The Road to Housing Act takes aim at one of the most persistent pain points in community banking: the risk that everyday deposit relationships — particularly those involving custodial arrangements and reciprocal deposit networks — get swept into the regulatory definition of “brokered deposits.” Sections 901 and 902 of the legislation offer meaningful, targeted relief, providing both structural clarity for institutions that rely on payment services arrangements and expanded safe harbors for reciprocal deposit programs. For community banks, these changes could meaningfully expand deposit stability without triggering the heightened regulatory scrutiny that brokered deposit classification brings.

Background

Under § 29 of the Federal Deposit Insurance Act, insured depository institutions that are not well capitalized face significant restrictions on accepting brokered deposits, and even well-capitalized institutions must navigate complex classification rules to ensure they are not deemed overly reliant on brokered deposits. The brokered deposit framework has long been a source of regulatory uncertainty, particularly as banking has evolved to include fintech partnerships, custodial payment arrangements, and reciprocal deposit networks — none of which were squarely contemplated when the original rules were written.

The FDIC attempted to modernize the framework through rulemaking in 2020, but questions remained — particularly around whether deposits flowing through custodial or fiduciary arrangements, and through payment services platforms, should be treated as brokered. The Road to Housing Act addresses these concerns directly through statutory fixes that go further than the 2020 rule.

Key Facts

Section 901 — Custodial Deposit Exception

  • Creates a statutory exception to brokered deposit classification for “custodial deposits” held at eligible banks, up to 20% of the institution’s total liabilities.
  • A “custodial deposit” is defined as a deposit placed through an insured depository institution, trust company, plan administrator, or investment advisor acting in a formal custodial or fiduciary capacity that is not placed in exchange for fees paid by the receiving institution to a third party under a fee agreement. This distinction is significant: it targets arrangements driven by the depositor’s need for insurance coverage rather than by a commercial referral relationship.
  • Eligible banks are those that have less than $10 billion in total assets, a CAMELS composite rating of 1, 2, or 3, and be well capitalized — or have obtained a waiver under the existing FDIC waiver process.
  • Institutions that accept custodial deposits while not well capitalized are subject to an interest rate cap tied to local or national market rates, consistent with existing brokered deposit rate restrictions.

Section 902 — Expanded Reciprocal Deposit Safe Harbor

  • Significantly expands the existing reciprocal deposit safe harbor first established by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018.
  • Under current law, agent institutions may exclude a fixed dollar cap of reciprocal deposits from brokered deposit classification. The Road to Housing Act replaces that cap with a tiered, liability-based formula:
    • 50% of total liabilities up to $1 billion
    • 40% of the portion of total liabilities between $1 billion and $10 billion
    • 30% of the portion of total liabilities between $10 billion and approximately $96.3 billion
  • Updates the definition of “agent institution” to align with the CAMELS 1, 2, or 3 rating standard — replacing the prior “outstanding or good” composite condition language — making the eligibility standard clearer and more consistent with other regulatory frameworks.
  • Directs the FDIC, in consultation with the Federal Reserve, to conduct a comprehensive study of reciprocal deposits, including performance data since 2018, usage during stress periods, and an analysis of end-user depositors such as municipalities, nonprofits, and businesses. A report to Congress is due within six months of enactment.

Our Take

Sections 901 and 902 of the Road to Housing Act represent a meaningful step toward modernizing a brokered deposit framework that has struggled to keep pace with how deposits actually flow in today’s banking system.

The custodial deposit exception in § 901 is particularly significant for community banks engaged in payment services partnerships or other arrangements where customer funds are held in a custodial or fiduciary capacity. Under the current framework, there has been legitimate concern that deposits flowing through these structures — even when the institution is not paying a referral fee and the arrangement is genuinely custodial in nature — could be mischaracterized as brokered. The statutory exception addresses that concern directly by focusing on the nature of the arrangement rather than the identity of the intermediary, while the 20% cap and eligibility requirements ensure the exception remains appropriately bounded.

Section 902’s expansion of the reciprocal deposit safe harbor is equally important for community banks looking to retain locally sourced deposits that are simply being placed through a network to maximize FDIC insurance coverage. Reciprocal deposits are a tool that allows community banks to offer their customers the same insurance protection that larger institutions can provide through size alone — and the expanded safe harbor acknowledges that these deposits behave more like core deposits than brokered ones in practice. The FDIC study requirement is also notable: it signals congressional intent to continue refining the framework based on real performance data, which could support further reform down the road.

Together, these provisions should give community banks greater confidence in structuring and growing deposit relationships that serve their customers and communities — without the overhang of brokered deposit classification risk.