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.

The FDIC’s revised final rule also provided new language for the posted notice required by 12 CFR Part 330.16.  Accordingly, all depository institutions that offer noninterest-bearing transaction accounts are required, no later than February 28, 2011,  to post prominently the following notice in the lobby of its main office, each domestic branch and, if it offers internet-based deposit services, on its website, the following notice:

All funds in a “noninterest-bearing transaction account” are insured in full by the Federal Deposit Insurance Corporation from December 31, 2010, through December 31, 2012. This temporary unlimited coverage is in addition to, and separate from, the coverage of at least $250,000 available to depositors under the FDIC’s general deposit insurance rules.

The term “noninterest-bearing transaction account” includes a traditional checking account or demand deposit account on which the insured depository institution pays no interest. It also includes Interest on Lawyers Trust Accounts (“IOLTAs”). It does not include other accounts, such as traditional checking or demand deposit accounts that may earn interest, NOW accounts, and money-market deposit accounts.

For more information about temporary FDIC insurance coverage of  transaction accounts, visit www.fdic.gov.

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.

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.”

Under the interim rule, participating IDIs were permitted to opt-out of the TAG program by email notice to the FDIC by 11:59 p.m., Eastern Time, April 30, 2010. The FDIC indicates that 441 institutions took advantage of this opt-out opportunity and indicated their intent to exit the program as of July 1, 2010. A participating IDI’s decision to remain in the extended TAG program obligates it to continue its participation through December 31, 2010, or for the duration of the program, if the Board further extends the TAG program as set forth in the final rule.

The interim rule reduced the maximum interest rate for NOW accounts guaranteed under the program from 50 to 25 basis points. During the rule’s review period, the FDIC considered comments that this interest rate cap may not align with prevailing rates by region or with future interest rates, but it elected to retain this limit for qualifying NOW accounts as representative of the prevailing nationwide interest rates for such accounts at this time and for the relatively short duration of the program’s extension.

 Lobby and Website Disclosure

The interim rule required IDIs to update lobby and website disclosures on or before May 20, 2010, to reflect their continued participation, pending exit, or non-participation in the TAG program. As the final rule does not change any of the elements of these required disclosures, no updates are necessary for IDIs that implemented updates pursuant to the interim rule. The rules require that each IDI that offers noninterest-bearing transaction accounts post a prominent notice in the lobby of its main office, each domestic branch and, if it offers Internet deposit services, on its website clearly indicating whether the institution is participating in the TAG program. These disclosures must be set out in simple, readily understandable text, and the FDIC provides the following sample language:

For Participating Institutions

[Institution Name] is participating in the FDIC’s Transaction Account Guarantee Program. Under that program, through December 31, 2010, 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 Participating Institutions that Elected to Opt-out of the Extended Transaction Account Guarantee Program Effective on July 1, 2010

Beginning July 1, 2010 [Institution Name] will no longer participate in the FDIC’s Transaction Account Guarantee Program. Thus, after June 30, 2010, funds held in noninterest-bearing transaction accounts will no longer be guaranteed in full under the Transaction Account Guarantee Program, but will be insured up to $250,000 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 for up to $250,000 under the FDIC’s general deposit insurance rules.

Participation in and Future of the Program

An estimated 6,300 or 80% of all IDIs currently participate in the TAG program. Of the $356 billion in deposits held by institutions subject to the FDIC’s TAG guarantee as of March 31, 2010, $280 billion represented amounts above the insured deposit limit. Among current program participants, the average TAG account size is $1.04 million. The FDIC estimates that about 509 institutions rely on TAG accounts to fund 10 percent or more of their assets.

The long-term future of the TAG guarantee is tied to the pending financial reform bill in Congress. The conference committee reconciling the House and Senate versions of the bill has agreed to make permanent the $250,000 increase in per depositor, per IDI insurance limit and is considering a two-year statutory extension of the TAG program.

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.

Assessments

The FDIC expects that the projected revenues from a six month extension could cover the projected costs for the duration of the extension.  However, due to assumptions regarding which institutions may choose to now opt-out, the FDIC expects projections will likely show a small loss due to the extension, although the overall Temporary Liquidity Guarantee Program is still expected to be a profitable program for the FDIC.  Accordingly, the FDIC decided not to increase the current tiered-assessment structure.  The FDIC further believes that maintaining the current pricing will enable most participating institutions to remain in the program, thereby providing a greater positive stimulus to the nation’s economic recovery.

The amount of the assessment will continue to depend on the institution’s Risk Category rating assigned with respect to regular FDIC assessments.  The fee will continue to be assessed only on the amount of deposits that exceed the existing deposit insurance limits. Institutions in Risk Category I (generally well-capitalized institutions with composite CAMELS 1 or 2 ratings) will pay an annualized assessment rate of 15 basis points.  Institutions in Risk Category II (generally adequately capitalized institutions with composite CAMELS 3 or better) will pay an annualized assessment rate of 20 basis points.  Institutions in Risk Category III or IV (generally under capitalized or composite CAMELS 4 or 5) will pay an annualized assessment rate of 25 basis points.

In light of the volatility of the amounts held in non-interest bearing demand deposit accounts, the FDIC is altering the calculation of the assessment, starting with the assessment for the third quarter ending September 30, 2010, to be based on average daily balance amounts.  Accordingly, the total dollar amount of TAG-qualifying accounts and the total number of accounts must be reported as an average daily balance in the September 20, 2010 Call Report.  The amount to be reported as the daily average balance is the total dollar amount of the non-interest bearing transaction accounts of more than $250,000 for each calendar day during the quarter divided by the number of calendar days in the quarter.  Institutions that do not opt out of the TAG program must establish procedures to gather the necessary daily data beginning on July 1, 2010.

While this modification is likely to have minimal impact for those institutions whose deposits assessments are already calculated on an average daily balance basis (generally those with total assets of more than $1 billion), this modification could create a significant administrative burden on those institutions that do not currently employ average daily balance reporting.

Right to Opt-Out

Currently participating institutions are being given (another) one-time, irrevocable, opportunity to affirmatively opt out of the TAG program. Institutions that previously opted out of the TAG program may not change their election at this time.

If a participating institution desires to remain in the TAG program, no action is required.  However, such an institution should update, by May 20, 2010,  its lobby and website disclosures to reflect the December 31, 2010 extension.  In the event the TAG program is further extended, participating institutions will be obligated to remain in the program during that extension, and further update their disclosures.

If a participating institution desires to opt out, it must send an e-mail to optout@fdic.gov no later than 11:59 p.m., Eastern Tine, April 30, 2010 that meets all the requirements of 12 CFR 370.5(g)(3), and post a prominent lobby and website notice notifying depositors that funds held in noninterest-bearing transaction accounts will not longer be fully guaranteed.  12 CFR 370.5(g)(2) generally requires the e-mail to have a subject line of “TLGP Request to Opt Out – Cert. No. ___” and to include:

1. Institution Name;
2. FDIC Certificate number;
3. City, State and ZIP;
4. Name, telephone number and e-mail address of contact person;
5. A statement that the institution is opting out of the Transaction Account Guarantee program effective July 1, 2010; and
6. Confirmation that the institution will, no later than May 20, 2010, provide the required lobby and website disclosure.

The FDIC states that it will send an e-mail reply confirming receipt of each institution’s opt-out election upon receipt of a conforming e-mail.

Lobby and Website Disclosure

The FDIC regulations require that each institution that offers non-interest bearing transaction accounts post a prominent notice in the lobby of its main office, each domestic branch and, if it offers Internet deposit services, on its website clearly indicating whether the institution is participating in the Transaction Account Guarantee program.  The regulations require that the disclosure be provided in simple, readily understandable text, and provide the following samples:

For Participating Institutions

[Institution Name] is participating in the FDIC’s Transaction Account Guarantee Program. Under that program, through December 31, 2010, 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 Participating Institutions that Elect to Opt out of the Extended Transaction Account Guaranty Program Effective on July 1, 2010

Beginning July 1, 2010 [Institution Name] will no longer participate in the FDIC’s Transaction Account Guarantee Program. Thus, after June 30, 2010, funds held in noninterest-bearing transaction accounts will no longer be guaranteed in full under the Transaction Account Guarantee Program, but will be insured up to $250,000 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 for up to $250,000 under the FDIC’s general deposit insurance rules.

Starting January 1, 2009, the FDIC assessment for its full guarantee of funds held in non-interest bearing demand deposit accounts will rise to an annualized rate of 15 to 25 basis points, depending on the Risk Category rating of the institution.

The deadline to affirmatively opt out of the Transaction Account Guarantee program is November 2, 2009. We have previously posted information about how to opt out.

Institutions electing to remain in the program will face increased assessments and potentially imply that they “need” continued government assistance, but will continue to be able offer depositors the comfort of a full government guarantee.  Institutions electing to opt out will save the increased assessments and provide a visible example of emerging from a government program, but may risk losing uninsured deposits to other institutions that have elected to retain the full FDIC guarantee.

All institutions are also reminded that they will need to update their lobby and website disclosures to reflect the June 30, 2010 extension.

On August 26, 2009, the FDIC extended the Transaction Account Guarantee (TAG) portion of the Temporary Liquidity Guarantee Program for six months, through June 30, 2010.  In addition to extending the expiration date of the TAG program, the FDIC’s final rule (1) increases the assessment fee for participation; and (2) provides an opportunity for participating institutions to opt out of the program as of January 1, 2010 (and thereby avoid the additional assessments).

All currently participating institutions have until November 2, 2009 to determine whether to continue in the program (at increased cost) 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

Funds held in non-interest bearing demand deposit accounts (as well as NOW accounts that are obligated to pay less than 50 basis points and IOLTA accounts) will be fully guaranteed by the FDIC for participating entities through June 30, 2010.

The FDIC received comments supporting no extension, as well as supporting extensions for up to three years.  The FDIC determined a six-month extension of the TAG program “will provide the optimum balance between continuing to provide support to those institutions most affected by the recent financial and economic turmoil and phasing out the program in an orderly manner.”

Increased Assessment

Beginning January 1, 2010, participants in the TAG program will be subject to increased quarterly fees.  The amount of the assessment will depend on the institution’s Risk Category rating assigned with respect to regular FDIC assessments.  The fee will continue to be assessed only on the amount of deposits that exceed the existing deposit insurance limits.

Institutions in Risk Category I (generally well-capitalized institutions with composite CAMELS 1 or 2 ratings) will pay an annualized assessment rate of 15 basis points.  Institutions in Risk Category II (generally adequately capitalized institutions with composite CAMELS 3 or better) will pay an annualized assessment rate of 20 basis points.  Institutions in Risk Category III or IV (generally under capitalized or composite CAMELS 4 or 5) will pay an annualized assessment rate of 25 basis points.  (Through December 31, 2009, the fee will remain an annualized 10 basis point assessment for all participating institutions.)

Right to Opt-Out

Currently participating institutions are being given a one-time, irrevocable, opportunity to affirmatively opt out of the TAG program. Institutions that previously opted out of the TAG program may not change their election at this time.

If a participating institution desires to remain in the TAG program, no action is required.  However, such an institution should update its lobby and website disclosures to reflect the June 30, 2010 extension.

If a participating institution desires to opt out, it must send an e-mail to dcas@fdic.gov no later than November 2, 2009 that meets all the requirements of 12 CFR 370.5(g)(2), and post a prominent lobby and website notice notifying depositors that funds held in noninterest-bearing transaction accounts will not longer be fully guaranteed.  12 CFR 370.5(g)(2) generally requires the e-mail to have a subject line of “TLGP Election to Opt Out – Cert. No. ___” and to include:

1. Institution Name;
2. FDIC Certificate number;
3. City, State and ZIP;
4. Name, telephone number and e-mail address of contact person;
5. A statement that the institution is opting out of the Transaction Account Guarantee program effective January 1, 2010; and
6. Confirmation that the institution will, no later than November 16, 2009, provide the required lobby and website disclosure.

The FDIC states that it will send an e-mail reply confirming receipt of each institution’s opt-out election upon receipt of a conforming e-mail.

Lobby and Website Disclosure

The FDIC regulations require that each institution that offers noninterest-bearing transaction accounts post a prominent notice in the lobby of its main office, each domestic branch and, if it offers Internet deposit services, on its website clearly indicating whether the institution is participating in the Transaction Account Guarantee program.  The regulations require that the disclosure be provided in simple, readily understandable text, and provide the following samples:

For Participating Institutions

[Institution Name] is participating in the FDIC’s Transaction Account Guarantee Program. Under that program, through June 30, 2010, 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 Participating Institutions that Elect to Opt out of the Extended Transaction Account Guaranty Program Effective on January 1, 2010

Beginning January 1, 2010 [Institution Name] will no longer participate in the FDIC’s Transaction Account Guarantee Program. Thus, after December 31, 2009, funds held in noninterest-bearing transaction accounts will no longer be guaranteed in full under the Transaction Account Guarantee Program, but will be insured up to $250,000 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 for up to $250,000 under the FDIC’s general deposit insurance rules.

The FDIC proposal offers two alternatives:

• allow the guarantee to expire as scheduled on December 31, 2009; or
• extend the guarantee through June 30, 2010, with increased fees.

If the guarantee is allowed to expire, then insurance limits will revert to the $250,000 threshold.

If the guarantee is extended for six months through June 30, 2010, then the FDIC proposes to also increase the fee to 25 basis points annualized (from the 10 basis points currently charged).  In light of this increase, the FDIC proposes that it would give all institutions a single opportunity to opt out of the extended guarantee program (and thereby avoid the increased cost).

The FDIC is providing a 30-day comment period to consider whether or not to extend the guarantee for non-interest bearing accounts.  While every rule proposal is subject to change, in this case the FDIC has explicitly proposed two completely different alternatives.   Accordingly, comments are likely to be very important.

The FDIC has also specifically requested comment on the following items:

• whether six months is the appropriate extension period;
• whether the permissible interest rate to be paid on NOW accounts covered by the program should be reduced; and
• whether the fee increase to 25 basis points annualized is appropriate.

• extended the $250,000 deposit insurance limit through December 31, 2013;
• extended the length of time the FDIC has to restore the Deposit Insurance Fund from five to eight years;
• increased the FDIC’s borrowing authority with the Treasury Department from $30 billion to $100 billion;
• increased the SIGTARP’s authority vis-a-vis public-private investment funds under PPIP (including the implementation of conflict of interest requirements, quarterly reporting obligations, coordination with the TALF program); and
• removed the requirement, implemented by the American Recovery and Reinvestment Act of 2009, for the Treasury to liquidate warrants of companies that redeemed TARP Capital Purchase Program preferred investments.  The Treasury is now permitted to liquidate such warrants at current market values, but is not required to do so.

This extension does not affect the Transaction Account Guarantee provided by the FDIC’s Temporary Liquidity Guarantee.  The Transaction  Account Guarantee, which provides an unlimited guarantee of funds held in noninterest bearing transaction accounts, is still scheduled to expire on December 31, 2009.

The FDIC has not revised the official FDIC Insurance sign, which still speaks of insurance limits of up to $100,000.  However, if a financial institution has previously posted a notice of the increase to $250,000 through December 31, 2009, it should update that notice.  As stated by the FDIC, a financial institution may post the following statement next to the official FDIC sign:

The standard insurance amount of $250,000 per depositor is in effect through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except IRAs and other certain retirement accounts, which will remain at $250,000 per depositor.

As of December 12, 2008, 863 banks had elected to opt-out of the Transaction Account Guarantee, but that number is 1,110 banks as of May 6, 2009.  Similarly, 3,116 entities (which includes affiliated bank holding companies) had elected to opt-out of the Debt Guarantee as of December 12, 2008, but that number is 6,501 entities as of May 6, 2009 (a 109% increase).  In Georgia, 25 banks have opted out of the Transaction Account Guarantee, while 165 entities have opted out of the Debt Guarantee.

The continued updates of the opt-out lists serves as a strong reminder to review these lists before (a) presuming that noninterest bearing deposit accounts have an unlimited guarantee; or (b) accepting any senior unsecured debt as being guaranteed by the FDIC.

The decision to opt out of either of these programs is an interesting one.  The fees associated with both programs are directly tied to the use of either guarantee; if a bank doesn’t have large noninterest bearing accounts, or doesn’t issue FDIC guaranteed debt, than there is no cost to participating in either program.  While the FDIC’s debt guarantee is likely to be of minimal use to many community banks, the ability to offer unlimited insurance for noninterest bearing deposit accounts would seem to be an opportunity that is difficult to justify turning down.

You can download a PDF copy or view the presentation online.