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The FDIC's Recent Brokered Deposit Rulemaking Might Provide Relief to the Prepaid Industry

On December 12, 2019, the Federal Deposit Insurance Corporation (“FDIC”) released a Notice of Proposed Rulemaking (“NPR”) to amend the brokered deposit regulation.  While the proposed regulation will not eliminate the restrictions or remove all burdens from those institutions that accept brokered deposits, the NPR indicates that the FDIC has recognized that changes in technology call for changes in regulation.  As a result, banks working with innovative prepaid payments companies to provide financial services might get some brokered deposit relief.

Section 29 of the Federal Deposit Insurance Act (“FDI Act”) currently defines “brokered deposit” as any deposit that is obtained directly or indirectly through the assistance of a deposit broker.  For nearly 30 years, the FDIC has interpreted “deposit broker” very broadly, so that any deposit that an institution obtains with the assistance of a third party could be considered to be a brokered deposit.  Although there is an exemption for “an agent or nominee whose primary purpose is not the placement of funds with depository institutions,” the FDIC has rarely applied that exception.    

Under the NPR, which is subject to comment, the FDIC could expand this “primary purpose” exception, in some cases subject to an application and approval process.  According to the NPR, the FDIC is seeking to “balance the need to promote safe and sound practices” with “changes in the banking landscape since 1989”.  If finalized, in many instances, funds held by banks for Fintech customers would no longer be deemed “brokered deposit,” which is good news for the prepaid industry and their banks.

Jelena McWilliams, FDIC Chairman, noted in a December 11, 2019 Keynote address (https://www.fdic.gov/news/news/speeches/spdec1119.pdf ) what the goals of the NPR are. 

– To develop a framework that encourages innovation within the industry, and allows banks to serve customers the way customers want to be served.

– To take a balanced approach to interpreting Section 29 that tracks the letter and spirit of the law.

– To minimize risk to the Deposit Insurance Fund, and to ensure we address the core problems Congress sought to address in passing Section 29.

-To establish an administrative process that emphasizes consistency and efficiency.

Here are links to the FDIC NPR and accompanying Memorandum.  We anticipate issuing a more detailed Client Alert shortly.

https://www.fdic.gov/news/board/2019/2019-12-12-notice-dis-b-fr.pdf

https://www.fdic.gov/news/board/2019/2019-12-12-notice-dis-b-mem.pdf

Copyright 2020 K & L Gates

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About this Author

Judith E. Rinearson, KL Gates, federal consumer protection lawyer, anti money laundering attorney
Partner

Judith Rinearson is a partner in the firm’s New York and London offices. Ms. Rinearson concentrates her practice in prepaid and emerging payment systems, electronic payments, crypto/virtual currencies, reward programs, ACH and check processing. She has more than 25 years of experience in the financial services industry, including 18 years at American Express’s General Counsel’s Office. Her expertise focuses particularly in the areas of emerging payments and compliance with state and federal consumer protection laws, anti-money laundering laws, state money transmitter...

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Partner

John ReVeal is a partner in the firm’s Washington, D.C. office and a member of the consumer financial services practice group. He advises banks and other financial services providers on consumer compliance and assists financial institutions in the review and development of Bank Secrecy Act and Anti-Money Laundering programs.

In addition, Mr. ReVeal advises financial institutions regarding bank and thrift powers, federal preemption, exportation of rates and charges, and financial institution licensing.

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