The FDIC issued revised questions and answers (the “Q&As”) regarding the process under Section 29 of the Federal Deposit Insurance Act and Section 337.6 of the FDIC Rules and Regulations (“Section 337.6”) for determining whether a FDIC‑insured depository institution (“DI”) is operating in a “high-rate area.” The Q&As provide clarification to the financial institution letter (“FIL-69-2009”) issued by the FDIC providing guidance on such determinations to DIs that are subject to interest rate restrictions. FIL-69-2009 updated FDIC guidance previously provided in FIL-62-2009.
As described in the November 17, 2009 Alert and December 8, 2009 Alert, Section 337.6 restricts the use of brokered deposits and limits interest rates paid on interest-bearing deposits solicited by less than well-capitalized DIs and DIs that meet the quantitative tests for being “well-capitalized,” but are subject to a capital maintenance provision issued by a federal banking agency within a formal written agreement, consent order, order to cease and desist, capital directive or prompt corrective action directive.
The Q&As provide clarifications and additional information with respect to the restrictions on interest rates and the process for seeking a determination that a DI is in a high-rate area. The Q&As state that the FDIC recognizes that in the current environment, the spread between the funding costs for community DIs and larger DIs has widened in a way that reflects a variety of factors, including market perceptions about the likelihood of government support for DIs of various sizes. The FDIC notes, however, that the materiality of this issue will vary across different geographic areas. Accordingly, the Q&As provide that in calculating prevailing local interest rates and comparing these to the national rate for the purpose of identifying high cost areas, the FDIC will, when appropriate, exclude the rates offered by multiple branches of the DI.The FDIC revised its response to the question of whether the cost of gifts or premiums that a DI gives for opening a deposit account should be included in the calculation of the deposit interest rate. Previously, the FDIC required the cost of all gifts to be included. The Q&As provide that small gifts of premiums ‑ with a value of $10 or $20 ‑ may not qualify as interest. The Q&As also clarify that a market area must be a geographic area that includes all DI competitors and cannot consist of a subset of DIs with similar characteristics, such as asset size or a retail focus.