The conference report of the Dodd-Frank Wall Street Reform and Consumer Protection Act contains a number of changes to FDIC Insurance limits.  The Dodd-Frank Act will also effectively make permanent the FDIC guarantee currently provided under the FDIC’s Transaction Account Guarantee program, with a few modifications.

As background, the $250,000 FDIC insurance limit has previously been extended through December 31, 2013, and the Transaction Account Guarantee program has previously been extended through December 31, 2010, with the FDIC maintaining the right to further extend through December 31, 2011.

If the conference report version of Dodd-Frank is signed into law, Section 335 will make the $250,000 FDIC insurance coverage limit permanent.  In addition, Dodd-Frank will make that increase retroactive to January 1, 2008, providing the benefit of the increased insurance limits for depositors in the thirteen institutions that were placed into receivership between January 1, 2008 and October 3, 2008, including IndyMac and Integrity Bank.  However, no relief would be provided to depositors with funds in excess of $100,000 on deposit with the three depository institutions that failed in 2007.

In addition, Section 343 will provide unlimited insurance for funds held in non-interest bearing transaction accounts effective December 31, 2010, the scheduled termination date for the existing Transaction Account Guarantee program.  While frequently described as making the Transaction Account Guarantee program as permanent, there are significant differences with the new insurance for non-interest bearing transaction accounts.  First, unlike the Transaction Account Guarantee program where institutions may opt out of the additional coverage, the new insurance coverage for non-interest bearing transaction accounts will apply to all depository financial institutions.  Under the current fee structure for the Transaction Account Guarantee program, participating institutions paid a fee of 15 to 25 basis points of the daily average balance in excess of $250,000 held in  non-interest bearing transaction accounts.  Section 343 treats the unlimited insurance for non-interest bearing transaction accounts as part of the overall insurance program, and institutions will not separately be assessed for this additional coverage (although additional insured funds under the Deposit Insurance Fund will necessitate the FDIC maintaining higher reserves).

Second, the permanent unlimited insurance for non-interest bearing transaction accounts under Section 343 will NOT extend to NOW accounts paying less than specified rates or to IOLTA accounts, both of which were covered under the Transaction Account Guarantee Program.  Section 343 proposes a statutory definition of non-interest bearing transaction accounts which limits it to accounts (i) with respect to which interest is not paid or accrued; (ii) on which the account holder can withdraws fund by negotiable instrument, payment orders, or by telephone; and (iii) on which the institution does not reserve the right to require advance notice.

While Section 627 of the Dodd-Frank Act will permit institutions to pay interest on transaction accounts one year after the enactment of the Act, if interest is paid on such accounts they will presumably lose the unlimited insurance provided by Section 343.  Presumably regulations adopted by the FDIC will clarify the interplay of these provisions.