FDIC's brokered deposits rule may hurt some middlemen

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WASHINGTON — As the Federal Deposit Insurance Corp. tries to update the classification of brokered deposits, the agency’s longstanding practice of sanctioning certain deposit services through individual rulings is getting more attention.

In the years since the FDIC created a brokered-deposit framework in the early '90s, the industry has relied on informal guidance and agency advisory opinions on how the rules apply to specific deposit-gathering businesses. Those rulings can determine whether deposits raised through a service are “brokered,” which are then subject to restrictions.

While the industry has applauded the FDIC’s efforts to modernize the rules, many have raised concerns that the FDIC’s December 2019 proposal would not sufficiently address the ongoing status of past advisory opinions, meaning some services that had thought they were in the clear could soon be in limbo.

“Fundamentally, they need to start with this: Here are the opinions we’re adopting, here are the opinions we’re throwing out, here’s what we’re modifying,” said Sara Kelsey, a former FDIC general counsel who is now in private practice. “Then, you can ask people to comment on the regulation. Then, people would understand what they’re really trying to do.”

Yet some observers say the hazy standards for defining a “deposit broker” through inconsistent advisory opinions have allowed certain services to skirt the rules. They see the FDIC’s rulemaking as an opportunity to impose order.

While the industry has applauded the FDIC’s efforts to modernize the rules, many have raised concern that the agency’s December 2019 proposal would not sufficiently address the ongoing status of past advisory opinions.
While the industry has applauded the FDIC’s efforts to modernize the rules, many have raised concern that the agency’s December 2019 proposal would not sufficiently address the ongoing status of past advisory opinions.

In a June comment letter on the FDIC’s proposal, Michael Erdman, a lawyer with Teeple Leonard & Erdman in Chicago, outlined concerns about companies including Kasasa, Bankrate.com and QwickRate.com. He argued the FDIC should consider risks posed by some companies that operate in a manner similar to modern deposit listing services.

In certain cases, Erdman said, deposits raised through such listing services should be considered brokered, even if the listing service was previously approved by the FDIC through an advisory opinion.

“To provide clarity, the FDIC should rescind all past inconsistent advisory opinions,” Erdman wrote. “For example, although the FDIC in the past may have permitted listing services to sort lists of depository institutions by interest rate, it has recognized in recent opinions that listings of institutions and listing of account details, and a search function for accounts, in an arrangement that involves trying to attract depositors with interest rates, can make a company a deposit broker.”

Under the law, banks cannot accept brokered deposits if they are less than well capitalized. But the industry has long argued that the FDIC has used outdated standards to define such deposits, overlooking online banking models that shift emphasis away from branches.

The proposed framework would narrow the definition of deposit brokers and create a formal process for businesses to apply for exemptions via the statute’s “primary purpose” clause. Under that clause, a company that places less than 25% of the funds it manages for customers at insured depository institutions can apply to receive an exemption.

But businesses relying on advisory opinions to avoid being labeled a “deposit broker” remain in the dark about just how the new framework will treat that staff guidance.

The FDIC proposal doesn’t “say how [its] proposal compares to this huge raft of advisory opinions that they’ve been giving out in the past on which businesses have that they’ve been basing their business structures,” said Kelsey.

One company that has relied on such guidance is Kasasa, which partners with banks by helping them find new customer deposits while offering data analysis, marketing and other advisory services. Unlike other services, Kasasa markets accounts opened through a partner bank under its own brand.

The company received two separate advisory opinions from the FDIC in 2014, which outlined steps it would need to take to avoid being labeled a deposit broker.

Among the recommendations was to list its branded accounts not on Kasasa’s own website, but “through an external source not associated with" the company, FDIC staff said in one opinion. The firm subsequently redirected customers to find accounts through DepositAccounts.com. Company representatives say that there is no monetary relationship between the site and Kasasa.

“By making and maintaining these modifications," the company "will cease to qualify as a ‘deposit broker’ because it will no longer be engaged in ‘facilitating the placement of deposits,” one of the FDIC advisory opinion concludes.

Kasasa executives say that the company endured revenue losses and reputational blowback before the advisories were issued and its regulatory status with the FDIC was uncertain, but that the company was ultimately able to meet the agency’s conditions.

“We’ve been able to manage our business not the way we’d like to, because we could grow faster being in the old model," but the FDIC "enabled us to keep our business,” Patrick Laughlin, a senior vice president for the company, said in an interview. But, “Holy smokes,” Laughlin added, “if that goes away, then guess what’s going to happen.”

The FDIC’s proposed rulemaking does not ignore the question of advisory opinions entirely.

The agency “intends to evaluate existing staff opinions to identify those that are no longer relevant or applicable based on any revisions made to the brokered deposit regulations,” the proposal says. The FDIC added that it would plan to “codify staff opinions of general applicability that continue to be relevant and applicable, and to rescind any staff opinions that are superseded or obsolete or are no longer relevant or applicable.”

But left unclear is which specific advisory opinions might make the cut, or the criteria the agency may use to determine their relevance. Instead, the FDIC asked commenters to suggest in their public feedback which advisory opinions “of general applicability” should be codified.

The uncertain fate of the FDIC’s advisory opinions under the new regime is further compounded by the fact that only some of the FDIC’s brokered deposit advisory opinions are public.

“How can you comment on a nonpublic letter?” said Paul Clark, a partner at Seward & Kissel. “How can I comment on something that’s never been made public to say whether it should be preserved?”

The issue has not escaped the attention of the industry’s leading trade association. In the American Bankers Association’s June comment letter, the group wrote that without knowing which advisory opinions will be codified, it would be “difficult to comment on proposed changes to a significant regulatory framework without a complete understanding of how the proposed framework will affect specific customer relationships, partnerships and business models.”

Some analysts have noted that staff opinions are not always consistent with one another, or rely on interpretation of internal guidance that is not publicly available.

“These are staff opinions that are historically written by maybe a lawyer, singular, maybe with consultation with the general counsel, maybe not, and then are issued,” said Clark. “It’s not even clear what the filing system is, let alone what the policy is with putting them on the [FDIC’s] website.”

In a speech at the Brookings Institution in December 2019, even Chairman Jelena McWilliams said the agency’s existing brokered deposit framework has been developed on an inconsistent basis.

“For years, the FDIC faced difficult questions regarding whether different types of deposit arrangements should be reported as brokered. The FDIC responded to each of these questions on a one-off basis, typically through confidential letters or public or nonpublic staff advisory opinions,” she said. “The result was the development of a fragmented, opaque legal regime that exists outside of the FDIC’s public-facing regulations, understood by only a select few.”

As a result, a key part of the FDIC’s push to reform the brokered deposit regulation has been to create “an application and reporting process with respect to the primary purpose exception,” according to the agency’s December notice of proposed rulemaking.

Having a formal application process will likely help the industry gain greater clarity on the regulatory minutiae of brokered deposits over time, analysts say.

“The process in place today has never been embodied in a formal rulemaking and never fully understood,” said Clark. “Having a formal process would be helpful.”

But in the meantime, the status of existing advisory opinions remains an open question.

Kasasa created a campaign to preserve existing staff opinions called the Partnership to Save Community Banking Competitiveness, which argues that threatening the preexisting guidance could jeopardize business models on which community banks rely.

“The FDIC proposed a rule change that will effectively cause the vast majority of third-party vendors to be considered deposit brokers,” the campaign’s website says. “This would devastate the competitiveness of community banks, many of whom have limited resources and rely on third-party vendors to help them innovate.”

But analysts such as Erdman question Kasasa’s own business model, saying it could run afoul of both existing rules and prior advisory opinions.

“My understanding is, based on how Kasasa operates, they may — emphasis on may — be inconsistent with those staff opinions,” Erdman said in an interview. “Even under existing law, with these existing opinions, it may be that Kasasa deposits should be reported as brokered.”

In his comment letter, Erdman suggested the third-party website, DepositAccounts.com, enables the company to steer customers to its accounts as if Kasasa operated the site itself.

“Kasasa, of course, does influence consumers through this site, explicitly directing them to institutions and accounts that offer ‘high rate’ Kasasa accounts,” Erdman wrote in the letter, adding that “Kasasa thus actively steers depositors to particular banks on the basis of high interest rates, facilitating rate-based placement.”

But representatives for Kasasa say those accusations are unfounded because customers who choose Kasasa-branded accounts through participating financial institutions have a direct relationship with the bank, and they apply for those accounts directly through the institution.

“We have no contractual relationship with any consumer,” said Laughlin. “We have no ability to actually influence their making a decision.”

“Absent that, we’re doing nothing. We have no involvement after they click on DepositAccounts.com and off they go,” he said.

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FDIC Deposits Partnerships Fintech Community banks Kasasa Regulatory guidance Financial regulations