ABA Staff Analysis: Signage and Disclosure of FDIC Coverage for 2011

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1 ABA Staff Analysis: Signage and Disclosure of FDIC Coverage for 2011 Changes made January 18-31, 2011 are in blue font. An FDIC FAQ on these issues is posted to TAG Program End and Coverage of Noninterest Transaction Accounts Q: Has the FDIC put out the final rule on TAG Program? The FDIC issued FIL on November 9, 2010 containing the Final Rule in draft form. Q: Does the Dodd-Frank Act provision mean any changes for banks currently in the FDIC Transaction Account Guarantee (TAG) Program? No; the FDIC announced on September 27, 2010, that the TAG Program will terminate on December 31, The Program continues unchanged until it sunsets on December 31, Banks that have remained in the Program (i.e., did not opt out) will still have the same coverage and will pay for the extra coverage at the same rate as before through December 31, However, banks still in the Program must, no later than December 31, 2010, notify in writing holders of accounts that were previously insured above $250,000 under the Program but will no longer be (i.e., low-interest NOW accounts). Q: What extra coverage did the Dodd-Frank Act provide? The Act provides unlimited FDIC insurance for noninterest-bearing transaction accounts in all banks effective December 31, 2010 and continuing through December 31, Q: What about Interest on Lawyers Trust Accounts (IOLTAs)? On December 22, 2010, Congress passed a bill (H.R. 6398) that authorizes the FDIC to treat IOLTAs as noninterest-bearing transaction accounts over i.e., to provide unlimited FDIC coverage of IOLTAs over this period. President Obama signed the bill into law (P.L ) on December 29, Q: Does the unlimited coverage provided to IOLTAs extend to other types of trust accounts, such as IOTAs, IORTAs or MAHTs? No. PL modifies the Federal Deposit Insurance Act, as amended by the Dodd-Frank Act, and expands the unlimited FDIC insurance coverage to a trust account established by an attorney or law firm on behalf of a client, commonly known as an `Interest on Lawyers Trust Account, or a functionally equivalent account, as determined by the FDIC. This wording leaves room for the FDIC to define (or limit) the coverage as they deem appropriate. However, the FDIC is not expected to expand the definition of covered IOLTA accounts beyond that used in the TAG Program: An IOLTA is an interest-bearing account maintained by a lawyer or law firm for clients. The interest from these accounts is not paid to the law firm or its clients, but rather is used to support law-related public service programs, such as providing legal aid to the poor. 3 1 See 2 See 3 FDIC, Temporary Liquidity Guarantee Program; Final Rule 73 Federal Register 72256, November 26, 2008 ( 1

2 Q: Is the extra coverage under the Dodd-Frank Act the same as under the TAG Program? For banks that are in the TAG Program, through December 31, 2010, there is unlimited FDIC coverage for noninterest-bearing transaction accounts as well as for NOW accounts (where the interest rate is contractually limited to no more than 25 basis points) and IOLTAs. The coverage provided for in the Dodd-Frank Act in 2011 and 2012 includes only transaction accounts that pay no interest; it does not include any NOW accounts. Therefore, NOW accounts paying no more than ¼ percent interest will no longer be covered above $250,000 for TAG Program participating banks. Holders of these accounts must be notified in writing of the change in FDIC coverage no later than December 31, Federal legislation that went into effect on December 29, 2010, provides unlimited FDIC coverage of IOLTAs over Q: Do banks need to opt into or out of the Dodd-Frank Act unlimited coverage of noninterestbearing transaction accounts? No. The Act provides unlimited FDIC coverage for all noninterest-bearing transaction accounts in all banks for 2011 and 2012 and H.R provides equivalent coverage for IOLTAs. Banks do not have to opt into this coverage or pay extra fees to participate nor can they opt out. The temporary extra coverage is provided as part of standard coverage and paid for by normal FDIC assessments. Q: What does the change in coverage mean for banks that have opted out of the TAG Program? All banks must post a new statement in the lobbies, in branches, and on their Internet websites. The specific language that must be used is provided below. Banks that did not opt out of the TAG Program must send notices to low-interest NOW account holder that such accounts will be covered only up to the $250,000 limit starting January 1, Banks that opted out of the TAG Program will not have coverage of noninterest-bearing transaction accounts and IOLTAs above the standard $250,000 level until December 31, 2010, when all banks will be subject to the new laws. These banks do not have to notify customers of loss of TAG Program coverage. Q: If a noninterest-bearing commercial DDA account earns no interest but does receive earnings credits, is that account still considered noninterest-bearing for purposes of the new FDIC coverage beginning January 1, 2011 and therefore would it be covered in its entirety? If earnings credits are not considered interest for the purpose of Reg Q, then it would not be interest for FDIC purposes. The FDIC Final Rule defines a noninterest-bearing transaction account as a deposit or account maintained at an insured depository institution- (I) with respect to which interest is neither accrued nor paid; (II) on which the depositor or account holder is permitted to make withdrawals by negotiable or transferable intent, 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 (III) on which the insured depository institution does not reserve the right to require advance notice of an intended withdrawal. 2

3 Q: Suppose that a TAG Program bank is sold to a non-participating bank before December 31, Are accounts protected under the TAG Program through December 31, 2010, and do these need to be notified by December 31, 2010? 4 The TAG Program ended with the sale of the bank because the remaining entity has not opted in. The original banks depositors should be notified of the loss of TAG Program coverage. Q: How are cashier s checks treated under this new rule? The rule's definition of noninterest-bearing transaction account encompasses official checks issued by insured banks. Official checks, such as cashier's checks and money orders issued by banks, are deposits as defined under the FDI Act (12 U.S.C.1813(1)) and Part 330 of the FDIC's regulations. The payee of the official check (the party to whom the check is payable) is the insured party. Notice and Disclosures for 2011 FDIC Insurance Coverage Q: What disclosures will be required? The FDIC has promulgated rules for disclosures related to the change of coverage provided for in the Dodd-Frank Act and PL (for IOLTAs). 5 No later than February 28, 2011, all banks must amend their standard disclosures to make clear that FDIC coverage is provided up to $250,000 and, during 2011 and 2012, coverage is unlimited for noninterest-bearing transaction accounts and IOLTAs. All insured depository institutions will be required to post a new notice in the main office, all branches and on their website. The FDIC has provided the following wording for this notice: 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, 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 also includes Interest on Lawyers Trust Accounts ( IOLTAs ). It does not include other accounts, such as traditional checking or demand deposit accounts that may earn interest, NOW accounts, and money-market deposit accounts. For more information about temporary FDIC insurance coverage of transaction accounts, visit The TAG Program expired on December 31, Banks are no longer required to post notices in their lobbies or on their websites stating that they are or are not participating in the Program and listing the accounts covered by it. 4 Response from the FDIC. 5 See and 3

4 Q: The new rules require banks to post notice in the main office, branches, on the website. Is this notice required for all banks or only those who have participated in the TAG Program? Every bank must post the notice, regardless of whether it participated in TAG Program or opted out. Q: Must a bank that participated in the TAG Program send the disclosure notice to accounts with balances less than the $250,000 insured limit, which are not actually affected by this change? A bank must notify all holders of NOW accounts that were covered under the TAG Program, whether their balance ever exceeds $250,000 or not. Low-interest NOW customers with balances below $250,000 may believe they have unlimited coverage now and in the future. Q: The interest rate paid on our NOWs never went below 0.30 percent, so they never qualified for the TAG Program. Being that they never qualified for the unlimited insurance in the first place, do we have to notify those customers that they no longer have something they never had? No. According to the final rule, Institutions participating in the FDIC's TAG Program on December 31, 2010, must provide a notice by mail to depositors with negotiable order of withdrawal accounts that are protected in full as of that date under the TAG Program that, as of January 1, 2011, such accounts no longer will be eligible for unlimited protection. 6 Q: Is there an obligation to notify sweep customers and other checking account customers if the bank did not participate in the TAG Program or opted out? The section (c)(3) notice requirement applies only with regard to sweep accounts (from a DDA to another deposit account that is not eligible for Dodd-Frank coverage); accounts whose terms the bank changes so that Dodd-Frank coverage is no longer available, and other bank accounts that render the account no longer eligible for Dodd-Frank coverage. Importantly, the Dodd-Frank Act removes the prohibition on payments of interest on demand deposit accounts as of July 21, 2011 (i.e., one year after the date of enactment, July 21, 2010). 7 Thus, should a depositor sweep money (in excess of the permanent $250,000 limit) from a noninterest-bearing transaction account to an interest-bearing demand deposit account, the over-$250,000 FDIC insurance coverage would cease to exist. Disclosures notifying the customer of this change would be required. The FDIC plans to issue guidance on this situation as July of next year approaches. On December 22, 2010, the FDIC updated its FAQ to address the confusion regarding the issue of sweep account customer notification. Question 28 in therein states that sweep arrangement NOT requiring notice include: Pre-arranged periodic transfers of funds initiated by the customer, whether on-line or in person, that are not part of the deposit agreement (for example, where a customer establishes a noninterest-bearing transaction account and thereafter opts to have funds transferred on a monthly basis to an interest-bearing account). Notice is required for Automated, recurring transfers of funds from a noninterest-bearing transaction account to an interest-bearing account specifically provided for in a deposit agreement signed by the customer. 6 Reference to IOLTAs has been removed, as per the FDIC rule issued January 18, 2011 ( 7 See Dodd-Frank Act 627, 4

5 Q: Our bank opted out of the TAG Program. We will make the required branch and website notice changes, however since we did not participate in Program, are we also required to send any type of notice to customers no later than December 31, 2010, (the same as TAG Participants)? No, banks that did not participate in the TAG Program or opted out were not required to send notices to customers. According to the final rule, notice is required in three situations: 1. ALL insured banks post a prescribed notice in their main office, each branch and, if applicable, on their Website; 2. ONLY insured banks currently participating in the TAG Program must notify NOW account depositors (that are currently protected under the TAG Program because of interest rate restrictions on those accounts) depositors that, beginning January 1, 2011, those accounts no longer will be eligible for unlimited protection; and 3. ALL insured banks must notify customers individually of any action they take to affect the deposit insurance coverage of funds held in noninterest-bearing transaction accounts. (For example, if a bank decides to pay interest on an account that was previously noninterest-bearing, it must notify customers of the change in insurance coverage.) This will be required for any changes made between January 1, 2011 and December 12, Q: If, after January 1, 2011, a depositor with funds in a fully-insured non-transaction account is able to sweep any portion of those funds into an interest bearing account, is there any notice requirement? Yes. You will need to notify these customers, in a commercially reasonable manner, that the funds swept into the interest-bearing account are no longer eligible for the unlimited coverage. This will probably be a one-time notice, but we are still awaiting further guidance from the FDIC on this issue. Q: Must a bank send the disclosure to Public Funds accounts even though it pledges securities for the uninsured balance? Banks must notify municipal customers, even though their accounts will be fully collateralized. The FDIC wants them to know that it will not be the FDIC that is responsible for protecting them next year. Q: If a bank participated in the TAG Program and its HSAs are transaction accounts that pay interest, must the account holder receive the notice? Yes. HSAs held in bank accounts have always been eligible for FDIC insurance coverage. If these accounts were noninterest-bearing transactions accounts, the new unlimited coverage rules have applied since December 31, Q: When must the notices be sent? Notice was required by December 31, Q: For banks that offer Internet banking services, must the entire TAG Program disclosure appear on the home page (or other website that accesses online banking services), or can the home page simply link to an appropriate disclosure? 8 Internet deposit services are defined broadly to include not only deposit taking, but any activity related to a deposit account, such as the ability to pay bills, transfer funds, view account balances, or obtain any account specific information. Internet deposit services, online banking services and Internet banking services are used interchangeably. 8 This answer is excerpted from the FDIC s TAG FAQ. See 5

6 Consistent with the requirements of the rule, the bank s home page and/or other access point to online banking services must contain the required Notice. Q: Is a link to the notice acceptable or must the entire notice appear on the bank s Internet site? A link titled something like Important disclosures regarding the new FDIC insurance rules would be appropriate. A link just titled FDIC Insurance may not be sufficient. Q: Banks that participated the TAG Program must notify customers of the change in FDIC coverage effective December 31, Should banks send the model notice to customers? Yes. Q: Can this be done via a statement message or should this be a stand-alone mailing? Can it be a statement stuffer? A statement message would satisfy the requirements. It can be a statement stuffer. Q: The final rule appears to say that this notice may be sent in any commercially reasonable manner. So again, can this be a statement message? Yes, when the notice requirement is triggered, the message can be sent as a statement message. Q: Can the notice be included with other information? Yes, but be careful not to bury it in bank advertisements or marketing materials where it could be easily overlooked by the customer to whom it applies. The clear and conspicuous standard applies. Placing the notice in a bank newsletter may be acceptable; placing it in a promotional advertisement for a new Home Equity Line of Credit would not. Q: Our deposit agreement is a 40-page booklet. In order to save us the cost of re-printing, can we disclose the information using branch signage? This would appear to suffice for new consumer customer notification after January 1, However, if a bank participated in the TAG Program, this would not suffice as notice for existing customers. Banks that participated must notify NOW account depositors that used to be protected under the TAG Program that, starting January 1, 2011, those accounts are longer be eligible for unlimited protection. After July 21, 2011, banks must notify customers of any action they take to affect the deposit insurance coverage of funds held in noninterest-bearing transaction accounts. Q: To comply with the notification requirements in the November rules from the FDIC, in 2010 we notified our IOLTA account holders that they would not be eligible for the unlimited FDIC coverage as of January 1, Should we contact these IOLTA customers to let them know about the change and that IOLTA accounts are now fully insured? An FDIC Financial Institutions Letter of January 21, 2011, states that banks that already sent the notice required in the November final rule to IOLTA depositors are encouraged, but not required, to send a revised notice to such depositors that their funds are fully insured through December 31, There is no prescribed wording for this notice. 9 See FDIC FIL , January 21, 2011, page 3, 6

7 Q: Can the model wording be modified by banks that have opted out of the TAG Program? No, not as to the posting requirement (Section (c)(1)). The wording may not be changed. Q: Is the model notice required or can the bank create its own verbiage? Whatever is more appropriate in the particular situation. Q: Does the new signage need to be posted at every teller window? The requirement is that Insured depository institutions must post a prescribed notice in their main office, each branch and, if applicable, on their Website. There is no requirement to post the notice at each teller window, but you can if you d like to do so. Q: Are there size or font requirements for the branch signage? There is no specified size requirement, although the notice must be clear and conspicuous, which seems to mean that the branch notice should be probably be large enough to be read by someone a few feet away. The website notice should be either prominently posted on your home page or made available though a link designed to bring attention to the importance of the information. Q: For banks that participated in the TAG Program, were low-interest NOW accounts fully insured through December 31, 2010 or did the new Dodd-Frank Act become effective on the December 31, 2010? For banks that are not participating in the TAG Program, did the expanded coverage for noninterest-bearing accounts begin on December 31, 2010 or January 1, 2011? There was a one day overlap of coverage under both programs. (Answer provided by the FDIC.) Q: How should banks comply with the requirement in the FDIC s rule if depositors have more than one affected account? A statement message containing the notice may not be sufficient because it would not identify all affected accounts as required by the final rule. The FDIC stated in the Final Rule that in respect to joint accounts protected under the TAG Program as of December 31, 2010, banks need only mail the notice to the address designated on the account. If depositors have more than one affected account, one notice is sufficient if it identifies all the applicable accounts. If that is not the case with your bank, then a separate mailing may be necessary. Q: Do we use the sample notice wording from the draft issuance called Notice of Changes in Temporary FDIC Coverage for Transaction Accounts? This is the correct notice. Q: The disclosure and notice requirements of the FDIC insurance rule changes effective December 31, 2010 require that banks notify customers individually of any action they take that would affect the deposit insurance coverage of funds held in noninterest-bearing transaction accounts. We were not sure if they meant an action a customer might take, such as changing from one account to another, or if they means a bank employee recommending a particular account to a customer or if they means actions the bank may take such as changing the account from noninterest-bearing to interest bearing. We interpret they to mean the bank with the possible exception of sweeps. This came up because next year, DFA will allow banks to pay interest on DDAs. If a bank decides to do this, they (the bank) must notify customers that the interest bearing DDA is no longer eligible for the unlimited coverage. 7

8 When a customer is sweeping funds from a noninterest-bearing DDA to an interest bearing account, there is a requirement to notify the customer that the transferred funds are no longer eligible for the expanded unlimited coverage. We are awaiting guidance on how banks will have to handle this going forward Q: Does a bank that did not participate in the TAG Program need to notify customers by December 31, 2010, that funds swept from a noninterest-bearing DDA to an interest bearing MMDA will not be eligible for the expanded coverage under the new rules? Our bank allows such sweeps, and although neither account is currently eligible for the expanded coverage now, the DDA will be after January 1, If the sweep notice referenced above is required, is a one-time notice or a per-occurrence notice? A notice would be required one time, after the new DFA coverage is in effect. (Answer provided by the FDIC.) Q: If the bank allows a sweep from a noninterest-bearing account to an interest bearing account, how does such a sweep impact the balance in the noninterest-bearing account? In other words, if a customer sweeps $50,000 from a noninterest-bearing DDA with a balance of $500,000 to a MMDA, does the remaining $450,000 in the DDA retain the unlimited insurance? Yes. (Answer provided by the FDIC.) Q: Suppose a bank s system allows a customer to have automatic transfers of any excess over an amount specified by the customer from a noninterest-bearing checking account to a savings account. Must customers that use this provision be notified of the change of FDIC coverage? No. This is not the type of system that the FDIC views as sweep accounts. Q: The Final Rule states that when a bank begins paying interest on a demand deposit accounts, a notice is required to be provided to customers informing them that earning interest on an account will terminate the unlimited insurance coverage under the Dodd-Frank Act. Is this notice required when the change is initiated by the bank, or when the bank receives a request from an individual customer to change his/her noninterest-bearing account into an interest bearing account? 10 If on or after July 21, 2011, a bank modifies the terms of its demand deposit account agreement so that the account may pay interest, the bank must notify affected customers that the account will no longer be eligible for unlimited FDIC coverage as a noninterest-bearing transaction account. A bank will need to provide a one-time notice to a customer only when the bank changes the account terms from a non-interest bearing account to an interest bearing account. The notice posted in the bank will be seen as sufficient notification when a customer changes his/her account such that a different FDIC insurance limit applies. For example, if in August 2011 a customer changes his/her deposit account to an interest-bearing account, then the bank will not be required to provide notice in addition to what is posted in the lobby and on the website. FDIC staff have stated that additional guidance on this notice requirement is planned closer to the July 2011 revocation of Regulation Q, because that revocation will allow banks to be able to pay interest on DDA accounts. 10 This clarification was provided by FDIC staff to ABA staff on January 6,

9 Call Report Changes Q: How does the change in coverage for IOLTAs affect what banks have to report on their Call Reports or TFRs? An FDIC Financial Institutions Letter (FIL) of January 21, 2011 answers this question: 11 Effective December 31, 2010, all [banks] were required to begin reporting the quarter-end dollar amount and number of noninterest-bearing transaction accounts of more than $250,000 in new data items in their respective regulatory reports. [PL (for IOLTAs)] necessitates a revision of the recently issued instructions for reporting on noninterest-bearing transaction accounts and estimated uninsured deposits. Accordingly, the FDIC is providing the following revised guidance for year-end 2010 regulatory reporting For Call Report Schedule RC-O, Memorandum items 5.a and 5.b; TFR Schedule DI, Line Items DI580 and DI585; and FFIEC 002 Schedule O, Memorandum items 5.a and 5.b, [banks] should treat IOLTAs as noninterest-bearing transaction accounts. Thus, [banks] should include those IOLTAs with balances of more than $250,000 in the total amount and number of noninterestbearing transaction accounts of more than $250,000 that they report in these data items. For Call Report Schedule RC-O, Memorandum item 2; TFR Schedule DI, Line Item DI210; and FFIEC 002 Schedule O, Memorandum item 2, [banks] should treat all noninterest-bearing transaction accounts, including all IOLTAs, as insured deposits and therefore exclude the balances of these accounts from the estimate of uninsured deposits that they report in this data item. This data item is required to be completed by banks and savings associations with $1 billion or more in total assets and by insured branches with $1 billion or more in total claims on nonrelated parties. Questions? Contact ABA s Leslie Callaway or Rob Strand for more information. 11 FDIC FIL , Jan. 21, 2011, page 3, 9