On November 15, 2010, the Federal Deposit Insurance Corporation (FDIC) issued a final rule to implement Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). Section 343 of the Act provides for unlimited deposit insurance for “noninterest-bearing transaction accounts” through December 31, 2012.
In the months since the FDIC issued its final rule, we have observed some confusion in the banking industry as to exactly what kinds of accounts will be considered to be “noninterest-bearing transaction accounts.” It is not the case, as some seem to have believed, that the definition covers only accounts offered to businesses. Consumer accounts can qualify for the unlimited deposit insurance, if properly structured. For some banks, this may mean a change to their existing deposit agreement terms.
FDIC regulation now defines “noninterest-bearing transaction account” as any deposit or account maintained at an FDIC insured bank or other depository institution with respect to which all three of the following are true:
(i) no interest may be paid or accrued on the account;
(ii) the depositor must be able to make withdrawals by using a negotiable or transferable payment instrument, payment order of withdrawal, telephone or other electronic media, or other similar items for the purpose of making payments or transfers to third parties; and
(iii) The depository institution may not reserve the right to require advance notice of intended withdrawal.
The FDIC has stated that the account may be held by a business, an individual, or other type of depositor. If your bank wants to offer accounts that meet this definition, here are the things to remember:
A. Noninterest-Bearing. Whether an account is noninterest-bearing depends on the terms of the account and not by the fact that the rate on the account at any point in time, or for certain balances for example, might be zero percent. The account will be treated as “interest-bearing” for all time (and thus not eligible for this program) if it could ever earn interest.
B. Demand Deposit. The account must allow for an unlimited number of deposits and withdrawals at any time. Money market demand accounts would not qualify, for example, due to the 6-withdrawals per month limitation imposed by Regulation D.
C. No Requirements for Advance Notice of Withdrawals. The final requirement is that the bank cannot reserve the right to require advance notice of withdrawals. Banks often reserve the right in deposit agreements to require not less than 7-days’ prior notice of any intended withdrawal. Banks typically do this to ensure that the account is not a “transaction account” for purposes of the Regulation D requirements. However, if you reserve this right for the account, then the account will not qualify for the unlimited FDIC insurance.
Some banks uniformly reserve this 7-day advance notice requirement for most or all of their deposit accounts simply as a matter of course. If you want to offer accounts that qualify for the unlimited insurance, you will need to ensure that your deposit agreements are modified to eliminate this requirement if doing so is otherwise consistent with your goals. However, if your bank eliminates this requirement, you also should confirm that the bank is properly reserving for the account under Regulation D.
We also should note that NOW accounts (negotiable order of withdrawal accounts), regardless of the interest paid, will not qualify for the unlimited FDIC insurance. Banks typically structure accounts as NOW accounts so that they could pay interest on the accounts without violating Regulation Q. However, because Regulation Q (and the underlying statute) will be repealed effective July 21, 2011, the NOW account structure will no longer be needed for Regulation Q purposes. This may allow your bank more flexibility in structuring accounts to qualify for the unlimited deposit insurance.
Finally, if your bank offers prepaid cards to consumers, those accounts can qualify for the unlimited FDIC insurance if the account terms are consistent with the three requirements – payable on demand, noninterest-bearing, and no requirement for the cardholder to provide the bank with advance notice of an intended withdrawal. Most prepaid cards issued by banks already satisfy these requirements, with the possible exception that banks have sometimes reserved the right to require 7-days advance notice of withdrawals.
Should you have any questions on this Dodd-Frank unlimited deposit insurance program, please contact:
Bryan Cave LLP
1155 F Street NW
Washington, DC 20004