The FDIC recently proposed a rule change which would expand the definition of brokered deposits in several key ways, including: classifying banking-as-a-service (BaaS) deposits as brokered, redefining the term “deposit broker” to include any provider taking fees for deposit placements, and revising the primary purpose exception criteria. These changes come on the heels of 2020’s brokered deposit rule changes, which many in the industry feel haven't been in place for enough time to determine if additional changes are warranted. 

The 2020 Brokered Deposit Rule Changes

In 2020, the FDIC made changes to its definition of deposit broker, clarified what entities constitute a deposit broker, and created a streamlined process for obtaining primary purpose exceptions. This rule took effect on April 1, 2021, and compliance was extended to January 1st, 2022. Also during this time, the US economy was facing unprecedented upheaval as a result of the global pandemic and its effect on the  financial landscape.   

Ampersand CEO Kelly Brown spoke to BAI regarding these rules .“There hasn’t been a sufficient amount of time to test those 2020 rules,” said Brown. “Think about the distortions in the economy since those rules have been in place, namely the pandemic and government stimulus, loan forbearance, unusual liquidity, and deposit flows. It’s not been a typical backdrop to test those rules.”

The New Proposed Rules

The FDIC's new proposed rules seek to expand the definition of brokered deposits in several significant ways. Key changes include:

1. Classifying BaaS Deposits as Brokered: The FDIC proposes to classify deposits made through BaaS platforms as brokered. This change would impact many banks that partner with fintech companies to offer consumer banking products. Previously, these deposits were not automatically considered brokered. 
2. Redefinition of Deposit Broker: The term "deposit broker" would be expanded to include any entity receiving a fee for placing deposits at a bank. This broader definition could encompass more companies and individuals, particularly those involved in fintech, making their activities subject to brokered deposit regulations.
3. Revisions to the Primary Purpose Exception: The FDIC also proposes revisions to the criteria for the primary purpose exception, which currently allows certain deposit arrangements to avoid being classified as brokered if the primary purpose of the arrangement is not to place deposits. The new rules could tighten these criteria, reducing the availability of this exception for many arrangements.

These changes follow the 2020 rule updates but go further by casting a wider net over what constitutes a brokered deposit. Frankly, the proposal does not reflect the realities of modern deposit management. With current advancements in technology, and labor shortages, many companies rely on deposit management firms to handle their day-to-day cash management needs. Firms like Ampersand play a crucial role in helping clients meet state law requirements, adhere to internal investment policy guidelines, and ensure deposits are managed effectively and securely. 

The Impact on Community Banking 

Community banks and smaller regional banks depend on BaaS deposits and their work with fintech companies to offer these products. If these deposits are classified as brokered, it would unfairly increase the regulatory burden and costs for these banks, limiting their ability to serve their communities effectively. It’s important to note that these deposits are often mischaracterized as "hot money," deposits that move quickly from one institution to another in search of higher rates. 

BaaS deposits are in fact, a stable source of deposits derived from everyday consumer banking activities. To support community banks, it is crucial to advocate for a more nuanced approach to regulation that recognizes the unique nature of BaaS deposits and the vital role that community banks play in the financial ecosystem. Simply put, we cannot afford to have community banks forced to contend with the financial and regulatory implications of these new rules. 

How You Can Help

At Ampersand, it’s important to us to protect community banks and ensure that they are able to do what they do best - serve their customers and local communities. We'd like to ask for your help in advocating for community banks. If you are a banker, business owner, or otherwise impacted by these proposed changes, please consider submitting a public comment regarding this rule. 

To submit a public comment regarding new proposed FDIC rule changes, or any other, you can follow these steps:

1. Identify the Proposed Rule

• Visit the FDIC's website and locate the section for "Proposed Rules" or "Regulations & Examinations."
• Find the specific rule you're interested in, such as the proposed changes to the definition of brokered deposits.

2. Read the Proposal

• Carefully review the proposed rulemaking document to understand the specifics of the changes and the rationale behind them.

3. Prepare Your Comment

• Write your comment, focusing on how the proposed changes will affect you or your organization. Be clear, concise, and provide evidence or examples to support your position.
• If relevant, include specific recommendations for how the rule could be improved or suggest alternatives.

4. Submit Your Comment

• Online: You can submit comments electronically via the Federal eRulemaking Portal at Regulations.gov. Search for the rule by its docket number (found in the FDIC proposal, in this case 89 FR 68244) and click on the "Comment Now!" button.
• Mail: You can also mail your comment to the FDIC. The address will be provided in the proposed rule document.
• Email: Sometimes, the FDIC allows comments to be submitted via email. The email address will be listed in the proposed rule document.

5. Track Your Comment

• After submitting, you can track the status of your comment on Regulations.gov. Public comments are typically published on the website, allowing you to see other stakeholders' feedback as well.

Learn how Ampersand can help your organization with deposit management strategies. Contact Ampersand to get started.