Compliance Blog

The first NCUA Legal Opinion Letter of 2018 answers the question whether New York State Lease Security Accounts (NYS Lease Accounts) qualify as "other similar escrow accounts" for the purpose of receiving pass-through share insurance. The background for this legal opinion dates back to 2015 when NCUA amended its share insurance regulation implementing the Credit Union Share Insurance Fund Parity Act, making it possible for credit unions to offer IOLTA and other similar escrow accounts by making these types of accounts eligible for share insurance coverage. Prior to this rule amendment, credit unions were not able to offer these types of fiduciary accounts as credit unions can only offer membership shares that are eligible for insurance coverage. See, 12 C.F.R. § 741.9.

Currently, the share insurance rule defines "other similar escrow account" as "an account where a licensed professional or other individual serving in a fiduciary capacity holds funds for the benefit of a client or principal as part of a transaction or business relationship. Examples of such accounts include, but are not limited to, real estate escrow accounts and prepaid funeral accounts." 12 C.F.R. § 745.14(c)(1)(ii). Because of the relatively large scope of the definition of "other similar escrow accounts", many credit unions have been asking whether certain accounts, such as the NYS Lease Account that allows a landlord to deposit a tenant’s security deposit on rental property, are similar enough to qualify for pass-through share insurance coverage.

Factors For "Other Similar Escrow Accounts"

Just recently, NCUA decided to weigh in on this debate with Legal Opinion Letter 17-0424 to give an example of another "similar escrow account" that would qualify for share insurance coverage. Note that this legal opinion letter is not determinative for other accounts even if they are similar as the letter takes into account specific state laws and factual representations made by the credit union that submitted the question. Nonetheless the letter is helpful to better understand the concept of “other similar escrow accounts” and identify the factors that make an account eligible for pass-through share insurance coverage.

Among the items to consider when determining if an account qualifies as a similar escrow account are: (1) membership eligibility; (2) existence of fiduciary relationship; and (3) funds are held for the benefit of a client or principal as part of a transaction or business relationship. Item 1 is easy to determine as the only factor that matters is whether the attorney administering the IOLTA or the agent/individual administering the other similar escrow account is a member of the federally insured credit union in which the funds are held. This is different from other account types such as irrevocable trusts in which the ability of the credit union to open the account relies on the membership of the settlor or the beneficiary of the funds instead of the membership status of the trustee. Items 2 and 3 are slightly more complicated as they may require the credit union review its state law as this may impact whether a fiduciary relationship exists and whether the funds are held as part of a business transaction.

The legal opinion letter in question reviewed the three items above and determined that the landlord was subject to membership with the credit union. The letter also discusses that under NYS law a landlord holds the security deposit in trust for a tenant, the actual owner of the funds, in a fiduciary capacity as part of their real estate related business relationship. Hence, NYS Lease Accounts are considered to be "similar escrow accounts".

Keep In Mind…

NCUA did note that even if the NYS Lease Account qualifies as a similar escrow account, there are other requirements under the rule that must be met to ensure the funds are insured. For example, the rule has recordkeeping requirements and dictates the manner in which an IOLTA or other similar escrow account must be titled. See, 12 C.F.R. § 745.14(a)(2).

For those reasons, credit unions considering offering these types of fiduciary accounts may want to review their state law and closely follow the requirements of Part 745 to ensure members are aware of the requirements to retain adequate documentation evidencing the fiduciary relationship between the attorney/agent administering the account and the clients/principals.

Finally, for research purposes, this letter is currently housed in NCUA's webpage under Legal Opinion Letters from 2017, even though it was released February 1^st, 2018.