Proposed Rule2023-23481
Simplification of Share 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
October 25, 2023
Issuing agencies
National Credit Union Administration
Abstract
The NCUA Board (Board) is seeking comment on proposed amendments to its regulations governing share insurance coverage. The proposed rule would address the following items: simplify the share insurance regulations by establishing a "trust accounts" category that would provide for coverage of funds of both revocable trusts and irrevocable trusts deposited at federally insured credit unions (FICUs); provide consistent share insurance treatment for all mortgage servicing account balances held to satisfy principal and interest obligations to a lender; and provide more flexibility for the NCUA to consider various records in determining share insurance coverage in liquidations.
Full Text
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<title>Federal Register, Volume 88 Issue 205 (Wednesday, October 25, 2023)</title>
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[Federal Register Volume 88, Number 205 (Wednesday, October 25, 2023)]
[Proposed Rules]
[Pages 73249-73265]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-23481]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 745
[NCUA-2023-0082]
RIN 3133-AF53
Simplification of Share Insurance Rules
AGENCY: National Credit Union Administration (NCUA).
ACTION: Proposed rule.
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SUMMARY: The NCUA Board (Board) is seeking comment on proposed
amendments to its regulations governing share insurance coverage. The
proposed rule would address the following items: simplify the share
insurance regulations by establishing a ``trust accounts'' category
that would provide for coverage of funds of both revocable trusts and
irrevocable trusts deposited at federally insured credit unions
(FICUs); provide consistent share insurance treatment for all mortgage
servicing account balances held to satisfy principal and interest
obligations to a lender; and provide more flexibility for the NCUA to
consider various records in determining share insurance coverage in
liquidations.
DATES: Comments must be received on or before December 26, 2023.
ADDRESSES: You may submit written comments by any of the following
methods (Please send comments by one method only):
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
The docket number for this proposed rule is NCUA-2023-0082. Follow the
instructions for submitting comments.
<bullet> Mail: Address to Melane Conyers-Ausbrooks, Secretary of
the Board, National Credit Union Administration, 1775 Duke Street,
Alexandria, Virginia 22314.
<bullet> Hand Delivery/Courier: Same as mail address.
Public inspection: All public comments are available on the Federal
eRulemaking Portal at https://
[[Page 73250]]
www.regulations.gov as submitted, except when impossible for technical
reasons. Public comments will not be edited to remove any identifying
or contact information. If you are unable to access public comments on
the internet, you may contact the NCUA for alternative access by
calling (703) 518-6540 or emailing <a href="/cdn-cgi/l/email-protection#fab5bdb9b79b9396ba94998f9bd49d958c"><span class="__cf_email__" data-cfemail="e0afa7a3ad81898ca08e839581ce878f96">[email protected]</span></a>.
FOR FURTHER INFORMATION CONTACT: Thomas Zells, Senior Staff Attorney,
Office of General Counsel, at (703) 518-6540 or by mail at National
Credit Union Administration, 1775 Duke Street, Alexandria, Virginia
22314.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. General Background and Legal Authority
A. General Background
B. Legal Authority
II. Simplification of Share Insurance Trust Rules
A. Policy Objectives
B. Background and Need for Rulemaking
1. Evolution of Insurance Coverage of Funds Held in Trust
Accounts
2. Current Rules for Coverage of Funds Held in Trust Accounts
3. Need for Further Rulemaking
C. Description of Proposed Rule
D. Examples Demonstrating Coverage Under Current and Proposed
Rules
E. Request for Comment
III. Amendments to Mortgage Servicing Account Rule
A. Policy Objectives
B. Background and Need for Rulemaking
C. Description of Proposed Rule
D. Request for Comment
IV. Recordkeeping Requirements
A. Policy Objectives
B. Background and Need for Rulemaking
C. Description of Proposed Rule
D. Request for Comment
V. Regulatory Procedures
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Executive Order 13132 on Federalism
D. Assessment of Federal Regulations and Policies on Families
I. General Background and Legal Authority
A. General Background
The NCUA is an independent Federal agency that insures funds
maintained in accounts of members or those otherwise eligible to
maintain insured accounts (member accounts) at FICUs, protects the
members who own credit unions, and charters and regulates Federal
credit unions (FCUs). The NCUA protects the safety and soundness of the
credit union system by identifying, monitoring, and reducing risks to
the National Credit Union Share Insurance Fund (Share Insurance Fund).
Backed by the full faith and credit of the United States, the Share
Insurance Fund provides Federal share insurance to millions of account
holders in all FCUs and the majority of state-chartered credit unions.
Under the Federal Credit Union Act (FCU Act), the NCUA is
responsible for paying share insurance to any member, or to any person
with funds lawfully held in a member account, in the event of a FICU's
failure up to the standard maximum share insurance amount (SMSIA),
which is currently set at $250,000.\1\ The FCU Act states the
determination of the net amount of share insurance paid ``shall be in
accordance with such regulations as the Board may prescribe'' and
requires that, ``in determining the amount payable to any member, there
shall be added together all accounts in the credit union maintained by
that member for that member's own benefit, either in the member's own
name or in the names of others.'' \2\ However, the FCU Act also
specifically authorizes the Board to ``define, with such
classifications and exceptions as it may prescribe, the extent of the
share insurance coverage provided for member accounts, including member
accounts in the name of a minor, in trust, or in joint tenancy.'' \3\
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\1\ 12 U.S.C. 1787(k)(1)(A), (k)(6).
\2\ 12 U.S.C. 1787(k)(1)(B).
\3\ 12 U.S.C. 1787(k)(1)(C).
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The NCUA has implemented these requirements by issuing regulations
recognizing particular categories of accounts, such as single ownership
accounts, joint ownership accounts, revocable trust accounts, and
irrevocable trust accounts.\4\ If an account meets the requirements for
a particular category, the account is insured up to the $250,000 limit
separately from shares held by the member in a different account
category at the same FICU. For example, provided all requirements are
met, shares in the single ownership category will be separately insured
from shares in the joint ownership category held by the same member at
the same FICU.
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\4\ 12 CFR part 745.
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The NCUA's share insurance categories have been defined through
both statute and regulation. Certain categories, such as the accounts
held by government depositors \5\ and certain retirement accounts,
including individual retirement accounts, have been expressly defined
by Congress.\6\ Other categories, such as joint accounts \7\ and
corporate accounts,\8\ have been based on statutory interpretation and
recognized through regulations issued in 12 CFR part 745 pursuant to
the NCUA's rulemaking authority. In addition to defining the insurance
categories, the share insurance regulations in part 745 provide the
criteria used to determine insurance coverage for shares in each
category.
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\5\ See 12 U.S.C. 1787(k)(2).
\6\ See 12 U.S.C. 1787(k)(3).
\7\ 12 CFR 745.8.
\8\ 12 CFR 745.6.
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It is also worth noting that the FCU Act provides a definition of
the term ``member account.'' The NCUA insures ``member accounts'' at
all FICUs.\9\ Importantly, the term ``member account'' is not limited
to those persons enumerated in the credit union's field of membership
who have become members. It also permits certain nonmembers, such as
other nonmember credit unions, nonmember public units and political
subdivisions, and, in the case of low-income designated credit unions,
deposits of nonmembers generally. In other words, the NCUA provides
share insurance coverage to members and those otherwise eligible to
maintain insured accounts at FICUs.
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\9\ 12 U.S.C. 1752(5).
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As discussed in more detail below, the proposed amendments reflect
the Board's aim to: (1) provide FICUs, FICU employees, and those with
member accounts at FICUs, with a rule that is easier to understand; (2)
provide parity with changes adopted by the FDIC in January 2022; and
(3) facilitate the prompt payment of share insurance in accordance with
the FCU Act, among other objectives.
B. Legal Authority
The Board has issued this proposed rule pursuant to its authority
under the FCU Act. Under the FCU Act, the NCUA is the chartering and
supervisory authority for FCUs and the Federal supervisory authority
for FICUs.\10\ The FCU Act grants the NCUA a broad mandate to issue
regulations governing both FCUs and FICUs. Section 120 of the FCU Act
is a general grant of regulatory authority and authorizes the Board to
prescribe rules and regulations for the administration of the FCU
Act.\11\ Section 207 of the FCU Act is a specific grant of authority
over share insurance coverage, conservatorships, and liquidations.\12\
Section 209 of the FCU Act is a plenary grant of regulatory authority
to the NCUA to issue rules and regulations necessary or appropriate to
carry out its role as share insurer for all FICUs.\13\ Accordingly, the
FCU Act grants the Board broad rulemaking
[[Page 73251]]
authority to ensure that the credit union industry and the Share
Insurance Fund remain safe and sound.
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\10\ 12 U.S.C. 1751 et seq.
\11\ 12 U.S.C. 1766(a).
\12\ 12 U.S.C. 1787.
\13\ 12 U.S.C. 1789(a)(11).
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II. Simplification of Share Insurance Trust Rules
A. Policy Objectives
The Board is seeking comment on proposed amendments to its
regulations governing share insurance coverage for funds held in member
accounts at FICUs in connection with trusts.\14\ The proposed
amendments are intended to: (1) provide FICUs, FICU employees, and
those with member accounts at FICUs with a rule for trust account
coverage that is easier to understand; (2) provide parity with changes
adopted by the FDIC in January 2022; \15\ and (3) facilitate the prompt
payment of share insurance in accordance with the FCU Act, among other
objectives. Accomplishing these objectives also would further the
NCUA's mission in other respects, as discussed in greater detail below.
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\14\ 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.
\15\ 87 FR 4455 (Jan. 28, 2022).
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Clarifying Insurance Coverage for Trust Accounts
The share insurance trust rules have evolved over time and can be
difficult to apply in some circumstances. The proposed amendments would
clarify for FICUs, their employees, their accountholders, 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 proposed amendments are intended to alleviate
some of the confusion that FICUs, their employees, and their
accountholders may experience with respect to insurance coverage and
limits.
Under the current regulations, there are distinct and separate sets
of rules applicable to shares of revocable trusts as opposed to
irrevocable trusts. Each set of rules has its own criteria for coverage
and methods by which coverage is calculated. Despite the NCUA's efforts
to simplify the revocable trust rules in 2008, the consistently high
volume of complex inquiries about trust accounts over an extended
period suggests continued confusion about insurance limits.\16\ NCUA
share insurance specialists have answered over 13,000 calls with
questions since the fourth quarter of 2019 alone.\17\ It is estimated
that over 50 percent of these inquiries, which do not include those
received through email or submitted through <a href="http://mycreditunion.gov">mycreditunion.gov</a>, pertain
to share insurance coverage for trust accounts (revocable or
irrevocable). 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 revocable and
irrevocable trust accounts and by establishing a simplified formula for
calculating coverage that would apply to these funds deposited at
FICUs. The NCUA proposes using the calculation the NCUA first adopted
in 2008 for revocable trust accounts with five or fewer beneficiaries.
This formula is straightforward and is already generally familiar to
FICUs and their members.\18\ The current formulas for revocable trust
accounts with more than five beneficiaries and irrevocable trust
accounts would be eliminated.
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\16\ 73 FR 60616 (Oct. 14, 2008).
\17\ The NCUA's Office of Credit Union Resources and Expansion,
which fields most share insurance inquiries, only began tracking
calls received on October 31, 2019. The high volume of trust-related
inquires predates this tracking.
\18\ In 2008, the NCUA adopted an insurance calculation for
revocable trusts that have five or fewer beneficiaries. Under this
rule, 12 CFR 745.4(a), each trust grantor is insured up to $250,000
per beneficiary.
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Parity
Adoption of the proposed changes would also align with changes the
FDIC adopted in January 2022, which are set to take effect on April 1,
2024.\19\ As it stressed in its 2021 final rule addressing the share
insurance coverage of joint ownership accounts, the Board believes it
is important to maintain parity between the nation's two Federal
deposit/share insurance programs, which are backed by the full faith
and credit of the United States.\20\ The Board believes it is important
that members of the public who use trust accounts receive the same
protection whether the accounts are maintained at FICUs or other
federally insured institutions.
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\19\ 87 FR 4455 (Jan. 28, 2022).
\20\ 86 FR 11098 (Feb. 24, 2021).
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Prompt Payment of Share Insurance
The FCU Act requires the NCUA to pay accountholders ``as soon as
possible'' after a FICU liquidation.\21\ However, the insurance
determination and subsequent payment for many trust accounts can be
delayed when NCUA staff must review complex trust agreements and apply
various rules for determining share insurance coverage. The proposed
amendments are intended to facilitate more timely share insurance
determinations for trust accounts by reducing the time needed to review
trust agreements and determine coverage. These amendments should
promote the NCUA's ability to pay insurance proceeds to accountholders
more quickly following the liquidation of a FICU, enabling
accountholders to meet their financial needs and obligations.
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\21\ 12 U.S.C. 1787(d)(1).
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Facilitating Liquidations
The proposed changes will also facilitate the liquidation of failed
FICUs. The NCUA is routinely required to make share insurance
determinations in connection with FICU liquidations. In many of these
instances, however, share insurance coverage for certain trust accounts
is based upon information that is not maintained in the FICU's account
records. As a result, NCUA staff work with accountholders to obtain
trust documentation following a FICU's liquidation to complete share
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, thereby reducing
potential delays in the completion of share insurance determinations
and payments.
B. Background and Need for Rulemaking
1. Evolution of Insurance Coverage of Funds Held in Trust Accounts
The NCUA first adopted regulations governing share insurance
coverage in 1971.\22\ Over the years, share insurance coverage has
evolved to reflect both the NCUA's experience and changes in the credit
union industry. While the regulations addressing irrevocable trusts
have undergone minimal change, the regulations addressing revocable
trusts have seen numerous changes, largely aimed at providing increased
flexibility and simplifying coverage. Of note, in 2004 the NCUA amended
the revocable trust rules, pointing to continued confusion about the
coverage for revocable trust deposits and the need for parity with then
recent FDIC amendments.\23\ Specifically, the NCUA eliminated 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
[[Page 73252]]
contingencies in the trust agreement.\24\ This more closely aligned
coverage for formal revocable trust accounts with payable-on-death
accounts. Importantly, and of relevance to this proposal, defeating
contingency provisions were not eliminated for irrevocable trusts and
remain relevant for calculating share insurance coverage under the
irrevocable trust provisions.\25\ At the same time, the NCUA also
eliminated the requirement to name the beneficiaries of a formal
revocable trust in the FICU's account records.\26\ The NCUA recognized
that a grantor may elect to change the beneficiaries or their interests
at any time before his or her death and that requiring a FICU to
maintain a current record of this information is impractical and
unnecessarily burdensome.
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\22\ 36 FR 2477 (Feb. 5, 1971).
\23\ 69 FR 8798 (Feb. 26, 2004).
\24\ Prior to the changes adopted in 2004, if the interest of a
qualifying beneficiary in an account established under the terms of
a living trust agreement was contingent upon fulfillment of a
specified condition, referred to as a defeating contingency,
separate insurance was not available for that beneficial interest.
Instead, the beneficial interest would be added to any individual
account(s) of the grantor and insured up to the SMSIA, then
$100,000. An example of a defeating contingency is where an account
owner names his son as a beneficiary but specifies in the living
trust document that his son's ability to receive any share of the
trust funds is dependent upon him successfully completing college.
\25\ 12 CFR 745.2(d).
\26\ 69 FR 8798, 8799 (Feb. 26, 2004).
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More recently, the NCUA's experience and adoption of similar
revisions by the FDIC suggested that further changes to the trust rules
were necessary. Specifically, in 2008, the NCUA simplified the rules in
several respects.\27\ 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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\27\ 73 FR 60616 (Oct. 14, 2008).
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A different insurance calculation applied to revocable trusts with
more than five beneficiaries. At that time, the SMSIA 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 SMSIA was increased to $250,000, a
similar adjustment was made from $100,000 to $250,000 for the
calculation of per beneficiary coverage.
2. Current Rules for Coverage of Funds Held in Trust Accounts
The NCUA recognizes two different insurance categories for funds
held in connection with trusts at FICUs: (1) revocable trusts and (2)
irrevocable trusts. The current rules for determining insurance
coverage for shares in each of these categories are described below.
Additionally, share insurance coverage is always limited to FICU
members and those otherwise eligible to maintain insured accounts at
the FICU. The NCUA's longstanding position has been that, for revocable
trust accounts, all grantors (sometimes described as settlors) of the
trust must be members of the FICU or otherwise eligible to maintain an
insured account.\28\ For irrevocable trust accounts, the NCUA has
maintained the position that either all grantors/settlors or all
beneficiaries of the trust must be members of the FICU or otherwise
eligible to maintain an insured account.\29\ As described in greater
detail in section II.E., the NCUA appreciates commenter feedback as to
whether these positions should be revisited.
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\28\ See 12 CFR part 701, app. A. Art. III, sec. 6 (``Shares
issued in a revocable trust--the settlor must be a member of this
credit union in his or her own right.'').
\29\ See 12 CFR part 701, app. A. Art. III, sec. 6 (``Shares
issued in an irrevocable trust--either the settlor or the
beneficiary must be a member of this credit union.'').
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Revocable Trust Accounts
The revocable trust category applies to funds for which the member
has evidenced an intention that the funds shall belong to one or more
beneficiaries upon his/her/their death. This category includes funds
held in connection with formal revocable trusts--that is, revocable
trusts established through a written trust agreement. It also includes
funds that are not subject to a formal trust agreement, where the FICU
makes payment to the beneficiaries identified in the FICU's records
upon the member's death, based on account titling and applicable state
law. The NCUA refers to these types of accounts, including Totten trust
accounts, payable-on-death accounts, and similar accounts, as
``informal revocable trusts.'' Funds associated with formal and
informal revocable trusts are aggregated for the purposes of the share
insurance rules; thus, funds that will pass from the same grantor to
beneficiaries are aggregated and insured up to the SMSIA, currently
$250,000, per beneficiary, regardless of whether the transfer would be
accomplished through a written revocable trust or an informal revocable
trust.\30\
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\30\ 12 CFR 745.4(a).
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Under the current revocable trust rules, beneficiaries with
insurable interests are limited to natural persons, charitable
organizations, and non-profit entities recognized as such under the
Internal Revenue Code of 1986.\31\ 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 the grantor maintains at the same
FICU.\32\
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\31\ 12 CFR 745.4(c).
\32\ 12 CFR 745.4(d).
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Certain requirements also must be satisfied for an account to be
insured in the revocable trust category. The required intention that
the funds shall belong to the beneficiaries upon the grantor's death
must be manifested in the ``title'' of the account or elsewhere in the
account records of the credit union using commonly accepted terms such
as ``in trust for,'' ``as trustee for,'' ``payable-on-death to,'' or
any acronym for these terms.\33\ For the purposes of this requirement,
a FICU's electronic account records are included. For example, a FICU's
electronic account records could identify the account as a revocable
trust account through coding or a similar mechanism. In addition, the
beneficiaries of informal trusts (i.e., payable-on-death accounts) must
be named in the FICU's account records.\34\ The requirement to name
beneficiaries in the FICU's account records does not apply to formal
revocable trusts; the NCUA generally obtains information on
beneficiaries of such trusts from accountholders following a FICU's
liquidation. Therefore, if a member's account funds exceed $250,000 at
a liquidated FICU, this will result in a hold being placed on the
member's funds in excess of the SMSIA until the NCUA can review the
ownership documents and trust agreement to verify the beneficiary rules
are satisfied, thereby delaying insurance determinations and full
insurance payments to some insured accountholders.
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\33\ 12 CFR 745.4(b).
\34\ Id.
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The calculation of share insurance coverage for revocable trust
accounts depends upon the number of unique beneficiaries named by a
member accountholder.\35\ If five or fewer
[[Page 73253]]
beneficiaries have been named, the member accountholder is insured in
an amount up to the total number of named beneficiaries multiplied by
the SMSIA, and the specific allocation of interests among the
beneficiaries is not considered.\36\ If more than five beneficiaries
have been named, the member accountholder is insured up to the greater
of: (1) five times the SMSIA; or (2) the total of the interests of each
beneficiary, with each such interest limited to the SMSIA.\37\ For the
purposes of this calculation, a life estate interest is valued at the
SMSIA.\38\
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\35\ For a FICU to open a revocable trust account, all grantors/
settlors of the trust must be members of the FICU or otherwise
eligible to maintain an insured account. See 12 CFR part 701, app.
A. Art. III, sec. 6 (``Shares issued in a revocable trust--the
settlor must be a member of this credit union in his or her own
right.'').
\36\ 12 CFR 745.4(a).
\37\ 12 CFR 745.4(e).
\38\ 12 CFR 745.4(g). For example, if a revocable trust provides
a life estate for the member accountholder's spouse and remainder
interests for six other beneficiaries, the spouse's life estate
interest would be valued at the lesser of $250,000 or the amount
held in the trust for the purposes of the share insurance
calculation.
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Where a revocable trust account is jointly owned, the interests of
each account owner are separately insured up to the SMSIA per
beneficiary.\39\ However, if the co-owners are the only beneficiaries
of the trust, the account is instead insured under the NCUA's joint
account rule.\40\
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\39\ 12 CFR 745.4(f)(1).
\40\ 12 CFR 745.4(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 share
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 account may continue to be insured under the
revocable trust rules.\41\ 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.\42\
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\41\ 12 CFR 745.4(h).
\42\ 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 Accounts
Accounts maintaining funds held by an irrevocable trust that has
been established either by written agreement or by statute are insured
in the irrevocable trust share insurance category. Calculating coverage
in this category requires a determination of whether beneficiaries'
interests in the trust are contingent or non-contingent.\43\ Non-
contingent interests are interests that may be determined without
evaluation of any contingencies, except for those covered by the
present worth and life expectancy tables and the rules for their use
set forth in the Internal Revenue Service (IRS) Federal Estate Tax
Regulations.\44\ Funds held for non-contingent trust interests are
insured up to the SMSIA for each such beneficiary.\45\ Funds held for
contingent trust interests are aggregated and insured up to the SMSIA
in total.\46\
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\43\ 12 CFR 745.2(d) and 745.9-1.
\44\ 12 CFR 745.2(d)(1). 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.
\45\ 12 CFR 745.9-1(b).
\46\ 12 CFR 745.2(d)(2).
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The irrevocable trust rules do not apply to funds held for a
grantor's retained interest in an irrevocable trust.\47\ Such funds are
aggregated with the grantor's other single ownership funds for the
purposes of applying the share insurance limit.
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\47\ See 12 CFR 745.2(d)(4) (The term ``trust interest'' does
not include any interest retained by the settlor.).
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3. Need for Further Rulemaking
As noted, the rules governing share insurance coverage for trust
accounts have been simplified on several occasions. However, these
rules are still frequently misunderstood and can present some
implementation challenges. The trust rules can require overly detailed,
time-consuming, and resource-intensive reviews of trust documentation
to obtain the information necessary to calculate share insurance
coverage. This information is often not found in a FICU's records and
must be obtained from members after a FICU's liquidation. Revision of
the share insurance coverage rules for trust accounts along the lines
proposed would reduce the amount of information that must be provided
for trust accounts, as well as the complexity of the NCUA's review.
This revision should enable the NCUA to complete share insurance
determinations more rapidly if a FICU with a large number of trust
accounts is liquidated. Delays in the payment of share insurance can be
consequential for accountholders and the proposal would help to
mitigate those delays.
Several factors contribute to the challenges of making insurance
determinations for trust accounts. First, there are two different sets
of rules governing share insurance coverage for trust accounts.
Understanding the coverage for a particular account requires a
threshold inquiry to determine which set of rules to apply--the
revocable trust rules or the irrevocable trust rules. 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 the revocable trust 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 accountholders and FICUs.
Second, even after determining which set of rules applies to a
particular account, 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 NCUA 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 NCUA share 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 accountholders, and extend the time needed to complete a
share insurance determination and insurance payment.
Third, the complexity and variety of account holders' trust
arrangements adds to the difficulty of determining share insurance
coverage. For example, trust interests are sometimes defined through
numerous conditions and formulas, and a careful analysis of these
provisions may be necessary to calculate share 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
[[Page 73254]]
difficulty of applying the trust rules. The NCUA believes
simplification of the share insurance rules presents an opportunity to
more closely align the coverage provided for different types of trust
funds. 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 SMSIA rather than up to the SMSIA per
beneficiary, while contingencies are not considered and therefore do
not limit coverage in the same manner for revocable trusts.
Finally, as previously noted, adoption of the proposed changes
would align with changes the FDIC adopted in January 2022, which are
set to take effect on April 1, 2024. The Board believes it is important
to maintain parity between the nation's two Federal deposit/share
insurance programs. It is imperative that members of the public who use
trust accounts for the transfer of ownership of assets better
understand the rules governing such accounts and receive the same
protection, whether the accounts are maintained at FICUs or other
federally insured institutions.
C. Description of Proposed Rule
The NCUA is proposing to amend the rules governing share insurance
coverage for funds held in trust accounts at FICUs. Generally, the
proposed amendments would: (1) merge the revocable and irrevocable
trust categories into one category; (2) apply a simpler, common
calculation method to determine insurance coverage for funds held by
revocable and irrevocable trusts; and (3) eliminate certain
requirements found in the current rules for revocable and irrevocable
trusts.
Merger of Revocable and Irrevocable Trust Categories
As discussed above, the NCUA historically has insured revocable
trust funds and irrevocable trust funds held at FICUs under two
separate insurance categories. The NCUA's experience has been that this
bifurcation often confuses FICUs and their members, as it requires a
threshold inquiry to determine which set of rules to apply to a trust
account. Moreover, all trust funds deposited at a FICU must be
categorized before the aggregation of trust funds deposited within each
category can be completed. The NCUA believes funds held in connection
with revocable and irrevocable trusts are sufficiently similar, for the
purposes of share insurance coverage, to warrant the merger of these
two categories into one category. Under the NCUA's current rules, share
insurance coverage is provided because the trustee maintains the funds
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 share insurance
coverage to the substance--rather than the legal form--of the trust
arrangement. This underlying principle of the share 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.\48\
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\48\ For example, the NCUA currently aggregates funds in
payable-on-death accounts and funds of written revocable trusts for
the purposes of share 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 NCUA instead
insures the trust's funds as joint funds, reflecting the
arrangement's substance rather than its legal form.
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FICU members may have a variety of reasons for selecting a
particular legal arrangement, but that decision should not
significantly affect share insurance coverage. Importantly, the
proposed merger of the revocable trust and irrevocable trust categories
into one category for share insurance purposes would not affect the
application or operation of state trust law; this would only affect the
determination of share insurance coverage for these types of trust
funds in the event of a FICU's liquidation.
Accordingly, the NCUA is proposing to amend Sec. 745.4 of its
regulations, which currently applies only to revocable trust accounts,
to establish a new ``trust accounts'' category that would include both
revocable and irrevocable trust funds deposited at a FICU. The proposed
rule defines the funds that would be included in this category as
follows: (1) informal revocable trust funds, such as payable-on-death
accounts, in-trust-for accounts, and Totten trust accounts; (2) formal
revocable trust funds, defined to mean funds held pursuant to a written
revocable trust agreement under which funds pass to one or more
beneficiaries upon the grantor's death; and (3) irrevocable trust
funds, meaning funds held pursuant to an irrevocable trust established
by written agreement or by statute.
In addition, the merger of the revocable trust and irrevocable
trust categories eliminates the need for Sec. Sec. 745.4(h) through
(i) of the current revocable trust rules, which provide that the
revocable trust rules may continue to apply to an account where a
formal revocable trust becomes irrevocable due to the death of one or
more of the trust's grantors. These provisions were intended to benefit
accountholders, who sometimes were unaware that a trust owner's death
could trigger a significant decrease in insurance coverage as a
revocable trust becomes irrevocable.
However, in the NCUA'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.\49\ As a result, an accountholder
could know a trust was irrevocable but not know which share insurance
rules to apply. The proposed rule would insure funds of formal and
informal revocable trusts and irrevocable trusts according to a common
set of rules, eliminating the need for these provisions (Sec. Sec.
745.4(h) through (i)) and simplifying coverage for accountholders.
Accordingly, the death of a formal revocable trust owner would not
result in a decrease in share insurance coverage for the trust.
Coverage for irrevocable and formal revocable trusts would fall under
the same category and share insurance coverage would remain the same,
even after the expiration of the six-month grace period following the
death of an account owner.\50\
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\49\ As noted above, if a revocable trust becomes irrevocable
due to the death of the grantor, the account continues to be insured
under the revocable trust rules. 12 CFR 745.4(h).
\50\ The death of an account owner can affect share 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 NCUA insures a deceased owner's accounts
as if he/she/they were still alive for a period of 6 months after
his/her/their death. 12 CFR 745.2(e).
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Informal revocable trust accounts would also be insured under this
same trust account category but are highly unlikely to result in the
creation of an irrevocable trust account upon an owner or co-owner's
death. As is the case under the existing share insurance regulations,
when a co-owner of an informal revocable trust account dies, share
insurance coverage for the deceased owner's interest in the account
will cease after the expiration of the 6-month grace period allowed for
the death of share account owners. After the expiration of the 6-month
grace period, share insurance coverage will be calculated as if the
deceased co-owner did not exist and the deceased co-owner's name did
not remain on the account. This treatment of the account will be based
upon the fact that all funds in the account will be owned by
[[Page 73255]]
one person (i.e., the surviving co-owner).
Calculation of Coverage
The NCUA is proposing to use one streamlined calculation to
determine the amount of share insurance coverage for funds of both
revocable and irrevocable trusts. This method is already used by the
NCUA 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 FICUs and their members. The proposed rule would provide
that a grantor's trust funds are insured in an amount up to the SMSIA
(currently $250,000) multiplied by the number of trust beneficiaries,
not to exceed five beneficiaries. The NCUA would presume that, for
share 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
NCUA's current treatment of revocable trusts with five or fewer
beneficiaries. This would, in effect, limit coverage for a grantor's
trust funds at each FICU to a total of $1,250,000; in other words,
maximum coverage would be equivalent to $250,000 per beneficiary for up
to five beneficiaries. In determining share insurance coverage, the
NCUA would continue to consider only beneficiaries who are expected to
receive the funds held by the trust in a member account at the FICU;
the NCUA would not consider beneficiaries who are expected to receive
only non-deposit assets of the trust.
The NCUA is proposing to calculate coverage in this manner, in
part, based on its experience with the revocable trust rules after the
modifications to these rules in 2008.\51\ The NCUA has found that the
share insurance calculation method for revocable trusts with five or
fewer beneficiaries has been the most straightforward and is easy for
FICUs 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
SMSIA).\52\ In addition to being simpler, this calculation has proven
beneficial in liquidations, as it leads to more prompt share insurance
determinations and quicker access to insured funds for accountholders.
Accordingly, the NCUA proposes to calculate share insurance coverage
for trust accounts based on the simpler calculation currently used for
revocable trusts with five or fewer beneficiaries.
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\51\ 73 FR 60616 (Oct. 14, 2008).
\52\ For example, two co-grantors that designate five
beneficiaries are insured for up to $2,500,000 (2 times 5 times
$250,000).
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The streamlined calculation that would be used to determine
coverage for revocable trust funds and irrevocable trust funds includes
a limit on the total amount of share insurance coverage for all of an
accountholder's funds in the trust category at the same FICU. The
proposed rule would provide coverage for trust funds at each FICU 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 SMSIA or 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-FICU limit is more straightforward and balances the objectives of
simplifying the trust rules, promoting timely payment of share
insurance, facilitating liquidations, ensuring consistency with the FCU
Act, and limiting risk to the Share Insurance Fund. The proposed rule
would also provide parity between the NCUA's regulations and those
adopted by the FDIC in early 2022.\53\
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\53\ 87 FR 4455 (Jan. 28, 2022).
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The NCUA anticipates that limiting coverage to $1,250,000 per
grantor, per FICU, for trust funds would not have a substantial effect
on accountholders, as most trust accounts in past FICU liquidations
have had balances well below this level. The NCUA lacks sufficient
information, however, to project the exact effects of the proposed
limit on current accountholders and requests that commenters provide
information that might be helpful in this regard.
Under the proposed rule, to determine the level of insurance
coverage that would apply to funds held in trust accounts,
accountholders would still need to identify the grantors and the
eligible beneficiaries of the trust. The level of coverage that applies
to trust accounts 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 funds are insured up to a
total of $1,250,000 per grantor, or an amount up to the SMSIA
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 funds held
in revocable and irrevocable trust accounts for the purposes of
applying the share insurance limit. Under the current rules, funds held
in informal revocable trust accounts and formal revocable trust
accounts are aggregated for this purpose.\54\ The proposed rule would
aggregate a grantor's informal and formal revocable trust accounts, as
well as irrevocable trust accounts. For example, all informal revocable
trusts, formal revocable trusts, and irrevocable trusts held for the
same grantor at the same FICU would be aggregated, and the grantor's
insurance limit would be determined by how many eligible and unique
beneficiaries were identified among all of their trust accounts.\55\
The share insurance coverage provided in the ``trust accounts''
category would remain separate from the coverage provided for other
funds held in a different right and capacity at the same FICU. However,
some accountholders who currently maintain both revocable trust and
irrevocable trust deposits at the same FICU may have funds in excess of
the insurance limit if these separate categories are combined. The NCUA
lacks data on accountholders' trust arrangements that would allow it to
estimate the number of accountholders who might be affected in this
manner. The agency does not believe this would impact a substantial
number of accountholders but requests
[[Page 73256]]
that commenters provide information that might be helpful in this
regard.
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\54\ See 12 CFR 745.4(a) (``All funds that an owner holds in
both living trust accounts and payable-on-death accounts, at the
same NCUA-insured credit union and naming the same beneficiaries,
are aggregated for insurance purposes and insured to the applicable
coverage limits. . . .'').
\55\ 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
share insurance available would be $1.25 million (1 grantor times
the SMSIA times the number of unique beneficiaries, limited to 5).
However, if the same three people were the beneficiaries of both
accounts, the maximum share insurance available would be $750,000 (1
grantor times the SMSIA times the 3 unique beneficiaries).
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Eligible Beneficiaries
Currently, the revocable trust rules provide that eligible
beneficiaries include natural persons, charitable organizations, and
non-profit entities recognized as such under the Internal Revenue Code
of 1986,\56\ while the irrevocable trust rules do not establish
criteria for beneficiaries. The NCUA believes that a single definition
should be used to determine whether an entity is an eligible
beneficiary for all trust funds and proposes to use the current
revocable trust rule's definition. The NCUA believes that this single
definition will result in a change in share insurance coverage only in
very rare cases.
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\56\ 12 CFR 754.4(c).
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The proposed rule also would exclude from the calculation of share
insurance coverage beneficiaries who 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 share insurance calculation.\57\ 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 the event of a
beneficiary's death would not increase share insurance coverage.
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\57\ See NCUA Your Insured Funds at 42 (``The beneficiaries are
the people or entities entitled to an interest in the trust.
Contingent or alternative trust beneficiaries are not considered to
have an interest in the trust funds and other assets as long as the
primary or initial beneficiaries are still living, with the
exception of revocable living trusts with a life estate
interest.'').
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Finally, the proposed rule would codify an interpretation of the
trust rules where an informal revocable trust designates the
depositor's formal trust as its beneficiary. A formal trust generally
does not meet the definition of an eligible beneficiary for share
insurance purposes, but the NCUA 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.\58\
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\58\ See 74 FR 55747, 55748 (Oct. 29, 2009).
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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 FICU for the purposes of the
share insurance calculation. These instances include a grantor's
retained interest in an irrevocable trust \59\ and interests of
beneficiaries who do not satisfy the definition of ``beneficiary.''
\60\ This adds complexity to the share insurance calculation, as a
detailed review of a trust agreement may be required to value such
interests so they may be aggregated with a grantor's other funds. To
implement the streamlined calculation for funds held in trust accounts,
the NCUA is proposing to eliminate these provisions. Under the proposed
rule, the grantor and other beneficiaries who do not satisfy the
definition of ``eligible beneficiary'' would not be included for the
purposes of the share insurance calculation.\61\ 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 share insurance coverage.
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\59\ See 12 CFR 745.2(d)(4).
\60\ 12 CFR 745.4(d).
\61\ In the unlikely event a trust does not name any eligible
beneficiaries, the NCUA would treat the funds in the trust account
as funds held in a single ownership account. Such funds would be
aggregated with any other single ownership funds that the grantor
maintains at the same FICU and insured up to the SMSIA 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 share 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 the 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 the
purposes of the share insurance calculation. This clarification is
consistent with the NCUA's current interpretations and would not
represent a substantive change in share insurance coverage.
Naming of Beneficiaries in Share 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 account records of the
FICU.\62\ The NCUA does not believe this requirement imposes a burden
on FICUs, as informal revocable trusts by their nature require the FICU
to be able to identify the individuals or entities to which funds would
be paid upon the accountholder's death.
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\62\ See 12 CFR 745.4(b).
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Presumption of Ownership
The proposed rule also would state that, unless otherwise specified
in a FICU's account records, funds held in an account for a trust
established by multiple grantors are presumed to be owned in equal
shares. This presumption is consistent with the current revocable trust
rules.\63\
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\63\ See 12 CFR 745.4(f).
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Funds Covered Under Other Rules
The proposed rule would exclude from coverage under Sec. 745.4
certain trust funds that are covered by other sections of the share
insurance regulations. For example, employee benefit plan accounts are
insured pursuant to current Sec. 745.9-2. In addition, if the co-
owners of an informal or formal revocable trust are the trust's sole
beneficiaries, funds held in connection with the trust would be treated
as a joint ownership account under Sec. 745.8. In each of these cases,
the NCUA is not proposing to change the current rule.
Removal of the Appendix to Part 745
Finally, the NCUA is proposing to remove the appendix to part 745,
which provides examples of share insurance coverage. The NCUA plans to
update its Your Insured Funds brochure to reflect any amendments made
to part 745.\64\ The Board believes an updated brochure and other
updated resources available on <a href="http://mycreditunion.gov">mycreditunion.gov</a> will provide a more
consumer friendly and easier-to-update avenue for providing examples of
share insurance coverage.
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\64\ <a href="https://mycreditunion.gov/sites/default/static-files/insured-funds-brochure.pdf">https://mycreditunion.gov/sites/default/static-files/insured-funds-brochure.pdf</a>.
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The NCUA is also proposing to remove references to the appendix in
the heading of part 745 and Sec. 745.0, Sec. 745.2, and Sec. 745.13.
This would mean that provision of the appendix would no longer satisfy
the notification to members/shareholders requirement in Sec. 745.13.
Instead, FICUs would have to make available either the rules in part
745 of the NCUA's regulations or the Your Insured Funds brochure.
Conforming Changes
The proposed simplification of the calculation for insurance
coverage for funds held in trust accounts also would permit the
elimination of current Sec. 745.2(d) of the regulations addressing
[[Page 73257]]
the valuation of trust interests. As discussed further below, the
description of non-contingent interests in Sec. Sec. 745.2(d)(1) and
(2) would no longer be relevant to trust accounts under the proposed
rule. Additionally, Sec. 745.2(d)(3) regarding the deemed pro rata
contribution of settlors to a trust would be replaced by proposed Sec.
745.4(b)(4), which would presume equal allocation. Section 745.2(d)(4)
defining a ``trust interest'' would be replaced by the proposed
definition of ``irrevocable trust'' in Sec. 745.4(a)(3).
Regarding non-contingent interests, the NCUA is also proposing to
move the current description of a non-contingent interest in Sec.
745.2(d)(1) to the definitions section of part 745. The new definition
of ``non-contingent interest'' in Sec. 745.1 would remain
substantively the same but would now only be relevant to evaluating
participants' non-contingent interests in shares of an employee benefit
plan under Sec. 745.9-2(a). The proposed definition of ``non-
contingent interest'' would add language to include any present worth
or life expectancy tables that the IRS may adopt that are similar to
those set forth in Sec. 20.2031-7 of the Federal Estate Tax
Regulations (26 CFR 20.2031-7). This is not intended to be a
substantive change but is instead intended to provide flexibility
should the IRS make any changes. As part of this change, the NCUA is
also proposing to make non-substantive changes to Sec. 745.1 to
improve readability. Additionally, the NCUA proposes to remove the
reference to Sec. 745.2 in current Sec. 745.9-2.
Finally, the NCUA is proposing to redesignate current Sec. 745.9-2
as Sec. 745.9 to reflect the elimination of current Sec. 745.9-1
governing irrevocable trust accounts. The reference in Sec. 745.9-2(a)
to Sec. 745.2 would also be removed to reflect the elimination of the
description of a non-contingent interest in current Sec. 745.2(d) and
adoption of a definition of ``non-contingent interest'' in proposed
Sec. 745.1.
D. Examples Demonstrating Coverage Under Current and Proposed Rules
To assist commenters, the NCUA is providing examples demonstrating
how the proposed rule would apply to determine share insurance coverage
for funds held in trust accounts. These examples are not intended to be
all-inclusive; they merely address a few possible scenarios involving
funds held in trust accounts. The NCUA expects that for most
accountholders, 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, all examples involve members or those otherwise
entitled to maintain insured accounts at the FICU. It is worth
reiterating that share insurance coverage is only available to FICU
members and those otherwise entitled to maintain insured accounts. For
revocable trust accounts, all grantors must be members of the FICU or
otherwise eligible to maintain an insured account to receive share
insurance coverage. In the case of an irrevocable trust account, all
grantors or all beneficiaries must be members of the FICU or otherwise
eligible to maintain an insured account to receive share insurance
coverage. Where a revocable trust account has become irrevocable
because of the death of a grantor, the deceased grantor's membership
will continue to satisfy their membership requirement as long as the
trust account continues to be maintained at the FICU.
Example 1: Payable-on-Death Account
Member A establishes a payable-on-death account at a FICU. Member A
has designated three beneficiaries for this account--B, C, and D--who
will receive the funds upon member A's death and listed all three on a
form provided to the FICU. The only other share account that member A
maintains at the same FICU is a share draft account with no designated
beneficiaries. What is the maximum amount of share insurance coverage
for member A's shares at the FICU?
Under the proposed rule, member 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 account would be
equal to the SMSIA (currently $250,000) multiplied by the number of
grantors (in this case one because member A established the account)
multiplied by the number of beneficiaries, up to a maximum of five
(here three, the number of beneficiaries is less than five). Member A's
payable-on-death account would be insured for up to ($250,000) times
(1) times (3) = $750,000.
The coverage for member A's payable-on-death account is separate
from the coverage provided for member A's share draft account, which
would be insured in the single ownership category because she has not
named any beneficiaries for that account. The single ownership share
draft account would be insured up to the SMSIA, $250,000. Member A's
total insurance coverage for shares at the FICU would be $750,000 +
$250,000 = $1,000,000. Notably, this level of coverage is the same as
that provided by the current share insurance rules.
Example 2: Formal Revocable Trust and Informal Revocable Trust
Members E and F jointly establish a payable-on-death account at a
FICU. Members E and F have designated three beneficiaries for this
account--G, H, and I--who will receive the funds after both members E
and F are deceased. They list these beneficiaries on a form provided to
the FICU. Members E and F also jointly establish an account titled in
the name of the ``E and F Living Trust'' at the same FICU. Members 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,
members E and F, do not maintain any other share accounts at this same
FICU. What is the maximum amount of share insurance coverage for
members E and F's shares?
Under the proposed rule, members E and F's payable-on-death account
represents an informal revocable trust and would be insured in the
trust accounts category. Members E and F's living trust account
constitutes a formal revocable trust and would also be insured in the
trust accounts category. To the extent the funds in these accounts
would pass from the same grantor (E or F) to beneficiaries (G, H, and
I), the funds would be aggregated for the purpose of applying the share
insurance limit. As under the current rules, it would be irrelevant
that the grantors' shares are divided between the payable-on-death
account and the living trust account.
The maximum coverage for members E and F's shares would be equal to
the SMSIA ($250,000) multiplied by the number of grantors (two, because
members E and F are the grantors with respect to both accounts)
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 accounts would be:
($250,000) times (2) times (3) = $1,500,000. This level of coverage is
the same as that provided by the current share insurance rules.
Example 3: Two-Owner Trust and a One-Owner Trust
Members J and K jointly establish a payable-on-death account at a
FICU. Members J and K have designated three beneficiaries for this
account--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 FICU.
At the same FICU, member
[[Page 73258]]
J establishes a payable-on-death account and designates member K as the
beneficiary upon J's death. What is the maximum amount of coverage for
members J and K's shares?
Under the proposed rule, both accounts would be insured under the
trust account category. To the extent these shares would pass from the
same grantor (J or K) to beneficiaries (such as L, M, and N), they
would be aggregated for the purpose of applying the share insurance
limit. For example, member K identified three beneficiaries (L, M, and
N), and therefore, member K's insurance limit is $750,000 (or 1 times 3
times SMSIA). Member 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, member J's situation differs from member K's because J has a
second trust account, but the insurance calculation remains the same.
Specifically, member J has two trust accounts and identified four
unique beneficiaries (L, M, N, and K); therefore, member J's insurance
limit is $1,000,000 (or 1 times 4 times SMSIA). Member J would remain
fully insured as long as J's trust shares--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 share insurance rules.
Example 4: Revocable and Irrevocable Trusts
Member O establishes a share account at a FICU titled the ``O
Living Trust.'' Member O is the grantor of this living trust, a formal
revocable trust that includes three beneficiaries--P, Q, and R. The
grantor, member O, also establishes an irrevocable trust for the
benefit of the same three beneficiaries. The trustee of the irrevocable
trust maintains a share account at the same FICU as the living trust
account, titled in the name of the irrevocable trust. Neither member O
nor the trustee maintains other share accounts at the same FICU. What
is the insurance coverage for these accounts?
Under the proposed rule, the living trust account is a formal
revocable trust and would be insured in the trust accounts category.
The account containing the funds from the irrevocable trust account
would also be insured in the trust accounts category. To the extent
these shares would pass from the same grantor (member O) to
beneficiaries (P, Q, or R), they would be aggregated for the purposes
of applying the share insurance limit. It would be irrelevant that the
shares are divided between the living trust account and the irrevocable
trust account. The maximum coverage for these shares would be equal to
the SMSIA ($250,000) multiplied by the number of grantors (one, because
member O is the grantor with respect to both accounts) 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 shares in the trust accounts would be: ($250,000)
times (1) times (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 accounts, depending on the structure of
the trust agreement. Under the current rules, member O would be insured
for up to $750,000 for revocable trust shares and separately insured
for up to $750,000 for irrevocable trust shares (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 expected. It is often the case
that irrevocable trust accounts are only insured 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 member O would be insured up to $1,000,000;
$750,000 for the revocable trust and $250,000 for the irrevocable
trust. In the NCUA's view, one of the key benefits of the proposed rule
versus the current rule would be greater clarity and predictability in
share insurance coverage because whether contingencies exist would no
longer be a factor that could affect share insurance.
Example 5: Many Beneficiaries Named
Member S establishes a share account at a FICU 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, member S, does not
maintain any other shares at the same FICU. What is the coverage for
this account?
Under the proposed rule, the living trust is a formal revocable
trust and would be insured in the trust accounts category. The maximum
coverage for this account would be equal to the SMSIA ($250,000)
multiplied by the number of grantors (one, because member 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 account would be: ($250,000) times (1) times (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 account is
insured up to the greater of the following: (1) five times the SMSIA;
or (2) the total of the interests of each beneficiary, with each such
interest limited to the SMSIA. Determining coverage requires review of
the trust agreement to ascertain each beneficiary's interest. Each such
insurable interest is limited to the SMSIA, and the total of all these
interests is compared with $1,250,000 (five times the SMSIA). 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.\65\ In the NCUA's view, one of the key benefits of the
proposed rule versus the current rule would be greater clarity and
predictability in share 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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\65\ For example, if all the beneficiaries' interests were
equal, coverage would be: $250,000 times (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
SMSIA 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. Request for Comment
The NCUA 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 share insurance rules
make insurance coverage for trust accounts easier to understand for
FICUs and the public?
<bullet> The NCUA believes that accountholders generally would have
the information necessary to readily calculate share insurance coverage
for their trust accounts under the proposed rule, allowing them to
better understand
[[Page 73259]]
insurance coverage for their trust accounts. Are there instances where
an accountholder would not likely have the necessary information?
<bullet> Are there any other types of trusts not described in this
proposal whose funds maintained in FICU accounts would be affected by
the proposed rule if adopted? What types of trusts are those, and how
would they be impacted?
<bullet> While the NCUA has substantial experience regarding trust
arrangements, the NCUA does not possess sufficiently detailed
information on accountholders' existing trust arrangements to allow the
NCUA to project the proposed rule's effects on current accountholders.
Are there any other sources of empirical information the NCUA should
consider that may be helpful in understanding the effects of the
proposed rule? The NCUA also encourages commenters to provide such
information, if possible.
<bullet> Grandfathering of the share insurance rules would result
in significantly greater complexity for the period during which two
sets of rules could apply to accounts--especially in conducting
liquidations. Therefore, the NCUA is not inclined to consider allowing
grandfathering but prefers to rely on a delayed implementation date to
allow stakeholders to make necessary adjustments because of the new
rules. However, the NCUA recognizes there are instances, such as trusts
holding share certificates or other account relationships, which may
not be easily restructured without adverse consequences to the
accountholder. 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 FICU
for an accountholder's funds held in trust accounts?
<bullet> Are the examples provided clear and understandable? Are
there other common trust scenarios that would benefit from an example
being provided?
<bullet> Historically, the NCUA has maintained the position that
the membership requirement for a revocable trust account is satisfied
when all grantors (sometimes described as settlors) of the trust are
members of the FICU or otherwise eligible to maintain an insured
account. For an irrevocable trust account, the NCUA has said that the
membership requirement is satisfied if either all the grantors/settlors
or all the beneficiaries of the trust are members of the FICU or
otherwise eligible to maintain an insured account. Are there
alternatives the NCUA should consider for fulfilling the membership
requirement for share insurance coverage of revocable and irrevocable
trust accounts? Should informal revocable trust accounts that are
established with a right of survivorship be treated akin to joint
accounts with member and nonmember co-owners who own the account with a
right of survivorship? \66\ Should a trustee who deposits funds at a
FICU pursuant to a revocable or irrevocable trust they administer be
considered to be maintaining a member account, providing share
insurance coverage to eligible beneficiaries?
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\66\ See 12 CFR 745.8(e) (``A nonmember may become a joint owner
with a member on a joint account with right of survivorship. The
nonmember's interest in such accounts will be insured in the same
manner as the member joint-owner's interest.'').
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<bullet> Are there any other amendments to the share insurance
rules applicable to trusts that the NCUA should consider?
III. Amendments to Mortgage Servicing Account Rule
A. Policy Objectives
The NCUA's regulations governing share insurance coverage include
specific rules on accounts maintained at FICUs by mortgage
servicers.\67\ These rules are intended to be easy to understand and
apply in determining the amount of share insurance coverage for a
mortgage servicer's account. The NCUA generally strives to maintain
parity with FDIC's regulations in furtherance of this aim.
---------------------------------------------------------------------------
\67\ 12 CFR 745.3(a)(3).
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The NCUA is proposing an amendment to its rules governing insurance
coverage for accounts maintained at FICUs by mortgage servicers that
consist of mortgagors' principal and interest payments. The proposed
rule would mirror a change made by the FDIC in early 2022,\68\
scheduled to become effective in April 2024, intended to address a
servicing arrangement that is not 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 mortgage servicing account (MSA)
with principal and interest payments collected directly from
mortgagors. The FDIC reasoned that the factors that motivated the FDIC
to establish its current rules for mortgage servicing accounts, which
the NCUA also adopted and are further described below, weigh in favor
of 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. The FDIC also noted that
it seeks to avoid uncertainty concerning the extent of deposit
insurance coverage for such accounts. The NCUA concurs with the
importance of avoiding uncertainty regarding the extent of insurance
coverage and believes that an important aspect of avoiding uncertainty
is maintaining parity between the share insurance and deposit insurance
regimes.
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\68\ 87 FR 4455 (Jan. 28, 2022).
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B. Background and Need for Rulemaking
The NCUA's rules governing coverage for MSAs were last amended in
2008 and corresponded to changes made by the FDIC. More specifically,
in 2008 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 insured depository institution's (IDI's)
failure.\69\ 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 MSA, up to the standard maximum
deposit insurance amount (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. The NCUA
agreed that this treatment of principal and interest payments provided
greater and fairer coverage for credit union members and decided to
take the same approach in its share insurance rules.\70\
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\69\ See 73 FR 61658, 61658-59 (Oct. 17, 2008).
\70\ 73 FR 62856, 62857 (Oct. 22, 2008).
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Importantly, the 2008 amendments to the rules for MSAs 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, in its recent rulemaking
the FDIC identified that this
[[Page 73260]]
is required of mortgage servicers in some instances. For example, the
FDIC noted that some IDIs identified challenges to implementing certain
recordkeeping requirements with respect to MSA deposit balances because
of the way in which servicer advances are administered and
accounted.\71\
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\71\ The FDIC noted that, to fulfill their contractual
obligations with investors, covered IDIs maintain mortgage principal
and interest balances at a pool level and remittances, advances,
advance reimbursements, and excess funds applications that affect
pool-level balances are not allocated back to individual borrowers.
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The NCUA's and the FDIC's rules currently in effect provide
coverage for principal and interest funds only to the extent ``paid
into the account by the mortgagors''; they do 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 an MSA consisting of principal
and interest payments directly from the borrower, which are insured up
to the SMSIA/SMDIA for each borrower. Instead, the advances are
aggregated and insured to the servicer as corporate funds for a total
of $250,000. In adopting changes to its rule in early 2022, the FDIC
expressed concern 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 their policy objective. The
NCUA shares these concerns and believes it is important that parity is
maintained between the insurance regimes.
C. Description of Proposed Rule
The NCUA is proposing to amend the rules governing coverage for
funds in MSAs to provide parity with the FDIC's regulation and provide
consistent share insurance treatment for all MSA 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) 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 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 SMSIA per mortgagor. Mortgage servicers'
advances of principal and interest funds on behalf of delinquent
borrowers would therefore be insured up to the SMSIA per mortgagor,
consistent with the coverage rules for payments of principal and
interest collected directly from borrowers.
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 SMSIA per
mortgagor.
The proposed rule would make no change to the share insurance
coverage provided for MSAs 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 funds therein
are held 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 funds would continue to be insured based on the
ownership interest of each mortgagor in the account and aggregated with
other funds maintained by the mortgagor at the same FICU in the same
capacity and right.
D. Request for Comment
The NCUA 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 MSAs 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 NCUA should consider in the share insurance
calculation, consistent with its policy objectives?
<bullet> Would share insurance coverage of servicer principal and
interest advances help to promote financial stability in the financial
system? If the NCUA does not amend the rule as proposed, how would
mortgage servicers react if their FICU, or the credit union industry as
a whole, appears stressed? How would funding arrangements or deposit
relationships change?
<bullet> Are there any alternatives to the proposed rule that would
better achieve the NCUA's policy objectives in connection with this
rulemaking? Are there any other amendments to the share insurance rules
applicable to MSAs that the NCUA should consider?
<bullet> If the NCUA opts to issue a final rule adopting the
proposed change is there any reason to delay its effective date, as is
being contemplated for the proposed changes to trust accounts? Or
should the NCUA make the change effective as soon as possible?
IV. Recordkeeping Requirements
A. Policy Objectives
The NCUA's regulations governing share insurance coverage include
general principles applicable in determining insurance of accounts.\72\
Among these general principles are provisions addressing
recordkeeping.\73\ The NCUA intends for these provisions to clearly
articulate the records the agency will look to in order to evaluate
insurance coverage. As discussed in more detail below, over time it has
become apparent that the recordkeeping provisions do not clearly
address all situations and may be especially unclear as to accounts
maintained by an agent, custodian, fiduciary, or other party on behalf
of a member or beneficial owner eligible to maintain an insured account
at a FICU. To better address these situations, the NCUA proposes to
amend the recordkeeping requirements as discussed below.
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\72\ 12 CFR 745.2.
\73\ 12 CFR 745.2(c).
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B. Background and Need for Rulemaking
Section 745.2(c) of the NCUA's regulations addresses general
recordkeeping requirements. Other recordkeeping requirements applicable
to specific account types are addressed as needed in the relevant
sections of part 745. Current Sec. 745.2(c)(1) provides that, as a
general matter, the account records of the FICU shall be conclusive as
to the existence of any relationship pursuant to which the funds in the
account are deposited and on which a claim for insurance coverage is
founded. Examples would be trustee, agent, custodian, or executor. No
claim for insurance based on such a relationship will be recognized in
the absence of such disclosure.
Section 745.2(c)(2) provides that, if the account records of a FICU
disclose
[[Page 73261]]
the existence of a relationship which may provide a basis for
additional insurance, as required under Sec. 745.2(c)(1), the details
of the relationship and the interest of other parties in the account
must be ascertainable either from the records of the FICU or the
records of the member maintained in good faith and in the regular
course of business. It is this provision that has raised questions
regarding accounts maintained by an agent, fiduciary, or similar party.
Specifically, the NCUA has received several questions regarding whether
records maintained by an agent, fiduciary, or similar third party on
behalf of the member or beneficial owner eligible to maintain an
insured account would qualify as the ``records of the member.'' Due to
the frequency with which these agent or fiduciary arrangements will
involve a party other than the FICU or member maintaining records on
the FICU's or member's behalf, the NCUA is proposing to add language
explicitly clarifying that such records, when maintained in good faith
and in the regular course of business, can be looked to when evaluating
the details of the relationship and the interest of other parties in
the account at the FICU.
C. Description of Proposed Rule
Section 745.3(a)(2) of the NCUA's regulations provides that when an
account is held by an agent or nominee, funds owned by a principal and
deposited in one or more accounts in the name or names of agents or
nominees shall be added to any individual account of the principal and
insured up to the SMSIA in the aggregate. The NCUA will also generally
look to the principal or beneficial owner for satisfying the membership
requirement or other eligibility to maintain an insured account at the
FICU. As such, records maintained by an agent or nominee on behalf of
the member principal or beneficial owner may not clearly be considered
``records of the member'' for the purpose of ascertaining their
interests in the account under current Sec. 745.2(c)(2).
The NCUA's Office of General Counsel has previously issued a legal
opinion stating that where an agent or custodian ``has an agreement
with the beneficial owner/member to maintain custody of the beneficial
owner/member's records, [the] NCUA would consider those records to be
`records of the member' within the meaning of 12 CFR 745(c)(2).'' \74\
However, the NCUA acknowledges that it would be beneficial for the
regulation to more clearly address this situation to allow the details
of the relationship and the interests of other parties in the account
to be ascertainable either from the account records of the FICU or from
records maintained, in good faith and in the regular course of
business, by the member or by some person or entity that has undertaken
to maintain such records for the member. Such a change would provide
much greater clarity, particularly in the event of multi-tiered
fiduciary relationships, and would more closely compare to language
previously adopted by the FDIC.\75\ Importantly, the NCUA retains
discretion to determine when records are maintained on behalf of a
member, in good faith and in the regular course of business.
Ultimately, the NCUA must be able to establish ownership interests in
the account by following the chain of records maintained by parties at
each level of the relationship from the account records maintained at
the FICU.
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\74\ NCUA Legal Op. 97-0909 (Feb. 6, 1998), available at <a href="https://www.ncua.gov/regulation-supervision/legal-opinions/1997/pass-through-insurance">https://www.ncua.gov/regulation-supervision/legal-opinions/1997/pass-through-insurance</a>.
\75\ 12 CFR 330.5(b)(2).
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Additionally, Sec. 745.2(c)(3) of the current regulations provides
that the account records of a FICU in connection with a trust account
shall disclose the name of both the settlor (grantor) and the trustee
of the trust and shall contain an account signature card executed by
the trustee. This requirement goes beyond the recordkeeping
requirements of Sec. 745.2(c)(1) through (2) and poses an unnecessary
burden on FICUs and their members. Further, the FDIC previously
eliminated a similar requirement.\76\ To eliminate unnecessary
recordkeeping complexity and provide parity with FDIC, the NCUA is
proposing to eliminate current Sec. 745.2(c)(3).
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\76\ 51 FR 21137 (June 11, 1986).
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Section 745.2(c)(4) states that the interests of the co-owners of a
joint account shall be deemed equal, unless otherwise stated on the
insured credit union's records in the case of a tenancy in common. The
NCUA is not proposing any substantive amendments to this provision but
is proposing to move it to Sec. 745.2(c)(3) given the proposed
elimination of the current requirement in that section.
Finally, Sec. 745.14(a)(2) notes that interest on lawyers' trust
accounts (IOLTAs) and other similar escrow accounts are subject to the
recordkeeping requirements of Sec. 745.2(c)(1) and (2). In doing so,
Sec. 745.14(a)(2) provides an example of how the details of the
relationship between the attorney or escrow agent and their clients and
principals must be ascertainable from the records of the FICU or from
records maintained, in good faith and in the regular course of
business, by the member attorney or member escrow agent administering
the account. The NCUA proposes to amend this description to conform to
the change to Sec. 745.2(c)(2) to explicitly state that the records
detailing the relationship and the interest of other parties in the
account must be maintained, in good faith and in the regular course of
business, by (1) the FICU or (2) the member attorney or member escrow
agent, or a person or entity acting on their behalf.
D. Request for Comment
The NCUA 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 recordkeeping
requirements in part 745 provide adequate clarity for FICUs, members,
and other relevant third parties as to the records the NCUA will look
to in evaluating the details of account relationships and the interests
of other parties in accounts maintained at FICUs?
<bullet> Are there any alternatives to the proposed rule that would
better achieve the NCUA's policy objectives in connection with this
rulemaking?
<bullet> Are there any other amendments to the recordkeeping
requirements applicable to the share insurance rules that the NCUA
should consider? For example, should the NCUA consider adopting a
definition of ``account records'' similar to the definition the FDIC
has provided for ``deposit account records'' in its regulations
governing deposit insurance coverage? \77\ Or, similarly, should the
NCUA adopt specific provisions addressing multi-tiered fiduciary
relationships like the FDIC has done? \78\
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\77\ See 12 CFR 330.1 (``Deposit account records means account
ledgers, signature cards, certificates of deposit, passbooks,
corporate resolutions authorizing accounts in the possession of the
insured depository institution and other books and records of the
insured depository institution, including records maintained by
computer, which relate to the insured depository institution's
deposit taking function, but does not mean account statements,
deposit slips, items deposited or cancelled checks.'').
\78\ See 12 CFR 330.5(b)(3).
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<bullet> Relatedly, the FDIC has adopted regulations to facilitate
prompt payment of FDIC-insured deposits when large IDIs fail.\79\ The
FDIC's recordkeeping for timely deposit insurance determination
regulations require each IDI that has two million or more deposit
accounts to (1)
[[Page 73262]]
configure its information technology system to be capable of
calculating the insured and uninsured amount in each deposit account by
ownership right and capacity, which would be used by the FDIC to make
deposit insurance determinations in the event of the institution's
failure, and (2) maintain complete and accurate information needed by
the FDIC to determine deposit insurance coverage with respect to each
deposit account, except as otherwise provided. These requirements are
intended to facilitate the FDIC's prompt payment of deposit insurance
after the failure of covered IDIs. By law, the FDIC must pay deposit
insurance ``as soon as possible'' after an IDI fails while also
resolving the IDI in the manner least costly to the Deposit Insurance
Fund.\80\ Similarly, the FCU Act requires the NCUA to pay
accountholders ``as soon as possible'' after a FICU liquidation.\81\
Should the NCUA consider adopting similar requirements for FICUs? If
so, would a lower threshold, such as 500,000 or 1 million member
accounts, be more appropriate?
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\79\ See 12 CFR part 370.
\80\ 12 U.S.C. 1821(f)(1); 12 U.S.C. 1823(c)(4).
\81\ 12 U.S.C. 1787(d)(1).
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<bullet> If the NCUA opts to issue a final rule adopting the
proposed change, is there any reason to delay its effective date, as
contemplated for the proposed changes to trust accounts? Or should the
NCUA make the change effective as soon as permitted by law?
V. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally 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 a proposed rule on small
entities. A regulatory flexibility analysis is not required, however,
if the agency certifies that the rule will not have a significant
economic impact on a substantial number of small entities (defined for
the purposes of the RFA to include credit unions with assets less than
$100 million) \82\ and publishes its certification and a short,
explanatory statement in the Federal Register together with the rule.
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\82\ See 80 FR 57512 (Sept. 24, 2015).
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The NCUA fully considered the potential economic impact of the
proposed changes during the development of the proposed rule. As noted
in the preamble, the proposed rule would simplify the NCUA's current
share insurance regulations covering various types of trust accounts.
It would also provide more flexibility on the coverage of MSAs.
Finally, it would explicitly provide for additional flexibility in what
records the NCUA can look to when determining the details of account
relationships and various parties' interests in the accounts.
In short, the NCUA believes the principal impact of the proposed
rule will be to streamline its administrative procedures for insurance
payouts on trust accounts when FICUs fail. While the proposed rule
would require FICUs and their members to be familiar with the new trust
rules and the coverage limits imposed on trust accounts, the NCUA
believes this will not impose any new significant burden on FICUs, may
ease some existing requirements, and should reduce the complexity of
questions FICUs receive from their members on share insurance coverage.
Additionally, FICUs and their members are familiar with the proposed
formula as it is already applied to revocable trust accounts with five
or fewer beneficiaries. The formula is also simpler to understand and
implement than the previous rules governing revocable trust accounts
with six or more beneficiaries and irrevocable trusts. The proposed
changes to the rule governing coverage of MSAs and the changes to the
recordkeeping requirements should only provide greater flexibility for
coverage of these accounts and should not cause any new burden on FICUs
or their members. Accordingly, the NCUA certifies that it would not
have a significant economic impact on a substantial number of small
FICUs.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency by rule creates a new paperwork burden on regulated
entities or modifies an existing burden.\83\ For the purposes of the
PRA, a paperwork burden may take the form of a reporting, disclosure,
or recordkeeping requirement, each referred to as an information
collection. The NCUA may not conduct or sponsor, and the respondent is
not required to respond to, an information collection unless it
displays a currently valid Office of Management and Budget (OMB)
control number.
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\83\ 44 U.S.C. 3507(d).
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The proposed rule does not contain information collection
requirements that require approval by OMB under the PRA. The proposed
rule will not create new or modify any existing paperwork burdens.
Rather, the proposed rule will simplify the share insurance regulations
by merging the revocable and irrevocable trust account categories into
one trust account category and applying a simpler, common calculation
method to determine insurance coverage for funds held in revocable and
irrevocable trust accounts. The proposed rule will also provide
consistent share insurance treatment for all MSA 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) to satisfy a
periodic obligation to remit principal and interest due to the lender.
Finally, the proposed rule will also explicitly allow the NCUA, when
making share insurance determinations, to look to records held in the
normal course of business that are maintained by parties other than a
FICU and its members on their behalf. As such, no PRA submissions to
OMB will be made with respect to this proposed rule. The NCUA invites
comments on its PRA determination.
C. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. The
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the principles of the executive order to
adhere to fundamental federalism principles. This proposed rule would
only impact the NCUA's regulations related to share insurance coverage;
it would not affect state law related to trust accounts. The proposed
rule would also not alter the NCUA's relationship or division of
responsibilities with state regulatory agencies or bodies because the
proposed rule would affect the NCUA's Federal share insurance
determinations exclusively. This proposal would not have a substantial
direct effect on the states, on the connection between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. The NCUA has
determined that this proposal does not constitute a policy that has
federalism implications for the purposes of the executive order.
D. Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this proposed rule will not affect
family well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999, Public Law 105-277, 112
Stat. 2681
[[Page 73263]]
(1998). Under this statute, if the agency determines the proposed
regulation may negatively affect family well-being, then the agency
must provide an adequate rationale for its implementation.
The NCUA has determined that the implementation of this proposed
rule would not negatively affect family well-being, but rather would
strengthen it. The NCUA believes that any effect would be limited
because the change may not affect many accounts, and members or others
maintaining those accounts would have time and notice to modify the
accounts before the NCUA adopts and implements any final rule on this
subject. Overall, the NCUA believes that the proposed rule would not
negatively affect family well-being despite this possible effect but
welcomes public comment on this issue. If the NCUA ultimately finds
that the rule would have a negative effect as the statute describes, it
believes the benefits that the preamble describes in simplifying
coverage and potentially reducing costs for the NCUA and for FICUs
would support implementing the rule.
E. Providing Accountability Through Transparency Act of 2023
The Providing Accountability Through Transparency Act of 2023 (5
U.S.C. 553(b)(4)) (Act) requires that a notice of proposed rulemaking
include the internet address of a summary of not more than 100 words in
length of a proposed rule, in plain language, that shall be posted on
the internet website under section 206(d) of the E-Government Act of
2002 (44 U.S.C. 3501 note) (commonly known as <a href="http://regulations.gov">regulations.gov</a>).
In summary, the proposed rule would simplify the share insurance
regulations by establishing a ``trust accounts'' category that would
provide for coverage of funds of both revocable trusts and irrevocable
trusts deposited at FICUs, provide consistent share insurance treatment
for all mortgage servicing account balances held to satisfy principal
and interest obligations to a lender, and provide more flexibility for
the NCUA to consider various records in determining share insurance
coverage in liquidations.
The proposal and the required summary can be found at <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
List of Subjects in 12 CFR Part 745
Credit, Credit Unions, Share Insurance.
By the National Credit Union Administration Board on October 19,
2023.
Melane Conyers-Ausbrooks,
Secretary of the Board.
For the reasons discussed in the preamble, the Board proposes to
amend 12 CFR part 745 as follows:
PART 745--SHARE INSURANCE COVERAGE
0
1. The authority citation for part 745 continues to read as follows:
Authority: 12 U.S.C. 1752(5), 1757, 1765, 1766, 1781, 1782,
1787, 1789; title V, Pub. L. 109-351;120 Stat. 1966.
0
2. The heading for part 745 is revised to read as set forth above.
Sec. 745.0 [Amended]
0
3. Amend Sec. 745.0 by removing the words ``and appendix''.
0
4. Revise Sec. 745.1 to read as follows:
Sec. 745.1 Definitions.
For the purposes of this part:
Account or accounts mean share, share certificate, or share draft
accounts (or their equivalent under state law, as determined by the
Board in the case of insured state-chartered credit unions) of a member
(which includes other credit unions, public units, and nonmembers where
permitted under the Act) in a credit union of a type approved by the
Board which evidences money or its equivalent received or held by a
credit union in the usual course of business and for which it has given
or is obligated to give credit to the account of the member.
Member or members mean those persons enumerated in the credit
union's field of membership who have been elected to membership in
accordance with the Act or state law in the case of state-chartered
credit unions. It also includes those nonmembers permitted under the
Act to maintain accounts in an insured credit union, including
nonmember credit unions and nonmember public units and political
subdivisions.
Non-contingent interest means an interest capable of determination
without evaluation of contingencies except for those covered by the
present worth tables and rules of calculation for their use set forth
in Sec. 20.2031-7 of the Federal Estate Tax Regulations (26 CFR
20.2031-7) or any similar present worth or life expectancy tables which
may be adopted by the Internal Revenue Service.
Political subdivision includes any subdivision of a public unit, as
defined in paragraph (c) of this section, or any principal department
of such public unit,
(1) The creation of which subdivision or department has been
expressly authorized by state statute;
(2) To which some functions of government have been delegated by
state statute; and
(3) To which funds have been allocated by statute or ordinance for
its exclusive use and control. It also includes drainage, irrigation,
navigation improvement, levee, sanitary, school or power districts and
bridge or port authorities, and other special districts created by
state statute or compacts between the states. Excluded from the term
are subordinate or nonautonomous divisions, agencies, or boards within
principal departments.
Public unit means the United States, any state of the United
States, the District of Columbia, the Commonwealth of Puerto Rico, the
Panama Canal Zone, any territory or possession of the United States,
any county, municipality, or political subdivision thereof, or any
Indian tribe as defined in section 3(c) of the Indian Financing Act of
1974.
Standard maximum share insurance amount referred to as the
``SMSIA'' hereafter, means $250,000 adjusted pursuant to subparagraph
(F) of section 11(a)(1) of the Federal Deposit Insurance Act (12 U.S.C.
1821(a)(1)(F)).
0
5. Amend Sec. 745.2 by:
0
a. Revising paragraph (a);
0
b. Revising paragraph (c)(2);
0
c. Removing paragraph (c)(3);
0
d. Redesignating paragraph (c)(4) as paragraph (c)(3);
0
e. Removing paragraph (d); and
0
f. Redesignating paragraphs (e) and (f) as paragraphs (d) and (e).
The revisions read as follows:
Sec. 745.2 General principles applicable in determining insurance of
accounts.
(a) General. This part provides for determination by the Board of
the amount of members' insured accounts. The rules for determining the
insurance coverage of accounts maintained by members in the same or
different rights and capacities in the same insured credit union are
set forth in the following provisions of this part. While the
provisions of this part govern in determining share insurance coverage,
to the extent local law enters into a share insurance determination,
the local law of the jurisdiction in which the insured credit union's
principal office is located will control over the local law of other
jurisdictions where the insured credit union has offices or service
facilities.
* * * * *
(c) * * *
(2) If the account records of an insured credit union disclose the
[[Page 73264]]
existence of a relationship which may provide a basis for additional
insurance, the details of the relationship and the interest of other
parties in the account must be ascertainable either from the records of
the credit union or the records of the member, maintained in good faith
and in the regular course of business by the member or by some person
or entity that has undertaken to maintain such records for the member.
* * * * *
0
6. Amend Sec. 745.3 by revising paragraph (a)(3) to read as follows:
Sec. 745.3 Single ownership accounts.
(a) * * *
(3) 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 SMSIA 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)(2)
of this section for the ownership interest of each mortgagor in such
accounts.
* * * * *
0
7. Revise Sec. 745.4 to read as follows:
Sec. 745.4 Trust accounts.
(a) Scope and definitions. This section governs coverage for funds
held in connection with informal revocable trusts, formal revocable
trusts, and irrevocable trusts. For the purposes of this section:
(1) Informal revocable trust means a trust under which deposited
funds pass directly to one or more beneficiaries upon the owner'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 deposited funds pass to one or more
beneficiaries upon the grantor's death.
(3) Irrevocable trust means an irrevocable trust established by
statute or a written trust agreement, except as described in paragraph
(e) of this section.
(b) Calculation of coverage--(1) General calculation. Deposited
trust funds are insured in an amount up to the SMSIA multiplied by the
total number of beneficiaries identified by each grantor, up to a
maximum of five beneficiaries.
(2) Aggregation for purposes of insurance limit. Deposited trust
funds that pass from the same grantor to beneficiaries are aggregated
for the purposes of determining coverage under this section, regardless
of whether those funds are held in connection with an informal
revocable trust, formal revocable trust, or irrevocable trust.
(3) Separate insurance coverage. The share insurance coverage
provided under this section is separate from coverage provided for
other funds at the same federally insured credit union.
(4) Equal allocation presumed. Unless otherwise specified in the
account records of the federally insured credit union, deposited funds
held in connection with a trust established by multiple grantors are
presumed to have been owned or funded by the grantors in equal shares.
(c) Number of beneficiaries. The total number of beneficiaries for
trust funds deposited under paragraph (b) of this section will be
determined as follows:
(1) Eligible beneficiaries. Subject to paragraph (c)(2) of this
section, beneficiaries include natural persons, as well as charitable
organizations and other non-profit entities recognized as such under
the Internal Revenue Code of 1986, as amended.
(2) Ineligible beneficiaries. Beneficiaries do not include:
(i) The grantor of a trust; or
(ii) A person or entity that would only obtain an interest in the
deposited funds 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) (``future trusts''), the future trust(s)
are not treated as beneficiaries of the trust; rather, the future
trust(s) are viewed as mechanisms for distributing trust funds, and the
beneficiaries are the natural persons or organizations that shall
receive the trust funds through the future trusts.
(4) Informal trust account payable to member's formal trust. If an
informal revocable trust designates the account owner's formal trust as
its beneficiary, the informal revocable trust account will be treated
as if titled in the name of the formal trust.
(d) Account records-- (1) Informal revocable trusts. The
beneficiaries of an informal revocable trust must be specifically named
in the account records of the federally insured credit union.
(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 federally insured credit union. If eligible beneficiaries of
such formal revocable trust are specifically named in the account
records of the federally insured credit union, the NCUA shall presume
the continued validity of the named beneficiaries' interest in the
trust.
(e) Deposited funds 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, deposited funds held in connection with the trust
are treated as joint ownership funds under Sec. 745.8.
(2) Employee benefit plan deposits. Deposited funds of employee
benefit plans, even if held in connection with a trust, are treated as
employee benefit plan funds under Sec. 745.9.
Sec. 745.9-1 [Removed]
0
8. Remove Sec. 745.9-1.
Sec. 745.9-2 [Redesignated as Sec. 745.9 and Amended]
0
9. Redesignate Sec. 745.9-2 as Sec. 745.9 and remove the words ``, in
accordance with Sec. 745.2 of this part'' in newly redesignated
paragraph (a).
Sec. 745.13 [Amended]
0
10. Amend Sec. 745.13 by removing the words ``the appendix''.
0
11. Amend Sec. 745.14 by revising paragraph (a)(2) to read as follows:
Sec. 745.14 Interest on lawyers trust accounts and other similar
escrow accounts.
(a) * * *
(2) Pass-through coverage will only be available if the
recordkeeping requirements of Sec. 745.2(c)(1) of this part and the
relationship disclosure requirements of Sec. 745.2(c)(2) of this part
are satisfied. In the event those requirements are satisfied, funds
attributable to each client and principal will be insured on a pass-
through basis in whatever right and capacity the client or principal
owns the funds. For example, an IOLTA or other similar escrow account
must be titled as such, and the underlying account records of the
insured credit union must sufficiently indicate the existence of the
relationship on which a claim for insurance is founded. The details of
the relationship between the attorney or escrow agent and their clients
and principals must be ascertainable from
[[Page 73265]]
the records of the insured credit union or from records maintained, in
good faith and in the regular course of business, by the attorney or
the escrow agent administering the account, or by some person or entity
that has undertaken to maintain such records for the attorney or escrow
agent. The NCUA will determine, in its sole discretion, the sufficiency
of these records for an IOLTA or other similar escrow account.
* * * * *
Appendix to Part 745 [Removed]
0
12. Remove Appendix to Part 745.
[FR Doc. 2023-23481 Filed 10-24-23; 8:45 am]
BILLING CODE 7535-01-P
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</html>Indexed from Federal Register on October 25, 2023.
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.