Banking and Finance Law Daily FDIC proposes changes to deposit insurance regulations
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Tuesday, July 20, 2021

FDIC proposes changes to deposit insurance regulations

By Charles A. Menke, J.D.

The proposal would amend the FDIC’s regulations governing deposit insurance coverage for deposits held in connection with trusts and for deposits maintained by mortgage servicers that consist of mortgagors’ principal and interest payments.

The Federal Deposit Insurance Corporation has issued a notice of proposed rulemaking (NPR) to amend the agency’s regulations governing deposit insurance coverage. The NPR would: (1) simplify the coverage rules for deposits held in connection with revocable and irrevocable trusts; and (2) provide consistent deposit insurance treatment for all mortgage servicing account deposit balances held to satisfy principal and interest obligations to a lender. Comments on the NPR are due within 60 days of its publication in the Federal Register. A memorandum prepared by the FDIC’s staff recommended that the agency approve and authorize the proposed rulemaking’s publication.

Trust accounts. The proposal would create a "trust accounts" category that would provide for coverage of deposits of both revocable trusts and irrevocable trusts. According to the FDIC, the proposed amendments are intended to: (1) provide depositors and bankers with a rule for trust account coverage that is easy to understand; and (2) to facilitate the prompt payment of deposit insurance in accordance with the Federal Deposit Insurance Act, among other objectives. In addition, "[a]ccomplishing these objectives also would further the FDIC’s mission in other respects," the agency said.

Accordingly, the proposal reduces the number of rules governing coverage for trust accounts as well as establishing a straightforward calculation to determine coverage. The FDIC noted that "[t]he deposit insurance trust rules have evolved over time and can be difficult to apply in some circumstances" and that "[t]he proposed amendments are intended to alleviate some of the confusion that depositors and bankers may experience with respect to insurance coverage and limits."

Mortgage servicers’ accounts. The NPR also would amend the FDIC’s rules governing insurance coverage for deposits maintained at insured depository institutions by mortgage servicers that consist of mortgagors’ principal and interest payments. "The proposed rule is intended to address a servicing arrangement that is not specifically addressed in the current rules," the FDIC said. Because some servicing arrangements allow or require servicers to advance their own funds to the lenders when mortgagors are delinquent in making principal and interest payments, the FDIC is concerned that servicers could commingle these advances in those mortgage servicing accounts (MSAs) where principal and interest payments are collected directly from mortgagors. "The FDIC believes that the factors that motivated the FDIC to establish its current rules for mortgage servicing accounts, described below, argue for treating funds advanced by a mortgage servicer in order to satisfy mortgagors’ principal and interest obligations to the lender as if such funds were collected directly from borrowers," the NPR stated.

The proposed amendments aim to provide consistent deposit insurance treatment for all MSA deposit balances held to satisfy principal and interest obligations to a lender, regardless of whether those funds are paid into the account by borrowers, or paid into the account by another party, such as the servicer, in order to satisfy a periodic obligation to remit principal and interest due to the lender. Therefore, accounts consisting of payments of principal and interest that are maintained by a mortgage servicer in an agency, custodial, or fiduciary capacity, would be insured for the cumulative balance paid into the account in order to satisfy principal and interest obligations to the lender, whether paid directly by the borrower or by another party, up to the limit of the standard maximum deposit insurance amount (SMDIA) per mortgagor. Mortgage servicers’ advances of principal and interest funds on behalf of delinquent borrowers would be insured up to the SMDIA per mortgagor, consistent with the coverage rules for payments of principal and interest collected directly from borrowers. While the FDIC’s current rule does not address whether foreclosure collections represent payments of principal and interest by a mortgagor, the proposed rule provides that foreclosure proceeds used to satisfy a borrower’s principal and interest obligation would be insured up to the limit of the SMDIA per mortgagor.

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