Compliance Bulletin

Summary of Final Rule on Unlimited Insurance Coverage For Noninterest-Bearing Transaction Accounts
November 22, 2010

The FDIC has issued final rules implementing Section 343 of the Dodd-Frank Act (“Act”), which makes the core of the Transaction Account Guarantee Program (TAG Program) non-optional beginning December 31, 2010 and ending December 31, 2012.The FDIC’s TAG Program was first adopted in the midst the financial crisis, and it allows depository financial institutions on an opt-out basis to acquire unlimited FDIC deposit insurance for noninterest-bearing transaction accounts [1]. In June 28 this year, the FDIC extended the program through December 31, 2010. On September 30, after the Act was enacted, the FDIC issued a proposed rule to implement Section 343, and the proposed rule is now issued with some changes in final form.

Under the existing TAG Program—again, terminating on December 31 this year—banks were given opportunities to opt out, and hundreds of banks did. The Act, which also includes a provision making the $250,000 per account coverage ceiling permanent, contains no provision allowing banks to opt out. Beginning on December 31, 2010, all noninterest-bearing transaction accounts in all FDIC-insured depository financial institutions will have unlimited FDIC coverage.

Whether an account is noninterest-bearing is determined by the terms of the account agreement and not by the fact that the rate may be zero percent at a particular point in time, such as during periods when the account balance exceeds a certain threshold. At all times, such an account would be treated as an interest-bearing account for deposit insurance purposes because the account agreement provides for the payment of interest under certain circumstances. On the other hand (as under the TAG Program) waiving fees would not be treated as paying interest. Thus, a bank could waive fees or provide fee-reducing credits without jeopardizing an account’s treatment as a qualifying noninterest-bearing transaction account. How reward programs will be treated will turn on whether interest is paid under current FDIC guidance at 12 CFR Part 329 (interest on deposits) and interpretations under Regulation Q (12 CFR Part 217). Cashier’s checks and bank-issued money orders are also encompassed within the definition noninterest-bearing transaction account as they are considered “deposits” under the FDI Act (12 U.S.C. 1813(1)) and 12 CFR Part 330.

NOW and IOLTA Accounts. Currently, the TAG Program also provides unlimited FDIC insurance coverage for NOW accounts (with a yield that is contractually limited to no more than 25 basis points) and Interest on Lawyers Trust Accounts (IOLTAs). The Act does not cover these accounts. Starting January 1, 2011, all NOW accounts and IOLTAs will be insured under the general deposit insurance rules and subject to the general $250,000 ceiling [2]. For banks that are not participating in the TAG Program, this constitutes no change.

Banks that are currently participating in the TAG Program must provide individual notices to depositors with NOW accounts and IOLTAs of the change in coverage. The notices must be delivered to depositors by mail no later than December 31, 2010. Banks may send the notices by electronic mail for depositors who ordinarily receive account information in this manner. The notice may be in the form of a copy of the notice required to be posted in the bank’s premises and website (see below). For joint accounts, a single notice need only be mailed to the address designated on the account. If depositors have more than one affected account, one notice may be sent as long as it identifies all the applicable accounts.

Certain Sweep Accounts. Under current FDIC rules, funds swept or transferred from one account to another are treated as being in the account to which the funds were transferred prior to the time of a bank failure. However, the final rule includes the following exception: “Notwithstanding its normal rules and procedures regarding sweep accounts under 12 CFR § 360.8, the FDIC will treat funds swept from a noninterest-bearing transaction account to a noninterest-bearing savings deposit account as being in a noninterest-bearing transaction account.” The FDIC explains that the exception is aimed at what is sometimes referred to as “reserve sweeps,” which are arrangements usually involving two sub-accounts within a single account (the destination account usually an MMDA account) that are designed to minimize reserve requirements. These arrangements will be treated as noninterest-bearing transaction accounts but, apart from this exception, MMDAs and noninterest-bearing savings accounts do not qualify for the extended insurance.

Separate Insurance. Funds held in noninterest-bearing transaction accounts will not be counted in determining the amount of deposit insurance on deposits held in other accounts that are subject to the general deposit insurance rules. Thus, as posed in an FDIC-provided example, a depositor with two accounts at the bank in her own name—a $225,000 certificate of deposit and a no-interest checking account with $300,000—would be fully insured for $525,000 (plus CD interest). The CD is covered up to the general $250,000 limit, and the checking account is separately covered for the entire balance without limit.

Notice/Posting Requirements. In addition to the notices to NOW and IOLTA account customers, banks are also required to post the following notice in the lobby of their main office, their branches and, if internet deposit services are offered, on their website:

NOTICE OF CHANGES IN TEMPORARY FDIC INSURANCE COVERAGE FOR TRANSACTION ACCOUNTS

All funds in a “noninterest-bearing transaction account” are insured in full by the Federal Deposit Insurance Corporation from December 31, 2010, through December 31, 2012. This temporary unlimited coverage is in addition to, and separate from, the coverage of at least $250,000 available to depositors under the FDIC’s general deposit insurance rules.

The term “noninterest-bearing transaction account” includes a traditional checking account or demand deposit account on which the insured depository institution pays no interest. It does not include other accounts, such as traditional checking or demand deposit accounts that may ear interest, NOW accounts, money-market deposit accounts, and Interest on Lawyers Trust Accounts (“IOLTAs”).

For more information about temporary FDIC insurance coverage of transaction accounts, visit ww.fdic.gov.

In addition, banks are required to furnish a notice to customers regarding any action taken that would affect their coverage. For example, if the bank offers an account in which funds are automatically swept from a covered noninterest-bearing transaction account to an account that does not qualify for the extended coverage, the bank must inform the affected customer that, upon such transfer, the funds will no longer have the extended coverage. In particular, banks must keep this requirement in mind if they intend to begin paying interest on demand deposit accounts, as will be permitted beginning July 21, 2011 as provided under section 627 of the Act. Such a change would disqualify the newly interest-bearing accounts for expanded deposit insurance coverage. The FDIC does not provide a form for this kind of notice, but notes that banks are to act in a “commercially reasonable manner” and to comply with applicable state and federal laws and regulations in informing depositors of changes to their account agreements.

The final rule is available at the FDIC’s website at
http://www.fdic.gov/news/board/Nov9no4.pdf and becomes effective as of December 31, 2010.

  1. The final rule’s definition of “noninterest-bearing transaction account” is identical to the statutory definition, which is a “deposit or account maintained at an insured depository institution—
    1. (I) with respect to which interest is neither accrued nor paid;
    2. (II) on which the depositor or account holder is permitted to make withdrawals by negotiable or transferable instrument, payment orders of withdrawal, telephone or other electronic media transfers, or other similar items for the purpose of making payments or transfers to third parties or others; and
    3. (III) on which the insured depository institution does not reserve the right to require advance notice of an intended withdrawal.”
  2. The FDIC offers a reminder in its preamble to the final rule that IOLTAs may qualify for pass-though insurance coverage (see 12 CFR Section 330.7) such that each client for whom a law firm holds funds may be insured up to the $250,000 limit if conditions are met. The accrued interest to the account may be separately insured for $250,000. 

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

© This CBA Regulatory Compliance Bulletin is copyrighted by the California Bankers Association, and may not be reproduced or distributed without the prior written consent of CBA.

 

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