit products; none of the Clubs endorses deposit products of other depository institutions; in your opinion, the amount the Bank pays to the Clubs represents a small fraction of the rates paid to traditional deposit brokers; the Bank's retention rate on deposit products received from Club members (for the most recent annual period for which data is available) was 72 percent for time deposits and 84 percent for checking and savings deposits and the Bank regards deposits received from Club members as core deposits; and the Clubs do not know which of their members have made deposits with the Bank, nor do they have access to deposit records of the amounts, rates or maturities of such deposits.
We agree with your observation that these facts and characteristics are similar to those involved in the June 1993 Opinion Letter. There are, however, three factual differences with respect to [CLUB GROUPS 1 AND 3]. Those Clubs sell advertising space to the Bank in their membership publications, permit the Bank to place poster and brochure racks relating to the Bank's credit and deposit products in Club offices, and include information about the Bank's products in packets given to new members that include information about a variety of services available through the Club. We do not regard the selling of advertising space in membership publications to be direct marketing of the Bank's products, particularly because, as indicated in your letter, the Clubs charge the Bank standard rates for the advertisements. We assume here that the advertisement is by the Bank for Bank products and that they are not Club advertisements for Bank products.
We believe, however, that permitting the Bank to place posters and brochure racks in Club offices and including information and materials on Bank deposit products in new member packets may constitute something other than "passive and indirect"marketing activity for the Bank, as discussed in the June 1993 Opinion Letter. Without these characteristics, we believe the arrangements between the Bank and [CLUB GROUPS 1 AND 3] would be sufficiently similar to the facts involved in the June 1993 Opinion Letter and, thus, would not cause the Clubs to be considered "deposit brokers" under section 29 of the FDI Act. Because [CLUB GROUP 2 MEMBERS] have no role whatsoever in marketing the Bank's deposit products, we agree that such Clubs would not be considered "deposit brokers" under section 29 of the FDI Act.
Thus, it is our view that, based on the facts described in your letter, [CLUB GROUP 1 AND 3 MEMBERS] are acting as "deposit brokers" under section 29 of the FDI Act in connection with their relationship with the Bank, but that [CLUB GROUP 2 MEMBERS] are not. We also believe that, if the marketing activities of [CLUB GROUP 1 AND 3 MEMBERS] were reduced to the type of activities discussed in the June 1993 Opinion Letter, those Clubs would not be considered "deposit brokers" under section 29 of the FDI Act.
The foregoing opinion is limited to the facts and circumstances of the programs described in your letter. Whether an activity constitutes deposit brokering within the meaning of the FDI Act and the FDIC's regulations is, of course, fact-specific. Accordingly, as we have noted above, the FDIC makes such determinations on a case-by-case basis, and, except as noted above, this letter expresses no view concerning determinations we may reach if the relevant facts and circumstances were at variance with those described in your letter.
Also, please note that to the extent the views expressed in this letter are inconsistent with those contained in FDIC Legal Advisory Opinion 92--79, this letter shall control.
We hope the foregoing adequately addresses your inquiry. Please do not hesitate to contact Joseph A. DiNuzzo (202/898-7349) or me (202/898-3734) if you have any further inquiries concerning the matters addressed in this letter.