On December 4, 2009, the FDIC published Financial Institution Letter FIL-69-2009, which outlines the process for requesting a “high-rate area” determination by the FDIC to exempt the institution from compliance with the national rate caps.  As we’ve previously discussed, financial institutions that are less than well capitalized will be barred from paying in excess of 75 basis points above the national rate unless the institution is able to persuade the FDIC that the institution’s local market rate is above the national rate.  The new guidance confirms our previous understanding of the process the FDIC will use in approving high-rate areas, and provides additional clarify.

Less than well-capitalized institutions that operate in market areas where rates paid on deposits are higher than the “national rate” can request a “high-rate area” determination from the FDIC by sending a letter to the applicable FDIC regional office.  The letter must identify the market area(s) in which the institution is operating.  The FDIC appears willing to defer to the institution to identify its relevant market area, so long as it is a geographic area and does not arbitrarily exclude FDIC-insured institutions and branches operating in that geographic area.

The FDIC will use its own standardized data (average rates by state, metropolitan statistical area and micropolitan statistical area) to determine whether the institution is in a high-rate area.  While the FDIC will not consider any specific supporting data offered by the institution, institutions may still want to calculate the expected market rate for various markets in determining whether to identify a larger or small relevant market area.  The FDIC has specified that market areas may not consist only of a subset of banks with similar characteristics (such as asset size or retail focus) and cannot exclude branches of large institutions.

The FDIC will then compare the average rate paid in the identified market versus the national rate in four non-jumbo deposit products: money market deposit accounts, 12-month CD’s, 24-month CD’s, and 26-month CD’s.  If the standardized data shows that the average rate paid in the bank’s market area exceeds the national average for a minim of three of the four deposit porducts by at least 10 percent, then the FDIC will determine that the institution is operating in a high-rate area.  In the FAQ attached to the Financial Institution Letter, the FDIC demonstrates this calculation with three sample market areas: Washington State, Athens-Clarke County Georgia MSA and the Maryville Missouri Micro SA.  Only the Athens-Clarke County Georgia MSA is determined to be a high-rate area, as all four of the local market rates exceed the respective national averages by at least 10%.

Generally, the FDIC will consider high-rate area determination requests within 30 days of receipt, and institutions must continue to comply with the national rates pending a determination by the FDIC.  However, the FDIC has implemented a special transition rule while provides a potentially significant delay for all less then well-capitalized banks.  Institutions requesting a high rate area determination by December 31, 2009 will not be required to comply with the national rate for local deposits until March 1, 2010, regardless of whether the FDIC grants the determination. Regardless of the determination, all institutions must begin using the national rate for noon-local deposits starting January 1, 2010.  All determinations will be effective for a calendar year, and thus institutions will need to seek renewals by November 30th of each year for the following year to maintain their high-rate area determination on a continuous basis.  Although determinations will be made based on standardized data, each institution must seek its own individual determination from the FDIC.

If a less than well-capitalized institution receives a high-rate area determination, the institution will not be permitted to pay more than 75 basis points in excess of the prevailing rate for the institution’s local market on each of the identified deposit products, even to the extent that the local rate may be less than the national rate for certain deposit types.  All less than well-capitalized institutions will remain subject to the national rate caps for out-of-market deposits, such as internet deposits.