4000 - Advisory Opinions
Whether Bank is Considered a Deposit Broker When Offering Secured Credit-Card Loans to Its Customers
March 11, 1994
Valerie J. Best, Counsel
In your letter of January 25, 1994, addressed to Acting General Counsel Douglas Jones, you sketch a proposal by an unidentified bank ("the Bank") to offer secured credit-card loans to its customers. The loans are to be secured by deposits belonging to the customers but held at another depository institution. You describe the Bank's role in placing the deposits at the latter institution as follows:
. . . [T]he Bank may include an application for a Card. The application and any accompanying solicitation materials (the "Card Solicitation") would explain that in order to obtain the Card, the applicant would have to post a Deposit at the Depository as security for the Bank's extension of credit. These materials would include an application for the Deposit as well as a pledge of that Deposit to Bank as security for its extensions of credit under the Card. The Card Solicitation and other marketing materials would also indicate that the Deposit will be FDIC-insured and may state the rate of interest on the Deposit. The Deposits would not be offered separately from the Card.
Furthermore, the Bank will not be compensated by the Depository with respect to Deposits opened at the Depository. To the contrary, the Bank will pay a fee to the Depository in respect of the recordkeeping and custodial services being provided by the Depository.
You ask whether the Bank would be a "deposit broker" within the meaning of section 29(g) of the Federal Deposit Insurance Act, 12 U.S.C. § 1831f(g).
I must caution you that the views I present here do not amount to an official determination by the FDIC. I can only provide you with my understanding of the FDIC legal staff's current position on the issues you present for consideration. The FDIC issues formal interpretations of its rules, but only pursuant to rule-making proceedings. See, e.g., 12 C.F.R. § 329.102 (interpreting payment-of-interest rules). The FDIC does not issue formal interpretations in the form of individual letters or rulings on particular cases.
Section 29(g) says the term "deposit broker" means:
(A) any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions
. . . .
12 U.S.C. § 1831f(g)(1)(A).
This definition seems, on its face at least, to embrace the practice you describe. The Bank's credit-card program creates a pool of deposits; the Bank directs the placement of the deposits in the pool; and the receiving institution has no access to the deposits through the program. Accordingly, in my view, the FDIC would consider that the Bank is "facilitating the placement" of third parties' deposits with another insured depository institution.
You suggest that, nevertheless, the Bank is not "engaged in the business' of placing deposits for its credit-card customers. The placement of the deposits is an integral part of the service that the Bank provides to its credit-card customers, however. The Bank selects the institution that will receive the deposits, and has its own business reasons for preferring one institution to another.1 Accordingly, I believe the FDIC would regard the Bank as being "engaged in the business" of placing deposits.
You next contend that the Bank might qualify as "an agent or nominee whose primary purpose is not the placement of funds with depository institutions," 12 U.S.C. § 1831f(g)(2)(I), and could therefore be excluded from the statutory definition of "deposit broker.'' I agree with this contention.
The "primary purpose" test is applied on a case-by-case basis, and we have issued a number of advisory opinions considering the applicability of this exclusion to various fact situations. Among others, see FDIC--90--21, FDIC--92--51, FDIC--92--92. In this instance, the Bank's "primary purpose" when depositing the funds is to obtain a perfected security interest in collateral, not to provide a deposit-placing service to its customers. The Bank would have required collateral under this arrangement even if deposit insurance were not available. The funds are placed in the depository institution for a substantial purpose other than the obtention of deposit insurance coverage. The depository institution does not pay any fee for the funds. The amount to be deposited is capped and is linked to the underlying credit agreement. That is, the amount deposited by any one credit-card customer is limited to the amount of the credit-line granted to the customer by the Bank. Less significantly, the Bank will place the funds with no more than one depository institution at a time, and the funds will be on deposit for an extended period of time. Based on the foregoing, it is my view that the Bank would be excluded from the definition of "deposit broker" pursuant to the exclusion at 12 U.S.C. § 1831f(g)(2)(I).
This opinion is based upon the facts as presented to the Legal Division in your letter. Should the facts change in the future or some fact be present of which we are not currently aware, the substance of this opinion may change.
If you have any further questions about this matter, please call me at (202) 898-3812.
1The FDIC has long taken the position that a deposit-placing institution cannot escape the designation "deposit broker" merely because the deposit-receiving institution does not pay it a fee. A receiving institution can compensate a placing institution in many ways--e.g., by providing record-keeping and custodial services at reduced rates. Go back to Text