On February 18, 2011, the FDIC adopted updated final rules, regarding the unlimited insurance coverage, through December 31, 2012, for deposits held in Interest on Lawyers Trust Accounts (IOLTAs). These accounts were previously covered by the FDIC’s Temporary Liquidity Guarantee Program, but were subsequently left out of Dodd-Frank’s expanded insurance coverage.
Recognizing that the interest paid on IOLTAs were used by States to support legal aid for low-income individuals, Congress passed (on December 22, 2010), and the President signed (on December 29, 2010), H.R. 6398, which amended the Federal Deposit Insurance Act to define noninterest-bearing transaction accounts to include IOLTAs. The FDIC noted the potential for this Congressional action in its final rules adopted November 9, 2011, implementing the unlimited insurance coverage for noninterest-bearing transaction accounts, and provided that it would act quickly to notify depository institutions on how to react to the change.
Prior to year-end, the FDIC notified depository institutions that they were not required to send individual notices to IOLTA customers that such funds would not longer be provided with unlimited insurance, and that any institutions that had previously provided such notice were encouraged, but not required to, provide a revised notice advising that IOLTAs will receive unlimited insurance coverage as noninterest-bearing transaction accounts for two years ending December 31, 2012.
On June 22, 2010, the FDIC Board of Directors adopted a final rule extending the Transaction Account Guarantee (TAG) component of the Temporary Liquidity Guarantee Program (TLGP) through December 31, 2010, for insured depository institutions (IDIs) currently participating in the program. The TAG program guarantees all funds held at participating IDIs in qualifying noninterest-bearing transaction accounts beyond the recently increased $250,000 deposit insurance limit. This final rule preserves the interim rule’s assessment fee structure and 25 basis-point interest rate limit for NOW accounts guaranteed by the program.
The final rule also provides that, without additional rulemaking, the Board may further extend the program for a period not more than a year (until and including December 31, 2011) if it finds that economic conditions and circumstances that led to the establishment of the program are likely to continue beyond December 31, 2010, and that extending the program for an additional period of time will help mitigate or resolve those conditions and circumstances. The FDIC must publish notice of any such further extension by October 29, 2010. This further extension language is the minor and only departure from the interim TAG rule issued on April 13, 2010. The interim rule provided that the FDIC could extend the program on the same grounds and without additional rulemaking “for an additional year.”
On April 13, 2010, the FDIC extended the Transaction Account Guarantee (TAG) portion of the Temporary Liquidity Guarantee Program for another six months, through December 31, 2010, and preserved the flexibility to further extend the Transaction Account Guarantee through December 31, 2011 without further rule making. In addition to extending the expiration date of the TAG program, the FDIC’s final rule (1) maintains the current assessment fees for participation, except that the calculation will now be based on an average daily balance rather than quarter-end balances; (2) reduces the maximum interest rate limit for NOW accounts guaranteed under the program from 50 basis points to 25 basis points; and (3) provides an opportunity for participating institutions to opt out of the program as of July 1, 2010.
All currently participating institutions have until April 30, 2010 to determine whether to continue in the program or opt out of the program. Attorneys in Bryan Cave’s financial institutions practice can discuss the advantages and disadvantages of opting out for particular financial institutions.
Six-Month Extension (and Right to Extend Further)
Funds held in non-interest bearing demand deposit accounts (as well as NOW accounts that are obligated to pay less than 25 basis points and IOLTA accounts) will be fully guaranteed by the FDIC for participating entities through December 31, 2010.
If the FDIC finds a continuing need for the TAG program, the FDIC Board may, at its discretion, elect to further extend the TAG program through December 31, 2011. The FDIC will announce such an extension, if warranted, no later than October 29, 2010. In the event the TAG program is further extended, participating institutions will be obligated to remain in the program during that extension. (In other words, no additional opportunities to opt out after April 30, 2010 are contemplated.)
Currently, nearly 6,400 insured depository institutions, representing approximately 80% of all insured depository institutions, continue to participate in the TAG program, holding almost $340 billion in deposits in accounts currently subject to the FDIC’s guarantee. Of those deposits, $266 billion represented amounts above the standard insurance limit and are thus only guaranteed through the TAG program.
On December 11, 2008, the Federal Financial Institutions Examination Council issued revised instructions for Call and Thrift Financial Reports applicable to participants in the TLGP Transaction Account Guarantee.
Participating institutions will be required to report the amount and number of its noninterest-bearing transaction accounts (including IOLTA accounts and certain NOW accounts) with balances in excess of $250,000. In calculating the figures, the bank or thrift is permitted, but not required, to exclude accounts or amounts that are otherwise insured under the FDIC’s pass-through insurance rules. The FDIC will use the reported amounts to calculate the 10 basis point assessment for participation in the Transaction Account Guarantee. As a result, it will likely be in the interest of reporting institutions to determine the amount in the accounts that is otherwise insured. The instructions note that the amounts must be fully supported in the institution’s workpapers.
The FFIEC also noted that the Call and Thrift Financial Reports have otherwise not been modified to reflect the temporary increase in deposit insurance to $250,000. As a result, institutions should continue to report the amount and number of deposit accounts (other than retirement accounts) of (a) $100,000 or less and (b) more than $100,000. In addition, when reporting estimated uninsured deposits, institutions should continue to calculate the amount of uninsured deposits based on the deposit insurance limits of $250,000 for retirement deposit accounts and $100,000 for all other accounts.
As noted in the FDIC’s latest Frequently Asked Questions on the TLGP, the FDIC will fully guarantee public funds deposits in NOW accounts so long as the interest rate does not exceed 0.5 percent and the institution has committed to maintain the interest rate at or below 0.5 percent (assuming the institution has not opted out of the Transaction Account Guarantee). The amount of collateral required for such guaranteed public funds, if any, is imposed by state law and not by the FDIC’s regulation. As noted by the FDIC, the amount of collateral will depend upon the wording and meaning of each state’s laws.
As noted below, the Georgia statutes are not 100% clear, but we believe that Georgia depository institutions should not be required to provide collateral for public funds that are fully guaranteed by the FDIC under the Transaction Account Guarantee portion of the TLGP. We believe the statutes should be read as treating the FDIC guarantee in the same manner as FDIC insurance. Although the FDIC has generally been careful to use the term “guarantee” rather than “insurance” for the Transaction Account Guarantee portion of TLGP, in their December 4th press release, the FDIC stated that such funds will be “fully insured by the FDIC.”
We also understand that the going rate for public funds in Georgia is currently in excess of the 50 basis points permitted for NOW accounts to be treated as noninterest-bearing transactional accounts under TLGP. However, given moving rates and the possibility of fully guaranteed FDIC funds, we could see enterprising bankers using this provision to their advantage.
Moreover, all banks with public fund deposits should re-examine their calculations for the amount of securities that must be pledged to confirm that they have taken into effect the increase in FDIC deposit insurance from $100,000 to $250,000.
In connection with the TLGP Transaction Account Guarantee Program, all depository institutions that offer noninterest-bearing transaction accounts will have new disclosures that must be made in the lobby of its main office and each domestic branch office, and, if the institution offers “Internet deposit services,” on its website. The disclosures must be in place by December 19, 2008, and must have made adequate disclosures in a commercially reasonable manner before that time.
Standard Disclosures. The FDIC regulations provide the following sample disclosures.
For Participating Institutions:
[Institution Name] is participating in the FDIC’s Transaction Account Guarantee Program. Under that program, through December 31, 2009, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. Coverage under the Transaction Account Guarantee Program is in addition to and separate from the coverage available under the FDIC’s general deposit insurance rules.
For Non-Participating Institutions:
[Institution Name] has chosen not to participate in the FDIC’s Transaction Account Guarantee Program. Customers of [Institution Name] with noninterest-bearing transaction accounts will continue to be insured through December 31, 2009 for up to $250,000 under the FDIC’s general deposit insurance rules.
On November 21, 2008, the FDIC approved the final rule regarding the Temporary Liquidity Guarantee Program. The FDIC also held a teleconference on the final rule (with 2,100 participants) summarizing the changes, which will be available on the FDIC’s website.
There are important changes from the FDIC’s interim rule, including: (i) the exclusion of short term borrowings (30 days or less) and an alternative minimum cap for guaranteed debt under the Senior Unsecured Debt Guarantee portion of the Program; and (ii) the inclusion of IOLTA and NOW accounts in the Transaction Account Guarantee portion of the Program.
We continue to expect that all banks will decide to remain in the Transaction Account Guarantee portion of the Program, but, with the revised terms, we believe community banks will need to closely examine whether to participate in the the Senior Unsecured Debt Guarantee portion of the Program.
On November 3, 2008, the FDIC extended the deadline for opting out of either component of the Temporary Liquidity Guarantee Program from November 12, 2008 until December 5, 2008. Failure to opt out by December 5, 2008 will constitute a decision to continue to participate in both the debt guarantee and transaction account guarantee programs. (Based on conversations with representatives of the FDIC on Monday, the FDIC does not expect any institution to opt out of the non-interest bearing transaction account guarantee program.)
Decisions to opt out or remain in are irrevocable, and will be made via the FDIConnect system. Election forms will be available starting November 12, 2008, and will require certification by the institution’s Chief Financial Officer.
All eligible entities within the same holding company structure, including the holding company itself, must make the same decision regarding continued participation in either or both programs. Eligible entities that do not opt out of the debt guarantee program must report the amount of outstanding senior, unsecured debt as of September 30, 2008, that is scheduled to mature on or before June 30, 2009.
The FDIC has also published a Sample Election Form, Election Form Instructions and Guidance for Election Options and Reporting Requirements.