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Deposit Insurance Fees: The FDIC Gets a Little Testy

For years banks have been allowed to charge their customers a deposit insurance fee to compensate the bank for the amount that it was required to pay the FDIC for deposit insurance coverage of the customer’s accounts. In Advisory Opinion 90-78 the FDIC stated that it was permissible for a bank to charge its customers a fee to compensate for the cost to the bank of deposit insurance on the customer’s account. In Advisory Opinion 91-30 the FDIC clarified its advice and stated that the fee charged could not exceed the actual cost of the insurance allocable to the account. In both opinions, the FDIC discouraged the practice but stated that it was allowable.

I am aware that some bank consultants have been recommending to their bank clients that they begin charging commercial customers a deposit insurance fee to replace some of the fee income that banks have lost from other regulatory changes. Apparently, many financial institutions have followed this advice. When customers complained about the new fee, some of the bankers told the customer that the fee was a reimbursement of a cost that the financial institution had to pay to maintain the account and referred the customers to the FDIC for more information. Whoa Nellie! Turns out the FDIC is a little thin-skinned. It doesn’t want your customers blaming it for the charges that they have to pay. On July 9, the FDIC issued FIL-33-2012. “The FDIC also is concerned that labeling a fee as “FDIC” or “deposit insurance” or referring customers to the FDIC for explanation of the fee may create the impression that the FDIC is requiring institutions to charge its customers the fee. . .Thus, it is inaccurate, and therefore misleading, for an IDI to state or imply that a particular fee charged to a customer is required by the FDIC or to refer customers to the FDIC for an explanation of the fee.”

The hook that the FDIC is really relying on in outlawing the practice is the fact that with the Dodd Frank risk based pricing insurance assessments the disclosure of the fee related to a specific account balance could theoretically disclose confidential examination results and if the fee was not allocable to the account balance then to call it a deposit insurance fee would be misleading.

In any event, as a result of the FDIC’s pronouncement, it is fine to charge the customer a fee to compensate for the cost of FDIC deposit insurance; however, you may not use either the words “FDIC” or “deposit insurance” to describe the fee. I have called the FDIC in an attempt to get some explanation of what a bank may call the fee, but I have received no response. If your bank is considering imposing a fee on your customers to reimburse you for the cost of deposit insurance you can certainly do so, but you cannot use nomenclature in describing the fee that would indicate to the customer what it is really for. Also, because you are not telling the customer the real reason for the fee, there is no requirement that it be equal to the deposit insurance cost for a particular account. You can call it an account maintenance fee, or a fee for the sun coming up this morning, and you may charge whatever you wish. I am more concerned about the impact of the ruling on banks that are already charging the fee. When you imposed the fee you disclosed to your customer what the fee was for, which was fine at the time you did so because at that time it was an acceptable practice. But now, you have your statements programmed to show an FDIC Deposit Insurance fee or something of that nature. You may no longer reflect the nature of the fee on your periodic statements. I recommend that you change the name of the fee to something that does not indicate its purpose and notify your customers that you will no longer charge the deposit insurance fee, but that you will begin charging a fee of a new name that has no relationship to the cost of deposit insurance. Alternative, you can drop the fee altogether.

On a more serious note, the Consumer Financial Protection Bureau has issued a proposed rule to modify Regulation Z and RESPA to combine the initial and closing disclosures for a consumer residential real estate secured loan. The proposal contains 1099 pages. Any regulation that takes 1099 pages to explain can’t be all good. I confess, I have not yet read it all. When enacted, it will bring sweeping changes to mortgage loan disclosures. I do think that the proposed disclosures will be more valuable to consumers than the existing disclosures, and once the rules are learned, I don’t think that the process will be any more difficult for lenders than the present process. My main concern is that the CFPB asserts that it has the right to implement regulations that are in contravention of the clear language of the law in order to make the disclosures more valuable to consumers. While the result in this case may be laudable if the CFPB truly has the power to rewrite laws written by Congress, then, it is truly a dangerous animal. We will provide more information on the proposed regulation when we have had time to review it.
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The above article was provided to Andrews Hooper Pavlik PLC (AHP) courtesy of TriComply, the compliance arm of TriNovus. AHP does not guarantee accuracy of the information provided in the article and it should not be construed as professional advice. If you have any questions regarding this article, please contact Randy Morse, CPA, Partner and leader of AHP’s Financial Institution practice. AHP provides a broad range of accounting, auditing, tax, and consulting services to financial institutions throughout the state of Michigan and beyond.

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