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Deposit Insurance Changes for Trusts and Mortgage Servicing Accounts

On January 21, 2022 the FDIC notified insured Institutions of simplification for the calculation of Deposit Insurance for Trust Accounts and Mortgage Servicing Accounts which will be effective April 1, 2024 (so, plenty of time to ease into the change). If you don’t want to read the 62-page regulation, you can always read on, or look at the FDIC’s fact sheet for the changes.

Trust Accounts

There are two distinct categories of trust accounts, revocable and irrevocable. Both categories have their own calculations which became quite complex and generated over 20,000 questions about calculations since the rules were changed 13 years ago.

Under the revised rules, instead of having separate coverage for each category of trust, all trusts (informal revocable, formal revocable and irrevocable) are now combined into one category with $250,000 coverage per grantor per eligible beneficiary* up to five beneficiaries. This gives a potential coverage of $1,250,000 for a single account ($250,000 x 5). This simplifies the calculation and will provide a quicker payout of FDIC insurance payments in the event of a bank failure.

*Eligible beneficiaries include natural persons, as well as charitable organizations and other non-profit entities recognized as such under the Internal Revenue Code. This is the current definition under revocable trusts but is different than the definition for irrevocable trusts. There are other exclusions from this definition found in the Regulation.

Beneficiaries must be named in the deposit account records of the Bank. Specifically:

  • Informal revocable trusts (also known as “totten trusts”). The beneficiaries of an informal revocable trust must be specifically named in the deposit account records of the insured depository institution.
  • Formal revocable trusts. The title of a formal trust account must include terminology sufficient to identify the account as a trust account, such as “family trust” or “living trust,” or must otherwise be identified as a testamentary trust in the account records of the insured depository institution.

The change in category for irrevocable trusts does not impact other potential categories, such as employee benefit plans (330.14), investment company/corporate deposits (330.11) and fiduciary funds held by the Bank as the trustee (330.12).

Mortgage Servicing Accounts

The updates to the coverage of Mortgage Servicing Accounts (MSAs) are specific and may not be an issue at most Institutions. The rules governing coverage for MSAs were originally adopted in 1990 following the transfer of responsibility for insuring deposits of savings associations from the FSLIC to the FDIC. Under the rule, principal and interest funds were generally owned by lenders, but payments of taxes and insurance were insured to the mortgagors or borrowers on a pass-through basis because the borrower owns such funds until tax and insurance bills are paid by the servicer.

The updates are intended to address an aspect of servicing arrangements that were not previously covered by the Mortgage Servicing Account Rule. Specifically, some servicing arrangements may permit or require servicers to advance their own funds to the lenders when mortgagors are delinquent in making principal and interest payments, and servicers might commingle such advances in the MSA with principal and interest payments collected directly from mortgagors. The FDIC believes the factors that motivated current rules for MSAs 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.

So, bottom line, when funds are advanced by servicers to lenders, these funds are now insured equally, up to the $250,000 limit per mortgagor as outlined below:

  • Accounts maintained by a mortgage servicer, in a custodial or other fiduciary capacity, which are comprised of payments of principal and interest, shall be insured for the cumulative balance paid into the account by mortgagors, or in order to satisfy mortgagors’ principal or interest obligations to the lender, up to the limit of the SMDIA per mortgagor.
  • Accounts maintained by a mortgage servicer, in a custodial or other fiduciary capacity, which are comprised of payments by mortgagors of taxes and insurance premiums shall be added together and insured with the ownership interest of each mortgagor in such accounts.

Having trouble navigating the FDIC deposit insurance requirements? TCA can help. Contact us at [email protected] or at (800) 934-7347.

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