FDIC May 2014 - FDIC: Federal Deposit Insurance Corporation

FDIC May 2014 - FDIC: Federal Deposit Insurance Corporation

Federal Deposit Insurance Corporation Advanced Topics in Deposit Insurance Coverage Seminar For Bankers FDIC May 2014 NOTE: Participants must log in to join the Live Meeting and must also dial into a conference call number for the audio portion of this presentation. This includes the question-and-answer period. Table of Contents 2 Part 1 General Principles of Deposit Insurance Part 2 Business/Organization Accounts Part 3 Government Accounts

Part 4 Mortgage Servicing Accounts Part 5 Health Savings Accounts Part 6 Pass-Through Deposit Insurance Coverage Part 7 When Insured Depository Institutions (IDIs) Merge Part 8 Right of Offset Part 9 Deposit Insurance Resources Advanced Topics in Deposit Insurance Coverage FDIC 2014 Advanced Topics in Deposit Insurance

Part 1 General Principles of Deposit Insurance 3 3 Advanced Topics in Deposit Insurance Coverage FDIC 2014 General Principles of Deposit Insurance 4 In order to determine deposit insurance coverage, bankers must ask and answer the following three questions: 1. Who owns the funds? 2. What ownership category is the depositor eligible to use or attempting to use? 3.

Does the depositor meet the requirements of that category? Advanced Topics in Deposit Insurance Coverage FDIC 2014 Deposit Insurance Ownership Categories Owner = individual Category 1 Single Accounts Category 2 Joint Accounts Owner = business/organization Category 7 Corporations, Partnerships and Unincorporated Association Accounts Owner = government entity

Category 3 Revocable Trust Accounts Category 4 Irrevocable Trust Accounts Category 8 Government Accounts Owner = mortgagee/lender Category 5 Certain Retirement Accounts 5 Category 6 Employee Benefit Plan

Accounts Category 9 Principal and Interest (P&I) Funds in Mortgage Servicing Accounts Advanced Topics in Deposit Insurance Part 2 Part 3 Category 7 Corporations, Partnerships and Unincorporated Association Accounts 6 Part 4

Category 9 Principal and Interest (P&I) Funds in Mortgage Servicing Accounts Category 8 Government Accounts Part 5 Part 6 Part 7 Part 8 Health Savings Accounts Pass-Through Deposit Insurance

Coverage When IDIs Merge Right of Offset Advanced Topics in Deposit Insurance Coverage FDIC 2014 Advanced Topics in Deposit Insurance Part 2 Business/Organization Accounts 7 7 Advanced Topics in Deposit Insurance Coverage FDIC 2014 Category 7 Business/Organization Accounts Business/Organization Accounts represent funds owned by a business or an organization. Requirements: Based on state law, the business/organization must be a legally created entity such as a/an: Corporation

(includes Subchapter S, LLCs, and PCs) Partnership Unincorporated Association The business/organization must be engaged in an independent activity* which is generally supported by: Separate tax identification numbers Separate charter or bylaws * Independent activity means the entity was formed for a business reason and not solely to deposit insurance coverage. increase 8 8 Advanced Topics in Deposit Insurance Coverage FDIC 2014

Category 7 Business/Organization Accounts Coverage: $250,000 per legal entity, engaged in an independent activity. Remember! 9 The existence of multiple signers such as partners, officers or directors does not increase coverage. A separate business purpose for funds owned by the same legal entity does not increase coverage. Advanced Topics in Deposit Insurance Coverage FDIC 2014 Advanced Topics in Deposit Insurance

Part 3 Government Accounts 10 Advanced Topics in Deposit Insurance Coverage FDIC 2014 Category 8 Government Accounts 11 Government Accounts are funds placed by an Official Custodian of a government entity, including federal, state, county, municipality, or political subdivision. For Category 8 - Government Accounts, the insured party is the official custodian an appointed or elected official who has plenary authority over funds in the account owned by the public unit.

Plenary authority includes possession, as well as the authority to establish accounts for such funds in IDIs and to make deposits, withdrawals, and disbursements of such funds. Advanced Topics in Deposit Insurance Coverage FDIC 2014 Category 8 Government Accounts By statute, each of these Government Entities are eligible for deposit insurance coverage: 12 United States

States Counties Municipalities District of Columbia Puerto Rico Other territories Indian tribes School districts Power districts Irrigation districts Bridge or port authorities Other political subdivisions Advanced Topics in Deposit Insurance Coverage FDIC 2014 Category 8 Government Accounts Coverage: Funds held by an official custodian of a government entity are insured as follows:

Accounts held in an in-state IDI Up to $250,000 for the combined amount of all time and savings accounts (including NOW accounts) and Up to $250,000 for all demand deposit accounts (interest-bearing and noninterest-bearing) Accounts held in an out-of-state IDI 13 Up to $250,000 for the combined total of all deposit accounts Advanced Topics in Deposit Insurance Coverage FDIC 2014 Category 8 Government Accounts Difference between a Negotiable Order of Withdrawal (NOW) account and an interest-bearing Demand Deposit Account (DDA) NOW Accounts IDI reserves the right to require at

least seven days written notice prior to withdrawal or transfer of any funds (See 12 C.F.R. 204.2(e)(2)). Only individuals, nonprofit organizations and government entities can own a NOW account; for-profit entities are expressly prohibited from holding NOW accounts. 14 DDA IDI does not reserve the right to require at least seven days written notice of an intended withdrawal (See 12 C.F.R. 204.2(b)(1)). Any depositor can own a demand deposit account. Advanced Topics in Deposit Insurance Coverage FDIC 2014 15 15 15

www.fdic.gov/deposit/deposits/FactSheet.html Advanced Topics in Deposit Insurance Part 4 Mortgage Servicing Accounts 16 Advanced Topics in Deposit Insurance Coverage FDIC 2014 Category 9 Mortgage Servicing Accounts 17 Mortgage Servicing Accounts are established by lenders or mortgagees and represent commingled principal and interest payment accounts received from borrowers. Coverage: Based on the borrowers payments of principal and interest

into the mortgage servicing account. Provided to the mortgagees/lenders, as a collective group. Advanced Topics in Deposit Insurance Coverage FDIC 2014 Category 9 Mortgage Servicing Accounts Coverage (cont.): Up to $250,000 per borrower. These funds will not be aggregated with other deposit accounts that the borrowers may maintain at the same IDI. Remember! 18 Payments of taxes and insurance (T&I) premiums are insured on a pass-through basis as the funds of each respective borrower.

T&I premiums are added to other individually owned funds held by each borrower at the same IDI and insured to the applicable limit. Advanced Topics in Deposit Insurance Coverage FDIC 2014 Category 9 Mortgage Servicing Accounts Example: 19 A mortgage servicer collects from one thousand different borrowers their monthly mortgage payments of $2,000 (P&I) and places the funds into a mortgage servicing account. Is the $2,000,000 aggregate balance of the mortgage servicers mortgage servicing account insured? Yes, the account is fully insured to the mortgage servicer because each mortgagors payment of $2,000 (P&I) is insured separately for up to $250,000. Advanced Topics in Deposit Insurance Coverage FDIC 2014

Advanced Topics in Deposit Insurance Part 5 Health Savings Accounts (HSAs) 20 Advanced Topics in Deposit Insurance Coverage FDIC 2014 Health Savings Accounts A Health Savings Account (HSA) is a tax-exempt trust or custodial account set up with a qualified HSA trustee, such as an IDI, to pay or reimburse certain medical expenses. HSAs are insured based on who owns the funds and whether beneficiaries are named in the IDI account records. If a depositor opens an HSA with no beneficiaries named, then the FDIC would insure these funds under the depositors Category 1 Single Ownership Accounts. When beneficiaries are named, the FDIC will insure the owner of an HSA deposit under Category 3 Revocable Trust Accounts in the same manner as a payable on death (POD) account. Remember! The FDIC does not require POD or ITF be included in the account title for an HSA to be eligible for Category 3 Revocable Trust Account coverage.

21 Advanced Topics in Deposit Insurance Coverage FDIC 2014 Advanced Topics in Deposit Insurance Part 6 Pass-Through Deposit Insurance Coverage 22 Advanced Topics in Deposit Insurance Coverage FDIC 2014 Pass-Through Deposit Insurance Coverage Pass-through deposit insurance regulations can be found at 12 C.F.R. 330.5 and 12 C.F.R. 330.7 (on the FDIC Website at: http://www.fdic.gov/regulations/laws/rules/2000-5400.html). Examples of accounts which may be entitled to receive pass-through coverage are Fiduciary Accounts. These accounts are established and maintained by third parties on behalf of the actual owner (referred to as the principal).

An account that meets the definition of a fiduciary or agency account is entitled to pass-through deposit insurance coverage from the FDIC through the third party who establishes the account to the actual owner/principal, provided certain conditions are met. Important! Fiduciary or agency accounts are not an ownership category! 23 Advanced Topics in Deposit Insurance Coverage FDIC 2014 Pass-Through Deposit Insurance Coverage 24 Examples of Third Parties Who Establish Fiduciary Accounts Examples of Fiduciary or Agency Accounts Agent

Escrow Nominee Power of Attorney Guardian Uniform Transfer to Minors Act (UTMA) Conservator Attorney Trust (IOLTA) Executor Agency Broker Brokered CDs Advanced Topics in Deposit Insurance Coverage FDIC 2014 Pass-Through Deposit Insurance Coverage

What is pass-through deposit insurance coverage? When funds are deposited by a fiduciary or custodian on behalf of one or more actual owners of the funds, the FDIC will insure the funds as if the actual owners had established the deposit in the IDI. What is the amount of pass-through deposit insurance coverage? Assuming the deposit meets the requirements for pass-through insurance coverage, then the amount of FDIC deposit insurance coverage will be based on the ownership capacity (i.e., under the applicable ownership category) in which each principal holds the funds. Owner 25 Funds Deposited by an Agent, Broker Nominee, Guardian,

Custodian or Executor IDI Advanced Topics in Deposit Insurance Coverage FDIC 2014 Pass-Through Deposit Insurance Coverage Examples of an IDIs Involvement with Agency Accounts 26 An IDI may accept or receive third party deposits in a number of ways including: 1. As a direct depository for agency funds (most common situation), 2. As an agent/broker placing funds with other IDIs as part of a third-party program or, 3.

As an agent/broker placing customers funds with other IDIs as part of its own program. Advanced Topics in Deposit Insurance Coverage FDIC 2014 Pass-Through Deposit Insurance Coverage Requirements for pass-through coverage include: Funds must be owned by the principal not the third party who set up the account (i.e., the fiduciary or custodian who is placing the funds). To confirm the actual ownership of the deposit funds, the FDIC may review: 1. 2. The agreement between the third party establishing the account and principal and The applicable state law the The IDIs account records must indicate the agency nature of the account (e.g., XYZ Company as Custodian, XYZ FBO, Jane Doe UTMA John Smith, Jr.).

The IDIs records or accountholders records must indicate both the principals identities as well as their ownership interest in the deposit. Deposit terms (i.e., the interest rate and maturity date) for accounts opened at the IDI must match the terms the third party agent promised the customer. If the terms dont match, the third party agent might be deemed to be the legal owner of the funds by the FDIC. An agent may retain a portion of the interest (as the agents fee) without precluding pass-through coverage. 27 Advanced Topics in Deposit Insurance Coverage FDIC 2014 IDI Failure and Pass-through Coverage How does the FDIC verify pass-through coverage when an IDI fails? Was the custodial account opened in the name of the principal/depositor? (e.g. ABC Inc.

FBO John Smith). Were the funds held in a comingled account and does the IDI have the name and ownership interest of each depositor? (e.g. payroll account cards). Were the funds held in a comingled account and is the custodian maintaining information regarding each owner? (e.g. Brokered deposits, IOLTAs, third party stored value cards). Do the terms (i.e. interest rate and maturity date) match the terms promised by the fiduciary or agent? For information about pass-through deposit insurance coverage linked to affiliates, see Guidance on Deposit Placement and Collection Activities (FIL-29-2010), dated June 7, 2010. 28 www.fdic.gov/news/news/financial/2010/fil10029.html Advanced Topics in Deposit Insurance

Part 7 When IDIs Merge 29 Advanced Topics in Deposit Insurance Coverage FDIC 2014 Coverage When IDIs Merge Coverage When IDIs Merge 30 Basic rule There is separate deposit insurance coverage (i.e., for deposits at each IDI) for up to six months (starting with the effective date of the merger) if a depositor had funds in two IDIs that merged. Special exception for time deposits For time deposits (i.e., CDs) issued by the assumed IDI, separate deposit insurance coverage will continue for the greater of either six months or the first maturity date of the time deposit. Advanced Topics in Deposit Insurance Coverage FDIC 2014

Coverage When IDIs Merge IDI Merger and CDs Example: Acquiring Bank and Bank Sold merged on July 1, 2010. Before the merger, Michelle Young had purchased: a $240,000 CD from Acquiring Bank on January 1, 2009. The CD has a four year term, and it matures on January 1, 2013; and a $230,000 CD from Bank Sold on October 1, 2009. The CD has a one year term, and it matures on October 1, 2010. Three months after the merger, on October 1, 2010, Michelle Young renewed her Bank Sold CD for another one year term until October 1, 2011. Michelle Young rolled over her original $230,000 principal from Bank Sold. Assume accrued interest for both CDs is mailed monthly. 31 Advanced Topics in Deposit Insurance Coverage FDIC 2014 How are these CDs insured? IDI Mergers and Grace Period 2009 32 2010

Acquiring Bank Bank Sold 2011 2012 $240K CD $230K CD Acquiring Bank and Bank Sold merged on July 1, 2010. Before the merger, Michelle Young purchased: a $240,000 CD from Acquiring Bank on January 1, 2009. The CD has a four year term, and it matures on January 1, 2013; and a $230,000 CD from Bank Sold on October 1, 2009. The CD has a one year term, and it matures on October 1, 2010. At the time of the merger, Michelle Young has a $240,000 CD from Acquiring Bank and a $230,000 CD from Bank Sold. 32 Advanced Topics in Deposit Insurance Coverage FDIC 2014 IDI Mergers and Grace Period 2009

33 2010 Acquiring Bank Bank Sold 2011 2012 $240K CD $230K CD 6 Month Grace Period By 2010, Michelle Young has a $240,000 CD from Acquiring Bank and a $230,000 CD from Bank Sold. The banks merge on July 1, 2010; the six month grace period extends to Dec. 31, 2010. 33 Advanced Topics in Deposit Insurance Coverage FDIC 2014

IDI Mergers and Grace Period 2009 2010 Acquiring Bank Bank Sold 2011 2012 $240K CD $230K CD $230K CD 6 Month Grace Period Combined Deposit $470K By 2010, Michelle Young has a $240,000 CD from Acquiring Bank and a $230,000 CD from Bank Sold. The banks merge on July 1, 2010; the six month grace period extends to Dec. 31, 2010.

During the grace period, Michelle Young renews her Bank Sold CD with the same terms so her two CDs continue to be insured separately until her Bank Sold CD matures on October 1, 2011. As a result, her two deposits totaling $470,000 are fully insured until October 1, 2011. 34 Advanced Topics in Deposit Insurance Coverage FDIC 2014 IDI Mergers and Grace Period 2009 35 2010 2012 $240K CD Acquiring Bank Bank Sold 2011 $230K CD

$230K CD ($220K) 6 Month Grace Period Combined Deposit Potentially Uninsured $470K $470K $220K By 2010, Michelle Young has a $240,000 CD from Acquiring Bank and a $230,000 CD from Bank Sold. The banks merge on July 1, 2010; the six month grace period extends to Dec. 31, 2010. the grace period, Michelle Young renews her Bank Sold CD with the same terms During so her two CDs continue to be insured separately until her Bank Sold CD matures on October 1, 2011. As a result, her $470,000 in combined funds are fully insured until October 1, 2011. But after October 1, 2011, of the $470,000 in combined funds, $250,000 will be insured and $220,000 could be uninsured. Michelle Young must withdraw at least $220,000 to avoid uninsured funds or consider restructuring her accounts.

Advanced Topics in Deposit Insurance Coverage FDIC 2014 35 Advanced Topics in Deposit Insurance Part 8 Right of Offset 36 Advanced Topics in Deposit Insurance Coverage FDIC 2014 Right of Offset Loan Offset Against Deposits 37 In the case of a non-delinquent loan, the depositor may elect to set off the loan against his/her deposits in order to receive full value for any uninsured deposits, provided the following exists: Mutuality the exact same owner of both the deposit and loan at the IDI,

The funds are not a special purpose deposit (e.g., funds held by the IDI trust department for safekeeping), The deposits are not property of a third party and The offset is permitted by state law. Advanced Topics in Deposit Insurance Coverage FDIC 2014 Advanced Topics in Deposit Insurance Part 9 Deposit Insurance Resources 38 38 Advanced Topics in Deposit Insurance Coverage FDIC 2014 Additional 2014 FDIC Deposit Insurance Seminars FDIC 2014 Seminar for Bankers FDIC 2014 Seminar for Bankers

Deposit Insurance Coverage for Revocable Trust Accounts Fundamentals of Deposit Insurance Coverage Category 3 Revocable Trust Accounts Category Category 11 Single Accounts Category 2 Joint Accounts Accounts Category 3 Revocable Trust Category 4 Irrevocable

Trust Accounts Category 5 Certain Retirement Accounts Category 6 Employee Benefit Benefit Plan Accounts Category 7 Corporations, Partnerships and Unincorporated Association Accounts 39 Category 8

Government Accounts Category 9 P&I Funds in Mortgage Servicing Accounts Advanced Topics in Deposit Insurance Coverage FDIC 2014 Deposit Insurance Resources FDIC Toll Free Number FDIC Website EDIE Deposit Insurance Resources 1-877-275-3342 Hearing Impaired Line FDIC Brochures

FDIC Online Product Catalogue Calculator www.fdic.gov Your 1-877-ASK-FDIC 1-800-925-4618 Insured Deposits www.fdic.gov/edie https://vcart.velocitypayment.com/fdic/ 40 Advanced Topics in Deposit Insurance Coverage FDIC 2014 Advanced topics in Deposit Insurance Thank you for participating in the seminar! Questions? 41 Advanced Topics in Deposit Insurance Coverage FDIC 2014

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