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The Basics of Unlimited Federal Deposit Insurance

On January 1, 2010 the Transaction Account Guaranty Program expired, and the unlimited insurance of non-interest bearing deposit accounts provided in Section 343 of Dodd Frank became effective. It in turn expires, unless extended by Congress, on December 31, 2012. It was originally assumed that this was a provision that Congress would extend from time to time. Now, it seems that Congress is so discombobulated that it cannot agree on anything and whether this unlimited insurance of deposits provision will be extended is problematic. In the meantime, financial institutions need to understand the ins and outs of the program.

Under the program, amounts in noninterest-bearing transaction accounts are fully insured. This applies to all covered accounts regardless of the purpose of the account or the nature of the account owner. To qualify as a noninterest-bearing transaction account, the account must meet three qualifications:

(1) it must not accrue or pay interest;
(2) the account owner must be permitted to make withdrawals and payments or transfers to third parties; and
(3) the depository institution may not reserve the right to require advance notice of an intended withdrawal.

Because of the third requirement, neither NOW accounts nor any type savings account, such as a money market account, qualifies for unlimited deposit insurance even if it is not interest bearing because both NOW accounts and savings accounts must provide that the depository institution retain the right to require seven days advance notice of a withdrawal.

There are two exceptions to the qualification requirements. The first is Interest On Lawyer’s Trust Accounts (IOLTA) where the interest is paid, not to the deposit holder, but to the state bar association or other state organization to fund legal assistance programs. The second is a money market account which does not bear interest to which funds are swept to and/or from a covered noninterest-bearing transaction account. Many institutions use that account combination to reduce reserve requirements.

The payment of a bonus or premium for the opening of an account or otherwise can disqualify an otherwise qualified account. A bonus is not interest provided that it is given for the opening of an account or the addition to an existing account, no more than two are paid during a year and the amount does not exceed $10 for amounts of $5000 or less or $20 for amounts exceeding $5000. Additionally, if there is no required minimum balance to open the account and there is no required period that the account must be open then the bonus or premium given to open the account is not interest. That is a person could come into a financial institution, open an account with $1, obtain the premium and close the account, then the premium is not interest regardless of how much it is. Also, if an institution has relationship accounts whereby a greater rate of interest is paid on an interest-bearing deposit account based on the balance in a noninterest-bearing account, that relationship disqualifies the noninterest-bearing account from unlimited deposit insurance coverage. Although much of these bonus rules are similar to those repealed under Regulation Q, they remain in effect for determining whether or not a specific reward provided in connection with transaction accounts will be considered interest paid on the account.

Because interest may now be paid on transaction accounts, for a transaction account to qualify as non-interest bearing, the account agreement should provide that the account does not bear interest. If that provision should change the institution must provide notice to the account holder. All financial institutions that offer accounts that qualify for unlimited deposit insurance coverage must post a notice, known as the Dodd Frank notice, in their lobbies. The text of the required notice can be found http://www.fdic.gov/deposit/deposits/unlimited/faq.pdf in the answer to frequently asked question number 24.

Additionally, if a member or depositor converts his/her from a qualifying non-interest bearing account to an interest bearing account, the financial institution must provide the customer with a written notice that that the account no longer will be eligible for full deposit insurance coverage as a noninterest-bearing transaction account. No timing, format or content requirements were required for this notice, but institutions are expected to act in a commercially reasonable manner and comply with standard change in terms notice requirements.
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The above article was provided to Andrews Hooper Pavlik PLC (AHP) courtesy of TriComply, the compliance arm of TriNovus. AHP does not guarantee accuracy of the information provided in the article and it should not be construed as professional advice. If you have any questions regarding this article, please contact Randy Morse, CPA, Partner and leader of AHP’s Financial Institution practice. AHP provides a broad range of accounting, auditing, tax, and consulting services to financial institutions throughout the state of Michigan and beyond.

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