Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
On November 22, the FDIC released an update to the Questions and Answers Related to the Brokered Deposits Rule. The FDIC clarified in a new FAQ in conjunction with the updated Brokered Deposit framework that, with respect to the “facilitation” definition’s first prong, a “third party that has legal authority, contractual or otherwise, to direct another entity (e.g., custodial agent) to move a depositor’s funds or close a depositor’s account would meet the first prong of the ‘facilitation’ definition.” The FAQ specified, however, that such third parties would not meet this first prong if the third party directs another entity to move depositor funds or close a depositor’s account “based only upon either instructions or an approval received from the depositor for each occurrence and specific to each deposit account.” The FAQ further noted that third parties recommending the placement of funds in a particular deposit account may meet the second and/or third prong of the “facilitation” definition depending on various facts and circumstances.
On October 5, the FDIC released an update to the Questions and Answers Related to the Brokered Deposits Rule document. The FDIC added an FAQ to expressly state that a broker-dealer that sweeps deposits to only one insured depository institution (IDI) does not need to file a notice to rely upon the 25 percent designated exception, because a third party that has an exclusive deposit placement arrangement with only one IDI does not meet the definition of “deposit broker.” The FAQs also specify that an individual “meets the first part of the ‘deposit broker’ definition when it is ‘engaged in the business of placing deposits’ on behalf of a third party (i.e., a depositor) at IDIs.” The FAQs further clarify that an individual “is ‘engaged in the business of placing deposits’ of third parties if that person, while engaged in business, receives third party funds and deposits those funds at more than one IDI.”
On September 8, the FDIC updated its brokered deposits FAQs by adding an FAQ to illustrate an example of when a broker is “proposing deposit allocations” under the “matchmaking” definition. According to the FAQ, if an individual identifies at which banks to place the funds of individual customers of a broker dealer as part of a broker dealer sweep program, the person is “proposing deposit allocations” for purposes of the “matchmaking” definition. The new FAQ explains that this is true even if the broker dealer determines the group of banks, or the order of banks, at which the person can propose placing individual depositor's funds or the maximum amount that can be placed at each bank. In addition, the guidance explains that a person that is “proposing deposit allocations” at, or between, more than one bank, also satisfies the other criteria in the matchmaking definition.
The FDIC also provided a public list of all entities that have submitted public notices for the primary purpose exception as of August 31, 2021. Of the two exceptions that require notice filing, the majority of the filers so far claimed an exception based on “enabling transactions” business relationships whereby 100 percent of depositors’ funds that an agent or nominee places, or assists in placing, at depository institutions are placed into transactional accounts that do not pay any fees, interest, or other remuneration to the depositor.
On December 15, the FDIC approved a final rule, which creates a new framework for brokered deposits by, among other things, establishing bright-line standards for determining the definition of a “deposit broker,” as well as a methodology for “analyzing whether deposits made through deposit arrangements qualify as brokered deposits, including those between insured depository institutions (IDIs) and third parties, such as financial technology companies.” Also released are two fact sheets on brokered deposits and interest rate restrictions (see here and here). The final rule follows a notice of proposed rulemaking issued last December (covered by InfoBytes here), which sought feedback on ways the agency could improve its brokered deposit regulation to ensure the “classification of a deposit as brokered appropriately reflects changes in the banking system, including banks’ use of new technologies to engage and interact with their customers.” The final rule also establishes a series of exceptions that will allow banks and their partners to determine whether they can avoid restrictions on brokered deposits, and will establish a process for entities to apply for a “primary purpose exception” if its relationship with an outside entity supplying deposits does not meet one of the final rule’s “designated exceptions.” Further, the FDIC noted that brokered deposit restrictions will not apply to banks that enter into exclusive deposit placement arrangements, such as those seen often between fintech companies and a partner bank, because, according to a statement released by FDIC Chairman Jelena McWilliams, “[e]ntities who place deposits with only one bank are less likely to present the types of funding stability risks that may arise when deposit brokers place deposits at a range of banks.” Further, the final rule amends the methodology for calculating the interest rate restrictions applicable to less than well capitalized IDIs, and changes the methodology for calculating the national rate and national rate cap for specific deposit products.
Acting Comptroller of the Currency Brian P. Brooks issued a statement in support of the final rule: “These improvements to the brokered-deposit rule help promote greater access to financial services by supporting fintech and bank partnerships and allowing a wider array of services to be available in the market, especially for unbanked and underbanked Americans for whom the easier user interface of fintech apps is a gateway to the mainstream financial system.”
On April 3, the FDIC announced the extension of public comment on its notice of proposed rulemaking (NPR) on revisions to the agency’s brokered deposit regulations. Due to challenges associated with the Covid-19 pandemic, the deadline for submitting comments is now June 9. As previously covered by InfoBytes, the NPR would modernize and establish a new framework to ensure the “classification of a deposit as brokered appropriately reflects changes in the banking system, including banks’ use of new technologies to engage and interact with their customers.”
On December 12, the FDIC issued a notice of proposed rulemaking (NPRM) requesting comments on revisions to the agency’s brokered deposit regulations implementing Section 29 of the FDI Act, and also issued an associated factsheet. The regulations were originally implemented in the late 1980s, and the FDIC more recently issued guidance in the form of FAQs in 2016. The FDIC’s NPRM follows an advanced notice of proposed rulemaking issued last December (previously covered by InfoBytes here), that requested feedback on ways in which the agency could improve its brokered deposit regulation. According to the FDIC, the NPRM would modernize and establish a new framework to ensure the “classification of a deposit as brokered appropriately reflects changes in the banking system, including banks’ use of new technologies to engage and interact with their customers.” Among other things, the NPRM would: (i) revise the “facilitation” prong of the deposit broker definition so that it applies to persons who engage in specified activities; (ii) revise two exceptions under Section 29—the first would allow a wholly owned operating subsidiary to be eligible for the insured depository institution exception to the “deposit broker” definition in certain circumstances, while the second would amend the “primary purpose exception” for agents or nominees whose primary purposes are not the placement of funds with insured depository institutions for customers (the FDIC plans to establish an application process for third parties who want to take advantage of the primary purpose exception); and (iii) continue to consider an agent’s placement of brokered CDs as deposit brokering, and continue to be report such deposits as brokered. Chair McWilliams provided remarks (linked here) about brokered deposit regulation at a Brookings Institution event the day before the NPRM was adopted.
Board member Martin Gruenberg voted against the NPRM, stating that the proposal would “significantly weaken” the rule and would narrow the scope of deposits that are considered brokered “without adequate justification and expose the banking system to significantly increased risk.”
Comments on the NPRM are due within 60 days of publication in the Federal Register.
On March 12, the CFPB released its winter 2019 Supervisory Highlights, which outlines its supervisory and enforcement actions in the areas of auto loan servicing, deposits, mortgage servicing, and remittances. The findings of the report cover examinations that generally were completed between June 2018 and November 2018. Highlights of the examination findings include:
- Auto Loan Servicing. The Bureau determined that attempts to collect miscalculated deficiency balances from extended warranty products were unfair. The Bureau also found that deficiency notices were deceptive where eligible rebates were not sought or applied, although the notice purported to be calculated to include such rebates.
- Deposits. The Bureau found that companies engaged in a deceptive act or practice by failing to adequately disclose that when a payee accepts only a paper check through the institutions online bill-pay service, a debit may occur earlier than the date selected by the consumer.
- Mortgage Servicing. The Bureau noted several issues related to mortgage servicing, including servicers (i) charging consumers late fees greater than the amount permitted by mortgage notes; (ii) misrepresenting the reasons PMI could not be cancelled; and (iii) failing to complete loss mitigation applications with “reasonable diligence.”
- Remittances. The Bureau determined that remittance transfer providers erred when they failed to refund fees and taxes when funds were not made available to recipients by the date listed in the disclosure and the mistake did not result from one of the exceptions listed in the Remittance Rule.
The report notes that in response to most examination findings, the companies have already remediated or have plans to remediate affected consumers, and implement corrective actions, such as new policies and procedures.
Lastly, the report also highlights recent public enforcement actions and guidance documents issued by the Bureau.
On December 19, the FDIC announced an advance notice of proposed rulemaking (ANPR) requesting comments on the agency's brokered deposit and interest rate cap regulations. (See also FDIC FIL-87-2018.) These regulations were originally implemented in the late 1980s and early 1990s, and apply to less than well-capitalized insured depository institutions. According to the FDIC, there have been “significant changes in technology, business models, the economic environment, and products since the regulations were adopted.” Currently, Section 29 of the Federal Deposit Insurance Act restricts less than well-capitalized insured depository institutions from accepting brokered deposits, and places restrictions on interest rates that these insured depository institutions can offer. The ANPR includes a series of questions seeking feedback on a number of issues, including (i) ways in which the FDIC can improve the implementation of Section 29 “while continuing to protect the safety and soundness of the banking system;” (ii) whether the definition of a brokered deposit is too narrow or too broad; (iii) whether there have been specific changes within the financial services industry since the regulations were adopted that should be considered; (iv) whether there should be changes to the agency’s national rate calculation; and (v) how rates offered by internet or electronic-based financial institutions should be calculated.
The ANPR further notes that the Economic Growth, Regulatory Relief, and Consumer Protection Act created an exception from brokered deposit consideration for some reciprocal deposits. (See previous InfoBytes coverage here.)