Summary of Deposit Insurance Regulations; Unlimited Coverage for Noninterest-bearing Transaction Accounts (12 CFR Part 330) FINAL RULE FDIC is adopting a final rule amending deposit insurance regulations to implement Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank Act), providing for unlimited deposit insurance for noninterest-bearing transaction accounts for two years beginning December 31, 2010. Effective Date: December 31, 2010 Once the final rule takes effect on December 31, 2010, the following will no longer be applicable: Transaction Account Guarantee Program ( TAGP ) Q&A s Who does the Final Rule apply to? The final rule applies to all insured depository institutions. How does a financial institution opt-in or opt-out of the unlimited deposit insurance coverage? Under the TAGP, insured depository institutions could choose not to participate in the program. Section 343 of the Dodd-Frank Act provides mandated deposit insurance coverage; therefore, insured depository institutions do not have to take any action for the coverage. Is there a separate assessment for this coverage? Under the TAGP, institutions which opted-in to the program were assessed separately for their participation in the program. The FDIC will not charge a separate assessment for the insurance for noninterest-bearing transaction accounts pursuant to Section 343. The FDIC will consider the cost for the additional insurance coverage in determining the amount the FDIC charges IDIs under its risk-based assessment system. Which accounts receive unlimited deposit insurance coverage? Unlimited deposit insurance coverage pursuant to Section 343 of Dodd- Frank Act applies to noninterest-bearing transaction accounts as defined in the
final rule Section 330.1(r). Whether an account is noninterest-bearing is determined by the account agreement and not by the fact that the rate on an account may be zero. NOW Accounts and IOLTA Accounts were covered under TAGP; are they also included in this unlimited deposit insurance? Yes and No. The definition of noninterest-bearing transaction accounts excludes NOW Accounts; therefore when the final rule takes effect on December 31, 2010, unlimited deposit coverage will not apply to these accounts. However, a bill just passed which allows coverage for IOLTA Accounts; therefore IOLTA Accounts will have unlimited deposit insurance when the rule takes effect. When does the unlimited deposit insurance coverage expire? Unlimited deposit coverage will be effective as of December 31, 2010 and continue for two years until December 31, 2012. Is the coverage in this final rule separate and in addition to coverage provided to depositors with respect to other accounts held at an IDI? Yes, all funds held in noninterest-bearing transaction accounts are fully insured, without limit, separate from, and in addition to the coverage provided to depositors with respect to other accounts held at an IDI. ACTION ITEMS: 1. Provide disclosure and notice to ensure the depositors are aware of and understand what types of accounts will be covered by this temporary deposit insurance coverage. The rule requires IDIs to provide notice and disclosure in the following three ways: a. Post a prescribe notice in main office, each branch, and if applicable on the website (Refer to summary of Section 330.16(c)(1)(a) for specific notice); b. IDIs currently participating in TAGP must provide individual notices to NOW account depositors no later than December 31, 2010 informing them that beginning January 1, 2011, these accounts will no longer be eligible for unlimited protection (Summary of section 330.16(c)(2)); and c. IDIs must notify customers individually of any action they take which affects the deposit insurance coverage of funds held in noninterest-bearing transaction accounts (Summary of Section 330.16(c)(3).
EDITORIAL COMMENTS: 1. Review account agreements to determine if a particular account is a noninterest-bearing transaction account under the definition provided in the final rule. 2. Provide the required notices and disclosures. 3. IDIs which will pay interest on DDAs after it is permitted on July 21, 2011, must inform affected clients that this action will affect deposit insurance coverage; paying interest on these accounts will remove the accounts from the definition of noninterest-bearing transaction accounts.
Summary of Final Rule Section 330 Deposit Insurance Regulations; Unlimited Coverage for Noninterest-bearing Transaction Accounts Section 330.1 Definitions (r). Noninterest-bearing transaction account a deposit or account maintained at an insured depository institution ( IDI ) where interest is neither accrued or paid and for which the account holder or depositor is permitted to make withdrawals by negotiable or transferable instrument, payment of orders of withdrawal, telephone or other electronic media transfers, or other similar items for the purpose of making payments or transfer to third parties or others; and on which the IDI does not reserve the right to require advance notice of an intended withdrawal. This definition is similar to the definition in TAGP, but it only encompasses traditional, noninterest-bearing demand deposit accounts, which allow unlimited number of deposits and withdrawals at any time, whether held by a business, an individual or other type of depositor. Under the final rule, NOW accounts (regardless of the rate of interest) are excluded from the definition of noninterestbearing accounts. Originally, IOLTA Accounts were also excluded from the definition of noninterest bearing transaction account. However, the passage of H.R. 6398 included IOLTAs in the unlimited deposit insurance coverage. Also, similar to TAGP, money market deposit accounts are not included in the definition of noninterest-bearing transaction account. Discussion of Application of Section 330.1(r): 1. The TAGP currently covers IOLTA accounts; with the implementation of the new definition of noninterest-bearing transaction account, IOLTAs were technically excluded. However, passage of H.R. 6398 allowed for the continuation of unlimited insurance coverage for IOLTA accounts. a. Under the FDIC s general deposit insurance rules, IOLTAs also may quality for pass through deposit insurance coverage, so long as the regulatory requirements are met (12 CFR Section 330.7). This would mean that each client for whom a law firm holds funds in an IOLTA may be insured up to $250,000 for his or her funds. In addition, the accrued interest to which a legal services entity or
program is entitled may be separately insured for $250,000. Although IOLTA Accounts are now included in the unlimited insurance coverage, it is important to remember this distinction for future reference. 2. TAGP will end on December 31, 2010 as the FDIC lacks the statutory authority to extend TAGP beyond that date. 3. Waiving fees is not treated as the earning of interest. Therefore, account features which waived certain fees would not prevent an account from qualifying as a noninterest-bearing transaction account as long as it satisfies the definition of noninterest-bearing transaction account. 4. Whether an account is noninterest-bearing is determined by the account agreement and not by the fact that the rate on an account may be zero. If the account agreement provides payment of interest under any circumstances, it is excluded from coverage under the final rule. 5. If an IDI offers rewards programs on noninterest checking accounts, the FDIC will look to current requirements and interpretations under Part 329 of its regulations and interpretations under Regulation Q of the Board of Governors of the Federal Reserve System to determine whether Rewards provided in connection with transaction accounts will be considered interest paid on the account and disqualify an account for treatment as a noninterest-bearing transaction account. 6. If an interest-bearing account is converted to noninterest-bearing account after December 31, 2010, it may obtain the benefits of unlimited FDIC coverage as long as under the modified deposit agreement, the depositor may not earn interest on the account. 7. As of July 21, 2011, IDIs will no longer be restricted from paying interest on demand deposit accounts. At that time, if IDIs pay interest on demand deposit accounts, those accounts will not satisfy the definition of a noninterest-bearing transaction account and therefore will not receive unlimited deposit coverage. 8. Official checks issued by IDIs are deposits and are encompassed in the final rule s definition of noninterest-bearing transaction account. The
payee is the insured party and would be insured for the full amount of the check upon the failure of the IDI that issued the official check. 9. If funds are swept from a noninterest-bearing transaction account to a product that is not a noninterest-bearing transaction account, the funds are treated as being in the account where the funds were transferred to. Therefore, since the funds were not in a noninterest-bearing transaction account, the funds would not be eligible for full insurance coverage. a. There is an exception to the treatment of swept funds in situations where funds are swept from a noninterest-bearing transaction account to a noninterest-bearing savings account, notably a MMDA. Under the final rule, the FDIC will consider such accounts noninterest-bearing transaction accounts. (330.16(b)) Section 330.16 Noninterest-bearing transaction accounts (a) Separate Insurance Coverage All funds held in noninterest-bearing transaction accounts are fully insured, without limit. This unlimited coverage is separate from, and in addition to, the coverage provided to depositors with respect to other accounts held at an IDI. Funds held in a noninterest-bearing transaction account will not be counted in determining the amount of deposit insurance on deposits held in other accounts, and in other rights and capacities, at the same IDI. Coverage for revocable trust accounts is generally based on the number of eligible beneficiaries named in the account. o Example: interest-bearing account with balance of $400,000 payable to a niece and a qualifying noninterest-bearing transaction account with balance of $200,000. First, determine total number of different beneficiaries named in all revocable trust accounts at the same IDI. Here, there are two. Then multiply that number times the SMDIA of $250,000 which in this case equals $500,000 on the account owner s revocable trusts. Then apply that amount to the owner s interest-bearing revocable trust which is $400,000; it is fully covered. The balance of the noninterest-bearing
transaction account ($200,000) is separately and fully covered under the final rule. (b) Certain Swept Funds FDIC will treat funds swept from a noninterestbearing transaction account to a noninterest-bearing savings deposit account as being in a noninterest-bearing transaction account. The distinction is that the IDI does not pay interest on either account and it is essentially one account divided into two sub accounts. Apart from these reserve sweep accounts, MMDAs and noninterest-bearing savings accounts do not qualify as noninterestbearing transaction accounts. (c) Disclosure and notice requirements the final rule requires that IDI s provide disclosure and notice to ensure the depositors are aware of and understand what types of accounts will be covered by this temporary deposit insurance coverage for noninterest-bearing transaction accounts. The final rule has three requirements: 1. Every IDI must post a prescribed notice in main office, each branch, and, if applicable, on their website. a. IDI must post prominently a copy of the following 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, 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 earn interest, NOW accounts, and money-market deposit accounts. For more information about temporary FDIC insurance coverage of transaction accounts, visit www.fdic.gov. b. This notice is excluded from the PRA because the FDIC provided specific text for the notice and allows for no variance in the language. 2. IDIs currently participating in the TAGP must provide individual notices to NOW account depositors (who are currently protected under TAGP) by mail no later than December 31, 2010 that beginning January 1, 2011, those accounts no longer will be eligible for unlimited protection. a. Electronic mail may be utilized for depositors who regularly receive account information in this manner. b. For Joint Accounts protected under TAGP as of December 31, 2010, IDIs need only mail the notice to the address designated on the account. b. If depositors have more than one affected account, one notice is sufficient if it identifies all applicable accounts. d. The notice mailed to affected depositors may be in the form of the posting notice section 330.16(c)(1) of the final rule. 3. IDIs must notify customers individually of any action they take to affect the deposit insurance coverage of funds held in noninterestbearing transaction accounts. a. This notice requirement is intended primarily to apply when IDIs begin paying interest on demand deposit accounts (as will be permitted beginning July 21, 2011). Therefore, if an IDI modifies the terms of its demand deposit agreement so that the account may pay interest, the IDI must notify affected customers that the account
Other Provisions of the Final Rule No Opting Out will no longer be eligible for unlimited deposit insurance coverage as a noninterest-bearing transaction account. b. There are no specific requirements regarding the form of the notice. c. IDIs are expected 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. d. If an IDI uses sweep arrangements which would result in the funds no longer being eligible for full coverage under this section, the IDI must notify affected customers and clearly, in writing, advise them that the sweep arrangement prevents full deposit insurance coverage. Under the TAGP, IDIs could choose not to participate in the program. Because Section 343 of the Dodd-Frank Act provides mandated deposit insurance coverage, IDIs are not required to take any action to obtain separate coverage for noninterest-bearing transaction accounts. From December 31, 2010 to December 31, 2012, noninterest-bearing transaction accounts at ALL IDIs will receive this temporary deposit insurance coverage. No Separate Assessment Under TAGP, IDI s are assessed a separate assessment or premium if they participate in TAGP. However, the FDIC will not charge a separate assessment for the insurance of noninterest-bearing transaction accounts pursuant to Section 343. However, the FDIC will consider the cost for this additional insurance coverage in determining the amount of the deposit insurance assessment the FDIC charges IDIs under its risk-based assessment system.