Compliance Blog

Written by Victoria Daka, Regulatory Compliance Specialist

On April 30, 2015, the NCUA Board proposed a rule to enhance pass-through share insurance for interest on lawyers trust accounts (IOLTAs) and “other similar accounts.” This proposed rule seeks to amend NCUA’s share insurance regulations to implement statutory amendments to the Federal Credit Union Act resulting from the recent enactment of the Credit Union Share Insurance Fund Parity Act (Insurance Parity Act). The Insurance Parity Act, enacted on December 18, 2014, ensures that NCUA and Federal Deposit Insurance Corporation (FDIC) insure those IOLTAs and “other similar accounts” in an equivalent manner. Due to the clarity of this Act, with regard to share insurance for IOLTAs, no implementing regulations are required to affect this aspect of the Act. Thus, NCUA reiterates IOLTA share insurance coverage is currently and will remain in place regardless of the direction the final rule takes.

However, other aspects of the Act remain ambiguous. As such, NCUA proposes the following: 1) the type of escrow accounts that should be included in the category of “other similar escrow accounts” as the phrase is used in the Insurance Parity Act; 2) prepaid card programs, such as payroll cards, should not be considered IOLTAs or “other similar escrow accounts” for share insurance purposes; 3) no additional recordkeeping requirements are imposed by the Insurance Parity Act; 4) while credit unions will begin to contain funds for non-members in IOLTAs and “other similar escrow accounts,” insured credit union’s BSA responsibilities continue; and 5) non-member funds kept in a federal credit union as a result of the enhanced share insurance coverage provided by the Insurance Parity Act do not count towards a federal credit union’s limit on the receipt of payments on shares from non-members pursuant to §701.32 of NCUA’s regulations.

Here is an overview of each item.

“Other similar escrow accounts”

In addition to the Insurance Parity Act providing that pass-through insurance coverage for IOLTAs, the Act also provides that escrow accounts “similar” to IOLTAs have pass-through insurance available. The type of escrow accounts that should be included in the category “other similar escrow accounts” as the phrase is used in the Insurance Parity Act is unclear. The Act remains silent as to the definition of “similar” and fails to describe what constitutes an escrow account that is “similar” to an IOLTA. Thus, NCUA is tasked with defining what accounts are “similar” to IOLTAs.

Given the various types of escrow accounts and the comparative nature of “similar,” NCUA seeks to provide regulatory clarity and certainty with regard to “other similar escrow accounts.” In addition, NCUA seeks to avoid case-by-case analyses of escrow accounts because this process would be inefficient and would provide credit unions with little to no notice of what would constitute “other similar escrow accounts.”

With that said, NCUA recognizes some escrow accounts whose nature and structure are similar, though not identical, to an IOLTA such as: typical realtor escrow accounts and prepaid funeral accounts. The signature characteristic common to these escrow accounts is that each has a licensed professional or other individual serving in a fiduciary capacity and holding funds for the benefit of a client as part of some transaction or business relationship. Therefore, NCUA proposes that escrow accounts with the signature characteristic should have pass-through share insurance coverage up to the limits provided for in Part 745 of NCUA’s regulations.

Prepaid card programs

Generally, prepaid card programs and IOLTAs have completely different structures and serve completely different purposes. More specifically, prepaid card programs and IOLTAs are completely different because the characteristics of the attorney/client relationship and fiduciary duties present in an IOLTA account are absent with prepaid card programs. Therefore, NCUA proposes that prepaid card programs, such as payroll cards, should not be considered IOLTAs or “other similar escrow accounts” for share insurance purposes.

Recordkeeping requirements

NCUA’s current share insurance regulations in §745.2(c)(1) and (2) provide the recordkeeping requirements for IOLTAs and “other similar accounts.” Therefore, NCUA proposes no additional recordkeeping requirements.

BSA requirements for insured credit unions

While credit unions will begin to contain funds for non-members in IOLTAs and “other similar escrow accounts,” insured credit unions BSA responsibilities continue. Therefore, NCUA proposes no additional BSA responsibilities for insured credit unions.

Federal credit union’s limit on the receipt of payments on shares from non-members pursuant to §701.32 of NCUA’s regulations

Under the Insurance Parity Act, IOLTAs and “other similar escrow accounts” are considered member accounts if the attorney administering the IOLTA or the escrow agent administering the account is a member of the insured credit union. In addition, NCUA believes that if an IOLTA or “other similar escrow accounts” satisfies this criterion then the IOLTA or “other similar escrow account” should be considered a member account for purposes of §701.32 of NCUA’s regulations. Therefore, NCUA does not propose any regulatory change on the limit of the receipt of payments on shares from non-members pursuant to §701.32 of NCUA’s regulations.

This proposal has a 60-day comment period. NAFCU’s Regulatory Affairs team will release a Reg Alert on this proposal later this week.