FDIC Simplifies Deposit Insurance for Trust Accounts
Despite the FDIC’s past efforts to simplify the trust rules, the FDIC continues to answer more than 10,000 trust account insurance questions each year. In a further attempt to simplify deposit insurance for trust accounts, the FDIC recently again amended the revocable trust deposit insurance regulations found at 12 CFR 330.10 and removed the irrevocable trust deposit insurance regulations found at 12 CFR 330.13.
Although previously separate categories, the final rule combines revocable and irrevocable trusts into one new “trust account” deposit insurance category. This category includes the following types of trusts: (1) informal revocable trust deposits, such as payable-on-death (POD) accounts, in-trust-for accounts, and Totten trust accounts; (2) formal revocable trust deposits where there is a written trust agreement (where funds pass to one or more beneficiaries upon the grantor’s death), (3) irrevocable trust deposits, where an irrevocable trust is established either by a written trust agreement or by statute. The final rule provides that a trust’s deposits will be insured in an amount up to the standard maximum deposit insurance amount (referred to in the regulation as “SMDIA,”) of $250,000. Because varying trust account deposits would be considered to be part of the same category for deposit insurance purposes, they would be aggregated when applying the deposit insurance limit.
Under the final rule, the method used to calculate deposit insurance will be the SMDIA multiplied by the number of trust beneficiaries, up to a total of five beneficiaries. This effectively limits coverage for each trust account to a total of $1,250,000 ($250,000 x five beneficiaries). If this method sounds familiar, it is because this method is currently used to calculate coverage for revocable trusts. The FDIC felt that this aspect of the current rules is generally well-understood and retaining this method of calculation seemed preferable to creating a new method. Eligible beneficiaries under the final rule include natural persons, charitable organizations and non-profit entities. A word of note, however: this rule doesn’t go into effect until April 1, 2024 in order to give banks time to implement changes and train employees.
In many ways this final rule is applying the rules that currently apply to revocable trusts to irrevocable trusts. The current rules for revocable trusts apply to the various types of revocable trusts discussed above, calculate insurance as described above, and define eligible beneficiaries as described above as part of the final rule.
The current rules for irrevocable trusts are a bit more complex and are undergoing wholesale changes. Although there are no limits on “eligible beneficiaries” as there are for revocable trusts, calculating coverage for irrevocable trust deposits currently requires a determination of whether beneficiaries’ interests are contingent or non-contingent. Non-contingent interests are interests that may be determined without evaluation of contingencies, except for those covered by the present worth and life expectancy tables in the IRS Regulations. Funds held for non-contingent trust interests are insured up to the SMDIA for each beneficiary. Funds held for contingent trust interests are aggregated and insured up to the SMDIA in total. This distinction will be going away when the final rule goes into effect.
The final rule does not change the rules for deposits held by an insured depository institution as trustee of an irrevocable trust. These remain to be governed Section 7(i) of the Federal Deposit Insurance Act, which is found in the federal regulations at 12 CFR 330.12.
Frequent HMDA Reporting Questions
Just after the New Year thing start to heat up for HMDA reporting, and here are a few popular topics related to HMDA reporting that the team at Compliance Alliance has been hearing about:
- What if more than one institution is involved? Only one institution reports the action taken, and if more than one institution is involved, the one who makes the credit decision is the one who reports the application or origination, regardless of in which institution’s name the loan closes. If the file was closed prior to a credit decision being made, then the institution who was reviewing the application in expectation of making a credit decision is the one who reports it.
- What do I report for the application date? An institution may choose to report either the date the application was received, or the date listed on the application. The commentary states that institutions should generally try to be consistent in which date is selected.
- Is a loan secured by a mixed-use property HMDA reportable? If a business loan is secured by mixed-use real property, the primary use of the property must be determined to see if the property is either primarily residential use and would be classified as a dwelling, therefore making the loan potentially HMDA reportable, or if the property is primarily non-residential in nature and therefore would not be considered a dwelling and the loan secured by this property would not be considered a dwelling-secured, HMDA reportable loan. The commentary indicates that an institution can use any reasonable standard to determine the primary use of the property, such as square footage or income generated, although institutions are not limited to just those two examples. There is no mention of needing to be consistent, so institutions are free to evaluate different mixed-use properties differently when making the determination of whether the property is primarily residential or primarily non-residential.
- Is this structure considered to be a dwelling? The definition of “dwelling” in the HMDA regulation is fairly broad and generally includes residential structures. The commentary helps to limit this definition not to include vehicles, houseboats and transitory residences like hotels, hospitals and dormitories. When trying to draw the line between what is and what is not a dwelling, particularly for the transitory residence exception, think of the attributes of the places mentioned: hotels, hospitals, dormitories, etc. These are places that a person stays to accomplish a specific task or goal: hotel (business or pleasure trip), hospital (get well and go home), and dormitories (go to school, then go back home). None of the transitory residence examples have any sense of permanence such that an individual wouldn’t normally change their mailing address, voter registration, vehicle registration, etc. because that is not really where they are residing, it is simply where they will be for a short period of time.
- Is my short-term loan exempt as temporary financing? This exemption from HMDA reporting really isn’t determined by the length of the loan term in the way that many other regulations approach temporary financing. In order to be exempt as temporary financing the loan or line must be designed to be replaced by separate permanent financing at a later time. A six-month loan may not be temporary financing, but a loan with a two-year term might be considered temporary financing. Only by reviewing the details of the transaction can you determine if it is exempt as temporary financing.
These are but some of the many varied questions that come up when trying to prepare your HMDA LAR. If you have a question about HMDA reporting or how to report it on your LAR, ask our hotline specialists. We’ll help to figure out if something is reportable, and if so, how to report it.
Changes Coming to Organizational SAR Sharing
Compliance Alliance gets many questions about virtually every aspect of SAR filings. However, an aspect we rarely get questions about is SAR confidentiality. Everyone seems to understand that SARs are confidential and even disclosing information that would reveal whether or not a SAR was filed is prohibited. Thanks to the Anti-Money Laundering Act of 2020 (the AML Act) the extent of SAR confidentiality could be changing.
New Guidance on Organizational Sharing
Pursuant to the AML Act, FinCEN recently issued a notice of proposed rulemaking (NPRM) on what it’s calling a “limited duration pilot program” for banks to share SARs and SAR information with their foreign branches, affiliates, and subsidiaries in an attempt to further lessen financial risks. The comment period for this NPRM will be open until March 28, 2022.
The AML Act was passed in part to improve information sharing, which will be aided by the pilot program. Regardless of when the program begins, it will terminate no later than January 1, 2024 unless FinCEN decides to extend the program, which it is authorized to do so for an additional two years. Banks will not be allowed to share with foreign branches, affiliates, or subsidiaries located in the People’s Republic of China, the Russian Federation, or a jurisdiction that is a state sponsor of terrorism.
Existing Guidance on Structural Sharing
In 2006 the agencies issued guidance on the sharing of SARs with head offices and controlling companies. This guidance stated that a U.S. branch of a foreign bank may share SARs with its main office outside of the U.S., and a U.S. bank may share SARs with its domestic or foreign controlling company. The agencies allowed for this sharing because the enterprise-wide risk management implications for a bank's main office or controlling company in complying with regulatory requirements. However, despite this guidance related to sharing within the same organizational structure, the guidance also stated that banks are required to have written confidentiality agreements or arrangements in place specifying that the main office or controlling company must protect the confidentiality of SARs through internal controls.
In 2010, subsequent guidance was issued related to sharing SARs with bank’s affiliates, which generally allowed for the sharing of SARs and related information with U.S. affiliates that are themselves subject to SAR filing obligations (e.g., money services businesses, residential mortgage lenders, etc.). Sharing was not allowed with foreign branches of U.S. banks because those branches are regarded as foreign banks for purposes of the BSA. This 2010 guidance also indicated that banks should have internal controls such as policies and procedures in place to protect the confidentiality of SARs. Both the 2006 and 2010 guidance indicated that there may be circumstances under which the financial institution, its affiliate, or both entities could be liable for direct or indirect disclosure of a SAR or any information that would reveal the existence of a SAR.
Even after this limited duration pilot program is launched, SARs will still be confidential and there will still be consequences for disclosing SARs or related information. However, sharing in accordance with the pilot program looks to be a little more open and should allow for information to flow through organizations in a way that may be helpful in lessening future financial risks, although this may require that institutions enhance their internal controls in order to safeguard confidential information.
New Standards for Micro-Entries Verifications Under NACHA
It is a fairly common practice for ACH originators to verify a receiver’s account by sending one or two small ACH credits of less than $1 each, and later debiting the receiver’s account either once or twice to take back some, or all, of the funds credited. Recently the National Automated Clearing House Association (NACHA) announced an upcoming rule regarding the standardization of these practices.
The upcoming rule will seek to accomplish the following four things: 1) provide a definition of these “micro-entries,” 2) standardize formatting requirements, 3) establish other origination practices, and 4) require the application of risk management requirements to the origination of these micro-entries.
The upcoming rule will define a “micro-entry” as a credit or debit used by an originator for the purpose of verifying a receiver’s account. Under the rule, micro-entries would have the following limitations: 1) credits must be in an amount of less than $1.00, 2) the total debit entries must not exceed the amount of the corresponding credits, and 3) debit entries only may exceed $1.00 to offset the amount of the credits. This rule will not require that originators use micro-entries as a method of account validation, but for those who use or want to use micro-entries for account validation, the rule will provide a better, more consistent process. This rule also does not require that originators that use credit micro-entries also use offsetting debit micro-entries. Originators will continue to be able to only use credit micro-entries for account validation.
The upcoming rule will standardize formatting requirements in the following ways: 1) the description, “ACCTVERIFY” will be required in the Company Entry Description field in order to make these entries more easily identifiable, and 2) the Company Name used must be recognizable to the receiver and similar to or the same as the Company Name that will be used in future entries. This change will really benefit customers and should lead to a better customer experience due to the micro-entries being more easily understoode.
The upcoming rule will establish the following other origination requirements: 1) an originator that is using offsetting micro-entries must send the debits and credits simultaneously for settlement at the same time, 2) the total amount of the credits must be greater than or equal to the total amount of the debits, and 3) since the originator is in the best position to know when the account has been validated, future entries may be initiated as soon as the originator’s process for validating the entries has been completed. However, the rule will not require ODFIs to actively monitor or inspect originator’s files of micro-entries for compliance with the origination requirements.
This rule will become effective in two phases. Based on the announcement it appears that the aforementioned definition, standardization of formatting requirements and establishment of other origination practices will be Phase I, which effective as of September 16, 2022.
The upcoming rule will further apply the following risk management requirements to originators: 1) the use of commercially available fraud detention intended to minimize the incident of fraud schemes and 2) monitoring forward and return volumes to establish a baseline of normal activity. Based on the announcement, it appears that the risk management requirement will be Phase II, and will be effective as of March 17, 2023.