Here are answers to common questions ABA has been receiving from bankers about the revised FDIC coverages

 

Changes in FDIC coverage have had bankers working hard to give customers accurate information. Here are answers to common questions asked to help bankers do that job.

 

 

Q. What do I tell customers who ask why this increase in FDIC insurance limits is only temporary?
A. In the Emergency Economic Stabilization Act (EESA), Congress temporarily increased the FDIC deposit insurance coverage limit from $100,000 to $250,000 as part of its efforts to shore up consumer confidence in the banking industry. The limit will revert to $100,000 on Dec. 31, 2009, unless Congress acts to extend the increase beyond that date. Note that retirement accounts were already insured up to $250,000 and will remain at that level when the EESA provision expires.

 

 

Q. What do we need to do to notify our customers of the changes in the FDIC insurance limits?
A. FDIC issued FIL 102-2008 (www.fdic.gov/news/news/financial/2008/fil08102.html), which allows you to post the statement: “On October 3, 2008, FDIC deposit insurance temporarily increased from $100,000 to $250,000 per depositor through December 31, 2009.” You should post this notice on or near the current signs. You can create your own signs, or you can order new signs by visiting  www.fdic.gov/regulations/resources/signage/

 

 

Q. Do we need to tell our customers the change is temporary?
A. Yes. Banks should be able to explain the increase in the deposit insurance limit and the duration of the change. It is particularly important that customers who open CDs with maturities after Dec. 31, 2009, understand the insurance limits so they can accurately assess their risk in the event of a bank failure. Although this information doesn’t need to be part of your account-opening disclosures or your written account agreement, it should be clearly and conspicuously posted in branches.

 

 

Q. Do we need to notify existing customers that the insurance limits have changed?
A. No, there is no requirement to notify existing customers of the temporary change, other than through branch signage. However, the general expectation is that banks may advertise or otherwise disclose the change so as long as the information is clearly and correctly stated.

 

Q. Have there been other changes to FDIC insurance coverage limits?
A. Yes, the FDIC has changed the rules on both formal and informal revocable trust accounts and created a new ownership category of non-interest-bearing transaction accounts. These changes are discussed below.

 

 

Q. What is this new ownership category for certain transaction accounts?
A. New rules recently released by the FDIC allow for optional unlimited coverage on non-interest-bearing transaction accounts. This new coverage was free to all FDIC-insured banks until Dec. 5, 2008 (unless extended). Like the increase in the deposit insurance limit to $250,000, this expanded coverage sunsets on Dec. 31, 2009. Although the new unlimited coverage is intended primarily to help businesses with payroll accounts and the like, the new coverage applies to all non-interest-bearing transactions accounts no matter how they are owned (i.e., individual, joint, business, revocable trust accounts). That means that all business checking accounts (as long as they are non-interest-bearing) will be insured for the amount on deposit at the bank, even if a business has multiple non-interest bearing- checking accounts.

Example: B.A. Ware has two accounts at his bank: a non-interest-bearing checking account with $350,000 and a sole owner savings account with $300,000. He will be insured up to $600,000 should the bank fail ($350,000 for the DDA, $250,000 for the savings account).

At the end of the initial period, banks were required to choose whether or not to participate in this coverage, which costs 10 basis points for the amount in the account above the $250,000 insurance limit. If a bank chooses not to participate, it must opt out, and non-interest-bearing transaction accounts of its customers will be insured up to $250,000, under the pre-existing rules. [At press time, FDIC issued rules that slightly expanded coverage to include NOWs with low interest rates (0.5% or less) and to IOLTAs (interest on lawyer trust account).]

 

 

Q. What changes were made to revocable trust coverage? 
A. There are two types of revocable trust accounts, and they are generally subject to the same rules. On Sept. 29, 2008,  FDIC eliminated the requirement for “qualifying beneficiaries.” Now, rather than limiting beneficiaries to spouse, parents, children, grandchildren, and siblings,  the beneficiary of a revocable trust account may be any living person or charitable entity.

Informal revocable trust accounts are commonly called “payable-on-death” or POD accounts, “in-trust-for” (ITF), testamentary accounts, or Totten Trusts. These informal revocable trusts are created when the account owner signs an agreement–usually part of the bank’s signature card–stating that the deposits will be payable to one or more named beneficiaries upon death. Most important: Account title must indicate existence of the trust relationship by including a term such as payable on death, in trust for, trust, or a POD or ITF. (See 12 C.F.R. 330.10(b)) Named beneficiaries must be listed in the bank’s records.

Formal revocable trusts include living trusts and family trusts and are generally created for estate planning purposes. Importantly, they are subject to the same titling rules that apply to informal revocable trusts. However, unlike informal revocable trusts, the designation of the beneficiaries is generally found in the trust documents, not in records of the depository institution.

 

 

Q. Apart from the unlimited coverage on non-interest-bearing transaction accounts, how are business entities insured?
A. All accounts held in the name of a corporation, partnership, or unincorporated association are added together and insured up to $250,000. Under FDIC rules, this is a separate ownership category, and businesses are not able to obtain additional coverage by using other ownership categories, such as joint accounts. In addition, holding a number of accounts for different purposes will not increase the limits. For example, a corporation with an operating account, a payroll account, and an expense account will still only be insured up to the maximum amount of coverage of $250,000 for all three accounts added together. The only exception is when the business is holding funds as a fiduciary (such as for an employee benefit plan), in which case the account is not a business account under FDIC rules, but rather an agency account which provides pass-through insurance to individual plan participants so long as required recordkeeping rules are satisfied.

 

 

Q. How are sole proprietors insured?
A. Because a sole proprietorship is considered to be a single entity with the owner, sole proprietor accounts are not insured separately from the owners. Accounts in the names of sole proprietorships (for example, “DBA accounts”) are added to the owner’s other individual accounts, if any, at the same insured bank and the total is insured up to $250,000. Unlike corporations, sole proprietors can also take advantage of joint accounts to increase their insurance coverage. (The unlimited insurance rule applies if the bank opts for such coverage.)

 

 

Q. If we decide to opt-out of offering the unlimited coverage on non-interest-bearing transaction accounts, can we opt-in later?
A. No. This was a limited, one-time offer. All FDIC-insured institutions were covered under the program for the first 30 days without incurring any costs. After that initial period, however, institutions wishing to no longer participate must opt out or be assessed for future participation. If an institution opts out, the guarantees were set to end Dec. 5, 2008.

 

 

Q. Are sweep accounts insured under the Transaction Account Guarantee Program?
A. Generally, no. If, at the end of the bank day, the funds are actually in an account that bears interest, the funds in the original deposit account will not be eligible for the optional full insurance. In accord with its usual rules for determining sweep balances at a failed depository, FDIC will treat the funds as being in the account to which the funds were transferred. (For details, visit www.fdic.gov/regulations/laws/federal/2008/08Interim717.html.)

The interim rule provides one exception for funds that are swept from a non-interest-bearing transaction account to a noninterest-bearing savings account. In this case, the funds swept into the non-interest-bearing savings account will be eligible for the optional full insurance.

 

 

Q. Does a bank need to post signage to let customers know it is participating or not participating in the program?
A. You must prominently disclose in writing at your main office and all branches at which deposits are taken, your decision to either participate in or opt-out of the Transaction Account Guarantee Program. Disclosures must.:

 

1. Be provided in simple, readily understood text indicating the institution’s participation or nonparticipation.

2. The disclosure must clearly state whether or not covered noninterest-bearing transaction accounts are fully insured.

If you use sweep arrangements or take other actions that result in funds in a non-interest-bearing transaction account being transferred to or reclassified as an interest-bearing account or a non-transaction account, the institution also must disclose those actions to the affected customers and clearly advise them in writing that such actions will void the transaction account guarantee. (For model disclosure language, see FIL 132-2008, which can be found  on www.fdic.gov.)

 

 

Q. My bank offers repo sweep investment accounts. How are these insured?
A. If at the time the bank fails, funds in a deposit account have been swept into a non-deposit account such as a repurchase agreement,  they are not eligible for FDIC insurance because the funds are not in a deposit account.

 

 

Q. We offer Public Funds accounts for our state government, which we keep in interest-bearing deposits and collateralize for amounts in excess of insurance limits. Can we move these into non-interest-bearing accounts to take advantage of unlimited insurance and so we can divest the collateral?
A. Separate rulings cover public funds deposits, on both the state and federal level. See www.fdic.gov/deposit/deposits/FactSheet.html. Also, you should consider your state law regarding public funds deposits. Most states require that funds on deposit with a bank must be “invested”–should earn interest as revenue for the state. Most states specify that state funds on deposit with a bank be placed in interest-bearing accounts such as CDs and be collateralized. BJ

 

The electronic version of this article available at: http://lb.ec2.nxtbook.com/nxtbooks/sb/ababj1208/index.php?startid=38

TrackBack URI for this entry