Simplification of Deposit Insurance Rules
| Published date | 28 January 2022 |
| Citation | 87 FR 4455 |
| Record Number | 2022-01607 |
| Section | Rules and Regulations |
| Court | Federal Deposit Insurance Corporation |
Federal Register, Volume 87 Issue 19 (Friday, January 28, 2022)
[Federal Register Volume 87, Number 19 (Friday, January 28, 2022)]
[Rules and Regulations]
[Pages 4455-4471]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-01607]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 87, No. 19 / Friday, January 28, 2022 / Rules
and Regulations
[[Page 4455]]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 330
RIN 3064-AF27
Simplification of Deposit Insurance Rules
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Final rule.
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SUMMARY: The Federal Deposit Insurance Corporation is amending its
regulations governing deposit insurance coverage. The amendments
simplify the deposit insurance regulations by establishing a ``trust
accounts'' category that governs coverage of deposits of both revocable
trusts and irrevocable trusts using a common calculation, and provide
consistent deposit insurance treatment for all mortgage servicing
account balances held to satisfy principal and interest obligations to
a lender.
DATES: The rule is effective on April 1, 2024.
FOR FURTHER INFORMATION CONTACT: James Watts, Counsel, Legal Division,
(202) 898-6678, [email protected]; Kathryn Marks, Counsel, Legal
Division, (202) 898-3896, [email protected].
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Simplification of Deposit Insurance Coverage Rules for Trusts
A. Policy Objectives
B. Background
1. Deposit Insurance and the FDIC's Statutory and Regulatory
Authority
2. Current Rules for Coverage of Trust Deposits
C. Final Rule
D. Discussion of Comments
E. Alternatives Considered
II. Amendments to Mortgage Servicing Account Rule
A. Policy Objectives
B. Background
C. Final Rule
D. Discussion of Comments
III. Regulatory Analysis
A. Expected Effects
1. Simplification of Trust Rules
2. Amendments to Mortgage Servicing Account Rule
B. Regulatory Flexibility Act
1. Simplification of Trust Rules
2. Amendments to Mortgage Servicing Account Rule
C. Congressional Review Act
D. Paperwork Reduction Act
E. Riegle Community Development and Regulatory Improvement Act
F. Plain Language
I. Simplification of Deposit Insurance Coverage Rules for Trusts
A. Policy Objectives
The Federal Deposit Insurance Corporation (FDIC) is amending its
regulations governing deposit insurance coverage for deposits held in
connection with trusts.\1\ The amendments merge the revocable and
irrevocable trust categories into one category, ``trust accounts.''
Coverage for deposits in this category will be calculated through a
simple calculation. Each grantor's trust deposits will be insured in an
amount up to the standard maximum deposit insurance amount (currently
$250,000) multiplied by the number of trust beneficiaries, not to
exceed five. This, in effect, will limit coverage for a grantor's trust
deposits at each IDI to a total of $1,250,000; in other words, maximum
coverage of $250,000 per beneficiary for up to five beneficiaries.
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\1\ Trusts include informal revocable trusts (commonly referred
to as payable-on-death accounts, in-trust-for accounts, or Totten
trusts), formal revocable trusts, and irrevocable trusts that do not
have an IDI as trustee.
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The amendments: (1) Provide depositors and bankers with a rule for
trust account coverage that is easy to understand; and (2) facilitate
the prompt payment of deposit insurance in accordance with the Federal
Deposit Insurance Act (FDI Act), among other objectives.
Simplifying Insurance Coverage for Trust Deposits
The amendments simplify for depositors, bankers, and other
interested parties the insurance rules and limits for trust accounts.
The deposit insurance rules for trust deposits, set forth in part 330
of the FDIC's regulations, have evolved over time and can be difficult
to apply in some circumstances. The amendments reduce the number of
rules governing coverage for trust accounts and establish a
straightforward calculation to determine coverage. This should
alleviate some of the confusion that depositors and bankers experience
with respect to insurance coverage and limits.
Under the current regulations, there are distinct and separate sets
of rules applicable to deposits of revocable trusts and irrevocable
trusts. Each set of rules has its own criteria for coverage and methods
by which coverage is calculated. Despite the FDIC's efforts to simplify
the revocable trust rules in 2008,\2\ FDIC deposit insurance
specialists have responded to approximately 20,000 complex insurance
inquiries per year on average over the last 13 years. More than 50
percent of inquiries pertain to deposit insurance coverage for trust
accounts (revocable or irrevocable). The amendments further simplify
insurance coverage of trust accounts (revocable and irrevocable) by
harmonizing the coverage criteria for certain types of trust accounts
and establishing a simplified formula for calculating coverage that
applies to these deposits. The calculation is the same calculation that
the FDIC first adopted in 2008 for revocable trust accounts with five
or fewer beneficiaries. This formula is straightforward and is already
generally familiar to bankers and depositors.\3\
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\2\ See 73 FR 56706 (Sep. 30, 2008).
\3\ In 2008, the FDIC adopted an insurance calculation for
revocable trusts that have five or fewer beneficiaries. Pursuant to
the 2008 amendments, each trust grantor is insured up to $250,000
per beneficiary.
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Prompt Payment of Deposit Insurance
The FDI Act requires the FDIC to pay depositors ``as soon as
possible'' after a bank failure.\4\ However, the insurance
determination and subsequent payment for many trust deposits must await
the depositor's submission of complex trust agreements, followed by
FDIC staff's review of that information and application of the rules to
determine deposit insurance coverage. The final rule's amendments are
expected to facilitate more timely deposit insurance determinations for
trust accounts by reducing the amount of time needed for FDIC staff to
review trust agreements and determine coverage. These amendments
promote the FDIC's ability to pay insurance to depositors promptly
[[Page 4456]]
following the failure of an insured depository institution (IDI),
enabling depositors to meet their financial needs and obligations.
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\4\ 12 U.S.C. 1821(f).
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Facilitating Resolutions
The changes will also facilitate the resolution of failed IDIs. The
FDIC is routinely required to make deposit insurance determinations in
connection with IDI failures. In many of these instances, however,
deposit insurance coverage for trust deposits is based upon information
that is not maintained in the failed IDI's deposit account records. As
a result, FDIC staff works with depositors, trustees, and other parties
to obtain trust documentation following an IDI's failure in order to
complete deposit insurance determinations. The difficulties associated
with completing such a determination have been exacerbated by the
substantial growth in the use of formal trusts in recent decades. The
amendments are expected to reduce the time spent reviewing such
information and provide greater flexibility to automate deposit
insurance determinations, thereby reducing potential delays in the
completion of deposit insurance determinations and payments. Timely
payment of deposit insurance also helps to avoid reductions in the
franchise value of failed IDIs, expanding resolution options and
mitigating losses.
Effects on the Deposit Insurance Fund
The FDIC is also mindful of the effect that changes to the deposit
insurance regulations have on deposit insurance coverage and generally
on the Deposit Insurance Fund (DIF), which is used to pay deposit
insurance in the event of an IDI's failure. The FDIC manages the DIF
according to parameters established by Congress and continually
evaluates the adequacy of the DIF to resolve failed banks and protect
insured depositors. The FDIC's general intent is that amendments to the
trust rules are neutral with respect to the DIF.
B. Background
1. Deposit Insurance and the FDIC's Statutory and Regulatory Authority
The FDIC is an independent agency that maintains stability and
public confidence in the nation's financial system by: Insuring
deposits; examining and supervising IDIs for safety and soundness and
compliance with consumer financial protection laws; and resolving IDIs
and large and complex financial institutions, and managing
receiverships. The FDIC has helped to maintain public confidence in
times of financial turmoil, including the period from 2008 to 2013,
when the United States experienced a severe financial crisis, and more
recently in 2020 during the financial stress associated with the COVID-
19 pandemic. During the more than 88 years since the FDIC was
established, no depositor has lost a penny of FDIC-insured funds.
The FDI Act establishes the key parameters of deposit insurance
coverage, including the standard maximum deposit insurance amount
(SMDIA), currently $250,000.\5\ In addition to providing deposit
insurance coverage up to the SMDIA at each IDI where a depositor
maintains deposits, the FDI Act also provides separate insurance
coverage for deposits that a depositor maintains in different rights
and capacities (also known as insurance categories) at the same IDI.\6\
For example, deposits in the single ownership category are separately
insured from deposits in the joint ownership category at the same IDI.
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\5\ See 12 U.S.C. 1821(a)(1)(E).
\6\ See 12 U.S.C. 1821(a)(1)(C) (deposits ``maintained by a
depositor in the same capacity and the same right'' at the same IDI
are aggregated for purposes of the deposit insurance limit).
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The FDIC's deposit insurance categories have been defined through
both statute and regulation. Certain categories, such as the government
deposit category, have been expressly defined by Congress.\7\ Other
categories, such as joint deposits and corporate deposits, have been
based on statutory interpretation and recognized through regulations
issued in 12 CFR part 330 pursuant to the FDIC's rulemaking authority.
In addition to defining the insurance categories, the deposit insurance
regulations in part 330 provide the criteria used to determine
insurance coverage for deposits in each category.
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\7\ 12 U.S.C. 1821(a)(2).
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Over the years, deposit insurance coverage has evolved to reflect
both the FDIC's experience and changes in the banking industry. The FDI
Act includes provisions defining the coverage for certain trust
deposits,\8\ while coverage for other trust deposits has been defined
by regulation.\9\
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\8\ See 12 U.S.C. 1817(i), 1821(a).
\9\ See 12 CFR 330.10, 330.13.
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2. Current Rules for Coverage of Trust Deposits
The FDIC currently recognizes three different insurance categories
for deposits held in connection with trusts: (1) Revocable trusts; (2)
irrevocable trusts; and (3) irrevocable trusts with an IDI as trustee.
Revocable Trust Deposits
The revocable trust category applies to deposits for which the
depositor has evidenced an intention that the deposit will belong to
one or more beneficiaries upon his or her death. This category includes
deposits held in connection with formal revocable trusts--that is,
revocable trusts established through a written trust agreement. It also
includes deposits that are not subject to a formal trust agreement,
where the IDI makes payment to the beneficiaries identified in the
IDI's records upon the depositor's death based on account titling and
applicable State law. The FDIC refers to these types of deposits,
including Totten trust accounts, payable-on-death accounts, and similar
accounts, as ``informal revocable trusts.'' Deposits associated with
formal and informal revocable trusts are aggregated for purposes of the
deposit insurance rules; thus, deposits that will pass from the same
grantor to beneficiaries are aggregated and insured up to the SMDIA,
currently $250,000, per beneficiary, regardless of whether the transfer
would be accomplished through a written revocable trust or an informal
revocable trust.\10\
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\10\ 12 CFR 330.10(a). In this document, the term ``grantor'' is
used to refer to the party that creates a trust, though trust
agreements also may use terms such as ``settlor'' or ``trustor.''
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Under the current revocable trust rules, beneficiaries include
natural persons, charitable organizations, and non-profit entities
recognized as such under the Internal Revenue Code of 1986.\11\ If a
named beneficiary does not qualify as a beneficiary under the rule,
funds held in trust for that beneficiary are treated as single
ownership funds of the grantor and aggregated with any other single
ownership accounts that the grantor maintains at the same IDI.\12\
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\11\ 12 CFR 330.10(c).
\12\ 12 CFR 330.10(d).
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Certain requirements also must be satisfied for a deposit to be
insured in the revocable trust category. The grantor must intend that
the funds will belong to the beneficiaries upon the depositor's death,
and this intention must be manifested in the ``title'' of the account
using commonly accepted terms such as ``in trust for,'' ``as trustee
for,'' ``payable-on-death to,'' or any acronym for these terms. For
purposes of this requirement, ``title'' includes the IDI's electronic
deposit account records. For example, an IDI's electronic deposit
account records could identify the account as a revocable trust account
through coding or a similar mechanism.\13\
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\13\ 12 CFR 330.10(b)(1).
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[[Page 4457]]
In addition, the beneficiaries of informal trusts (i.e., payable-
on-death accounts) must be named in the IDI's deposit account
records.\14\ Since 2004, the requirement to name beneficiaries in the
IDI's deposit account records has not applied to formal revocable
trusts; the FDIC generally obtains information on beneficiaries of such
trusts from depositors following an IDI's failure. Therefore, if a
formal revocable trust deposit exceeds $250,000, and the depositor's
IDI were to fail, it is likely that a hold would be placed on the
deposit until the FDIC can review the trust agreement and verify that
coverage criteria are satisfied.
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\14\ 12 CFR 330.10(b)(2).
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The calculation of deposit insurance coverage for revocable trust
deposits depends upon the number of unique beneficiaries named by a
depositor. If five or fewer beneficiaries have been named, the
depositor is insured in an amount up to the total number of named
beneficiaries multiplied by the SMDIA, and the specific allocation of
interests among the beneficiaries is not considered.\15\ If more than
five beneficiaries have been named, the depositor is insured up to the
greater of: (1) Five times the SMDIA; or (2) the total of the interests
of each beneficiary, with each such interest limited to the SMDIA.\16\
For purposes of this calculation, a life estate interest is valued at
the SMDIA.\17\
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\15\ 12 CFR 330.10(a).
\16\ 12 CFR 330.10(e).
\17\ 12 CFR 330.10(g). For example, if a revocable trust
provides a life estate for the depositor's spouse and remainder
interests for six other beneficiaries, the spouse's life estate
interest would be valued at $250,000 for purposes of the deposit
insurance calculation.
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Where a revocable trust deposit is jointly owned by multiple co-
owners, the interests of each account owner are separately insured up
to the SMDIA per beneficiary.\18\ However, if the co-owners are the
only beneficiaries of the trust, the account is instead insured under
the FDIC's joint account rule.\19\
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\18\ 12 CFR 330.10(f)(1).
\19\ 12 CFR 330.10(f)(2).
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The current revocable trust rule also contains a provision that was
intended to reduce confusion and the potential for a decrease in
deposit insurance coverage in the case of the death of a grantor.
Specifically, if a revocable trust becomes irrevocable due to the death
of the grantor, the trust's deposit may continue to be insured under
the revocable trust rules.\20\ Absent this provision, the irrevocable
trust rules would apply following the grantor's death, as the revocable
trust becomes irrevocable at that time, which could result in a
reduction in coverage.\21\
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\20\ 12 CFR 330.10(h).
\21\ The revocable trust rules tend to provide greater coverage
than the irrevocable trust rules because contingencies are not
considered for revocable trusts. In addition, where five or fewer
beneficiaries are named by a revocable trust, specific allocations
to beneficiaries also are not considered.
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Irrevocable Trust Deposits
Deposits held by an irrevocable trust that has been established
either by written agreement or by statute are insured in the
irrevocable trust deposit insurance category. Calculating coverage for
deposits insured in this category requires a determination of whether
beneficiaries' interests in the trust are contingent or non-contingent.
Non-contingent interests are interests that may be determined without
evaluation of any contingencies, except for those covered by the
present worth and life expectancy tables and the rules for their use
set forth in the Internal Revenue Service (IRS) Federal Estate Tax
Regulations.\22\ Funds held for non-contingent trust interests are
insured up to the SMDIA for each such beneficiary.\23\ Funds held for
contingent trust interests are aggregated and insured up to the SMDIA
in total.\24\
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\22\ 12 CFR 330.1(m). For example, a life estate interest is
generally non-contingent, as it may be valued using the life
expectancy tables. However, where a trustee has discretion to divert
funds from one beneficiary to another (for example, to provide for
the second beneficiary's medical needs), the first beneficiary's
interest is contingent upon the trustee's discretion.
\23\ 12 CFR 330.13(a).
\24\ 12 CFR 330.13(b).
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The irrevocable trust rules do not apply to deposits held for a
grantor's retained interest in an irrevocable trust.\25\ Such deposits
are aggregated with the grantor's other single ownership deposits for
purposes of applying the deposit insurance limit.
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\25\ See 12 CFR 330.1(r) (definition of ``trust interest'' does
not include any interest retained by the settlor).
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Deposits Held by an IDI as Trustee of an Irrevocable Trust
For deposits held by an IDI in its capacity as trustee of an
irrevocable trust, deposit insurance coverage is governed by section
7(i) of the FDI Act, a provision rooted in the Banking Act of 1935.
Section 7(i) provides that ``[t]rust funds held on deposit by an
insured depository institution in a fiduciary capacity as trustee
pursuant to any irrevocable trust established pursuant to any statute
or written trust agreement shall be insured in an amount not to exceed
the standard maximum deposit insurance amount . . . for each trust
estate.'' \26\
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\26\ 12 U.S.C. 1817(i).
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The FDIC's regulations governing coverage for deposits held by an
IDI in its capacity as trustee of an irrevocable trust are found in
Sec. 330.12. The rule provides that ``trust funds'' held by an IDI in
its capacity as trustee of an irrevocable trust, whether held in the
IDI's trust department or another department, or deposited by the
fiduciary institution in another IDI, are insured up to the SMDIA for
each owner or beneficiary represented.\27\ This coverage is separate
from the coverage provided for other deposits of the owners or the
beneficiaries,\28\ and deposits held for a grantor's retained interest
are not aggregated with the grantor's single ownership deposits.
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\27\ Part 330 defines ``trust funds'' as ``funds held by an
insured depository institution as trustee pursuant to any
irrevocable trust established pursuant to any statute or written
trust agreement.'' 12 CFR 330.1(q).
\28\ 12 CFR 330.12(a).
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C. Final Rule
In July 2021, the FDIC proposed for comment a number of amendments
to the rules governing deposit insurance coverage for trust
deposits.\29\ Generally, the FDIC proposed to: Merge the revocable and
irrevocable trust categories into one category; apply a simpler, common
calculation method to determine insurance coverage for deposits held by
certain revocable and irrevocable trusts; and eliminate certain
requirements found in the current rules for revocable and irrevocable
trusts.
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\29\ See 86 FR 41766 (Aug. 3, 2021).
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The FDIC received seven comments in response to the proposed rule.
Commenters generally supported the proposed rule, as discussed below.
After careful consideration of the comments, the FDIC is adopting the
rule generally as proposed, with only technical, non-substantive
changes.
Merger of Revocable and Irrevocable Trust Categories
The final rule amends Sec. 330.10 of the FDIC's regulations, which
currently applies only to revocable trust deposits, to establish a new
``trust accounts'' category that would include both revocable and
irrevocable trust deposits. The rule defines the types of deposits that
would be included in this category: (1) Informal revocable trust
deposits, such as payable-on-death accounts, in-trust-for accounts, and
Totten trust accounts; (2) formal revocable trust deposits, defined to
mean deposits held pursuant to a written revocable trust agreement
under which a deposit passes to one or more beneficiaries upon the
grantor's death; and (3) irrevocable trust deposits, meaning deposits
held
[[Page 4458]]
pursuant to an irrevocable trust established by written agreement or by
statute. Because these deposits would be considered to be part of the
same category for deposit insurance purposes, they would be aggregated
when applying the deposit insurance limit.
As amended, Sec. 330.10 does not apply to deposits maintained by
an IDI in its capacity as trustee of an irrevocable trust; these
deposits are insured separately pursuant to section 7(i) of the FDI Act
and Sec. 330.12 of the deposit insurance regulations.
Calculation of Coverage
The FDIC will use one streamlined calculation to determine the
amount of deposit insurance coverage for deposits of revocable and
irrevocable trusts. This method is already utilized by the FDIC to
calculate coverage for revocable trusts that have five or fewer
beneficiaries and it is an aspect of the current rules that is
generally well-understood by bankers and trust depositors. The rule
provides that a grantor's trust deposits will be insured in an amount
up to the SMDIA (currently $250,000) multiplied by the number of trust
beneficiaries, not to exceed five beneficiaries. This, in effect, will
limit coverage for a grantor's trust deposits at each IDI to a total of
$1,250,000; in other words, maximum coverage of $250,000 per
beneficiary for up to five beneficiaries. The $1,250,000 per-grantor,
per-IDI limit is intended to be more straightforward and balance the
objectives of simplifying the trust rules, promoting timely payment of
deposit insurance, facilitating resolutions, ensuring consistency with
the FDI Act, and limiting risk to the DIF.
Eliminating Certain Requirements
Eligible Beneficiaries
The current revocable trust rules provide that beneficiaries
include natural persons, charitable organizations, and non-profit
entities recognized as such under the Internal Revenue Code of
1986,\30\ while the irrevocable trust rules do not establish criteria
for beneficiaries. As stated in the proposed rule, the FDIC believes
that a single definition should be used to determine whether an entity
is an ``eligible'' beneficiary. The final rule will use the current
revocable trust rule's definition.
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\30\ 12 CFR 330.10(c).
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The final rule also excludes from the calculation of deposit
insurance coverage beneficiaries that only would obtain an interest in
a trust if one or more beneficiaries are deceased. This codifies
existing practice to include only primary, unique beneficiaries in the
deposit insurance calculation.\31\ Consistent with current treatment,
naming a chain of contingent beneficiaries that would obtain trust
interests only in event of a beneficiary's death will not increase
deposit insurance coverage.
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\31\ See FDIC Financial Institution Employee's Guide to Deposit
Insurance at 51 (``Sometimes the trust agreement will provide that
if a primary beneficiary predeceases the owner, the deceased
beneficiary's share will pass to an alternative or contingent
beneficiary. Regardless of such language, if the primary beneficiary
is alive at the time of an IDI's failure, only the primary
beneficiary, and not the alternative or contingent beneficiary, is
taken into account in calculating deposit insurance coverage.'').
Including only unique beneficiaries means that when an owner names
the same beneficiary on multiple trust accounts, the beneficiary
will only be counted once in calculating trust coverage. For
example, if a grantor has two trust deposit accounts and names the
same beneficiary in both trust documents, the total deposit
insurance coverage associated with that beneficiary is limited to
$250,000 in total.
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Finally, the FDIC is codifying a longstanding interpretation of the
trust rules under which an informal revocable trust designates the
depositor's formal trust as its beneficiary. A formal trust generally
does not meet the definition of an eligible beneficiary for deposit
insurance purposes, but the FDIC has treated such accounts as revocable
trust accounts under the trust rules, insuring the account as if it
were titled in the name of the formal trust.\32\
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\32\ See FDIC Financial Institution Employee's Guide to Deposit
Insurance at 71.
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Retained Interests and Ineligible Beneficiaries' Interests
The current trust rules provide that in some instances, funds
intended for specific beneficiaries are aggregated with a grantor's
single ownership deposits at the same IDI for purposes of the deposit
insurance calculation. These instances include a grantor's retained
interest in an irrevocable trust \33\ and interests of ineligible
beneficiaries that do not satisfy the definition of a revocable trust
``beneficiary.'' \34\ This adds complexity to the deposit insurance
calculation, as a detailed review of a trust agreement may be required
to value such interests in order to aggregate them with a grantor's
single ownership funds. In order to implement the streamlined
calculation for trust deposits, the FDIC is eliminating these
provisions. Under the final rule, the grantor and other beneficiaries
that do not satisfy the definition of ``eligible beneficiary'' are not
included in the deposit insurance calculation.\35\ Importantly, this
does not in any way limit a grantor's ability to establish such trust
interests under State law; these interests simply do not factor into
the calculation of deposit insurance coverage.
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\33\ See 12 CFR 330.1(r); see also FDIC Financial Institution
Employee's Guide to Deposit Insurance at 87.
\34\ 12 CFR 330.10(d).
\35\ In the unlikely event a trust does not name any eligible
beneficiaries, the FDIC would treat the trust's deposits as single
ownership deposits. Such deposits would be aggregated with any other
single ownership deposits that the grantor maintains at the same IDI
and insured up to the SMDIA of $250,000.
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Future Trusts Named as Beneficiaries
Trusts often contain provisions for the establishment of one or
more new trusts upon the grantor's death, and the final rule clarifies
deposit insurance coverage in these situations. Specifically, if a
trust agreement provides that trust funds will pass into one or more
new trusts upon the death of the grantor (or grantors), the future
trust (or trusts) will not be treated as beneficiaries for purposes of
the calculation under the proposed rule. Rather, the future trust(s)
will be considered mechanisms for distributing trust funds, and the
natural persons or organizations that receive the trust funds through
the future trusts will be considered the beneficiaries for purposes of
the deposit insurance calculation. This clarification is consistent
with published guidance and does not represent a substantive change in
deposit insurance coverage.\36\
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\36\ See FDIC Financial Institution Employee's Guide to Deposit
Insurance at 74.
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Naming of Beneficiaries in Deposit Account Records
Consistent with the current revocable trust rules, the final rule
continues to require the beneficiaries of an informal revocable trust
to be specifically named in the deposit account records of the IDI.\37\
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\37\ See 12 CFR 330.10(b)(2).
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Presumption of Ownership
Consistent with the current revocable trust rules, the final rule
provides that, unless otherwise specified in an IDI's deposit account
records, a deposit of a trust established by multiple grantors will be
presumed to be owned in equal shares.\38\
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\38\ See 12 CFR 330.10(f).
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Bankruptcy Trustee Deposits
The FDIC will maintain the current treatment of deposits placed at
an IDI by a bankruptcy trustee. Under the final rule, if funds of
multiple bankruptcy estates are commingled in a single account at the
IDI, each estate will be separately insured up to the SMDIA.
[[Page 4459]]
Deposits Covered Under Other Rules
The final rule excludes from coverage under Sec. 330.10 certain
trust deposits that are covered by other sections of the deposit
insurance regulations. For example, employee benefit plan deposits are
insured pursuant to Sec. 330.14, and investment company deposits are
insured as corporate deposits pursuant to Sec. 330.11. Deposits held
by an insured depository institution in its capacity as trustee of an
irrevocable trust are insured pursuant to Sec. 330.12. In addition, if
the co-owners of an informal or formal revocable trust are the trust's
sole beneficiaries, deposits held in connection with the trust are
treated as joint deposits under Sec. 330.9. In each of these cases,
the FDIC will not alter the current rules.
Effective Date
The effective date of the final rule is April 1, 2024. This is
intended to provide IDIs, depositors, and the FDIC time to prepare for
the changes in deposit insurance coverage. IDIs will have an
opportunity to review the changes in coverage, train employees, and
update publications if necessary. In addition, ``covered institutions''
under the FDIC's rule entitled ``Recordkeeping for timely deposit
insurance determination,'' codified at 12 CFR part 370 will need to
prepare to implement changes to recordkeeping and information
technology capabilities. Depositors may review insurance coverage for
their deposits and adjust their deposit account arrangements and
deposit relationships, if desired. In addition, the FDIC must reprogram
the information technology infrastructure that it uses to determine
deposit insurance coverage and to make payment to insured depositors
and update its deposit insurance coverage publications, including
publications that provide guidance to covered institutions.
D. Discussion of Comments
The FDIC received seven comments on the proposed rule, including
one joint letter from three national trade associations and individual
letters from another national trade association, a State banker's
association, a deposit solutions provider, and three individuals.
Several commenters expressed appreciation for the FDIC's efforts to
simplify the trust rules and offered suggestions for modifications to
the proposed rule.
Some commenters also offered suggestions that relate primarily to
other parts of the FDIC's regulations and thus are outside the scope of
the proposed rule. Nonetheless, the FDIC reviewed these suggestions as
part of the process of developing the final rule as discussed below.
Institutional Trusts
Three trade associations raised a concern about the coverage that
would apply to certain institutional trusts under the proposed rule,
including common trust funds, collective investment funds, indenture
bonds, and securitization trusts. The commenters explained that these
types of irrevocable trusts are sometimes established by entities other
than insured depository institutions--such as uninsured limited purpose
nationally-chartered banks, limited purpose state-chartered banks, and
state-chartered trust companies--to collectively invest funds, issue
bonds, or form securitized investments. The commenters asserted that
deposits of such trusts potentially fall within the scope of the
existing irrevocable trust category and would experience a reduction in
coverage under the proposed rule because per-beneficiary coverage would
be provided only for up to five eligible beneficiaries. The commenters
urged the FDIC to amend the pass-through deposit insurance rules and,
in the interim, to clarify through guidance that institutional trusts
qualify for pass-through insurance coverage.
Pass-through insurance coverage applies to deposits of specific
types of institutional trusts under the current rules, and this
coverage would not be affected by the rule. The commenters noted that
collective trust funds are established for the purpose of investing
assets of retirement, pension, profit sharing, stock bonus or other
employee benefit trusts. Deposits of employee benefit plans are insured
on a pass-through basis pursuant to statute and regulation.\39\
Moreover, Sec. 330.10(f)(2) of the proposed rule stated that deposits
of employee benefit plans would be covered pursuant to the rules for
employee benefit plan deposits found in Sec. 330.14, even if such
deposits belonged to a trust.
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\39\ See 12 U.S.C. 1821(a)(1)(D); 12 CFR 330.14.
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Pass-through insurance coverage generally does not apply to
deposits of other types of investment trusts, such as mutual funds or
other investment company structures.\40\ While some institutional
trusts (similarly to some individual trusts) may experience a reduction
in deposit insurance coverage under this final rule, the FDIC believes
that a simplified insurance calculation for trust deposits has
substantial benefits for depositors and IDIs.
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\40\ Under the current deposit insurance rules, deposits
maintained by trusts or other business arrangements that are subject
to certain securities laws are insured for up to $250,000 in total,
regardless of the number of underlying investors. 12 CFR
330.11(a)(2).
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Per-Grantor Coverage Limit
Two individuals submitted comment letters questioning the
elimination of coverage for a grantor's trust deposits exceeding
$1,250,000 at a single IDI. The FDIC recognizes that this aspect of the
proposed rule may result in a reduction in deposit insurance coverage
for a small number of trust depositors that hold deposits exceeding
$1,250,000 at a single IDI, and these depositors may wish to
restructure their trust deposits. However, the FDIC believes that a
simplified insurance calculation for trust deposits has substantial
benefits for depositors and IDIs, as discussed above. The $1,250,000
per-grantor, per-IDI limit is intended to be more straightforward and
balance the objectives of simplifying the trust rules, promoting timely
payment of deposit insurance, facilitating resolutions, ensuring
consistency with the FDI Act, and limiting risk to the DIF. In
addition, as discussed below, the FDIC intends to update its
publications and engage in public outreach to promote awareness of the
changes in coverage.
Educational Materials
A trade association suggested that the FDIC provide template
language for bankers to explain trust coverage changes to depositors
and publish and regularly update guidance and frequently asked
questions on its website to address specific scenarios. The FDIC
appreciates this suggestion and recognizes the need for public outreach
on a variety of fronts. The FDIC already has many resources for bankers
and the public that help explain deposit insurance coverage generally,
and several presentations that are specific to trust accounts,
including the following:
Financial Institution Employee's Guide to Deposit
Insurance: Describes deposit insurance coverage for various account
categories and provides examples of coverage in multiple different
scenarios.
Bankers' seminars: The FDIC holds deposit insurance
seminars for bankers multiple times each year, during which FDIC staff
discuss the current rules and take questions.
Electronic Deposit Insurance Estimator (EDIE): A tool on
the FDIC's website that can be used to help determine deposit insurance
coverage for particular account arrangements.
[[Page 4460]]
Published guidance and materials relating to deposit
insurance coverage intended to assist the covered institutions subject
to part 370
As part of its implementation of the final rule by the effective
date of April 1, 2024, the FDIC intends to review all relevant
resources and publications and update or remove those materials, as
appropriate. Additionally, the FDIC will ensure that all materials,
including brochures and any other documents, are updated and available
for distribution. The FDIC will also consider additional ways to inform
the public regarding the final rule and ways to assist bankers in
explaining any changes to depositors.
Comments Focused on Part 370
Commenters also addressed various aspects of the NPR that have
implications for covered institutions. Issues raised by these
commenters and the FDIC's responses are discussed below. The commenters
also raised issues with part 370 that are outside the scope of this
rulemaking effort. While the FDIC acknowledges those comments, it
believes those comments are not directly related to the final rule.
Beneficiaries of Future Trusts
Several trade associations argued that the proposed rule's
treatment of beneficiaries of future trusts would add considerable
burden to compliance with part 370 and urged the FDIC to treat future
trusts as another type of eligible beneficiary. The FDIC does not
believe that looking through future trusts to identify potential
beneficiaries will add any compliance burden for part 370 covered
institutions. Under Sec. 370.4(b)(2), a covered institution is not
required to maintain the identity of a formal trust's beneficiary(ies)
in its deposit account records for the trust's account(s) if it does
not otherwise maintain the information that would be needed for its
information technology system to meet the requirements set forth in
Sec. 370.3. Thus, to the extent a trust's beneficiaries include a
future trust, the covered institution would not be required to collect
information on the beneficiaries of a future trust in order to comply
with part 370. It is important to note, however, that regardless of
whether or not an insured depository institution is covered by part
370, if an insured depository institution were to fail, then the
depositor may need to provide the identity(ies) of a future trust's
beneficiary(ies) in order for the FDIC to make a complete and accurate
deposit insurance determination. In addition, the FDIC notes that it is
required by statute to aggregate each depositor's deposits within each
insurance category when making an insurance determination.\41\
Recognizing a future trust as an eligible beneficiary could result in
duplicative coverage to the extent the beneficiaries of the existing
trust and the future trust overlap.
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\41\ 12 U.S.C. 1821(a)(1)(C).
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Multiple Beneficiaries Across Multiple Trust Accounts
Three trade associations recommended that any final rulemaking for
trust coverage simplification should include a specific example to
explain part 370 recordkeeping requirements when there are more than
five beneficiaries associated with more than one trust account
established by the same grantor. According to the example recommended
by commenters, when a grantor has established both an informal trust
account (e.g., a payable-on-death (POD) account) and a formal trust
that also has accounts at the same covered institution, the covered
institution would be required to identify the beneficiary(ies) only for
the informal trust account in the deposit account records.
As the commenters note, accounts held in connection with a formal
trust that are insured under Sec. 330.10, as amended pursuant to this
final rule (or Sec. 330.13 prior to the effective date of this final
rule), are eligible for alternative recordkeeping under Sec.
370.4(b)(2). A covered institution is not required to maintain
information identifying the beneficiaries of a formal trust in the
deposit account records for purposes of part 370 if it does not
otherwise maintain the information that would be needed for its
information technology system to meet the requirements set forth in
Sec. 370.3. Nevertheless, if a covered institution should fail, the
depositor (or the trustee for the formal trust) may need to submit to
the FDIC information identifying the formal trust's beneficiary(ies).
Need To Provide Trust Documentation Upon Bank Failure
A deposit solutions provider submitted a comment letter describing
its operation of a sweep program and the method by which it allocates
trust deposits among several banks. The commenter indicated that if the
depositor's originating bank does not provide information on trust
beneficiaries, only up to $250,000 of that depositor's funds will be
allocated to a single bank in the network. The commenter requested the
FDIC recognize that operating the program in this way eliminates the
need for the originating bank to provide trust documentation to the
FDIC after a bank failure or for the purpose of complying with part
370's recordkeeping requirements.
The deposit solutions provider's methodology for allocating the
trust deposits is intended to ensure that the total corpus of trust
funds would be eligible for deposit insurance (because the amount
placed at each receiving bank would not exceed the SMDIA for each
beneficial owner of the deposits). That methodology, however, would not
necessarily provide the FDIC with all of the requisite information to
complete an accurate deposit insurance determination on a particular
depositor's accounts. Several other factors must be considered and
evaluated.
Although it may be uncommon for an individual depositor
participating in the commenter's program to maintain other deposit
accounts at a bank holding the swept trust funds, the FDIC is required
by statute to aggregate all of a beneficial owner's funds placed in one
bank in the same right and capacity. Consequently, the FDIC would have
to obtain any additional depositor or trust account information (or
confirm that there is none) in order to aggregate all the depositor's
accounts in the trust category. The requisite information would include
identification of both the grantor(s) and the beneficiaries of the
trust. For example, in the event that a depositor maintained more than
one trust account with the same beneficiary, that particular
beneficiary would only count once for purposes of deposit insurance
eligibility. Additionally, it is possible that an entity listed as a
beneficiary would not meet the definition of a ``beneficiary'' as set
forth in Sec. 330.10(c).\42\ Finally, if the grantor has multiple
trust accounts at the same bank, it is possible that the FDIC would
provide deposit insurance for one trust account before receiving the
necessary trust account information for another trust account. As
stated previously, the FDIC would have to ensure that both trust
accounts are aggregated before paying additional deposit insurance for
the second trust account. The FDIC would be unable to perform this
function without the relevant grantor and beneficiary information.
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\42\ 12 CFR 330.10(c) provides that ``[f]or purposes of this
section, a beneficiary includes a natural person as well as a
charitable organization and other non-profit entity recognized as
such under the Internal Revenue Code of 1986, as amended.''
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The part 370 recordkeeping requirements for informal revocable
trust accounts closely track the recordkeeping requirements set forth
in
[[Page 4461]]
12 CFR 330.10, as amended. For example, Sec. 370.4(a)(1)(iii) requires
the covered institution to maintain information concerning the
beneficiaries of a payable-on-death account in the covered
institution's records.\43\ Therefore, this information should be
immediately available to the FDIC at a covered institution's failure.
In contrast, for formal trust accounts, Sec. 370.4(b)(2) permits
alternative recordkeeping treatment and requires a covered institution
to maintain some, but not all, of the requisite information the FDIC
would need to have to complete an accurate deposit insurance
determination. Nevertheless, the FDIC would require this information to
be available after a covered institution's failure for the reasons
discussed above.
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\43\ See Sec. 330.10(b)(2) which requires ``[f]or informal
revocable trust accounts, the beneficiaries must be specifically
named in the deposit account records of the insured depository
institution.''
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Implementation of Part 370 Capabilities
Three trade associations urged the FDIC to postpone part 370
examinations on the types of deposit accounts impacted. Part 370
requires a covered institution to implement information technology and
recordkeeping capabilities to calculate deposit insurance as provided
under part 330. The final rule has a delayed effective date and will
not go into effect until April 1, 2024.\44\ Accordingly, covered
institutions will have at least 24 months after the FDIC's adoption of
the final rule to prepare the updates or changes to its information
technology system or recordkeeping capabilities that will be necessary
to satisfy part 370 requirements as of the effective date of the final
rule. The FDIC is also publishing a separate notification elsewhere in
this issue of the Federal Register to part 370 covered institutions
regarding the final rule's implications regarding compliance with part
370.
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\44\ Although Sec. 370.10(d) provides that ``[a] covered
institution will not be considered to be in violation of this part
as a result of a change in law that alters the availability or
calculation of deposit insurance for such period as specified by the
FDIC following the effective date of such change[,]'' the FDIC is
not providing an additional period of time pursuant to Sec.
370.10(d) because the delayed effective date of the final rule
provides covered institutions with at least 24 months to prepare the
changes that will need to be operational on April 1, 2024.
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FDIC Testing of Part 370 Capabilities
Several trade associations suggested that the FDIC delay part 370
compliance tests for three years after a covered institution's part 370
annual certification following the effective date of the final rule.
The FDIC will continue to conduct periodic tests pursuant to 12 CFR
370.10(b) and evaluate the part 370 capabilities under the rules
effective at the time of the compliance test. Ongoing compliance
testing is necessary because a covered institution could fail at any
time, and the FDIC would need to utilize the covered institution's part
370 capabilities to effectively conduct a timely deposit insurance
determination. The FDIC relies on compliance testing to provide it with
insight regarding how comprehensive a covered institution's part 370
capabilities are. Further, the revisions to deposit insurance coverage
made by the final rule are expected to impact a relatively small volume
of a covered institution's deposit balances so should not significantly
impact compliance testing, and would nonetheless be useful in assessing
a covered institution's part 370 capabilities.
Comments Outside the Scope of This Rulemaking
Finally, commenters recommended certain changes to part 370
requirements. Three trade associations suggested that the FDIC limit
the annual certification requirement for testing and attestation to
material changes only and waive certain recordkeeping requirements for
grantors. The FDIC believes that the recommendations to change part 370
compliance and recordkeeping requirements are outside the scope of the
current part 330 rulemaking and would require an amendment to part 370
instead. Currently, covered institutions are required to submit to the
FDIC a certification of compliance that must, among other requirements,
``confirm that the covered institution has implemented all required
capabilities and tested its information technology system during the
proceeding twelve months.'' \45\ The purpose of this requirement is to
guarantee that a covered institution perform an end-to-end test of its
part 370 capabilities at least once per year and to confirm that those
capabilities function properly. In the event that a covered institution
were to fail, the FDIC would rely upon all of the covered institution's
part 370 capabilities to complete the deposit insurance calculations.
Moreover, the FDIC would not limit its testing to only the capabilities
that the covered institution has materially changed during the
preceding compliance year. Rather it would test the covered
institution's capabilities to calculate deposit insurance should the
need arise and understand which capabilities function properly and
which do not.
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\45\ 12 CFR 370.10(a).
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Among the comments related solely to part 370, a trade association
requested that the FDIC waive certain recordkeeping requirements under
Sec. 370.4 that are applicable to formal revocable trust and
irrevocable trust accounts with transactional features, namely the
requirement that a covered institution maintain a unique identifier for
the trust's grantor. In the preamble to the 2019 part 370 final rule,
the FDIC stated that having a method to identify the grantor at failure
(i.e., a unique identifier) would enable the FDIC to aggregate the
deposits of formal revocable trusts established by the same grantor and
insure those accounts up to the SMDIA.\46\ This could enable payment
instructions presented against those accounts to be completed after
failure.\47\ The same approach would be used for certain irrevocable
trust accounts that have a common grantor.\48\
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\46\ 84 FR 37020, 37029 (July 30, 2019).
\47\ Id. The FDIC explained further that ``[t]his capability
will facilitate the FDIC's resolution efforts by enabling a
successor [insured depository institution] to continue payments
processing uninterrupted, and will also mitigate adverse effects of
the covered institution's failure on these account holders.''
\48\ Id., discussing trust deposits insured pursuant to 12 CFR
330.13, which coverage is now combined under revised 12 CFR 330.10.
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Trade association commenters also recommended that the FDIC allow
covered institutions to amend existing exception requests and provide
extensions for granted relief to account for changes to part 330. This
request is outside the scope of this rulemaking, and the FDIC will
consider this outside the scope of this rulemaking.
The FDIC reiterates that recommendations to amend part 370 are
beyond the scope of this final rule.
E. Alternatives Considered
The FDIC considered a number of alternatives to the amendments to
the trust rules that could meet its objectives, as described in the
preamble to the proposed rule.\49\ Commenters generally did not address
these alternatives, and for the reasons stated in the preamble to the
proposed rule, the FDIC concludes that the proposed rule was preferable
to the alternatives.
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\49\ See 86 FR 41766, 41776 (Aug. 3, 2021).
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II. Amendments to Mortgage Servicing Account Rule
A. Policy Objectives
The FDIC's regulations governing deposit insurance coverage include
specific rules on deposits maintained at IDIs by mortgage servicers.
These rules are intended to be easy to understand and apply in
determining the amount of
[[Page 4462]]
deposit insurance coverage for a mortgage servicer's deposits. The FDIC
also seeks to avoid uncertainty concerning the extent of deposit
insurance coverage for such deposits, as deposits in mortgage servicing
accounts (MSAs) provide a source of funding for IDIs.
The FDIC is amending its rules governing insurance coverage for
deposits maintained at IDIs by mortgage servicers that are comprised of
mortgagors' principal and interest payments. The amendments are
intended to address an aspect of servicing arrangements that was not
previously covered by the mortgage servicing account rule.
Specifically, some servicing arrangements may permit or require
servicers to advance their own funds to the lenders when mortgagors are
delinquent in making principal and interest payments, and servicers
might commingle such advances in the MSA with principal and interest
payments collected directly from mortgagors. This may be required, for
example, under certain mortgage securitizations. The FDIC believes that
the factors that motivated the FDIC to establish its current rules for
mortgage servicing accounts, described below, argue for treating funds
advanced by a mortgage servicer in order to satisfy mortgagors'
principal and interest obligations to the lender as if such funds were
collected directly from borrowers.\50\
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\50\ Certain funds collected from mortgagors and held by a bank
may not be ``deposits'' under the FDI Act, and thus fall outside the
scope of deposit insurance coverage. For example, funds received by
a bank that are immediately applied to reduce the debt owed to that
bank are specifically excluded from the statutory definition of
``deposit.'' 12 U.S.C. 1813(l)(3).
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B. Background
The FDIC's rules governing coverage for mortgage servicing accounts
were originally adopted in 1990 following the transfer of
responsibility for insuring deposits of savings associations from the
Federal Savings and Loan Insurance Corporation (FSLIC) to the FDIC.
Under the rules adopted in 1990, deposits comprised of payments of
principal and interest were insured on a pass-through basis to lenders,
mortgagees, investors, or security holders (lenders). In adopting this
rule, the FDIC focused on the fact that principal and interest funds
were generally owned by lenders, on whose behalf the servicer, as
agent, accepted principal and interest payments. By contrast, payments
of taxes and insurance were insured to the mortgagors or borrowers on a
pass-through basis because the borrower owns such funds until tax and
insurance bills are paid by the servicer.
In 2008, however, the FDIC recognized that securitization methods
and vehicles for mortgages had become more complex, exacerbating the
difficulty of determining the ownership of deposits comprised of
principal and interest payments by mortgagors and extending the time
required to make a deposit insurance determination for deposits of a
mortgage servicer in the event of an IDI's failure.\51\ The FDIC
expressed concern that a lengthy insurance determination could lead to
continuous withdrawal of deposits of principal and interest payments
from IDIs and unnecessarily reduce a funding source for such
institutions. The FDIC therefore amended its rules to provide coverage
to lenders based on each mortgagor's payments of principal and interest
into the mortgage servicing account, up to the SMDIA (currently
$250,000) per mortgagor. The FDIC did not amend the rule for coverage
of tax and insurance payments, which continued to be insured to each
mortgagor on a pass-through basis and aggregated with any other
deposits maintained by each mortgagor at the same IDI in the same right
and capacity.
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\51\ See 73 FR 61658, 61658-59 (Oct. 17, 2008).
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The 2008 amendments to the rules for mortgage servicing accounts
did not provide for the fact that servicers may be required to advance
their own funds to make payments of principal and interest on behalf of
delinquent borrowers to the lenders. However, this is required of
mortgage servicers under some mortgage servicing arrangements. Covered
institutions identified challenges to implementing certain
recordkeeping requirements with respect to MSA deposit balances as a
result of the ways in which servicer advances are administered and
accounted.\52\
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\52\ In order to fulfill their contractual obligations with
investors, covered institutions maintain mortgage principal and
interest balances at a pool level and remittances, advances, advance
reimbursement and excess funds applications that affect pool-level
balances are not allocated back to individual borrowers.
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The current rule provides coverage for principal and interest funds
only to the extent ``paid into the account by the mortgagors''; it does
not provide coverage for funds paid into the account from other
sources, such as the servicer's own operating funds, even if those
funds satisfy mortgagors' principal and interest payments. As a result,
deposits into an MSA by a servicer for the purpose of making an advance
are not provided the same level of coverage as other deposits in a
mortgage servicing account consisting of principal and interest
payments directly from the borrower, which are insured up to the SMDIA
for each borrower. Instead, the advances are aggregated and insured to
the servicer as corporate funds for a total of $250,000. The FDIC is
concerned that this inconsistent treatment of principal and interest
amounts could result in financial instability during times of stress,
and could further complicate the insurance determination process, a
result that is inconsistent with the FDIC's policy objectives.
C. Final Rule
In July 2021, the FDIC proposed to amend the rules governing
coverage for deposits in mortgage servicing accounts to provide
consistent deposit insurance treatment for all MSA deposit balances
held to satisfy principal and interest obligations to a lender,
regardless of whether those funds are paid into the account by
borrowers, or paid into the account by another party (such as the
servicer) in order to satisfy a periodic obligation to remit principal
and interest due to the lender.\53\ Under the rule, accounts maintained
by a mortgage servicer in an agency, custodial, or fiduciary capacity,
for the purpose of payment of a borrower's principal and interest
obligations, would be insured for the cumulative balance paid into the
account in order to satisfy principal and interest obligations to the
lender, whether paid directly by the borrower or by another party, up
to the limit of the SMDIA per mortgagor. Mortgage servicers' advances
of principal and interest funds on behalf of delinquent borrowers would
therefore be insured up to the SMDIA per mortgagor, consistent with the
coverage rules for payments of principal and interest collected
directly from borrowers.\54\
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\53\ See 86 FR 41766 (Aug. 3, 2021).
\54\ Servicers' advances may have been insured under the rule
that applied to mortgage servicing account deposits prior to 2008.
Prior to 2008, mortgage servicing deposits were insured on a pass-
through basis. Under the pass-through insurance rules, the identity
of the party that pays funds into a deposit account does not
generally factor into insurance coverage. In this sense, the
proposed rule can be viewed as restoring coverage to the previous
level.
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The FDIC received one joint comment letter responding to the
proposed change in coverage for mortgage servicing accounts, discussed
below.
Under the final rule, the composition of an MSA attributable to
principal and interest payments would also include collections by a
servicer, such as foreclosure proceeds, that are used to satisfy a
borrower's principal and interest obligations to the lender. These
[[Page 4463]]
funds will be insured up to the limit of the SMDIA per mortgagor.
The FDIC did not propose changes to the deposit insurance coverage
provided for mortgage servicing accounts comprised of payments from
mortgagors of taxes and insurance premiums. Such aggregate escrow
accounts are held separately from the principal and interest MSAs and
the deposits therein are held in trust for the mortgagors until such
time as tax and insurance payments are disbursed by the servicer on the
borrower's behalf. Such deposits continued to be insured based on the
ownership interest of each mortgagor in the account and aggregated with
other deposits maintained by the mortgagor at the same IDI in the same
capacity and right.
D. Discussion of Comments
The proposed rule provided that balances in mortgage servicing
accounts that were paid into the account by either the borrower or
another party would be insurable if they were held to satisfy the
principal and interest obligations of a mortgagor. The comment was
supportive of this change, noting that the allocations provided would
allow for more stability in these types of accounts in periods of
turmoil. The FDIC is finalizing the rule as proposed.
Three trade associations, through a joint comment letter,
specifically requested additional clarity on the coverage that would be
provided for three specific types of funds placed into mortgage
servicing accounts by the servicer--interest shortfall payments, funds
from distressed homeowner programs, and funds used to satisfy buyout or
repurchase obligations.
Interest shortfall payments are funded by the servicer when a loan
is refinanced or paid off before the end of a month. The associations
noted that servicers are generally required to fund the interest that
would have accrued during the month, just as if the borrower had
continued the payment stream as agreed. Because these payments are
traceable at the loan level and held to satisfy the interest obligation
of the mortgagor, they are covered under the mortgage servicing account
rule. Federal, state, and local governments have created various
programs during emergencies that provide funds to borrowers who are
having difficulties paying their home mortgages. While the most recent
iterations of these programs were spurred by the COVID-19 pandemic,
these types of programs can result from other types of emergencies as
well (e.g., natural disasters) and can vary in duration. While each
program would need to be evaluated on its individual terms, the FDIC
expects that funds originating from most government programs designed
to help homeowners with mortgage payments would be included in the
borrower's insurable balance covered by the mortgage servicing account
rule due to the provision of funds to satisfy the borrower's principal
and interest obligations.
With respect to servicer-funded buyouts and repurchases of loans,
it is common for the servicer to be requested to repurchase or
substitute a loan in a securitization if the loan is defective or in a
specific delinquency status. Although the amount of unpaid principal
balance plus the accrued but unpaid interest on that loan is the price
paid to repurchase the loan from the pool, the repurchase of the loan
from the investor pool does not satisfy the borrower's principal and
interest obligation, and thus, falls outside the scope of the rule.
Alternatively, the associations suggested that the FDIC eliminate
the borrower-level allocation, as most mortgage servicers account for
the deposits in their account on the portfolio level as opposed to the
loan-specific level. The commenters' suggested removal of the borrower
allocation would change the insurable amount calculation to insure the
lesser of the balance in the mortgage servicing account or the number
of borrowers multiplied by the SMDIA. The FDIC believes that the
elimination of the borrower-level allocation would significantly expand
deposit insurance coverage in some circumstances and declines to adopt
the suggested alternative. For example, a balance representing a large
commercial mortgage payment could be fully insured if the pooled
custodial account contained funds for a large number of other
borrowers, even if this large payment significantly exceeded the
$250,000 deposit insurance limit.
III. Regulatory Analysis
A. Expected Effects
1. Simplification of Trust Rules
Generally, the simplification of the trust rules is expected to
have benefits including clarifying depositors' and bankers'
understanding of the insurance rules, promoting the timely payment of
deposit insurance following an IDI's failure, facilitating the transfer
of deposit relationships to failed bank acquirers (thereby potentially
reducing the FDIC's resolution costs), and addressing differences in
the treatment of revocable trust deposits and irrevocable trust
deposits contained in the current rules. The changes to the current
rules would directly affect the level of deposit insurance coverage
provided to some depositors with trust deposits. In some cases, which
the FDIC expects are rare, the changes could reduce deposit insurance
coverage; for the vast majority of depositors, the FDIC expects the
coverage level to be unchanged. The FDIC has also considered the impact
of any changes in the deposit insurance rules on the DIF and on the
covered institutions that are subject to part 370. Finally, the FDIC
describes other potential effects of the changes, such as the effects
on information technology (IT) service providers to the institutions
that could be affected by the final rule. These effects are discussed
in greater detail below.
Effects on Deposit Insurance Coverage
The final rule would affect deposit insurance coverage for deposits
held in connection with trusts. According to September 30, 2021 Call
Report data, the FDIC insures 4,923 depository institutions \55\ that
report holding approximately 812 million deposit accounts.
Additionally, 1,551 IDIs have powers granted by a state or national
regulatory authority to administer accounts in a fiduciary capacity
(i.e., trust powers) and 1,155 exercise those powers, comprising 31.5
percent and 23.5 percent, respectively, of all IDIs.\56\ However,
individual depositors may establish a trust account at an IDI even if
that IDI does not itself have or exercise trust powers, and in fact, as
discussed below, 99 percent of a sample of failed banks had trust
accounts. Therefore, the FDIC estimates that the final rule could
affect between 1,155 and 4,923 IDIs.
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\55\ The count of institutions includes FDIC-insured U.S.
branches of institutions headquartered in foreign countries.
\56\ FDIC Call Report data, September 30, 2021.
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The FDIC does not have detailed data on depositors' trust
arrangements that would allow it to precisely estimate the number of
trust accounts that are currently held by FDIC-insured institutions.
However, the FDIC estimated the number of trust accounts and trust
account depositors utilizing data from failed banks. Based on data from
249 failed banks \57\ between 2010 and 2020, 335,657 deposit accounts--
owned by 250,139 distinct depositors--were trust accounts (revocable or
irrevocable), out of a total of 3,013,575 deposit accounts. Thus, about
11.14
[[Page 4464]]
percent of the deposit accounts at the 249 failed banks were trust
accounts. Of the 249 institutions, 247 (99 percent) reported having
trust accounts at time of failure. Of the 247 failed banks that
reported trust accounts, 212 reported not having trust powers as of
their last Call Report. Assuming the percentage of trust accounts at
failed banks is representative of the percentage of trust accounts
among all FDIC-insured institutions, the FDIC estimates, for purposes
of this analysis, that there are approximately 90.5 million trust
accounts in existence at FDIC-insured institutions.\58\ Additionally,
based on the observed number of trust account depositors per trust
account in the population of 249 failed banks, the FDIC estimates, for
purposes of this analysis, that there are approximately 67.4 million
trust depositors.\59\ These estimates are subject to considerable
uncertainty, since the percentage of deposit accounts that are trust
accounts and the number of depositors per trust account for all FDIC
insured institutions may differ from what was observed at the 249
failed banks. The FDIC does not have information that would shed light
on whether or how the numbers of trust accounts and trust depositors at
failed banks differs from the corresponding numbers for other FDIC-
insured institutions.
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\57\ Data on failed banks comes from the FDIC's Claims
Administration System, which contains data on depositors' funds from
every failed IDI since September 2010.
\58\ There were approximately 812 million deposit accounts
reported by FDIC-insured institutions as of September 30, 2021,
based on Call Report data. Assuming that 11.14 percent of accounts
are trust accounts, then there are an estimated 90.5 million trust
accounts as of September 30, 2021.
\59\ Using the data from failed banks, 250,139 distinct
depositors held 335,657 revocable or irrevocable trust accounts, or
there were 0.745 trust account depositors per trust account (250,139
divided by 335,657). The estimated number of trust depositors at
FDIC-insured institutions (67.4 million) is obtained by multiplying
the estimated number of trust accounts by the number of trust
account depositors per trust account (90.5 million multiplied by
0.745).
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The FDIC also does not have detailed data on depositors' trust
arrangements that would allow the FDIC to precisely estimate the
quantitative effects of the final rule on deposit insurance coverage.
Thus, the effects of the changes to the insurance rules are outlined
qualitatively below. The FDIC expects that most depositors would
experience no change in the coverage for their deposits under the final
rule. However, some depositors that maintain trust deposits would
experience a change in their insurance coverage under the final rule.
The FDIC anticipates that deposit insurance coverage for some
irrevocable trust deposits would increase under the final rule. The
FDIC's experience suggests that the provisions of the current
irrevocable trust rules that require the identification and aggregation
of contingent interests often apply due to the inclusion of
contingencies in such trusts.\60\ Thus, even where an irrevocable trust
names multiple beneficiaries, the current trust rules often provide a
total of only $250,000 in deposit insurance coverage. The final rule
would not consider such contingencies in the calculation of coverage,
and per-beneficiary coverage would apply.
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\60\ As discussed above, the provisions relating to contingent
interests may not apply when a trust has become irrevocable due to
the death of one or more grantors. In such instances, the revocable
trust rules continue to apply.
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In limited instances, the merger of the revocable trust and
irrevocable trust categories may decrease coverage for depositors.
Deposits of revocable trusts and deposits of irrevocable trusts are
currently insured separately. The final rule would require aggregation
for purposes of applying the deposit insurance limit, thereby
increasing the likelihood of the combined trust account balances
exceeding the insurance limit.\61\ However, the FDIC's experience is
that irrevocable trust deposits comprise a relatively small share of
the average IDI's deposit base,\62\ and that it is rare for IDIs to
hold deposits in connection with irrevocable and revocable trusts
established by the same grantor(s).\63\ Individual grantors' trust
deposits held for the benefit of up to five different beneficiaries
would continue to be separately insured.
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\61\ As discussed above, deposits maintained by an IDI as
trustee of an irrevocable trust would not be included in this
aggregation, and would remain separately insured pursuant to section
7(i) of the FDI Act and 12 CFR 330.12.
\62\ Data obtained in connection with IDI failures during the
recent financial crisis suggests that irrevocable trust deposits
comprise less than one percent of trust deposits. However, as
discussed above, the FDIC does not possess sufficient information to
enable it to estimate the effects of the final rule on trust account
depositors at all IDIs.
\63\ In the data obtained in connection with IDI failures during
the recent financial crisis, only 51 out of 250,139 depositors with
trust accounts had both revocable and irrevocable types. Of these 51
depositors, nine had total trust account balances greater than
$250,000, and only one had a total trust balance of more than
$1,250,000.
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With respect to revocable and irrevocable trusts, depositors who
have designated more than five beneficiaries and structured their trust
accounts in a manner that provides for more than $1,250,000 in coverage
per grantor, per IDI under the current rules would experience a
reduction in coverage. The FDIC's experience suggests that the
$1,250,000 maximum coverage amount per grantor, per IDI would not
affect the vast majority of trust depositors, as most trusts have
either five or fewer beneficiaries, less than $1,250,000 per grantor on
deposit at the same IDI, or are structured in a manner that results in
only $1,250,000 in coverage under the current rules. The FDIC estimates
that approximately 26,959 trust account depositors and approximately
36,175 trust accounts could be directly affected by this aspect of the
final rule, representing about 0.04 percent of both the estimated
number of trust account depositors and the estimated number of trust
accounts.\64\ The actual number of trust depositors and trust accounts
impacted will likely differ, as the estimates rely on data from failed
banks, and failed banks may differ from other institutions in their
percentages of trust depositors or trust accounts. It is also possible
depositors may restructure their deposits in response to changes to the
rule, thus mitigating the potential effects on deposit insurance
coverage.
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\64\ To estimate the numbers of trust account depositors and
trust accounts affected, the FDIC performed the following
calculation. First, based on data from 249 failed banks between 2010
and 2020, the FDIC determined that there were 335,657 trust accounts
out of 3,013,575 deposit accounts (trust account share). Second, the
FDIC determined the number of trust accounts per trust depositor
(335,657/250,139). The FDIC then estimated the number of trust
accounts by multiplying the trust account share (335,657/3,013,575)
by the number of deposit accounts across all IDIs (812,414,977)
according to September 30, 2021, Call Report data. This step yielded
an estimate of 90,488,133 trust accounts. Based on the estimated
number of trust accounts per trust depositor from the failed bank
data, the FDIC estimated the total number of trust depositors to be
67,433,752. Using failed bank data, 100 out of 250,139 trust
depositors had balances in excess of $1,250,000 in their trust
accounts. Thus, the FDIC estimated that, of the approximately 67.4
million trust depositors, (100/250,139) of them--approximately
26,959--had balances in excess of $1,250,000 in their trust
accounts, and therefore could be directly affected by the final
rule. These estimated 26,959 trust depositors are associated with an
estimated 36,175 trust accounts, based on the observed number of
trust accounts per trust depositor from the data from 249 failed
banks between 2010 and 2020.
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Clarification of Insurance Rules
The merger of certain revocable and irrevocable trust categories is
intended to simplify deposit insurance coverage for trust accounts.
Specifically, the merger of these categories would mostly eliminate the
need to distinguish revocable and irrevocable trusts currently required
to determine coverage for a particular trust deposit. The benefit of
the common set of rules would likely be particularly significant for
depositors that have established arrangements involving multiple
trusts, as they would no longer need to apply two different sets of
rules to determine the level of deposit insurance coverage that would
apply to their deposits. For example, the final rule would eliminate
the need to consider the specific
[[Page 4465]]
allocation of interests among the beneficiaries of revocable trusts
with six or more beneficiaries, as well as contingencies established in
irrevocable trusts. The merger of the categories also would eliminate
the need for current Sec. 330.10(h) and (i), which allows for the
continued application of the revocable trust rules to the account of a
revocable trust that becomes irrevocable due to the death of the
trust's owner. As previously discussed, these provisions of the current
trust rules have proven confusing as illustrated by the numerous
inquiries that are consistently submitted to the FDIC on these topics.
FDIC-insured depository institutions may incur some regulatory
costs associated with making necessary changes to internal processes
and systems and bank personnel training in order to accommodate the
final rule's definition of ``trust accounts'' and attendant deposit
insurance coverage terms. There also may be some initial cost for IDIs
to become familiar with the changes to the trust insurance coverage
rules in order to be able to explain them to potential trust customers,
counterbalanced to some extent by the fact that the rules should be
simpler for IDIs to understand and explain going forward.
Prompt Payment of Deposit Insurance
The FDIC also expects that simplification of the trust rules would
promote the timely payment of deposit insurance in the event of an
IDI's failure. The FDIC's experience has been that the current trust
rules often require detailed, time-consuming, and resource-intensive
review of trust documentation to obtain the information that is
necessary to calculate deposit insurance coverage. This information is
often not found in an IDI's records and must be obtained from
depositors after the IDI's failure. The final rule would ameliorate the
operational challenge of calculating deposit insurance coverage, which
could be particularly acute in the case of a failure of a large IDI
with a large number of trust accounts. The final rule would streamline
the review of trust documents required to make a deposit insurance
determination, promoting more prompt payment of deposit insurance.
Timely payment of deposit insurance also can help to facilitate the
transfer of depositor relationships to a failed bank's acquirer,
potentially expand resolution options, potentially reduce the FDIC's
resolution costs, and support greater confidence in the banking system.
Deposit Insurance Fund Impact
As discussed above, the final rule is expected to have mixed
effects on the level of insurance coverage provided for trust deposits.
Coverage for some irrevocable trust deposits would be expected to
increase, but in the FDIC's experience, irrevocable trust deposits are
not nearly as common as revocable trust deposits. The level of coverage
for some trust deposits would be expected to decrease due to the final
rule's simplified calculation of coverage and its aggregation of
revocable and irrevocable trust deposits. As noted above, the FDIC does
not have detailed data on depositors' trust arrangements to allow it to
precisely project the quantitative effects of the final rule on deposit
insurance coverage.
Indirect Effects
A change in the level of deposit insurance coverage does not
necessarily result in a direct economic impact, as deposit insurance is
only paid to depositors in the event of an IDI's failure. However,
changes in deposit insurance coverage may prompt depositors to take
actions with respect to their deposits. In response to changes in the
level of coverage under the final rule, trust depositors could maximize
coverage relative to the coverage under the current rule by
transferring some of their trust deposits to other types of accounts
that provide similar or higher amounts of coverage or by amending the
terms of their trusts. Parties affected could include IDIs, depositors,
and other firms in the financial services marketplace (e.g., deposit
brokers). Any costs borne by the depositor in moving a portion of the
funds to a different IDI to stay under the insurance limit would be
accompanied by benefits, such as more prompt deposit insurance
determinations, and quicker access to insured deposits for depositors
during the resolution process. The FDIC cannot estimate these effects
because it does not have information on the individual costs of each
action that confronts each depositor, their ability to amend their
trust structure or move funds, and their subjective risk preference
with respect to holding insured and uninsured deposits.
Part 370 Covered Institutions
As discussed previously, institutions covered by part 370 must
maintain deposit account records and systems capable of applying the
deposit insurance rules in an automated manner. The final rule would
change certain aspects of how coverage is determined for trust
deposits. This could require covered institutions to reprogram certain
systems to ensure that those systems continue to be capable of applying
the deposit insurance rules as part 370 requires.
The FDIC expects that the final rule would make the deposit
insurance status of a trust account generally clearer. Moreover, since
part 370 requires covered institutions to develop and maintain the
capabilities to calculate deposit insurance for its deposits, the final
rule could make compliance with part 370 relatively less burdensome.
This is because the underlying rules that would be applied to most
trust deposits would be simplified. In particular, the final rule
requires the aggregation of revocable and irrevocable trust deposits,
categories that are currently separated for purposes of the deposit
insurance calculation capabilities required by part 370. The FDIC does
not expect that the final rule would require significant changes with
respect to covered institutions' treatment of informal revocable trust
deposits. Moreover, many deposits of formal revocable trusts and
irrevocable trusts currently fall within the scope of part 370's
alternative recordkeeping provisions, meaning that covered institutions
are not required to maintain all of the records necessary to calculate
the maximum amount of deposit insurance coverage available for these
deposits. These factors may diminish the impact of the final rule on
the part 370 covered institutions, but the FDIC does not have
sufficient information on covered institutions' systems and records to
quantify this effect.
Other Potential Effects
Although the FDIC expects that coverage for most trust depositors
will be unchanged under the final rule, and that the rule's changes
simplify the FDIC's insurance rules for trust accounts, the rule may
have other potential effects. For example, the IDIs affected by the
rule may rely on third-party IT service providers to perform insurance
coverage estimates for their trust depositors. The final rule may lead
such IT service providers to revise their systems to account for the
final rule's changes.
2. Amendments to Mortgage Servicing Account Rule
The final rule would affect the deposit insurance coverage for
certain principal and interest payments within MSA deposits maintained
at IDIs by mortgage servicers. According to the September 30, 2021 Call
Report data, the FDIC
[[Page 4466]]
insures 4,923 IDIs.\65\ Of the 4,923 IDIs, 1,161 IDIs (23.6 percent)
report holding mortgage servicing assets, which indicates that they
service mortgage loans and could thus be affected by the rule. In
addition, mortgage servicing accounts may be maintained at IDIs that do
not themselves service mortgage loans. The FDIC does not know how many
IDIs are recipients of mortgage servicing account deposits, but
believes that most IDIs are not. Therefore, the FDIC estimates that the
number of IDIs potentially affected by the final rule is greater than
1,161 but substantially less than 4,923.
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\65\ The count of institutions includes FDIC-insured U.S.
branches of institutions headquartered in foreign countries.
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The FDIC does not have detailed data on MSAs that would allow the
FDIC to reliably estimate the number of MSAs maintained at IDIs that
would be affected by the rule, or any potential change in the total
amount of insured deposits. Thus, the potential effects of the
amendments regarding governing deposit insurance coverage for MSAs are
outlined qualitatively below.
The final rule directly affects the level of deposit insurance
coverage provided for some MSAs. Under the rule, the composition of an
MSA attributable to mortgage servicers' advances of principal and
interest funds on behalf of delinquent borrowers and collections such
as foreclosure proceeds would be insured up to the SMDIA per mortgagor,
consistent with the coverage for payments of principal and interest
collected directly from borrowers. Under the current rules, principal
and interest funds advanced by a servicer to cover delinquencies, and
foreclosure proceeds collected by servicers, are not insured under the
rules for MSA deposits, but instead are insured to the servicer as
corporate funds up to the SMDIA. Therefore, the final rule expands
deposit insurance coverage in instances where an account maintained by
a mortgage servicer contains principal and interest funds advanced by
the servicer in order to satisfy the obligations of delinquent
borrowers to the lender, or foreclosure proceeds collected by the
servicers; and where the funds in such instances exceed the mortgage
servicer's SMDIA.
The final rule is likely to benefit a servicer compelled by the
terms of a pooling and servicing agreement to advance principal and
interest funds to note holders when a borrower is delinquent, and
therefore the servicer has not received such funds from the borrower.
In the event that the IDI hosting the MSA for the servicer fails, the
rule reduces the likelihood that the funds advanced by the servicer are
uninsured, and thereby facilitates access to, and helps avoids losses
of, those funds. As previously discussed, the FDIC does not have
detailed data on MSAs held at IDIs, pooling and servicing agreements
for outstanding mortgage loans, or servicer payments into MSAs that
would allow the FDIC to reliably estimate the number of, and volume of
funds within, MSAs maintained at IDIs that would be affected by the
final rule.
Further, the final rule is likely to benefit an IDI who is hosting
an MSA for a servicer that is compelled by the terms of a pooling and
servicing agreement to advance principal and interest funds to note
holders on behalf of delinquent borrowers by increasing the volume of
insured funds. In the event that the IDI enters into a troubled
condition, the rule could marginally increase the stability of MSA
deposits from such servicers, thereby increasing the general stability
of funding.
Finally, the FDIC believes that the rule poses general benefits to
parties that provide or utilize financial services related to mortgage
products by amending an inconsistency in the deposit insurance
treatment for principal and interest payments made by the borrower and
such payments made by the servicer on behalf of the borrower.
Effects on Part 370 Covered Institutions
Part 370 covered institutions may bear some costs in recognizing
the expanded coverage for servicer advances and foreclosure proceeds.
However, part 370 covered institutions already are responsible for
calculating coverage for MSA accounts based on each borrower's
payments. Therefore, the FDIC does not believe the impact of the rule
on part 370 covered institutions will be significant.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), requires that, in connection
with a final rulemaking, an agency prepare and make available for
public comment a regulatory flexibility analysis that describes the
impact of the final rule on small entities.\66\ However, a regulatory
flexibility analysis is not required if the agency certifies that the
rule will not have a significant economic impact on a substantial
number of small entities and publishes its certification and a short
explanatory statement in the Federal Register together with the rule.
The Small Business Administration (SBA) has defined ``small entities''
to include banking organizations with total assets of less than or
equal to $600 million.\67\ Generally, the FDIC considers a significant
effect to be a quantified effect in excess of 5 percent of total annual
salaries and benefits per institution, or 2.5 percent of total
noninterest expenses. The FDIC believes that effects in excess of these
thresholds typically represent significant effects for small entities.
The FDIC does not believe that the final rule will have a significant
economic effect on a substantial number of small entities. However,
some expected effects of the rule are difficult to assess or accurately
quantify given current information, therefore the FDIC has included a
Regulatory Flexibility Act Analysis in this section.
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\66\ 5 U.S.C. 601 et seq.
\67\ The SBA defines a small banking organization as having $600
million or less in assets, where ``a financial institution's assets
are determined by averaging the assets reported on its four
quarterly financial statements for the preceding year.'' See 13 CFR
121.201 (as amended by 84 FR 34261, effective August 19, 2019).
``SBA counts the receipts, employees, or other measure of size of
the concern whose size is at issue and all of its domestic and
foreign affiliates.'' See 13 CFR 121.103. Following these
regulations, the FDIC uses a covered entity's affiliated and
acquired assets, averaged over the preceding four quarters, to
determine whether the FDIC-supervised institution is ``small'' for
the purposes of RFA.
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1. Simplification of Trust Rules
Reasons Why This Action Is Being Considered
As previously discussed, the rules governing deposit insurance
coverage for trust deposits have been amended on several occasions, but
still frequently cause confusion for depositors. Under the current
regulations, there are distinct and separate sets of rules applicable
to deposits of revocable trusts and irrevocable trusts. Each set of
rules has its own criteria for coverage and methods by which coverage
is calculated. Despite the FDIC's efforts to simplify the revocable
trust rules in 2008,\68\ over the last 10 years, FDIC deposit insurance
specialists have responded to approximately 20,000 complex insurance
inquiries per year on average. More than 50 percent pertain to deposit
insurance coverage for trust accounts (revocable or irrevocable). The
consistently high volume of complex inquiries about trust accounts over
an extended period of time suggests continued confusion about insurance
limits.
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\68\ See 73 FR 56706 (Sep. 30, 2008).
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The FDI Act requires the FDIC to pay depositors ``as soon as
possible'' after a bank failure. However, the insurance determination
and subsequent payment
[[Page 4467]]
for many trust deposits can be delayed while FDIC staff reviews complex
trust agreements and apply the rules for determining deposit insurance
coverage. Moreover, in many of these instances, deposit insurance
coverage for trust deposits is based upon information that is not
maintained in the failed IDI's deposit account records. This requires
FDIC staff to work with depositors, trustees, and other parties to
obtain trust documentation following an IDI's failure in order to
complete deposit insurance determinations. The difficulties associated
with this are exacerbated by the substantial growth in the use of
formal trusts in recent decades. For example, following the 2008
failure of IndyMac Federal Bank, FSB (IndyMac), FDIC claims personnel
contacted more than 10,500 IndyMac depositors to obtain the trust
documentation necessary to complete deposit insurance determinations
for their revocable trust and irrevocable trust deposits. As noted
previously, delays in the payment of deposit insurance could be
consequential, as revocable trust deposits in particular can be used by
depositors to satisfy their daily financial obligations.
Policy Objectives
As discussed previously, the changes adopted by the final rule are
intended to provide depositors and bankers with a rule for trust
account coverage that is easy to understand, and also to facilitate the
prompt payment of deposit insurance in accordance with the FDI Act. The
FDIC believes that accomplishing these objectives also would further
the agency's mission in other respects. Specifically, the changes would
promote depositor confidence and further the FDIC's mission to maintain
stability and promote public confidence in the U.S. financial system by
assisting depositors to more readily and accurately determine their
insurance limits. The changes will also facilitate the resolution of
failed IDIs in a least costly manner. The changes could reduce the
FDIC's reliance on trust documentation (which could be difficult to
obtain in a timely manner during resolutions of IDI failures) and
provide greater flexibility to automate deposit insurance
determinations, thereby reducing potential delays in the completion of
deposit insurance determinations and payments. Finally, in amending the
trust rules, the FDIC's intent is that the changes would generally be
neutral with respect to the DIF.
Legal Basis
The FDIC's deposit insurance categories have been defined through
both statute and regulation. Certain categories, such as the government
deposit category, have been expressly defined by Congress.\69\ Other
categories, such as joint deposits and corporate deposits, have been
based on statutory interpretation and recognized through regulations
issued in 12 CFR part 330 pursuant to the FDIC's rulemaking authority.
In addition to defining the insurance categories, the deposit insurance
regulations in part 330 provide the criteria used to determine
insurance coverage for deposits in each category. The FDIC is amending
Sec. 330.10 of its regulations, which currently applies only to
revocable trust deposits, to establish a new ``trust accounts''
category that would include both revocable and irrevocable trust
deposits. For a more detailed discussion of the rule's legal basis
please refer to section I.C entitled ``Proposed Rule'' and section I.D
entitled ``Discussion of Comments and Final Rule.''
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\69\ 12 U.S.C. 1821(a)(2).
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The Final Rule
The FDIC is amending the rules governing deposit insurance coverage
for trust deposits. Generally, the amendments would: Merge the
revocable and irrevocable trust categories into one category; apply a
simpler, common calculation method to determine insurance coverage for
deposits held by revocable and irrevocable trusts; eliminate certain
requirements found in the current rules for revocable and irrevocable
trusts; and amend certain recordkeeping requirements for trust
accounts. For a more detailed discussion of the final rule please refer
to section I.C entitled ``Proposed Rule'' and section I.D entitled
``Discussion of Comments and Final Rule.''
Small Entities Affected
Based on the September 30, 2021 Call Report data, the FDIC insures
4,923 depository institutions,\70\ of which 3,303 are considered small
entities for the purposes of RFA.\71\ Of the 3,303 small IDIs, 783 have
powers granted by a state or national regulatory authority to
administer accounts in a fiduciary capacity and 539 exercise those
powers, comprising 23.7 percent and 16.3 percent, respectively, of
small IDIs.\72\ However, individuals may establish trust accounts at an
IDI even if that IDI does not itself have or exercise authority to
administer accounts in a fiduciary capacity, and in fact, as noted
earlier, 99 percent of a sample of failed banks had trust accounts.
Therefore, the FDIC estimates that the rule could affect between 539
and 3,303 small, FDIC-insured institutions.
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\70\ The count of institutions includes FDIC-insured U.S.
branches of institutions headquartered in foreign countries.
\71\ FDIC Call Report data, September 30, 2021.
\72\ Id.
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As noted above, the FDIC does not have detailed data on depositors'
trust arrangements for trust accounts held at small FDIC-insured
institutions. Therefore, it is difficult to accurately estimate the
number of small IDIs that would be potentially affected by the final
rule. However, the FDIC believes that the number of small IDIs that
will be directly affected by the rule is likely to be small, given that
in the agency's resolution experience only a small number of trust
accounts have balances above the adopted coverage limit of $1,250,000
per grantor, per IDI for trust deposits. For example, data obtained
from a sample of 249 IDIs that failed between 2010 and 2020 show that
only 100 depositors out of 250,139 (or 0.04 percent) had trust account
balances greater than $1,250,000; at small IDIs, 18 out of 34,304
depositors (or 0.05 percent) had trust account balances greater than
$1,250,000.\73\ The data from failed banks suggest small IDIs could be
affected by the rule roughly in proportion to the share of trust
depositors with account balances greater than $1,250,000 at IDIs of all
sizes which failed between 2010 and 2020.
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\73\ Whether a failed IDI is considered small is based on data
from its four quarterly Call Reports prior to failure.
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Expected Effects
The simplification of the deposit insurance rules for trust
deposits is expected to have a variety of effects. The changes will
directly affect the level of deposit insurance coverage provided to
some depositors with trust deposits. In addition, simplification of the
rules is expected to have benefits in terms of promoting the timely
payment of deposit insurance following a small IDI's failure,
facilitating the transfer of deposit relationships to failed bank
acquirers with consequent potential reductions to the FDIC's resolution
costs, and addressing differences in the treatment of revocable trust
deposits and irrevocable trust deposits contained in the current rules.
The FDIC has also considered the impact of any changes in the deposit
insurance rules on the DIF and other potential effects.\74\ These
[[Page 4468]]
effects are discussed in greater detail in section III.A entitled
``Expected Effects.''
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\74\ The FDIC has also considered the impact of any changes in
the deposit insurance rules on the covered institutions that are
subject to part 370. As described previously, part 370 affects IDIs
with two million or more deposit accounts. Based on Call Report data
as of September 30, 2021, the FDIC insures one institution with two
million or more deposit accounts that is also considered a small
entity.
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Overall, due to the fact that the FDIC expects most small IDIs to
have only a small number of trust accounts with balances above the
adopted coverage limit of $1,250,000 per grantor, per IDI for trust
deposits, effects on the deposit insurance coverage of small entities'
customers are likely to be small. There also may be some initial cost
for small entities to become familiar with the changes to the trust
insurance coverage rules in order to be able to explain them to
potential trust customers, counterbalanced to some extent by the fact
that the rules should be simpler to understand and explain going
forward.
Alternatives Considered
The FDIC has considered a number of alternatives to the final rule
that could meet its objectives in this rulemaking. However, for reasons
previously stated in section I.E ``Alternatives Considered,'' the FDIC
considers the final rule to be a more appropriate alternative.
The FDIC also considered the status quo alternative to not amend
the existing trust rules. However, for reasons previously stated in
section I.E ``Alternatives Considered,'' the FDIC considers the final
rule to be a more appropriate alternative.
Other Statutes and Federal Rules
The FDIC has not identified any likely duplication, overlap, and/or
potential conflict between this final rule and any other federal rule.
2. Amendments to Mortgage Servicing Account Rule
Reasons Why This Action Is Being Considered
As previously discussed, the FDIC provides coverage, up to the
SMDIA for each borrower, for principal and interest funds in MSAs only
to the extent ``paid into the account by the mortgagors,'' and does not
provide coverage for funds paid into the account from other sources,
such as the servicer's own operating funds, even if those funds satisfy
mortgagors' principal and interest payments under the current rules.
The advances are aggregated and insured to the servicer as corporate
funds for a total of $250,000. Under some servicing arrangements,
however, mortgage servicers may be required to advance their own funds
to make payments of principal and interest on behalf of delinquent
borrowers to the lenders in certain circumstances. Thus, under the
current rules, such advances are not provided the same level of
coverage as other deposits in a mortgage servicing account comprised of
principal and interest payments directly from the borrower. This could
result in delayed access to certain funds in an MSA, or to the extent
that aggregated advances insured to the servicer exceed the insurance
limit, loss of such funds, in the event of an IDI's failure. The FDIC
is therefore amending its rules governing coverage for deposits in
mortgage servicing accounts to address this inconsistency.
Policy Objectives
As discussed previously, the FDIC's regulations governing deposit
insurance coverage include specific rules on deposits maintained at
IDIs by mortgage servicers. With the final rule, the FDIC seeks to
address an inconsistency concerning the extent of deposit insurance
coverage for such deposits, as in the event of an IDI's failure the
current rules could result in delayed access to certain funds in a
mortgage servicing account (MSA) that have been aggregated and insured
to a mortgage servicer, or to the extent that aggregated funds insured
to a servicer exceed the insurance limit, loss of such funds.
The final rule also addresses a servicing arrangement that is not
specifically addressed in the current rules. Specifically, some
servicing arrangements may permit or require servicers to advance their
own funds to the lenders when mortgagors are delinquent in making
principal and interest payments, and servicers might commingle such
advances in the MSA with principal and interest payments collected
directly from mortgagors. This may be required, for example, under
certain mortgage securitizations. The FDIC believes that the factors
that motivated the FDIC to establish its current rules for MSAs,
described previously, argue for treating funds advanced by a mortgage
servicer in order to satisfy mortgagors' principal and interest
obligations to the lender as if such funds were collected directly from
borrowers.
Legal Basis
The FDIC's deposit insurance categories have been defined through
both statute and regulation. Certain categories, such as the government
deposit category, have been expressly defined by Congress. Other
categories, such as joint deposits and corporate deposits, have been
based on statutory interpretation and recognized through regulations
issued in 12 CFR part 330 pursuant to the FDIC's rulemaking authority.
In addition to defining the insurance categories, the deposit insurance
regulations in part 330 provide the criteria used to determine
insurance coverage for deposits in each category. The FDIC is amending
Sec. 330.7(d) of its regulations, which currently applies only to
cumulative balance paid by the mortgagors into an MSA maintained by a
mortgage servicer, to include balances paid in to the account to
satisfy mortgagors' principal or interest obligations to the lender.
For a more detailed discussion of the rule's legal basis please refer
to section II.C entitled ``Proposed Rule'' and section II.D entitled
``Discussion of Comments and Final Rule.''
The Final Rule
The FDIC is amending the rules governing deposit insurance coverage
for deposits maintained at IDIs by mortgage servicers. Generally, the
amendments would provide consistent deposit insurance treatment for all
MSA deposit balances held to satisfy principal and interest obligations
to a lender, regardless of whether those funds are paid into the
account by borrowers, or paid into the account by another party (such
as the servicer) in order to satisfy a periodic obligation to remit
principal and interest due to the lender. The composition of an MSA
attributable to principal and interest payments would include mortgage
servicers' advances of principal and interest funds on behalf of
delinquent borrowers, and collections by a servicer such as foreclosure
proceeds. The final rule makes no change to the deposit insurance
coverage provided for mortgage servicing accounts comprised of payments
from mortgagors of taxes and insurance premiums. For a more detailed
discussion of the rule please refer to section II.C entitled ``Proposed
Rule'' and section II.D entitled ``Discussion of Comments and Final
Rule.''
Small Entities Affected
Based on the September 30, 2021 Call Report data, the FDIC insures
4,923 depository institutions, of which 3,303 are considered small
entities for the purposes of RFA. Of the 3,303 small IDIs, 473 IDIs
(14.3 percent) report holding mortgage servicing assets, which
indicates that they service mortgage loans and could thus be affected
by the final rule. However, mortgage servicing accounts may be
maintained at small IDIs that do not
[[Page 4469]]
themselves service mortgage loans. The FDIC does not know how many IDIs
that are small entities are recipients of mortgage servicing account
deposits, but believes that most such entities are not because there
are relatively few mortgage servicers.\75\ Therefore, the FDIC
estimates that the number of small IDIs potentially affected by the
proposed rule, if adopted, would be between 473 and 3,303, but believes
that the number is close to the lower end of the range.
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\75\ According to the U.S. Census Bureau within the ``Other
Activities Related to Credit Intermediation'' (NAICS 522390)
national industry where mortgage servicers are captured there were
3,595 firms in 2018, relative to the 37,627 firms in the Credit
Intermediation and Related Activities subsector (NAICS 522).
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As noted in section III.A, titled ``Expected Effects,'' the FDIC
does not have detailed data on MSAs that would allow the FDIC to
reliably estimate the number of MSAs maintained at IDIs that would be
affected by the final rule, or any potential change in the total amount
of insured deposits. Therefore, it is difficult to accurately estimate
the number of small IDIs that would be potentially affected by the
final rule.
Expected Effects
The final rule would directly affect the level of deposit insurance
coverage for certain funds within MSAs. The rule is likely to benefit a
servicer compelled by the terms of a pooling and servicing agreement to
advance principal and interest funds to note holders when a borrower is
delinquent, and therefore the servicer has not received such funds from
the borrower. In the event that the IDI hosting the MSA for the
servicer fails, the final rule reduces the likelihood that the funds
advanced by the servicer are uninsured, and thereby facilitates access
to, and helps avoids losses of, those funds. As previously discussed,
the FDIC does not have detailed data on MSAs held at IDIs, pooling and
servicing agreements for outstanding mortgage loans, or servicer
payments into MSAs that would allow the FDIC to reliably estimate the
number of, and volume of funds within, MSAs maintained at IDIs that
would be affected by the final rule.
Further, the final rule is likely to benefit a small IDI who is
hosting an MSA for a servicer that is compelled by the terms of a
pooling and servicing agreement to advance principal and interest funds
to note holders on behalf of delinquent borrowers by increasing the
volume of insured funds. In the event that the small IDI enters into a
troubled condition, the proposed rule could marginally increase the
stability of MSA deposits from such servicers, thereby increasing the
general stability of funding.
Based on the preceding information the FDIC believes that the final
rule is unlikely to have a significant economic effect on a substantial
number of small entities.
Alternatives Considered
The FDIC is adopting revising to the deposit insurance rules for
MSAs to advance the objectives discussed above. The FDIC considered the
status quo alternative to not revise the existing rules for MSAs and
not propose the revisions. However, for reasons previously stated in
section II.B, entitled ``Background,'' the FDIC considers the final
rule to be a more appropriate alternative. Were the FDIC to not adopt
the rule, then in the event of an IDI's failure the current rules could
result in delayed access to certain funds in an MSA that have been
aggregated and insured to a mortgage servicer, or to the extent that
aggregated funds insured to a servicer exceed the insurance limit, loss
of such funds.
Other Statutes and Federal Rules
The FDIC has not identified any likely duplication, overlap, and/or
potential conflict between this rule and any other federal rule.
C. Congressional Review Act
For purposes of the Congressional Review Act, the Office of
Management and Budget (OMB) makes a determination as to whether a final
rule constitutes a ``major'' rule. If a rule is deemed a ``major rule''
by the OMB, the Congressional Review Act generally provides that the
rule may not take effect until at least 60 days following its
publication.
The Congressional Review Act defines a ``major rule'' as any rule
that the Administrator of the Office of Information and Regulatory
Affairs of the OMB finds has resulted in or is likely to result in (1)
an annual effect on the economy of $100,000,000 or more; (2) a major
increase in costs or prices for consumers, individual industries,
Federal, State, or local government agencies or geographic regions, or
(3) significant adverse effects on competition, employment, investment,
productivity, innovation, or on the ability of United States-based
enterprises to compete with foreign-based enterprises in domestic and
export markets. The FDIC will submit the final rule and other
appropriate reports to Congress and the Government Accountability
Office for review.
D. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3521) states
that no agency may conduct or sponsor, nor is the respondent required
to respond to, an information collection unless it displays a currently
valid OMB control number. The final rule does not create any new, or
revise any existing, collections of information under section 3504(h)
of the Paperwork Reduction Act. Consequently, no information collection
request will be submitted to the OMB for review.
E. Riegle Community Development and Regulatory Improvement Act
Section 302 of the Riegle Community Development and Regulatory
Improvement Act of 1994 (RCDRIA) requires that the Federal banking
agencies, including the FDIC, in determining the effective date and
administrative compliance requirements of new regulations that impose
additional reporting, disclosure, or other requirements on insured
depository institutions, consider, consistent with principles of safety
and soundness and the public interest, any administrative burdens that
such regulations would place on depository institutions, including
small depository institutions, and customers of depository
institutions, as well as the benefits of such regulations.\76\ Subject
to certain exceptions, new regulations and amendments to regulations
prescribed by a Federal banking agency which impose additional
reporting, disclosures, or other new requirements on insured depository
institutions shall take effect on the first day of a calendar quarter
which begins on or after the date on which the regulations are
published in final form.\77\
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\76\ 12 U.S.C. 4802(a).
\77\ 12 U.S.C. 4802(b).
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The final rule does not impose additional reporting or disclosure
requirements on insured depository institutions, including small
depository institutions, or on the customers of depository
institutions. However, it may require part 370 covered institutions to
update their reporting or recordkeeping to reflect the revised deposit
insurance rules. Accordingly, the FDIC has established the effective
date of the final rule as the first day of a calendar quarter, April 1,
2024.
F. Plain Language
Section 722 of the Gramm-Leach-Bliley Act \78\ requires the Federal
[[Page 4470]]
banking agencies to use plain language in all proposed and final
rulemakings published in the Federal Register after January 1, 2000.
FDIC staff believes the final rule is presented in a simple and
straightforward manner. The FDIC did not receive any comments with
respect to the use of plain language.
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\78\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999), 12 U.S.C. 4809.
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List of Subjects in 12 CFR Part 330
Bank deposit insurance, Reporting and recordkeeping requirements,
Savings associations.
Authority and Issuance
For the reasons stated above, the Board of Directors of the Federal
Deposit Insurance Corporation amends part 330 of title 12 of the Code
of Federal Regulations as follows:
PART 330--DEPOSIT INSURANCE COVERAGE
0
1. The authority citation for part 330 continues to read as follows:
Authority: 12 U.S.C. 1813(l), 1813(m), 1817(i), 1818(q),
1819(a)(Tenth), 1820(f), 1820(g), 1821(a), 1821(d), 1822(c).
Sec. 330.1 [Amended]
0
2. Amend Sec. 330.1 by removing and reserving paragraphs (m) and (r).
0
3. Revise Sec. 330.7(d) to read as follows:
Sec. 330.7 Accounts held by an agent, nominee, guardian, custodian or
conservator.
* * * * *
(d) Mortgage servicing accounts. Accounts maintained by a mortgage
servicer, in a custodial or other fiduciary capacity, which are
comprised of payments of principal and interest, shall be insured for
the cumulative balance paid into the account by mortgagors, or in order
to satisfy mortgagors' principal or interest obligations to the lender,
up to the limit of the SMDIA per mortgagor. Accounts maintained by a
mortgage servicer, in a custodial or other fiduciary capacity, which
are comprised of payments by mortgagors of taxes and insurance premiums
shall be added together and insured in accordance with paragraph (a) of
this section for the ownership interest of each mortgagor in such
accounts.
* * * * *
0
4. Revise Sec. 330.10 to read as follows:
Sec. 330.10 Trust accounts.
(a) Scope and definitions. This section governs coverage for
deposits held in connection with informal revocable trusts, formal
revocable trusts, and irrevocable trusts not covered by Sec. 330.12
(``trust accounts''). For purposes of this section:
(1) Informal revocable trust means a trust under which a deposit
passes directly to one or more beneficiaries upon the depositor's death
without a written trust agreement, commonly referred to as a payable-
on-death account, in-trust-for account, or Totten trust account.
(2) Formal revocable trust means a revocable trust established by a
written trust agreement under which a deposit passes to one or more
beneficiaries upon the grantor's death.
(3) Irrevocable trust means an irrevocable trust established by
statute or a written trust agreement, except as described in paragraph
(f) of this section.
(b) Calculation of coverage--(1) General calculation. Trust
deposits are insured in an amount up to the SMDIA multiplied by the
total number of beneficiaries identified by each grantor, up to a
maximum of 5 beneficiaries.
(2) Aggregation for purposes of insurance limit. Trust deposits
that pass from the same grantor to beneficiaries are aggregated for
purposes of determining coverage under this section, regardless of
whether those deposits are held in connection with an informal
revocable trust, formal revocable trust, or irrevocable trust.
(3) Separate insurance coverage. The deposit insurance coverage
provided under this section is separate from coverage provided for
other deposits at the same insured depository institution.
(4) Equal allocation presumed. Unless otherwise specified in the
deposit account records of the insured depository institution, a
deposit held in connection with a trust established by multiple
grantors is presumed to have been owned or funded by the grantors in
equal shares.
(c) Number of beneficiaries. The total number of beneficiaries for
a trust deposit under paragraph (b) of this section will be determined
as follows:
(1) Eligible beneficiaries. Subject to paragraph (c)(2) of this
section, beneficiaries include natural persons, as well as charitable
organizations and other non-profit entities recognized as such under
the Internal Revenue Code of 1986, as amended.
(2) Ineligible beneficiaries. Beneficiaries do not include:
(i) The grantor of a trust; or
(ii) A person or entity that would only obtain an interest in the
deposit if one or more identified beneficiaries are deceased.
(3) Future trust(s) named as beneficiaries. If a trust agreement
provides that trust funds will pass into one or more new trusts upon
the death of the grantor(s) (``future trusts''), the future trust(s)
are not treated as beneficiaries of the trust; rather, the future
trust(s) are viewed as mechanisms for distributing trust funds, and the
beneficiaries are the natural persons or organizations that shall
receive the trust funds through the future trusts.
(4) Informal trust account payable to depositor's formal trust. If
an informal revocable trust designates the depositor's formal trust as
its beneficiary, the informal revocable trust account will be treated
as if titled in the name of the formal trust.
(d) Deposit account records--(1) Informal revocable trusts. The
beneficiaries of an informal revocable trust must be specifically named
in the deposit account records of the insured depository institution.
(2) Formal revocable trusts. The title of a formal trust account
must include terminology sufficient to identify the account as a trust
account, such as ``family trust'' or ``living trust,'' or must
otherwise be identified as a testamentary trust in the account records
of the insured depository institution. If eligible beneficiaries of
such formal revocable trust are specifically named in the deposit
account records of the insured depository institution, the FDIC shall
presume the continued validity of the named beneficiary's interest in
the trust consistent with Sec. 330.5(a).
(e) Commingled deposits of bankruptcy trustees. If a bankruptcy
trustee appointed under title 11 of the United States Code commingles
the funds of various bankruptcy estates in the same account at an
insured depository institution, the funds of each title 11 bankruptcy
estate will be added together and insured up to the SMDIA, separately
from the funds of any other such estate.
(f) Deposits excluded from coverage under this section--(1)
Revocable trust co-owners that are sole beneficiaries of a trust. If
the co-owners of an informal or formal revocable trust are the trust's
sole beneficiaries, deposits held in connection with the trust are
treated as joint ownership deposits under Sec. 330.9.
(2) Employee benefit plan deposits. Deposits of employee benefit
plans, even if held in connection with a trust, are treated as employee
benefit plan deposits under Sec. 330.14.
(3) Investment company deposits. This section shall not apply to
deposits of trust funds belonging to a trust classified as a
corporation under Sec. 330.11(a)(2).
[[Page 4471]]
(4) Insured depository institution as trustee of an irrevocable
trust. Deposits held by an insured depository institution in its
capacity as trustee of an irrevocable trust are insured as provided in
Sec. 330.12.
Sec. 330.13 [Removed and Reserved]
0
5. Remove and reserve Sec. 330.13.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, this 21st day of January, 2022.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2022-01607 Filed 1-27-22; 8:45 am]
BILLING CODE 6714-01-P
