The Federal Deposit Insurance Corporation (FDIC) has issued a proposed rule to implement a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) providing for temporary unlimited deposit insurance for non-interest bearing transaction accounts. The unlimited coverage is similar to the coverage provided to depositors under the FDIC’s Transaction Account Guarantee Program (the TAGP), but there are some important differences.
The FDIC adopted the TAGP in October 2008 as one of its responses to the financial crisis. Under the TAGP, the FDIC insures all funds held at participating institutions in eligible non-interest bearing transaction accounts. A “non-interest bearing transaction account” was defined as a transaction account that does not accrue or receive interest and on which the institution does not reserve the right to require advance notice of an intended withdrawal. However, the FDIC also included low-interest negotiable order of withdrawal (NOW) accounts and lawyers trust (IOLTA) accounts (on which interest was paid) within the program. Institutions were given the option of participating in the TAGP and were charged a separate assessment for the unlimited coverage.
The TAGP was extended twice from its original expiration date of December 31, 2009. Most recently, the TAGP was extended to December 31, 2010, and the FDIC reserved the right to extend the program to December 31, 2011, without further rulemaking. In view of the Dodd-Frank Act provision described below, however, the FDIC’s proposed rule indicates that there will be no further extension of the TAGP.
The Dodd-Frank Act provides for temporary unlimited deposit insurance coverage for non-interest bearing transactions accounts at all insured institutions. The Dodd-Frank Act coverage will take effect when the TAGP ends and will be in effect from January 1, 2011 to December 31, 2012. However, there are some important differences between the TAGP and the Dodd-Frank Act coverage.
First, all insured institutions will have unlimited coverage for non-interest bearing transaction accounts under the Dodd-Frank Act. There is no opt-in or opt-out and no action need be taken by an institution to be covered.
Second, only standard, non-interest-bearing transaction accounts are covered. Low interest NOW and IOLTA accounts are excluded.
Third, there is no separate insurance assessment related to the Dodd-Frank Act unlimited coverage. That cost will be part of the regular deposit insurance assessment.
Among the more important points covered by the FDIC’s proposed rule are the following:
The eligibility of an account for Dodd-Frank Act unlimited coverage is governed by the terms of the account agreement. If an account agreement provides for the payment of interest under any circumstances, it will be excluded.
Changes in an account to add an interest feature (such as when institutions may pay interest on demand deposits starting July 21, 2011, pursuant to Dodd-Frank Act authority) will disqualify the account from unlimited coverage and the changes to that deposit insurance coverage must be disclosed to the customer.
The unlimited coverage for non-interest-bearing transaction accounts is separate from the regular $250,000 deposit insurance coverage. Funds held in a non-interest-bearing transaction account will be excluded for purposes of calculating the regular $250,000 coverage. To use the FDIC’s example, if a customer has a $225,000 certificate of deposit and a non-interest checking account of $300,000, the customer would be fully insured for both accounts. The $225,000 certificate of deposit would fall under the regular coverage and the $300,000 non-interest checking account under the Dodd-Frank Act unlimited coverage.
The proposed rule contains various notice requirements: (i) a prescribed lobby and website posting, (ii) a requirement for current TAGP participants to notify NOW account and IOLTA account depositors of the termination of unlimited coverage as of January 1, 2011, and (iii) a customer notification requirement if an institution takes any action (such as adding an interest feature to a previous non-interest-bearing account) that affects their deposit insurance coverage.
The FDIC is accepting comments on the proposed rule through October 15, 2010 and will then issue a final rule.