Proposed Rule2021-15732
Simplification of Deposit Insurance Rules
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 3, 2021
Issuing agencies
Federal Deposit Insurance Corporation
Abstract
The Federal Deposit Insurance Corporation is seeking comment on proposed amendments to its regulations governing deposit insurance coverage. The proposed rule would simplify the deposit insurance regulations by establishing a "trust accounts" category that would provide for coverage of deposits of both revocable trusts and irrevocable trusts, and provide consistent deposit insurance treatment for all mortgage servicing account balances held to satisfy principal and interest obligations to a lender.
Full Text
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<title>Federal Register, Volume 86 Issue 146 (Tuesday, August 3, 2021)</title>
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[Federal Register Volume 86, Number 146 (Tuesday, August 3, 2021)]
[Proposed Rules]
[Pages 41766-41786]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-15732]
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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: Notice of proposed rulemaking.
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SUMMARY: The Federal Deposit Insurance Corporation is seeking comment
on proposed amendments to its regulations governing deposit insurance
coverage. The proposed rule would simplify the deposit insurance
regulations by establishing a ``trust accounts'' category that would
provide for coverage of deposits of both revocable trusts and
irrevocable trusts, and provide consistent deposit insurance treatment
for all mortgage servicing account balances held to satisfy principal
and interest obligations to a lender.
DATES: Comments will be accepted until October 4, 2021.
ADDRESSES: You may submit comments on the notice of proposed rulemaking
using any of the following methods:
<bullet> Agency Website: <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/">https://www.fdic.gov/resources/regulations/federal-register-publications/</a>. Follow the instructions for
submitting comments on the agency website.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#80e3efedede5eef4f3c0e6e4e9e3aee7eff6"><span class="__cf_email__" data-cfemail="21424e4c4c444f555261474548420f464e57">[email protected]</span></a>. Include RIN 3064-AF27 on the
subject line of the message.
<bullet> Mail: James P. Sheesley, Assistant Executive Secretary,
Attention: Comments-RIN 3064-AF27, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, DC 20429.
<bullet> Hand Delivery: Comments may be hand delivered to the guard
station at the rear of the 550 17th Street NW building (located on F
Street) on business days between 7 a.m. and 5 p.m.
<bullet> Public Inspection: All comments received, including any
personal information provided, will be posted generally without change
to <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/">https://www.fdic.gov/resources/regulations/federal-register-publications/</a>.
FOR FURTHER INFORMATION CONTACT: James Watts, Counsel, Legal Division,
(202) 898-6678, <a href="/cdn-cgi/l/email-protection#79130e180d0d0a391f1d101a571e160f"><span class="__cf_email__" data-cfemail="80eaf7e1f4f4f3c0e6e4e9e3aee7eff6">[email protected]</span></a>; Kathryn Marks, Counsel, Legal
Division, (202) 898-3896, <a href="/cdn-cgi/l/email-protection#462d2b27342d350620222f2568212930"><span class="__cf_email__" data-cfemail="42292f233029310224262b216c252d34">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Simplification of Deposit Insurance Trust Rules
A. Policy Objectives
[[Page 41767]]
B. Background
1. Deposit Insurance and the FDIC's Statutory and Regulatory
Authority
2. Evolution of Insurance Coverage of Trust Deposits
3. Current Rules for Coverage of Trust Deposits
4. Part 370 and Recordkeeping at the Largest IDIs
5. Need for Further Rulemaking
C. Description of Proposed Rule
D. Examples Demonstrating Coverage Under Current and Proposed
Rules
E. Alternatives Considered
F. Request for Comment
II. Amendments to Mortgage Servicing Account Rule
A. Policy Objectives
B. Background and Need for Rulemaking
C. Proposed Rule
D. Request for Comment
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. Paperwork Reduction Act
D. Riegle Community Development and Regulatory Improvement Act
E. Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
F. Plain Language
I. Simplification of Deposit Insurance Trust Rules
A. Policy Objectives
The Federal Deposit Insurance Corporation (FDIC) is seeking comment
on proposed amendments to its regulations governing deposit insurance
coverage for deposits held in connection with trusts.\1\ The proposed
amendments are intended to (1) provide depositors and bankers with a
rule for trust account coverage that is easy to understand and (2) to
facilitate the prompt payment of deposit insurance in accordance with
the Federal Deposit Insurance Act (FDI Act), among other objectives.
Accomplishing these objectives also would further the FDIC's mission in
other respects, as discussed in greater detail below.
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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.
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Clarifying Insurance Coverage for Trust Deposits
The proposed amendments would clarify for depositors, bankers, and
other interested parties the insurance rules and limits for trust
accounts. The proposal both reduces the number of rules governing
coverage for trust accounts and establishes a straightforward
calculation to determine coverage. The deposit insurance trust rules
have evolved over time and can be difficult to apply in some
circumstances. The proposed amendments are intended to alleviate some
of the confusion that depositors and bankers may 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\ over the last 13 years FDIC deposit insurance
specialists have responded to approximately 20,000 complex insurance
inquiries per year on average. More than 50 percent of inquiries
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. To help clarify insurance limits, the
proposed amendments would further simplify insurance coverage of trust
accounts (revocable and irrevocable) by harmonizing the coverage
criteria for certain types of trust accounts and by establishing a
simplified formula for calculating coverage that would apply to these
deposits. The FDIC proposes using the 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. Under this
rule, 12 CFR 330.10(a), 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. However, the insurance determination
and subsequent payment for many trust deposits can be delayed when FDIC
staff must review complex trust agreements and apply various rules for
determining deposit insurance coverage. The proposed amendments are
intended to facilitate more timely deposit insurance determinations for
trust accounts by reducing the amount of time needed to review trust
agreements and determine coverage. These amendments should promote the
FDIC's ability to pay insurance to depositors promptly following the
failure of an insured depository institution (IDI), enabling depositors
to meet their financial needs and obligations.
Facilitating Resolutions
The proposed 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 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 completing such a determination are
exacerbated by the substantial growth in the use of formal trusts in
recent decades. The proposed amendments could 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 the proposed changes to
the deposit insurance regulations could 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 protect insured
depositors. The FDIC's general intent is that proposed amendments to
the trust rules be 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,
including large and complex financial institutions, and managing
receiverships. The FDIC has helped to maintain public confidence in
[[Page 41768]]
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.\4\ 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.\5\
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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\4\ See 12 U.S.C. 1821(a)(1)(E).
\5\ 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.\6\ 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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\6\ 12 U.S.C. 1821(a)(2).
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2. Evolution of Insurance Coverage of Trust Deposits
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,\7\ while coverage for other trust deposits has been defined
by regulation.\8\ The following review of historical coverage for trust
deposits provides context for the FDIC's proposed amendments to the
trust rules.
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\7\ See 12 U.S.C. 1817(i), 1821(a).
\8\ See 12 CFR 330.10, 330.13.
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In the FDIC's earliest years, deposit insurance coverage for trust
deposits depended upon whether the beneficiaries of the trust were
named in the bank's records. If the beneficiaries were named in the
bank's records, the trust deposit was insured according to the
beneficiaries' respective interests because the deposit was held in
trust for the beneficiaries. If beneficiaries were not named in the
bank's records, the grantor trustee was treated as the depositor
instead and insured to the applicable limit (then $5,000); however, the
trust deposit was insured separately from the trustee's other deposits,
if any, at the same bank.\9\ If the bank itself was designated as
trustee of the trust, deposits of the trust were insured up to the
$5,000 limit for each trust estate pursuant to statute.\10\
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\9\ See 1934 FDIC Annual Report at 143.
\10\ See Banking Act of 1935, Public Law 74-305 (Aug. 23, 1935),
section 101 (``Trust funds held by an insured bank in a fiduciary
capacity whether held in its trust or deposited in any other
department or in another bank shall be insured in an amount not to
exceed $5,000 for each trust estate, and when deposited by the
fiduciary bank in another insured bank such trust funds shall be
similarly insured to the fiduciary bank according to the trust
estates represented.'').
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Over time, some states began recognizing the existence of a trust
based on a designation in the bank's records that a deposit was held in
trust for another person--even in the absence of a written trust
agreement. In 1955, the FDIC's then-General Counsel concluded that if
relevant state law recognized these ``Totten trusts'' \11\ and the
depositor complied with the law in establishing the trust, the FDIC
would insure these deposits separately from the depositor's other
deposit accounts.\12\ This was the first time the FDIC insured informal
trusts as trust deposits.
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\11\ The name ``Totten trust'' is derived from an early New York
court decision recognizing this form of trust, Matter of Totten, 179
N.Y. 112 (N.Y. 1904). Many other states have recognized similar
types of accounts, commonly known as ``payable-on-death'' accounts
or tentative trust accounts.
\12\ Separate Insurability of ``Totten Trust'' Accounts (June 1,
1955), Federal Banking Law Reporter ] 92,583.
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The FDIC further clarified insurance coverage for trust deposits in
1967 when it issued rules defining the deposit insurance categories
that the FDIC had recognized.\13\ These rules defined a ``testamentary
accounts'' category that included revocable trust accounts, tentative
or Totten trust accounts, and payable-on-death accounts and similar
accounts evidencing an intention that the funds shall belong to another
person upon the depositor's death. Testamentary deposits were insured
up to the applicable limit (which Congress had raised to $15,000) for
each named beneficiary who was the depositor's spouse, child, or
grandchild. If the named beneficiary did not satisfy this kinship
requirement, the deposit was aggregated with the depositor's individual
accounts for purposes of deposit insurance coverage. The rules also
included a separate ``trust accounts'' category for irrevocable trusts
with coverage of up to $15,000 for each beneficiary's trust interests
in deposit accounts established by the same grantor pursuant to a trust
agreement. Irrevocable trust accounts were insured separately from
other deposit accounts of the trustee, grantor, or beneficiary,
including testamentary accounts.
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\13\ 32 FR 10408 (July 14, 1967).
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In 1989, Congress transferred responsibility for insuring deposits
of savings associations from the Federal Savings and Loan Insurance
Corporation (FSLIC) to the FDIC. As part of this transition, the FDIC
issued uniform deposit insurance rules for the deposits of banks and
savings associations, reconciling the differences between the FDIC and
FSLIC insurance rules.\14\ These uniform rules redesignated the
``testamentary accounts'' category as ``revocable trust accounts,'' and
continued to require beneficiaries for revocable trust deposits to be
named, but added the requirement that these beneficiaries be named in
the failed IDI's deposit account records in order for per-beneficiary
coverage to apply. In the notice of proposed rulemaking discussing this
change, the FDIC explained that the change was expected to simplify the
deposit insurance determination process for revocable trust deposits
and expedite the payment of deposit insurance.\15\ These rules also
redesignated the ``trust accounts'' category as ``irrevocable trust
accounts'' and introduced a distinction between contingent interests
and non-contingent interests in irrevocable trusts that would affect
deposit insurance coverage. Non-contingent interests were each insured
up to the applicable limit (then $100,000), while contingent interests
were aggregated and insured up to $100,000 in total.\16\
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\14\ 55 FR 20111 (May 15, 1990).
\15\ 54 FR 52399, 52408 (Dec. 21, 1989) (notice of proposed
rulemaking).
\16\ 55 FR 20126 (May 15, 1990).
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As revocable trusts increased in popularity during the late 1980s
and early 1990s as an estate planning tool, the FDIC began receiving
more inquiries about the revocable trust rules. Many of these inquiries
were prompted by complex trust agreements that included numerous
conditions prescribing whether, when, or how a named beneficiary would
receive trust assets. FDIC staff generally interpreted the revocable
trust rules to require
[[Page 41769]]
beneficiaries' interests in formal and informal revocable trusts to be
vested in order to qualify for separate insurance coverage, meaning
that, after a grantor's death, there was no condition attached to the
beneficiary's interest that would make the interest contingent
(referred to as a ``defeating contingency'').\17\ Staff reasoned that
only a vested trust interest could establish a reasonable expectation
that the revocable trust deposit ``shall belong to'' the beneficiary,
as the regulation required.
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\17\ See, e.g., Advisory Opinion 94-32, Guidelines for Insurance
Coverage of Revocable Trust Accounts (Including ``Living Trust''
Accounts), (May 18, 1994). While the vested interest requirement
applied to both formal and informal trusts, interests in informal
trusts were generally considered to be vested because they
automatically passed to the designated beneficiaries upon the death
of the last grantor.
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In 1996, the FDIC sought public comment on potential simplification
of the deposit insurance rules, noting that its experience with bank
and savings association failures and a steady volume of inquiries on
deposit insurance coverage suggested that simplification could be
beneficial.\18\ Among other changes, the FDIC proposed specific
amendments to the rules for revocable trust deposits. Certain of these
changes were finalized in 1998, when a provision was added to the rules
defining the conditions that would constitute a defeating
contingency.\19\ Soon afterward, the FDIC expanded the list of
beneficiaries that would qualify for per-beneficiary coverage to
include siblings and parents, noting that some depositors had lost
money in bank failures because they had named non-qualifying
beneficiaries.\20\
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\18\ 61 FR 25596 (May 22, 1996).
\19\ 63 FR 25750 (May 11, 1998).
\20\ 64 FR 15653 (Apr. 1, 1999).
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In 2003, the FDIC proposed amending the revocable trust rules,
pointing to continued confusion about the coverage for revocable trust
deposits.\21\ Specifically, the FDIC proposed to eliminate the
defeating contingency provisions of the rules, with the result that
coverage would be based on the interests of qualifying beneficiaries,
irrespective of any defeating contingencies in the trust agreement. The
FDIC subsequently adopted this change, noting that it more closely
aligned coverage for living trust accounts with payable-on-death
accounts.\22\ Defeating contingency provisions were not eliminated for
irrevocable trusts. At the same time, the FDIC also eliminated the
requirement to name the beneficiaries of a formal revocable trust in
the IDI's deposit account records.\23\ Because the FDIC had to obtain
and review trust agreements from depositors following an IDI's failure
to determine the eligibility of the beneficiaries and allocation of
funds to each beneficiary, eliminating this requirement was based on
the conclusion that also requiring IDIs to maintain records of trust
beneficiaries, or requiring grantors to inform IDIs of changes in their
trust agreements, was unnecessary and burdensome. Though the additional
information might expedite deposit insurance payments, the FDIC
determined that removing this recordkeeping requirement would support
ongoing efforts under the Economic Growth and Regulatory Paperwork
Reduction Act to eliminate unnecessary regulatory requirements.
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\21\ 68 FR 38645 (June 30, 2003).
\22\ 69 FR 2825 (Jan. 21, 2004).
\23\ 69 FR 2825, 2828 (Jan. 21, 2004).
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The FDIC's experience with making deposit insurance determinations
during the early stages of the most recent financial crisis suggested
that further changes to the trust rules were necessary. In 2008, the
FDIC simplified the rules in several respects.\24\ First, it eliminated
the kinship requirement for revocable trust beneficiaries, instead
allowing any natural person, charitable organization, or non-profit, to
qualify for per-beneficiary coverage. Second, a simplified calculation
was established if a revocable trust named five or fewer beneficiaries;
coverage would be determined without regard to the allocation of
interests among the beneficiaries. This eliminated the need to discern
and consider beneficial interests in many cases.
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\24\ 73 FR 56706 (Sep. 30, 2008).
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A different insurance calculation applied to revocable trusts with
more than five beneficiaries. Specifically, at that time, the SMDIA was
$100,000 and thus if more than five beneficiaries were named in a
revocable trust, coverage would be the greater of: (1) $500,000; or (2)
the aggregate amount of all beneficiaries' interests in the trust(s),
limited to $100,000 per beneficiary. When the SMDIA was increased to
$250,000, a similar adjustment was made from $100,000 to $250,000 for
the calculation of per beneficiary coverage.
3. 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.
The current rules for determining insurance coverage for deposits in
each of these categories are described below.
Revocable Trust Deposits
The revocable trust category applies to deposits for which the
depositor has evidenced an intention that the deposit shall 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.\25\
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\25\ 12 CFR 330.10(a).
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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.\26\ If a
named beneficiary does not satisfy this requirement, 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.\27\
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\26\ 12 CFR 330.10(c).
\27\ 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 required intention that
the funds shall belong to the beneficiaries upon the depositor's death
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.\28\ In addition,
[[Page 41770]]
the beneficiaries of informal trusts (i.e., payable-on-death accounts)
must be named in the IDI's deposit account records.\29\ 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, this will likely
result in a hold being placed on the deposit until the FDIC can review
the trust agreement and verify that the beneficiary rules are
satisfied, thereby delaying insurance determinations and payments to
insured depositors.
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\28\ 12 CFR 330.10(b)(1).
\29\ 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.\30\ 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.\31\
For purposes of this calculation, a life estate interest is valued at
the SMDIA.\32\
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\30\ 12 CFR 330.10(a).
\31\ 12 CFR 330.10(e).
\32\ 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.\33\ However, if the co-owners are the
only beneficiaries of the trust, the account is instead insured under
the FDIC's joint account rule.\34\
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\33\ 12 CFR 330.10(f)(1).
\34\ 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.\35\ 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.\36\
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\35\ 12 CFR 330.10(h).
\36\ 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 IRS Federal Estate Tax Regulations.\37\ Funds held for
non-contingent trust interests are insured up to the SMDIA for each
such beneficiary.\38\ Funds held for contingent trust interests are
aggregated and insured up to the SMDIA in total.\39\
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\37\ 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 to provide for the second
beneficiary's medical needs, the first beneficiary's interest is
contingent upon the trustee's discretion.
\38\ 12 CFR 330.13(a).
\39\ 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.\40\ Such deposits
are aggregated with the grantor's other single ownership deposits for
purposes of applying the deposit insurance limit.
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\40\ 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 ``trust 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.'' \41\
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\41\ 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.\42\ This coverage is separate
from the coverage provided for other deposits of the owners or the
beneficiaries,\43\ and deposits held for a grantor's retained interest
are not aggregated with the grantor's single ownership deposits. Given
the statutory basis for coverage, the FDIC is not proposing any changes
to Sec. 330.12.
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\42\ 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).
\43\ 12 CFR 330.12(a).
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4. Part 370 and Recordkeeping at the Largest IDIs
Simplification of the deposit insurance rules would make deposit
insurance coverage easier to understand and improve the FDIC's ability
to resolve insurance claims in a timely manner, broadly benefiting the
public and IDIs, and it would have particular significance for the
large IDIs that are subject to part 370 of the FDIC's regulations. Part
370 was adopted in 2016 to promote the timely payment of deposit
insurance in the event of the failure of a large IDI.\44\ Its
development was prompted by the FDIC's goal of ensuring a timely
insurance determination in the event a large IDI with a high volume of
deposit accounts fails. Part 370 requires ``covered institutions,''
which generally include IDIs with two million or more deposit accounts,
to maintain complete and accurate depositor information and to
configure their information technology systems so as to permit the FDIC
to calculate deposit insurance coverage
[[Page 41771]]
promptly in the event of the IDI's failure. To implement part 370,
covered institutions are updating their deposit account records and
developing systems capable of applying the deposit insurance rules in
an automated manner.
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\44\ 81 FR 87734 (Dec. 5, 2016).
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In addition to broadly benefiting the public and all IDIs,
simplification of the deposit insurance rules complements part 370 in
that it would further promote the timely payment of deposit insurance
for depositors of the largest IDIs. For instance, neither part 370 nor
any other rule requires covered institutions to maintain certain
records necessary to make an insurance determination for formal trust
deposits, meaning that the FDIC would need to obtain and review
revocable and irrevocable trust agreements following a covered
institution's failure. Analysis of data from part 370 covered
institutions suggest the number of revocable trusts is significant and,
if a covered institution were to fail, processing of deposit insurance
for formal revocable trusts would likely extend well beyond normal FDIC
payment timeframes. Simplification of the deposit insurance rules would
streamline insurance determinations for trust accounts. The FDIC
expects that capabilities developed in accordance with part 370 will be
helpful in addressing many of the challenges involved in making deposit
insurance determinations in connection with a very large IDI's failure.
Simplification of the deposit insurance rules would provide additional
benefits by reducing the amount of time needed to collect and process
trust information after failure in order to make use of a covered
institution's part 370 deposit insurance calculation capabilities. With
less time needed to calculate insurance coverage, the FDIC would be
able to make more timely insurance payments to insured depositors.
5. Need for Further Rulemaking
The rules governing deposit insurance coverage for trust deposits
have been simplified on several occasions, but are still frequently
misunderstood, and can present some implementation challenges. For
example, 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 an IDI's failure. For example,
the FDIC's deposit insurance determinations for depositors of IndyMac
Bank, F.S.B. (IndyMac) following its failure in 2008 were challenging
in part because IndyMac had a large number of trust accounts for which
deposit insurance coverage was governed by complex deposit insurance
rules.\45\ 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. In some cases, this process took several
months. Revision of the deposit insurance coverage rules for trust
deposits along the lines proposed would reduce the amount of
information that must be provided by trust depositors, as well as the
complexity of the FDIC's review. This revision should enable the FDIC
to complete deposit insurance determinations more rapidly if another
IDI with a large number of trust accounts were to fail in the future.
Delays in the payment of deposit insurance can be consequential, as
revocable trust deposits in particular are often used by depositors to
satisfy their daily financial obligations, and the proposal would help
to mitigate those delays.
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\45\ See Crisis and Response: An FDIC History, 2008-2013 at 197,
FN 48, Federal Deposit Insurance Corporation 2017.
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Several factors contribute to the challenges of making insurance
determinations for trust deposits. First, there are three different
sets of rules governing deposit insurance coverage for trust deposits.
Understanding the coverage for a particular deposit requires a
threshold inquiry to determine which set of rules to apply--the
revocable trust rules, the irrevocable trust rules, or the rules for
deposits held by an IDI as trustee of an irrevocable trust. This
requires review of the trust agreement to determine the type of trust
(revocable or irrevocable), and the inquiry may be complicated by
innovations in state trust law that are intended to increase the
flexibility and utility of trusts. In some cases, this threshold
inquiry is also complicated by the provision of the revocable trust
rules that allows for continued coverage under those rules where a
trust becomes irrevocable upon the grantor's death. The result of an
irrevocable trust deposit being insured under the revocable trust rules
has proven confusing for both depositors and bankers.
Second, even after determining which set of rules applies to a
particular deposit, it may be challenging to apply the rules. For
example, the revocable trust rules include unique titling requirements
and beneficiary requirements. These rules also provide for two separate
calculations to determine insurance coverage, depending in part upon
whether there are five or fewer trust beneficiaries or at least six
beneficiaries. In addition, for revocable trusts that provide benefits
to multiple generations of potential beneficiaries, the FDIC needs to
evaluate the trust agreement to determine whether a beneficiary is a
primary beneficiary (immediately entitled to funds when a grantor
dies), contingent beneficiary, or remainder beneficiary. Only
``eligible'' primary beneficiaries and remainder beneficiaries are
considered in calculating FDIC deposit insurance coverage. The
irrevocable trust rules may require detailed review of trust agreements
to determine whether beneficiaries' interests are contingent and may
also require actuarial or present value calculations. These types of
requirements complicate the determination of insurance coverage for
trust deposits, have proven confusing for depositors, and extend the
amount of time needed to complete a deposit insurance determination and
insurance payment.
Third, the complexity and variety of depositors' trust arrangements
adds to the difficulty of determining deposit insurance coverage. For
example, trust interests are sometimes defined through numerous
conditions and formulas, and a careful analysis of these provisions may
be necessary in order to calculate deposit insurance coverage under the
current rules. Arrangements involving multiple trusts where the same
beneficiaries are named by the same grantor(s) in different trusts add
to the difficulty of applying the trust rules.
The FDIC believes that simplification of the deposit insurance
rules also presents an opportunity to more closely align the coverage
provided for different types of trust deposits. For example, the
revocable trust rules generally provide for a greater amount of
coverage than the irrevocable trust rules. This outcome occurs because
contingent interests for irrevocable trusts are aggregated and insured
up to the SMDIA rather than being insured up to the SMDIA per
beneficiary, while contingencies are not considered and therefore do
not limit coverage in the same manner for revocable trusts.
C. Description of Proposed Rule
The FDIC is proposing to amend the rules governing deposit
insurance coverage for trust deposits. Generally, the proposed
amendments would: Merge the revocable and irrevocable trust categories
into one category; apply a simpler, common calculation method
[[Page 41772]]
to determine insurance coverage for deposits held by revocable and
irrevocable trusts; and eliminate certain requirements found in the
current rules for revocable and irrevocable trusts.
Merger of Revocable and Irrevocable Trust Categories
As discussed above, the FDIC historically has insured revocable
trust deposits and irrevocable trust deposits under two separate
insurance categories. Staff's experience has been that this bifurcation
often confuses depositors and bankers, as it requires a threshold
inquiry to determine which set of rules to apply to a trust deposit.
Moreover, each trust deposit must be categorized before the aggregation
of trust deposits within each category can be completed.
The FDIC believes that trust deposits held in connection with
revocable and irrevocable trusts are sufficiently similar, for purposes
of deposit insurance coverage, to warrant the merger of these two
categories into one category. Under the FDIC's current rules, deposit
insurance coverage is provided because the trustee maintains the
deposit for the benefit of the beneficiaries. This is true regardless
of whether the trust is revocable or irrevocable. Merger of the
revocable and irrevocable trust categories would better conform deposit
insurance coverage to the substance--rather than the legal form--of the
trust arrangement. This underlying principle of the deposit insurance
rules is particularly important in the context of trusts, as state law
often provides flexibility to structure arrangements in different ways
to accomplish a given purpose.\46\ Depositors may have a variety of
reasons for selecting a particular legal arrangement, but that decision
should not significantly affect deposit insurance coverage.
Importantly, the proposed merger of the revocable trust and irrevocable
trust categories into one category for deposit insurance purposes would
not affect the application or operation of state trust law; this only
would affect the determination of deposit insurance coverage for these
types of trust deposits in the event of an IDI's failure.
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\46\ For example, the FDIC currently aggregates deposits in
payable-on-death accounts and deposits of written revocable trusts
for purposes of deposit insurance coverage, despite their separate
and distinct legal mechanisms. Also, where the co-owners of a
revocable trust are also that trust's sole beneficiaries, the FDIC
instead insures the trust's deposits as joint deposits, reflecting
the arrangement's substance rather than its legal form.
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Accordingly, the FDIC is proposing to amend 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. The proposed rule defines the
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 pursuant to an irrevocable trust
established by written agreement or by statute. Section 330.10 would
not apply to deposits maintained by an IDI in its capacity as trustee
of an irrevocable trust; these deposits would continue to be insured
separately pursuant to section 7(i) of the FDI Act and Sec. 330.12 of
the deposit insurance regulations.
In addition, the merger of the revocable trust and irrevocable
trust categories eliminates the need for Sec. 330.10(h)-(i) of the
current revocable trust rules, which provides that the revocable trust
rules may continue to apply to a deposit where a revocable trust
becomes irrevocable due to the death of one or more of the trust's
grantors. These provisions were intended to benefit depositors, who
sometimes were unaware that a trust owner's death could also trigger a
significant decrease in insurance coverage as a revocable trust becomes
irrevocable. However, in the FDIC's experience, this rule has proven
complex in part because it results in some irrevocable trusts being
insured per the revocable trust rules, while other irrevocable trusts
are insured under the irrevocable trust rules.\47\ As a result, a
depositor could know a trust was irrevocable but not know which deposit
insurance rules to apply. The proposed rule would insure deposits of
revocable trusts and irrevocable trusts according to a common set of
rules, eliminating the need for these provisions (Sec. 330.10(h)-(i))
and simplifying coverage for depositors. Accordingly, the death of a
revocable trust owner would not result in a decrease in deposit
insurance coverage for the trust. Coverage for irrevocable and
revocable trusts would fall under the same category and deposit
insurance coverage would remain the same, even after the expiration of
the six-month grace period following the death of a deposit owner.\48\
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\47\ As noted above, if a revocable trust becomes irrevocable
due to the death of the grantor, the trust's deposit continues to be
insured under the revocable trust rules. 12 CFR 330.10(h).
\48\ The death of an account owner can affect deposit insurance
coverage, often reducing the amount of coverage that applies to a
family's accounts. To ensure that families dealing with the death of
a family member have adequate time to review and restructure
accounts if necessary, the FDIC insures a deceased owner's accounts
as if he or she were still alive for a period of six months after
his or her death. 12 CFR 330.3(j).
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Calculation of Coverage
The FDIC is proposing to 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 rules that is generally
well-understood by bankers and trust depositors.
The proposed rule would provide that a grantor's trust deposits are
insured in an amount up to the SMDIA (currently $250,000) multiplied by
the number of trust beneficiaries, not to exceed five beneficiaries.
The FDIC would presume that, for deposit insurance purposes, the trust
provides for equal treatment of beneficiaries such that specific
allocation of the funds to the respective beneficiaries will not be
relevant, consistent with the FDIC's current treatment of revocable
trusts with five or fewer beneficiaries. This would, in effect, limit
coverage for a grantor's trust deposits at each IDI to a total of
$1,250,000; in other words, maximum coverage would be equivalent to
$250,000 per beneficiary up to five beneficiaries. In determining
deposit insurance coverage, the FDIC would continue to only consider
beneficiaries that are expected to receive the deposit held by the
trust in the IDI; the FDIC would not consider beneficiaries who are
expected to receive only non-deposit assets of the trust.
The FDIC is proposing to calculate coverage in this manner based on
its experience with the revocable trust rules after the most recent
modifications to these rules in 2008. The FDIC has found that the
deposit insurance calculation method for revocable trusts with five or
fewer beneficiaries has been the most straightforward and is easy for
bankers and the public to understand. This calculation provides for
insurance in an amount up to the total number of unique grantor-
beneficiary trust relationships (i.e., the number of grantors,
multiplied by the total number of beneficiaries, multiplied by the
SMDIA).\49\ In addition to being simpler,
[[Page 41773]]
this calculation has proven beneficial in resolutions, as it leads to
more prompt deposit insurance determinations and quicker access to
insured deposits for depositors. Accordingly, the FDIC proposes to
calculate deposit insurance coverage for trust deposits based on the
simpler calculation currently used for revocable trusts with five or
fewer beneficiaries.
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\49\ For example, two co-grantors that designate five
beneficiaries are insured for up to $2,500,000 (2 x 5 x $250,000).
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The streamlined calculation that would be used to determine
coverage for revocable trust deposits and irrevocable trust deposits
includes a limit on the total amount of deposit insurance coverage for
all of a depositor's funds in the trust category at the same IDI. The
proposed rule would provide coverage for trust deposits at each IDI up
to a total of $1,250,000 per grantor; in other words, each grantor's
insurance limit would be $250,000 per beneficiary up to a maximum of
five beneficiaries. The level of five beneficiaries is an important
threshold in the current revocable trust rules, as it defines whether a
grantor's coverage is determined using the simpler calculation of the
number of beneficiaries multiplied by the SMDIA, rather than the more
complex calculation involving the consideration of the amount of each
beneficiary's specific interest (which applies when there are six or
more beneficiaries). The trust rules currently limit coverage by tying
coverage to the specific interests of each beneficiary of an
irrevocable trust or of each beneficiary of a revocable trust with more
than five beneficiaries. The proposed rule's $1,250,000 per-grantor,
per-IDI limit is more straightforward and balances 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.
The FDIC anticipates that limiting coverage to $1,250,000 per
grantor, per IDI, for trust deposits would affect very few depositors,
as most trust deposits in past IDI failures have had balances well
below this level. For example, data obtained from a sample of IDI
failures from 2010-2020 suggests that only about 0.085 percent of
depositors maintaining trust deposits might be affected by the proposed
$1,250,000 limit.\50\ The FDIC does not possess sufficient information,
however, to enable it to project the effects of the proposed limit on
current depositors, and requests that commenters provide information
that might be helpful in this regard.
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\50\ Data from 2,550,001 depositors, including 249,257 trust
account depositors, at 246 failed banks from September 17, 2010-
April 3, 2020. A total of 212 out of 249,257 (.085 percent) trust
account depositors had more than $1.25 million in deposits across
all of their trust accounts. Of these depositors, only 24 had more
than five beneficiaries named in the bank's records. However, not
all trust accounts in the sample maintained beneficiary records at
the bank, so this likely underestimates the number of affected
depositors.
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Under the proposed rule, to determine the level of insurance
coverage that would apply to trust deposits, depositors would still
need to identify the grantors and the eligible beneficiaries of the
trust. The level of coverage that applies to trust deposits would no
longer be affected by the specific allocation of trust funds to each of
the beneficiaries of the trust or by contingencies outlined in the
trust agreement. Instead, the proposed rule would provide that a
grantor's trust deposits are insured up to a total of $1,250,000 per
grantor, or an amount up to the SMDIA multiplied by the number of
eligible beneficiaries, with a limit of no more than five
beneficiaries.
Aggregation
The proposed rule also provides for the aggregation of revocable
and irrevocable trust deposits for purposes of applying the deposit
insurance limit. Under the current rules, deposits of informal
revocable trusts and formal revocable trusts are aggregated for this
purpose.\51\ The proposed rule would aggregate a grantor's informal and
formal revocable trust deposits, as well as irrevocable trust deposits.
For example, all informal revocable trusts, formal revocable trusts and
irrevocable trusts held for the same grantor, at the same IDI would be
aggregated and the grantor's insurance limit would be determined by how
many eligible and unique beneficiaries were identified between all of
their trust accounts.\52\ The deposit insurance coverage provided in
the ``trust accounts'' category would continue to remain separate from
the coverage provided for other deposits held in a different right and
capacity at the same IDI. However, a small number of depositors that
currently maintain both revocable trust and irrevocable trust deposits
at the same IDI may have deposits in excess of the insurance limit if
these separate categories are combined. The FDIC does not have data on
depositors' trust arrangements that would allow it to estimate the
number of depositors that might be affected in this manner, and
requests that commenters provide information that might be helpful in
this regard.
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\51\ See 12 CFR 330.10(a) (``all funds that a depositor holds in
both living trust accounts and payable-on-death accounts, at the
same FDIC-insured institution and naming the same beneficiaries, are
aggregated for insurance purposes'').
\52\ For example, if a grantor maintained both an informal
revocable trust account with three beneficiaries and a formal
revocable trust account with three separate and unique
beneficiaries, the two accounts would be aggregated and the maximum
deposit insurance available would be $1.25 million (1 grantor x
SMDIA x number of unique beneficiaries, limited to 5). However, if
the same three people were the beneficiaries of both accounts, the
maximum deposit insurance available would be $750,000 (1 grantor x
SMDIA x 3 unique beneficiaries).
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Eligible Beneficiaries
Currently, the 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,\53\ while the irrevocable trust rules do not establish criteria
for beneficiaries. The FDIC believes that a single definition should be
used to determine whether an entity is an ``eligible'' beneficiary for
all trust deposits, and proposes to use the current revocable trust
rule's definition. The FDIC believes that this will result in a change
in deposit insurance coverage only in very rare cases.
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\53\ 12 CFR 330.10(c).
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The proposed rule also would exclude from the calculation of
deposit insurance coverage beneficiaries that only would obtain an
interest in a trust if one or more named beneficiaries are deceased
(often referred to as contingent beneficiaries). In this respect, the
proposed rule would codify existing practice to include only primary,
unique beneficiaries in the deposit insurance calculation.\54\ This
would not represent a substantive change in coverage. Consistent with
treatment under the current trust rules, naming a chain of contingent
beneficiaries that would obtain trust interests only in event of a
beneficiary's death would not increase deposit insurance coverage.
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\54\ 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 proposed rule would codify a longstanding
interpretation of the trust rules where an informal
[[Page 41774]]
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.\55\
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\55\ 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
corresponding to 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 \56\ and interests of beneficiaries
that do not satisfy the definition of ``beneficiary.'' \57\ This adds
complexity to the deposit insurance calculation, as detailed review of
a trust agreement may be required to value such interests in order to
aggregate them with a grantor's other funds. In order to implement the
streamlined calculation for trust deposits, the FDIC is proposing to
eliminate these provisions. Under the proposed rules, the grantor and
other beneficiaries that do not satisfy the definition of ``eligible
beneficiary'' would not be included for purposes of the deposit
insurance calculation.\58\ Importantly, this would not in any way limit
a grantor's ability to establish such trust interests under State law.
These interests simply would not factor into the calculation of deposit
insurance coverage.
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\56\ See 12 CFR 330.1(r); see also FDIC Financial Institution
Employee's Guide to Deposit Insurance at 87.
\57\ 12 CFR 330.10(d).
\58\ 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 proposed rule also
would clarify 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) would not be treated as
beneficiaries for purposes of the calculation. The future trust(s)
instead would be considered mechanisms for distributing trust funds,
and the natural persons or organizations that receive the trust funds
through the future trusts would be considered the beneficiaries for
purposes of the deposit insurance calculation. This clarification is
consistent with published guidance and would not represent a
substantive change in deposit insurance coverage.\59\
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\59\ 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 proposed
rule would continue to require the beneficiaries of an informal
revocable trust to be specifically named in the deposit account records
of the IDI.\60\ The FDIC does not believe this requirement imposes a
burden on IDIs, as informal revocable trusts by their nature require
the IDI to be able to identify the individuals or entities to which a
deposit would be paid upon the depositor's death.
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\60\ See 12 CFR 330.10(b)(2).
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Presumption of Ownership
The proposed rule also would state that, unless otherwise specified
in an IDI's deposit account records, a deposit of a trust established
by multiple grantors is presumed to be owned in equal shares. This
presumption is consistent with the current revocable trust rules.\61\
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\61\ See 12 CFR 330.10(f).
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Bankruptcy Trustee Deposits
The proposed rule would continue the current treatment of deposits
placed at an IDI by a bankruptcy trustee. If funds of multiple
bankruptcy estates were commingled in a single account at the IDI, each
estate would be separately insured up to the SMDIA.
Deposits Covered Under Other Rules
The proposed rule would exclude 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 would be treated as joint deposits under Sec. 330.9. In each
of these cases, the FDIC is not proposing to change the current rule.
Conforming Changes
The proposed simplification of the calculation for insurance
coverage for trust deposits also would permit the elimination of
certain definitions from Sec. 330.1 of the regulations. Specifically,
Sec. 330.1 defines ``trust interest'' and ``non-contingent trust
interest,'' terms that are used in connection with the current
irrevocable trust rules. Because the proposed rule would eliminate the
evaluation of contingencies in determining coverage for trust deposits,
the FDIC is proposing to remove these definitions from the regulation.
Enhancements to Claims Processes
The FDIC is also considering enhancements to its claims processes
to further promote prompt insurance determinations for trust deposits.
For example, the FDIC may be able to establish enhanced processes and
systems for reaching out to depositors and obtaining trust
documentation following an IDI's failure. The claims process
enhancements adopted by the FDIC will likely depend upon the amendments
to the deposit insurance rules, if any, that are adopted through this
rulemaking.
D. Examples Demonstrating Coverage Under Current and Proposed Rules
To assist commenters, the FDIC is providing examples demonstrating
how the proposed rule would apply to determine deposit insurance
coverage for trust deposits. These examples are not intended to be all-
inclusive; they merely address a few possible scenarios involving trust
deposits. The FDIC expects that for the vast majority of depositors,
insurance coverage would not change under the proposed rule. The
examples here specifically highlight a few instances where coverage
could be reduced to ensure that commenters are aware of them. In
addition, in any instances where a trust is established, the examples
assume that the trustee is not an IDI.
Example 1: Payable-on-Death Account
Depositor A establishes a payable-on-death account at an FDIC-
insured bank. A has designated three beneficiaries for this deposit--B,
C, and D--who will receive the funds upon her death, and listed all
three on a form provided to the bank. The only other deposit account
that A maintains at the same bank is a checking account with no
designated beneficiaries. What is the maximum amount of deposit
insurance coverage for A's deposits at the bank?
[[Page 41775]]
Under the proposed rule, Depositor A's payable-on-death account
represents an informal revocable trust and would be insured in the
trust accounts category. The maximum coverage for this deposit would be
equal to the SMDIA (currently $250,000) multiplied by the number of
grantors (in this case, one because A established the account herself)
multiplied by the number of beneficiaries, up to a maximum of five
(here three, the number of beneficiaries, is less than five). A's
payable-on-death account would be insured for up to: ($250,000) x (1) x
(3) = $750,000.
The coverage for A's payable-on-death account is separate from the
coverage provided for A's checking account, which would be insured in
the single ownership category because she has not named any
beneficiaries for that account. The single ownership checking account
would be insured up to the SMDIA, $250,000. A's total insurance
coverage for her deposits at the bank would be: $750,000 + $250,000 =
$1,000,000. Notably, this level of coverage is the same as that
provided by the current deposit insurance rules.
Example 2: Formal Revocable Trust and Informal Revocable Trust
Depositors E and F jointly establish a payable-on-death account at
an FDIC-insured bank. E and F have designated three beneficiaries for
this deposit--G, H and I--who will receive the funds after both E and F
are deceased. They list these beneficiaries on a form provided to the
bank. E and F also jointly establish an account titled in the name of
the ``E and F Living Trust'' at the same bank. E and F are the grantors
of the living trust, a formal revocable trust that includes the same
three beneficiaries, G, H, and I. The grantors, E and F, do not
maintain any other deposit accounts at this same bank. What is the
maximum amount of deposit insurance coverage for E and F's deposits?
Under the proposed rule, E and F's payable-on-death account
represents an informal revocable trust and would be insured in the
trust accounts category. E and F's living trust account constitutes a
formal revocable trust and also would be insured in the trust accounts
category. To the extent these deposits would pass from the same grantor
(E or F) to beneficiaries (G, H, and I), they would be aggregated for
purposes of applying the deposit insurance limit. As under the current
rules, it would be irrelevant that the grantors' deposits are divided
between the payable-on-death account and the living trust account.
The maximum coverage for E and F's deposits would be equal to the
SMDIA ($250,000) multiplied by the number of grantors (two, because E
and F are the grantors with respect to both deposits) multiplied by the
number of unique beneficiaries, up to a maximum of five (here three,
the number of beneficiaries, is less than five). Therefore, the
coverage for E and F's trust deposits would be: ($250,000) x (2) x (3)
= $1,500,000. This level of coverage is the same as that provided by
the current deposit insurance rules.
Example 3: Two-Owner Trust and a One-Owner Trust
Depositors J and K jointly establish a payable-on-death account at
an FDIC-insured bank. J and K have designated three beneficiaries for
this deposit--L, M and N--who will receive the funds after both J and K
are deceased. They list these beneficiaries on a form provided to the
bank. At the same FDIC-insured bank, J establishes a payable-on-death
account and designates K as the beneficiary upon J's death. What is the
maximum amount of coverage for J and K's deposits?
Under the proposed rule, both accounts would be insured under the
trust account category. To the extent these deposits would pass from
the same grantor (J or K) to beneficiaries (such as L, M, and N), they
would be aggregated for purposes of applying the deposit insurance
limit. For example, K identified three beneficiaries (L, M and N), and
therefore, K's insurance limit is $750,000 (or 1 x 3 x SMDIA). K would
be fully insured as long as one-half interest of the co-owned trust
account was $750,000 or less, which is the same level of coverage
provided under current rules.
In this example, J's situation differs from K because J has a
second trust account, but the insurance calculation remains the same.
Specifically, J has two trust accounts and identified four unique
beneficiaries (L, M, N, and K); therefore, J's insurance limit is
$1,000,000 (or 1 x 4 x SMDIA). J would remain fully insured as long as
J's trust deposits--equal to one-half of the co-owned trust account
plus J's personal trust account--total no more than $1,000,000. This
methodology and level of coverage is the same as that provided by the
current deposit insurance rules.
Example 4: Revocable and Irrevocable Trusts
Depositor O establishes a deposit account at an FDIC-insured bank
titled the ``O Living Trust''. O is the grantor of this living trust, a
formal revocable trust that includes three beneficiaries--P, Q, and R.
The grantor, O, also establishes an irrevocable trust for the benefit
of the same three beneficiaries. The trustee of the irrevocable trust
maintains a deposit account at the same bank as the living trust
account, titled in the name of the irrevocable trust. Neither O nor the
trustee maintains other deposit accounts at the same bank. What is the
insurance coverage for these deposits?
Under the proposed rule, the living trust account is a deposit of a
formal revocable trust and would be insured in the trust accounts
category. The deposit of the irrevocable trust also would be insured in
the trust accounts category. To the extent these deposits would pass
from the same grantor (O) to beneficiaries (P, Q, or R), they would be
aggregated for purposes of applying the deposit insurance limit. It
would be irrelevant that the deposits are divided between the living
trust account and the irrevocable trust account. The maximum coverage
for these deposits would be equal to the SMDIA ($250,000) multiplied by
the number of grantors (one, because O is the grantor with respect to
both deposits) multiplied by the number of beneficiaries, up to a
maximum of five (here three, the number of beneficiaries, is less than
five). Therefore, the maximum coverage for the trust deposits would be:
($250,000) x (1) x (3) = $750,000.
This is one of the isolated instances where the proposed rule may
provide a reduced amount of coverage as a result of the aggregation of
revocable and irrevocable trust deposits, depending on the structure of
the trust agreement. Under the current rules, O would be insured for up
to $750,000 for revocable trust deposits and separately insured for up
to $750,000 for irrevocable trust deposits (assuming non-contingent
beneficial interests), resulting in $1,500,000 in total coverage. If
that were the case, current coverage would exceed that provided by the
proposed rule. However, the terms of irrevocable trusts sometimes lead
to less coverage than depositors might expect. FDIC staff's experience
is that irrevocable trust deposits are often insured only up to
$250,000 under the current rules due to contingencies in the trust
agreement, but determining this with certainty often requires careful
consideration of the trust agreement's contingency provisions. Under
the current rule, if contingencies existed, current coverage would
exceed that provided by the proposed rule, as O would be insured up to
$1,000,000; $750,000 for his revocable trust and $250,000 for his
irrevocable trust. In the FDIC's view, one of the key benefits of the
proposed rule versus the current rule would be greater clarity and
predictability in
[[Page 41776]]
deposit insurance coverage because whether contingencies exist would no
longer be a factor that could affect deposit insurance.
Example 5: Many Beneficiaries Named
Depositor S establishes a deposit account at an FDIC-insured bank
titled in the name of the ``S Living Trust''. This trust is a revocable
trust naming seven beneficiaries--T, U, V, W, X, Y, and Z. The grantor,
S, does not maintain any other deposits at the same bank. What is the
coverage for this deposit?
Under the proposed rule, the living trust account is a deposit of a
formal revocable trust and would be insured in the trust accounts
category. The maximum coverage for this deposit would be equal to the
SMDIA ($250,000) multiplied by the number of grantors (one, because S
is the sole grantor) multiplied by the number of beneficiaries, up to a
maximum of five. Here the number of named beneficiaries (seven) exceeds
the maximum (five) so insurance is calculated using the maximum (five).
Coverage for the deposit would be: ($250,000) x (1) x (5) = $1,250,000.
This is another limited instance where the proposed rule may
provide for less coverage than the current rule. Under the current
rule, because more than five beneficiaries are named, the deposit 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. Determining coverage requires review of the trust
agreement to ascertain each beneficiary's interest. Each such insurable
interest is limited to the SMDIA, and the total of all of these
interests is compared with $1,250,000 (five times the SMDIA). The
current rule provides coverage in the greater of these two amounts. The
result would fall into a range from $1,250,000 to $1,750,000, depending
on the precise allocation of trust interests among the
beneficiaries.\62\ In the FDIC's view, one of the key benefits of the
proposed rule versus the current rule would be greater clarity and
predictability in deposit insurance coverage because a single formula
would be used to determine maximum coverage, and this formula would not
depend upon the specific allocation of funds among beneficiaries.
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\62\ For example, if all of the beneficiaries' interests were
equal, coverage would be: $250,000 x (7 beneficiaries) = $1,750,000.
This is the maximum coverage possible under the current rule.
Conversely, if a few beneficiaries had a large interest in the
trust, the total of all beneficiaries' interests (limited to the
SMDIA per beneficiary) could be less than $1,250,000, in which case
the current rule would provide a minimum of $1,250,000 in coverage.
Depending upon the precise allocation of interests, the amount of
coverage provided would fall somewhere within this range.
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E. Alternatives Considered
The FDIC has considered a number of alternatives to the proposed
rule that could meet its objectives in this rulemaking. Some of these
alternatives are described below.
Insuring Revocable Trust Deposits up to $250,000 per Grantor and
Irrevocable Trust Deposits up to $250,000 per Trust
The FDIC considered limiting the total amount of deposit insurance
coverage for revocable trust deposits to the SMDIA (currently $250,000)
for each grantor and irrevocable trust deposits up to $250,000 per
trust. This would dramatically simplify the trust rules because the
determination of coverage would no longer require the review of trust
agreements or the consideration of beneficiaries' interests. This
alternative would therefore provide significant benefits in terms of
supporting the timely payment of deposit insurance. However, this would
substantially reduce deposit insurance coverage for many trust deposits
that currently exceed $250,000. The FDIC therefore declined to pursue
this proposal.
Provide Per-Beneficiary Coverage Where Beneficiary Information Is
Maintained at the IDI
The FDIC considered changing the trust rules to provide coverage of
$250,000 per beneficiary for trust deposits only where the trust
documentation necessary to determine insurance coverage is maintained
in an IDI's deposit account records. This would promote the timely
payment of deposit insurance and simplify insurance determinations, as
the information required to calculate coverage would be immediately
available to the FDIC following the failure of an IDI. However, such a
requirement could prove burdensome and difficult to comply with for
IDIs and depositors. Furthermore, even if depositors were to provide
the necessary documentation to IDIs, they could be unaware as to
whether the IDIs are maintaining that information in their records.
Accordingly, the FDIC believes that this alternative may not promote
depositor confidence in the level of coverage for their deposits.
Retain Separate Trust Categories, Harmonize Rules
The FDIC also considered harmonizing the rules for calculating
coverage for revocable and irrevocable trusts while maintaining these
two categories as separate for deposit insurance purposes. The use of
common rules would reduce complexity to some extent. However, so long
as these categories remain separate, determining the level of coverage
for a trust deposit would require the threshold inquiry as to whether
the trust is revocable or irrevocable. This is because the deposits in
each category would still be aggregated within each deposit insurance
category for purposes of applying the insurance limit. The FDIC
believes that the proposed rule provides greater benefits than this
alternative.
Status Quo
The FDIC is proposing amendments to the trust rules to advance the
objectives discussed above, including making the rules more
understandable for the public and depositors, promoting the timely
payment of deposit insurance, and facilitating the administration of
resolutions. The FDIC considered the status quo alternative to not
amend the existing trust rules and not propose the amendments. However,
for reasons previously stated in Section I.B entitled ``Background,''
the FDIC considers the proposed rule to be a more appropriate
alternative.
F. Request for Comment
The FDIC is requesting comment on all aspects of the proposed rule,
including the alternatives presented. Comment is specifically invited
with respect to the following questions:
<bullet> Would the proposed amendments to the deposit insurance
rules make insurance coverage for trust deposits easier to understand
for bankers and the public?
<bullet> The FDIC believes that depositors generally would have the
information necessary to readily calculate deposit insurance coverage
for their trust deposits under the proposed rule, allowing them to
better understand insurance coverage for their trust deposits. Are
there instances where a depositor would not likely have the necessary
information?
<bullet> Are there any other types of trusts not described in this
proposal whose deposits would be affected by the proposed rule if
adopted? What types of trusts are those and how would they be impacted?
<bullet> While the FDIC has substantial experience regarding trust
arrangements, the FDIC does not possess sufficiently detailed
information on depositors' existing trust arrangements to allow the
FDIC to project the proposed rule's effects on current depositors. Are
there any other sources of empirical information that the FDIC should
consider that may be helpful in
[[Page 41777]]
understanding the effects of the proposed rule? The FDIC also
encourages commenters to provide such information, if possible.
<bullet> Grandfathering of the deposit insurance rules would result
in significantly greater complexity for the period of time during which
two sets of rules could apply to deposits--especially in conducting
resolutions. Therefore, the FDIC is not inclined to consider allowing
grandfathering, but rather rely on a delayed implementation date to
allow stakeholders to make necessary adjustments as a result of the new
rules. However, the FDIC recognizes there are instances, such as trusts
holding time deposits or other deposit relationships, which may not be
easily restructured without adverse consequences to the depositor. Are
there fact patterns where grandfathering the current rules may be
appropriate? Would grandfathering be appropriate with respect to the
proposed rule's coverage limit of $1,250,000 per IDI for a depositor's
trust deposits?
<bullet> Are the examples provided clear and understandable? Are
there other common trust deposit scenarios that would benefit from an
example being provided?
<bullet> Would any of the alternatives described above better meet
the FDIC's objectives in connection with this rulemaking? Are there any
other alternatives that would better meet those objectives? Are there
any other amendments to the deposit insurance rules applicable to
trusts that the FDIC should consider?
<bullet> For the covered institutions subject to part 370, what
cost and time frame might be required to update information technology
systems and deposit account records to be capable of calculating
insurance coverage under the proposed rule? The FDIC also seeks any
supporting information that commenters might be able to provide on this
topic.
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 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 proposing an amendment to its rules governing insurance
coverage for deposits maintained at IDIs by mortgage servicers that
consist of mortgagors' principal and interest payments. The proposed
rule is intended to address 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 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.
B. Background and Need for Rulemaking
The FDIC's rules governing coverage for mortgage servicing accounts
were adopted in 1990 following the transfer of responsibility for
insuring deposits of savings associations from the FSLIC to the FDIC.
Under the rules adopted in 1990, funds representing payments of
principal and interest were insured on a pass-through basis to
mortgagees, investors, or security holders. In adopting this rule, the
FDIC focused on the fact that principal and interest funds were
generally owned by investors, 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 consisting 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.\63\ 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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\63\ 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 in some instances. For example, insured depository
institutions covered by 12 CFR part 370, the FDIC's rule requiring
recordkeeping and information technology capabilities for deposit
insurance purposes (covered institutions), identified challenges to
implementing certain recordkeeping requirements with respect to MSA
deposit balances as a result of the way in which servicer advances are
administered and accounted.\64\
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\64\ 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,
advances 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 objective.
[[Page 41778]]
C. Proposed Rule
The FDIC is proposing 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.
Under the proposed rule, accounts maintained by a mortgage servicer in
an agency, custodial, or fiduciary capacity, which consist of payments
of principal and interest, 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.\65\
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\65\ 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 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 obligation to the lender. In some cases, foreclosure
proceeds may not be paid directly by a mortgagor. The current rule does
not address whether foreclosure collections represent payments of
principal and interest by a mortgagor. Under the proposed rule,
foreclosure proceeds used to satisfy a borrower's principal and
interest obligation would be insured up to the limit of the SMDIA per
mortgagor.
The proposed rule would make no change 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. Under the proposed rule, such deposits would
continue 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. Request for Comment
The FDIC is requesting comment on all aspects of the proposed rule.
Comment is specifically invited with respect to the following
questions:
<bullet> Would the proposed amendments to the rules governing
coverage for mortgage servicing accounts adequately address servicers'
practices with respect to these accounts, as described above? Are there
any other funds representing principal and interest that are commingled
with borrowers' payments that the FDIC should take into account in the
deposit insurance calculation, consistent with its policy objectives?
<bullet> Would deposit insurance coverage of servicer principal and
interest advances help to promote financial stability in the financial
system? If the FDIC does not amend the rule as proposed, how would
mortgage servicers react if their insured depository institution, or
the banking industry as a whole, appears stressed? If so, how would
funding arrangements or deposit relationships change?
<bullet> Does the proposed rule reduce the compliance burden for
part 370 covered institutions?
<bullet> Are there any alternatives to the proposed rule that would
better achieve the FDIC's policy objectives in connection with this
rulemaking? Are there any other amendments to the deposit insurance
rules applicable to MSAs that the FDIC should consider?
III. Regulatory Analysis
A. Expected Effects
1. Simplification of Trust Rules
Generally, the proposed 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 proposed amendments 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 proposed amendments 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 proposal,
such as the effects on information technology (IT) service providers to
the institutions that could be affected by the proposed rule. These
effects are discussed in greater detail below.
Effects on Deposit Insurance Coverage
The proposed rule would affect deposit insurance coverage for
deposits held in connection with trusts. According to the March 31,
2021 Call Report data, the FDIC insures 4,987 depository institutions
\66\ that report holding approximately 641 million deposit accounts.
Additionally, 1,573 IDIs have powers granted by a state or national
regulatory authority to administer accounts in a fiduciary capacity
(i.e., trust powers) and 1,167 exercise those powers, comprising 31.5
percent and 23.4 percent, respectively, of all IDIs.\67\ 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 proposed rule, if
adopted, could affect between 1,167 and 4,987 IDIs.
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\66\ The count of institutions includes FDIC-insured U.S.
branches of institutions headquartered in foreign countries.
\67\ FDIC Call Report data, March 31, 2021.
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The FDIC does not have detailed data on depositors' trust
arrangements that would allow the FDIC 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 \68\ 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 percent of the deposit accounts at the 249 failed banks were
trust accounts. Of
[[Page 41779]]
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 71.4 million trust accounts in
existence at FDIC-insured institutions.\69\ 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 53.2 million trust
depositors.\70\ 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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\68\ 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.
\69\ There were approximately 641 million deposit accounts
reported by FDIC-insured institutions as of March 31, 2021, based on
Call Report data. Assuming that 11.14 percent of accounts are trust
accounts, then there are an estimated 71.4 million trust accounts as
of March 31, 2021.
\70\ 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 (53.2 million) is obtained by multiplying
the estimated number of trust accounts by the number of trust
account depositors per trust account (71.4 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 proposed rule on deposit insurance
coverage. Thus, the effects of the proposed 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 proposed rule. However, some depositors that
maintain trust deposits would experience a change in their insurance
coverage under the proposed rule.
The FDIC anticipates that deposit insurance coverage for some
irrevocable trust deposits would increase under the proposed 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.\71\ 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 proposed rule
would not consider such contingencies in the calculation of coverage,
and per-beneficiary coverage would apply.
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\71\ 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 proposed 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 proposed 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.\72\ However, the FDIC's
experience is that irrevocable trust deposits comprise a relatively
small share of the average IDI's deposit base,\73\ and that it is rare
for IDIs to hold deposits in connection with irrevocable and revocable
trusts established by the same grantor(s).\74\ Individual grantors'
trust deposits held for the benefit of up to five different
beneficiaries would continue to be separately insured.
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\72\ 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.
\73\ 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 proposed rule on trust
account depositors at all IDIs.
\74\ 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 $1.25
million.
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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 21,268 trust account depositors and approximately
28,539 trust accounts could be directly affected by this aspect of the
proposed rule, representing about 0.04 percent of both the estimated
number of trust account depositors and the estimated number of trust
accounts.\75\ 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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\75\ 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 (640,918,226)
according to March 31, 2021, Call Report data. This step yielded an
estimate of 71,386,539 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
53,198,823. Using failed bank data, 100 out of 250,139 trust
depositors had balances in excess of $1.25 million in their trust
accounts. Thus, the FDIC estimated that, of the approximately 53.2
million trust depositors, (100/250,139) of them--approximately
21,268--had balances in excess of $1.25 million in their trust
accounts, and therefore could be directly affected by the proposal.
These estimated 21,268 trust depositors are associated with an
estimated 28,539 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 proposed merger of certain revocable and irrevocable trust
categories is intended to clarify 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
[[Page 41780]]
proposed rule would eliminate the need to consider the specific
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 will incur some regulatory
costs associated with making necessary changes to internal processes
and systems and bank personnel training in order to accommodate the
proposed rule's definition of ``trust accounts'' and attendant deposit
insurance coverage terms, if adopted. There also may be some initial
cost for institutions to become familiar with the proposed 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 proposed rules should be simpler for institutions to
understand and explain going forward. As the business impacts and costs
associated with operationalizing the proposed changes to the trust
rules may vary significantly across IDIs, the FDIC would welcome
industry comments in this regard.
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 proposed 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 proposed 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 proposed 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
proposed 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 proposed 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 proposed rules, 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 proposed 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 they continue to be capable of applying the
deposit insurance rules as part 370 requires. A covered institution is
not considered to be in violation of part 370 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.\76\
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\76\ See 12 CFR 370.10(d).
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The FDIC expects that the proposed 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
capacity to calculate deposit insurance for its deposits, the proposed
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 proposed rule
would require the aggregation of revocable and irrevocable trust
deposits, categories that are currently separated for purposes of part
370's recordkeeping provisions. The FDIC does not expect that the
proposed 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 proposed rule on the part 370
covered institutions, but the FDIC does not have sufficient information
on covered institutions' systems and records to quantify this.
Although the FDIC does not have sufficient information to determine
the time that might be required to reprogram systems, it believes that
a two-year period of time may be reasonable. The FDIC requests comment
on this proposal, including any information that commenters may be able
to provide to support their views
[[Page 41781]]
on the time necessary to attain compliance with part 370 if the
proposed rule is adopted.
Other Potential Effects
Although the FDIC expects that coverage for most trust depositors
would be unchanged under the proposal, and that the proposed changes
simplify the FDIC's insurance rules for trust accounts, the proposal
may have other potential effects. For example, the institutions
affected by the proposal may rely on third-party IT service providers
to perform insurance coverage estimates for their trust depositors. The
proposal may lead such IT service providers to revise their systems to
account for the proposal's changes.
2. Amendments to Mortgage Servicing Account Rule
The proposed 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 March 31, 2021 Call
Report data, the FDIC insures 4,987 IDIs.\77\ Of the 4,987 IDIs, 1,167
IDIs (23.4 percent) report holding mortgage servicing assets, which
indicates that they service mortgage loans and could thus be affected
by the proposed 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
proposed rule, if adopted, would be greater than 1,167 and
substantially less than 4,987.
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\77\ 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 proposed rule, or any potential change in the
total amount of insured deposits. Thus, the potential effects of the
proposed amendments regarding governing deposit insurance coverage for
MSAs are outlined qualitatively below.
The proposed rule would directly affect the level of deposit
insurance coverage provided for some MSAs. Under the proposed 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 be insured under the rules for MSA deposits, but instead are
insured to the servicer as corporate funds up to the SMDIA. Therefore,
the proposed rule would expand 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.
If enacted, the proposed 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 proposal 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 proposed rule.
Further, the proposed 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 proposed 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 proposed rule, if enacted,
would pose 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
Institutions subject to the enhanced requirements of part 370 may
bear some costs in recognizing the expanded coverage for servicer
advances and foreclosure proceeds. However, institutions subject to the
requirements of part 370 already are responsible for determining
coverage for MSA accounts based on each borrower's payments. Therefore,
the FDIC does not believe the impact of the proposal on part 370
covered IDIs will be significant.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), requires that, in connection
with a notice of proposed rulemaking, an agency prepare and make
available for public comment an initial regulatory flexibility analysis
that describes the impact of the proposed rule on small entities.\78\
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.\79\ 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 proposed rule,
if adopted, will have a significant economic effect on a substantial
number of small entities. However, some expected effects of the
proposed rule are difficult to assess or accurately quantify given
current information, therefore the FDIC has included an Initial
Regulatory Flexibility Act Analysis in this section.
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\78\ 5 U.S.C. 601 et seq.
\79\ 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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[[Page 41782]]
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,\80\ 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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\80\ 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 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 proposed amendments 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 proposed amendments 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 proposed changes will also facilitate the
resolution of failed IDIs in a least costly manner. The proposed
amendments 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 proposing amendments to 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.\81\ 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 proposes to
amend 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 proposal's legal basis
please refer to Section I.C entitled ``Description of Proposed Rule.''
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\81\ 12 U.S.C. 1821(a)(2).
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The Proposed Rule
The FDIC is proposing to amend the rules governing deposit
insurance coverage for trust deposits. Generally, the proposed
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 proposed rule please refer to Section I.C entitled
``Description of Proposed Rule.''
Small Entities Affected
Based on the March 31, 2021 Call Report data, the FDIC insures
4,987 depository institutions,\82\ of which 3,431 are considered small
entities for the purposes of RFA.\83\ Of the 3,431 small IDIs, 826 have
powers granted by a state or national regulatory authority to
administer accounts in a fiduciary capacity and 567 exercise those
powers, comprising 24.1 percent and 16.5 percent, respectively, of
small IDIs.\84\ 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 proposed rule, if adopted, could
affect between 567 and 3,431 small, FDIC-insured institutions.
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\82\ The count of institutions includes FDIC-insured U.S.
branches of institutions headquartered in foreign countries.
\83\ FDIC Call Report data, March 31, 2021.
\84\ Id.
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As noted in the Aggregation sub-section of Section I.C
``Description of Proposed Rule,'' 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 proposed rule. However, the FDIC believes that the number of small
IDIs that will be directly affected by the proposal is likely to be
small, given that in the agency's resolution experience only a small
number of trust accounts have balances above the proposed 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 $1.25 million; at
small IDIs, 18 out of 34,304 depositors (or 0.05 percent) had trust
account
[[Page 41783]]
balances greater than $1.25 million.\85\ The data from failed banks
suggest small IDIs could be affected by the proposal roughly in
proportion to the share of trust depositors with account balances
greater than $1.25 million at IDIs of all sizes which failed between
2010 and 2020.
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\85\ 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 proposed simplification of the deposit insurance rules for
trust deposits is expected to have a variety of effects. The proposed
amendments would 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.\86\ These effects are discussed in greater detail in Section
III.A entitled ``Expected Effects.''
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\86\ 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 March 31, 2021, the FDIC does not insure any institutions with
two million or more deposit accounts that are also considered small
entities.
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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
proposed 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 proposed 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 proposed rules should be simpler to understand and explain
going forward. As the business impacts and costs associated with
operationalizing the proposed changes to the trust rules may vary
significantly across IDIs, the FDIC would welcome industry comments in
this regard.
Alternatives Considered
The FDIC has considered a number of alternatives to the proposed
rule that could meet its objectives in this rulemaking. However, for
reasons previously stated in Section I.E ``Alternatives Considered,''
the FDIC considers the proposed 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
proposed 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 proposal and any other federal rule.
The FDIC invites comments on all aspects of the supporting
information provided in this RFA section. In particular, would the
proposal have any significant effects on small entities that the FDIC
has not identified?
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 proposing to amend 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 proposed amendments, 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 proposed rule is intended to address 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 proposes to
amend 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
[[Page 41784]]
proposal's legal basis please refer to Section II.C, entitled
``Proposed Rule.''
The Proposed Rule
The FDIC is proposing to amend the rules governing deposit
insurance coverage for deposits maintained at IDIs by mortgage
servicers. Generally, the proposed amendment 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 proposed
rule would make 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
proposed rule please refer to Section II.C, entitled ``Proposed Rule.''
Small Entities Affected
Based on the March 31, 2021 Call Report data, the FDIC insures
4,987 depository institutions, of which 3,431 are considered small
entities for the purposes of RFA. Of the 3,431 small IDIs, 491 IDIs
(14.3 percent) report holding mortgage servicing assets, which
indicates that they service mortgage loans and could thus be affected
by the proposed rule. However, mortgage servicing accounts may be
maintained at small IDIs that do not 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.\87\ Therefore, the FDIC estimates that the number of small
IDIs potentially affected by the proposed rule, if adopted, would be
between 491 and 3,431, but believes that the number is close to the
lower end of the range.
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\87\ 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 proposed 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 proposed rule.
Expected Effects
The proposed rule would directly affect the level of deposit
insurance coverage for certain funds within MSAs. If enacted, the
proposed 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 proposal
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
proposed rule.
Further, the proposed 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
proposed rule, if enacted, is unlikely to have a significant economic
effect on a substantial number of small entities.
Alternatives Considered
The FDIC is proposing revisions 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 and Need for Rulemaking,'' the FDIC
considers the proposed rule to be a more appropriate alternative. Were
the FDIC to not propose the revisions, 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 proposal and any other federal rule.
The FDIC invites comments on all aspects of the supporting
information provided in this RFA section. In particular, would the
proposal have any significant effects on small entities that the FDIC
has not identified?
C. 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 Office of Management and Budget (OMB) control number. The FDIC
has determined that this proposed rule does not create any new, or
revise any existing, collections of information under section 3504(h)
of the Paperwork Reduction Act (PRA). Consequently, no information
collection request will be submitted to the OMB for review. The FDIC
invites comment on its PRA determination.
D. 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.\88\ 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
[[Page 41785]]
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.\89\
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\88\ 12 U.S.C. 4802(a).
\89\ 12 U.S.C. 4802(b).
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The proposed rule would not impose additional reporting or
disclosure requirements on insured depository institutions, including
small depository institutions, or on the customers of depository
institutions. Accordingly, section 302 of RCDRIA does not apply.
Nevertheless, the requirements of RCDRIA will be considered as part of
the overall rulemaking process, and the FDIC invites comments that will
further inform its consideration of RCDRIA.
E. Treasury and General Government Appropriations Act, 1999--Assessment
of Federal Regulations and Policies on Families
The FDIC has determined that the proposed rule will not affect
family well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, enacted as part of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act of 1999.\90\
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\90\ Public Law 105-277, 112 Stat. 2681 (Oct. 21, 1998).
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F. Plain Language
Section 722 of the Gramm-Leach-Bliley Act \91\ requires the Federal
banking agencies to use plain language in all proposed and final
rulemakings published in the Federal Register after January 1, 2000.
The FDIC invites your comments on how to make this proposal easier to
understand. For example:
---------------------------------------------------------------------------
\91\ Public Law 106-102, 113 Stat. 1338, 1471 (Nov. 12, 1999).
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<bullet> Has the FDIC organized the material to suit your needs? If
not, how could the material be better organized?
<bullet> Are the requirements in the proposed regulation clearly
stated? If not, how could the regulation be stated more clearly?
<bullet> Does the proposed regulation contain language or jargon
that is unclear? If so, which language requires clarification?
<bullet> Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand?
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 Federal Deposit Insurance
Corporation proposes to amend 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 and not otherwise insured as
described in Sec. 330.12.
(b) Calculation of coverage--(1) General calculation. Each
grantor's trust deposits are insured in an amount up to the SMDIA
multiplied by the total number of beneficiaries identified by the
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. For purposes only of determining the
total number of beneficiaries for a trust deposit under paragraph (b)
of this section:
(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 named 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), 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.
[[Page 41786]]
(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).
(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, on July 20, 2021.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2021-15732 Filed 8-2-21; 8:45 am]
BILLING CODE 6714-01-P
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</html>Indexed from Federal Register on August 3, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.