Written by Benjamin M. Litchfield, Regulatory Compliance Counsel
Greetings compliance fans! With the January 27, 2016 effective date of NCUA’s IOLTA rule quickly approaching, many of you may be wondering what accounts will receive pass-through share insurance coverage. Some of you may even be wondering how NCUA will determine the insurable amounts owed to members in the unfortunate event that an insured credit union is placed into liquidation. For all this and more, I present this blog to you! (What better way to start a Monday morning than a rousing discussion of share insurance?)
IOLTAs
IOLTAs (or, interest on lawyers trust accounts) are considered member accounts and eligible for pass-through share insurance if the attorney administering the IOLTA is a member of the insured credit union. Share insurance is provided on a pass-through basis for these accounts regardless of whether the client is a member of the credit union. This means, that as long as the attorney is a member of the credit union, he or she may set up an IOLTA and the funds will be insured up to the SMSIA for each client, separately.
Other Similar Escrow Accounts
Escrow accounts that are similar in nature to IOLTAs are also eligible for pass-through share insurance if the escrow agent administering the escrow program is a member of the insured credit union. NCUA defines an “other similar escrow account” to mean:
"…an account where a licensed professional or other individual serving in a fiduciary capacity holds funds for the benefit of a client or principal as part of a transaction or business relationship. Examples of such accounts include, but are not limited to, real estate escrow accounts and prepaid funeral accounts."
12 C.F.R. § 745.14(c)(1)(ii). In the final rule, the NCUA Board noted that the lack of uniformity in language, function, and organizational structure make it difficult to identify by name the escrows eligible for pass-through coverage. Instead, the Board will provide pass-through overage on a case-by-case basis, provided that the escrow account meets the definition in the rule. Like IOLTAs, the membership status of the client is irrelevant to whether the accounts are insured on a pass-through basis.
Prepaid Cards
The rule does not provide pass-through share insurance coverage for general-purpose reloadable prepaid cards. The Board noted that open loop cards, which allow cardholders to use the card at any retail location including withdrawing funds from an ATM, have too many functional and structural dissimilarities to IOLTAs and escrow accounts. For example, open loop programs are typically administered by a deposit broker that serves as drastically different purpose than an attorney representing a client.
Determining Aggregate Share Insurance Coverage
The final rule treats IOLTAs and other similar escrow accounts as “escrow accounts” for purposes of determining the aggregate share insurance coverage provided to each insured person. See, 12 C.F.R. § 745.14(a)(1), (b). As noted in NCUA Legal Opinion Letter 92-0338 (May 5, 1992), escrow accounts are treated as “agent accounts” and insured according to the rules in Section 745.3. This means that when determining the amount of share insurance due to a particular person, NCUA may aggregate the funds held in the same ownership capacity in the same credit union.
For example, assume an attorney deposits funds into an IOLTA account held at ABC FCU. John Member, the attorney’s client, happens to have a single ownership account at ABC FCU as well. Unfortunately, ABC FCU is deemed insolvent and placed into liquidation by NCUA. When determining the amount owed to John Member, NCUA would likely aggregate the funds held on the IOLTA for John Member with the funds held by John Member to determine the amount of share insurance owed.
Same facts but slightly different – the account held by John Member is a joint ownership account with Jane Member, John’s wife. John is going through a nasty divorce and has hired the attorney to handle this matter for him. Since the funds held in ABC FCU are held as a joint account, they are separately insured under Section 745.8. Therefore, NCUA would not likely aggregate the IOLTA with John’s joint account. They would be separately insured.
There are many different combinations of accounts that we could imagine but the result remains the same – in some circumstances, the member will be stuck with the perverse result of having less funds covered by share insurance than he or she would have thought based on the actions of an escrow agent or attorney. This may seem like a draconian result, since the member does not generally have control over where his or her escrow agent or attorney deposits the funds, but this approach is consistent with how FDIC insures IOLTAs under its deposit insurance rules.
Note – What the Rule Does Not Change
Since NCUA finalized the IOLTA rule, we have received questions regarding some commentary in the preamble discussing escrow and prepaid accounts that may receive share insurance coverage under NCUA’s existing rules independent of the IOLTA rule. These types of accounts involve escrow accounts held at a credit union where the owner of the funds is also a member of the credit union. Similarly, these accounts may involve prepaid cards where the cardholder is a member of the credit union.
As a general rule, the status of the escrow agent is irrelevant for NCUSIF insurance purposes. Instead, NCUA looks to the owner of the funds to determine whether the account is insurable. The IOLTA rule merely changes this general rule for a small, discrete subset of accounts that have distinct characteristics. Similarly, prepaid cards held by cardholders who are members of the credit union would generally qualify as share accounts and be insurable regardless of the IOLTA rule since they are funds held in the credit union by a member.
I hope this blog has answered some of the questions you may have had about NCUA’s IOLTA rule and share insurance generally (or provided you with a decent excuse to drink that extra cup of coffee). Have a good week and...
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