February’s Top Regulatory Change

The pace of regulatory change continued as we entered February and there are several alerts and advisories that banks and credit unions should be aware of to remain compliant. To help, each month Quantivate will provide our blog readers with access to the top attorney-generated compliance alert our customers receive.

This month, the top alert made customers aware that the Federal Deposit Insurance Corporation (FDIC) issued its final rule on deposit insurance for trust and mortgage servicing accounts. This compliance change was made final as January ended, but will become effective on April 1, 2022.

Executive Summary

The FDIC amended its regulations governing deposit insurance coverage for trust accounts and mortgage servicing accounts.  The amendments are intended to simplify the regulations and facilitate more timely deposit insurance determinations by:

1. Establishing a “trust accounts” category that governs coverage of deposits of both revocable trusts and irrevocable trusts using a common calculation, and
2. Providing consistent deposit insurance treatment for all mortgage servicing account balances held to satisfy principal and interest obligations to a lender.

Key Issues of Regulatory Action

Deposit Insurance Rules for Trust Accounts

Under current regulations, there are separate sets of rules for deposit insurance coverage for revocable trusts, irrevocable trusts, and irrevocable trusts held by an insured depository institution (“IDI”) as trustee. And each set of rules has its own criteria for coverage and methods by which coverage is calculated.

The Final Rule merges the “revocable” and “irrevocable” trust categories into one category, “trust accounts”, and provides a straightforward calculation to determine coverage.

The rule defines the types of deposits that  will be included in this “trust accounts” category:

1. Informal revocable   trust deposits, such as payable-on-death accounts, in-trust-for accounts, and Totten trust accounts;
2. formal revocable trust deposits, defined as deposits held pursuant to a written revocable trust agreement under which a deposit passes to one or more beneficiaries upon the grantor’s death; and
3. irrevocable trust deposits, meaning deposits held pursuant to an irrevocable trust established by written agreement or by statute.

Under the Final Rule, each grantor’s trust deposits will be insured in an amount up to the standard maximum deposit insurance amount (currently $250,000) multiplied by the number of trust beneficiaries, not to exceed five.

Therefore, coverage for a grantor’s trust deposits at each IDI will be limited to a total of $1,250,000.

Deposits maintained by an IDI in its capacity as trustee of an irrevocable trust will continue to be insured separately pursuant to section 7(i) of the FDI Act and § 330.12 of the deposit insurance regulations.

Deposit Insurance Rules for Mortgage Servicing Accounts

The Final Rule amends the rules governing insurance coverage for deposits maintained at IDIs by mortgage servicers.

The amendments are intended to address an aspect of servicing arrangements that is not covered by the current rule. That is, 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 may commingle those advances in the mortgage servicing account with principal and interest payments.

The current rule provides coverage for principal and interest funds only to the extent “paid into the account by the mortgagors”; it does not provide coverage for funds paid into the account from other sources, such as the servicer’s own operating funds, even if those funds satisfy mortgagors’ principal and interest payments

Under the Final Rule, accounts maintained by a mortgage servicer in an agency, custodial, or fiduciary capacity, for the purpose of payment of a borrower’s principal and interest obligations, will be insured for the cumulative balance paid into the account in order to satisfy principal and interest obligations, whether paid directly by the borrower or by another party, up to the limit of the standard maximum deposit insurance amount per mortgagor.

Under the Final Rule, the funds in a mortgage servicing account attributable to principal and interest payments will also include collections by a servicer, such as foreclosure proceeds, that are used to satisfy the borrower’s principal and interest obligations.

Relevant Links

The full announcement and corresponding letter from the FDIC can be found below.

How to Ensure Compliance

Review Final Rule revisions for purpose of calculating coverage for trust accounts and mortgage servicing accounts.

Navigate Compliance Change Management with Ease

In February, Quantivate Compliance Management Services customers were made aware of 21 compliance alerts and advisories that will impact banks and credit unions soon. In partnership with business law firm Farleigh Wada Witt, Quantivate customers can access integrated regulatory change alerts featuring executive summaries, in-depth documentation, and action plans.

Quantivate’s software and content partners take the headache out of regulatory change management so compliance teams can focus on more important tasks.

As the leader in governance, risk management, and compliance for banks and credit unions, Quantivate provides an integrated approach to compliance management through:

1. A fully configurable platform that adapts to even the most unique compliance processes.
2. Templates, workflows, and configurable notifications/alerts designed for banks and credit unions
3. Data integration with our Enterprise Risk Management, Internal Audit, Policy & Document, and Business Continuity applications to create a comprehensive view of your compliance program.

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