[Federal Register Volume 80, Number 248 (Monday, December 28, 2015)]
[Rules and Regulations]
[Pages 80635-80643]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32164]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 /
Rules and Regulations
[[Page 80635]]
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 745
RIN 3133-AE49
Pass-Through Share Insurance for Interest on Lawyers Trust
Accounts
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: The NCUA Board (Board) is amending its share insurance
regulations to implement statutory amendments to the Federal Credit
Union Act (FCU Act or the Act) resulting from the recent enactment of
the Credit Union Share Insurance Fund Parity Act (Insurance Parity
Act). The statutory amendments require NCUA to provide enhanced, pass-
through share insurance for interest on lawyers trust accounts (IOLTA)
and other similar escrow accounts. As its name implies, the Insurance
Parity Act ensures that NCUA and the Federal Deposit Insurance
Corporation (FDIC) insure IOLTAs and other similar escrow accounts in
an equivalent manner.
DATES: This rule is effective January 27, 2016.
FOR FURTHER INFORMATION CONTACT: Frank Kressman, Associate General
Counsel, Office of General Counsel, at the above address or telephone
(703) 518-6540.
SUPPLEMENTARY INFORMATION:
I. Background
II. Summary of the April 2015 Proposed Rule
III. Public Comments on the April 2015 Proposed Rule
IV. Final Rule
V. Regulatory Procedures
I. Background
A. History of IOLTAs
According to the National Association of IOLTA Programs (NAIP),\1\
IOLTA programs began in Australia and Canada in the late 1960s to
generate funds for legal services to the poor.\2\ In the United States,
Congress passed legislation in the 1980s permitting the establishment
of certain interest-bearing checking accounts,\3\ which, among many
things, helped to enable the creation of IOLTA accounts throughout the
United States. The various states operate IOLTA programs pursuant to
their own laws.\4\
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\1\ The NAIP was established in 1986 to enhance legal services
for the poor and for the administration of justice through the
growth and development of IOLTA programs. http://www.iolta.org/about-naip.
\2\ http://www.iolta.org/what-is-iolta/iolta-history.
\3\ The Depository Institutions Deregulation and Monetary
Control Act of 1980 (Pub. L. 96-221; 94 Stat. 132).
\4\ http://www.americanbar.org/groups/interest_lawyers_trust_accounts/resources/status_of_iolta_programs.html. As determined by each state, an IOLTA
program may be mandatory, voluntary, or an attorney may opt out of
the program.
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Under an IOLTA program, an attorney or law firm may establish an
account at one or more financial institutions to hold their clients'
funds to pay for legal services or for other purposes. An attorney or a
law firm would deposit clients' funds in one or more IOLTAs and hold
these funds in trust until needed. Typically, the interest or dividends
on IOLTAs are donated to charities or other 501(c)(3) tax exempt
organizations pursuant to state law. Generally, the donated funds are
used to subsidize legal aid services or for other charitable purposes.
B. The Credit Union Share Insurance Fund Parity Act of 2014
On December 18, 2014, President Obama signed into law the Insurance
Parity Act.\5\ The Insurance Parity Act amended the share insurance
provisions of the FCU Act by requiring enhanced, pass-through share
insurance coverage for IOLTAs and other similar escrow accounts.\6\ The
Insurance Parity Act specifically defines ``pass-through share
insurance,'' with respect to IOLTAs and other similar escrow accounts,
as ``insurance coverage based on the interest of each person on whose
behalf funds are held in such accounts by the attorney administering
the IOLTA or the escrow agent administering a similar escrow account,
in accordance with regulations issued by [NCUA].'' \7\
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\5\ Pub. L. 113-252, 128 Stat. 2893 (2014).
\6\ 12 U.S.C. 1787(k).
\7\ Pub. L. 113-252, 128 Stat. 2893 (2014).
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The Insurance Parity Act defines an IOLTA as ``a system in which
lawyers place certain client funds in interest-bearing or dividend-
bearing accounts, with the interest or dividends then used to fund
programs such as legal service organizations who provide services to
clients in need.'' \8\ Pursuant to the Insurance Parity Act, IOLTAs are
treated as escrow accounts for share insurance purposes. Further,
IOLTAs and other similar escrow accounts are considered member accounts
if the attorney administering the IOLTA or the escrow agent
administering the escrow account is a member of the insured credit
union in which the funds are held.\9\
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\8\ Id.
\9\ The Insurance Parity Act also emphasizes that its amendments
to the FCU Act do not authorize an insured credit union to accept
deposits of an IOLTA or similar escrow account in an amount greater
than such credit union is authorized to accept under any other
provisions of federal or state law.
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C. Comparison of FDIC's and NCUA's Current Insurance Regulations
Regarding IOLTAs
The FDIC's deposit insurance regulations \10\ do not specifically
mention IOLTAs by name. Rather, the FDIC insures an IOLTA as an agent
or nominee account. To be insured by the FDIC, an agent or nominee
account like an IOLTA must expressly disclose, by way of specific
reference, the existence of any fiduciary relationship such as an agent
or nominee pursuant to which funds are deposited into a bank account
and on which a claim for deposit insurance coverage is based. The FDIC
has stated that such an account, including an IOLTA, must disclose that
the funds are held by the nominal account holder on the behalf of
others.\11\ To be insurable, the FDIC must be able to ascertain the
interests of the other parties in the IOLTA from the records of the
insured depository institution or from the records of the lawyer.\12\
Funds attributable to each client will be insured on a pass-through
basis if this
[[Page 80636]]
recordkeeping requirement is satisfied.\13\
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\10\ 12 CFR part 330.
\11\ FDIC Opinion Letter No. 98--2 (June 16, 1998) at https://www.fdic.gov/regulations/laws/rules/4000-9940.html.
\12\ Id.
\13\ Id.
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Prior to the enactment of the Insurance Parity Act, NCUA's position
with respect to the insurability of IOLTAs was very similar to FDIC's,
except that NCUA's coverage was limited only to those clients of the
attorney who were also members of the insured credit union in which the
IOLTA was kept. This was due to the FCU Act's general limitation to
insure only member accounts, with some exceptions not applicable to
this rulemaking.
Many federally insured credit unions maintained that NCUA's
position on this issue placed them at a competitive disadvantage. The
Insurance Parity Act removed any such disadvantage, however.
Specifically, provided the lawyer administering the IOLTA or the escrow
agent administering a similar escrow account is a member of the insured
credit union in which such account is maintained, then the interests of
each client or principal, on whose behalf funds are being held in such
accounts by the lawyer or escrow agent, will be insured on a pass-
through basis in accordance with the limits in part 745 of NCUA's
regulations, regardless of the membership status of the client or
principal. In an IOLTA and other similar escrow accounts, the true
owners of the funds are the clients and principals. The lawyers or law
firms and the escrow agents are only agents holding the funds on the
clients' and principals' behalf.
II. Summary of the April 2015 Proposed Rule
In April 2015, the Board issued a proposed rule amending its share
insurance regulations to implement statutory amendments to the FCU Act
resulting from the enactment of the Insurance Parity Act.\14\ The
sections below reiterate the discussion in the proposed rule.
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\14\ 80 FR 27109 (May 12, 2015).
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A. Why NCUA issued a proposed rule?
The Insurance Parity Act clearly states that NCUA shall provide
pass-through share insurance for IOLTAs, and it defines an IOLTA.
Accordingly, share insurance coverage for IOLTAs took effect with the
enactment of the Insurance Parity Act, even without any regulatory
action on NCUA's part. No implementing regulations were required to
effect this aspect of the legislation. However, the proposed rule
addressed other aspects of the legislation that did require NCUA to
take regulatory action.
Additionally, some of the language in the Insurance Parity Act is
ambiguous and left certain questions unanswered. For example, these
questions included:
What escrow accounts should be included in the category
``other similar escrow accounts'' as that phrase is used in the
Insurance Parity Act?
Should prepaid card programs, such as payroll cards, be
considered IOLTAs or other similar escrow accounts for share insurance
purposes?
What recordkeeping requirements must be satisfied to
receive share insurance on IOLTAs and other similar escrow accounts?
Does the enhanced share insurance coverage provided by the
Insurance Parity Act affect the Bank Secrecy Act (BSA) requirements for
insured credit unions?
Should nonmember funds kept in a federal credit union as a
result of the enhanced share insurance coverage provided by the
Insurance Parity Act count towards a federal credit union's limit on
the receipt of payments on shares from nonmembers pursuant to Sec.
701.32 of NCUA's regulations?
As discussed below, NCUA analyzed the above questions and proposed
how each should be addressed. However, NCUA requested public comment on
alternative interpretations of the Insurance Parity Act and alternative
regulatory approaches that commenters believe are appropriate and
beneficial.
B. Pass-Through Share Insurance for IOLTAs and Other Similar Escrow
Accounts
As noted above, the Insurance Parity Act defines ``pass-through
share insurance,'' with respect to IOLTAs and other similar escrow
accounts, as ``insurance coverage based on the interest of each person
on whose behalf funds are held in such accounts by the attorney
administering the IOLTA or the escrow agent administering a similar
escrow account, in accordance with regulations issued by [NCUA].'' \15\
This definition is clear and accurate, as well as consistent with how
NCUA currently defines ``pass-through share insurance'' in its share
insurance regulations relating to coverage of certain employee benefit
plans.\16\ Accordingly, the Board proposed to adopt that statutory
definition of ``pass-through share insurance'' as the regulatory
definition of that term in part 745.
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\15\ Pub. L. 113-252, 128 Stat. 2893 (2014).
\16\ 12 U.S.C. 1787(k)(4); 12 CFR 745.9-2.
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C. What escrow accounts should be included in the category ``other
similar escrow accounts'' as that phrase is used in the Insurance
Parity Act?
The Insurance Parity Act provides that, for share insurance
purposes, IOLTAs are treated as escrow accounts. It also provides that
pass-through insurance coverage is available for other kinds of escrow
accounts that are similar to IOLTAs. However, the Insurance Parity Act
does not define or further describe what constitutes an escrow account
that is ``similar'' to an IOLTA.
The Insurance Parity Act defines an IOLTA as ``a system in which
lawyers place certain client funds in interest-bearing or dividend-
bearing accounts, with the interest or dividends then used to fund
programs such as legal service organizations who provide services to
clients in need.'' NCUA is tasked with defining the kinds of escrow
accounts that are similar enough to IOLTAs to be eligible for pass-
through share insurance as discussed above. In the proposed rule, the
Board acknowledged the challenge to describe with precision the
circumstances under which such coverage should be provided. There are
many different kinds of escrow accounts in use, with varying forms and
structures. Also, the Board noted in the proposed rule that ``similar''
is a relative term that may necessitate NCUA reviewing escrow accounts
with varying structures on a case-by-case basis to determine which are
similar enough to IOLTAs to receive pass-through insurance coverage.
Despite the amorphous nature of escrow accounts, the Board noted in
the proposed rule the importance of providing insured credit unions
with as much regulatory clarity and certainty as possible about which
escrow accounts are considered similar enough to IOLTAs to receive
pass-through insurance coverage. NCUA seeks to avoid, to the greatest
extent possible, the need to make case-by-case analyses of escrow
accounts, as that process is labor intensive and inefficient and it
creates uncertainty for insured credit unions.
There are some escrow accounts whose nature and structure are
immediately recognizable as similar to an IOLTA. For example, the Board
noted in the proposed rule that typical real estate escrow accounts and
prepaid funeral accounts have attributes that, while not identical to
IOLTAs, are similar to IOLTAs and should be entitled to pass-through
share insurance coverage. One of the signature characteristics common
to typical real estate escrow accounts, prepaid funeral
[[Page 80637]]
accounts, and IOLTAs is that each of these kinds of account 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.
The Board proposed, at a minimum, to extend pass-through share
insurance coverage to escrow accounts with these characteristics, up to
the limits provided for in part 745 of NCUA's regulations. However, the
Board encouraged commenters to identify and discuss other kinds of
escrow accounts, in addition to real estate and prepaid funeral
accounts, which also have characteristics similar enough to IOLTAs to
warrant pass-through insurance coverage.
Specifically, the Board requested comment on the following: (1)
what kinds of escrow accounts should qualify for pass-through share
insurance coverage and why; (2) what specific attributes these escrow
accounts need to possess to obtain coverage; (3) how NCUA can define
these accounts to capture their essence and minimize the need for case-
by-case analyses of their characteristics; and (4) any other aspect of
this topic. In addition, the Board specifically invited comment on
whether it is appropriate to limit the pool of other similar escrow
accounts to those where a recognizable fiduciary duty is owed by the
escrow agent to the principal.
D. Prepaid Cards
In the proposed rule, the Board welcomed comments on NCUA's
proposed treatment of prepaid card programs. To put this issue in
context and provide background information about such programs, the
Board included the following excerpt on prepaid cards from the Federal
Financial Institutions Examination Council's Web site.\17\
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\17\ http://ithandbook.ffiec.gov/it-booklets/retail-payment-systems/payment-instruments,-clearing,-and-settlement/card-based-electronic-payments/prepaid-(stored-value)-cards.aspx
The market for prepaid cards, sometimes called stored-value
cards, is one of the fastest-growing segments of the retail
financial services industry. While the terms prepaid cards and
stored-value cards are frequently used interchangeably, differences
exist between the two products.
Prepaid cards are generally issued to persons who deposit funds
into an account of the issuer. During the funds deposit process,
most issuers establish an account and obtain identifying data from
the purchaser (e.g., name, phone number, etc.).
Stored-value cards do not typically involve a deposit of funds
as the value is prepaid and stored directly on the cards. Because
its business model requires cardholders to pay in advance, it
substantially eliminates the nonpayment risk for the issuing
financial institution. The functionality of this product is leading
to a wide range of card programs that operate in either closed or
open-loop systems, and program innovation has resulted in the
development of systems that operate in both structures. Closed-loop
systems are generally retailer/issuer business models, while
general-purpose cards issued by financial institutions tend to
operate in open-loop systems. Open-loop system prepaid cards are
processed using the same systems as the branded network cards
(MasterCard, Visa, American Express, and Discover) and offer the
same functionality.
In the past, prepaid cards were mostly issued by nonfinancial
businesses in limited deployment environments such as mass transit
systems and universities. In recent years, prepaid cards have grown
significantly as financial institutions and nonbank organizations
target under-banked markets and overseas remittances. Technological
innovations in the way information is stored (e.g., magnetic strip
or computer chip), the physical form of the payment mechanism, and
biometric account access and authentication are converging to create
efficiencies, reduce transaction times at the point of sale, and
lower transaction costs.
There are several types of prepaid cards, including gift,
payroll, travel, and teen cards. Either the consumer or an issuer
funds the account for the card. When a consumer uses the card to
make a purchase, the merchant deducts the amount of the purchase
from the card. Transaction authorization can take place through an
existing network, a chip stored on the card, or information coded on
the magnetic strip. Once the stored value in the card is exhausted,
customers may either replenish the value or acquire a new card.
In addition to cards, stored-value payment devices are emerging
in a variety of other physical forms, most notably key fobs. With
the recent introduction of contactless payment technologies, use of
chips (smart cards), radio frequency identification (RFID), and
near-field communication (NFC) payment devices are becoming more
innovative. Initiatives are underway to introduce mobile phones with
integrated microchips that can initiate a payment when waved over a
specially-equipped reader. The integrated chip can store value,
authenticate a consumer, or contain consumer preferences and loyalty
program information that can be used for marketing purposes.
Prepaid cards may be subject to legal and regulatory risks. For
example, the Federal Reserve Board's final rule on Regulation E,
issued August 30, 2006, extended its applicability to prepaid cards
used for consumers' payroll. The Federal Reserve Board noted that it
will monitor the development of other card products and may
reconsider Regulation E coverage as these products continue to
develop. State laws vary widely with regard to fees. Additionally,
financial institutions should ensure that prepaid card product
programs comply with the Bank Secrecy Act and anti-money laundering
guidance.
The proposed rule articulated NCUA's general position that prepaid
card programs, including payroll cards, should not be considered escrow
accounts similar to IOLTAs for share insurance purposes because the
characteristics that define an attorney's relationship with, and the
fiduciary duties owed to, the attorney's clients are typically not
present in the prepaid card scenario. An IOLTA and a prepaid card
program serve very different purposes and typically have significantly
different structures. For this and other reasons, a prepaid card
program is not sufficiently similar to an IOLTA, for purposes of the
Insurance Parity Act, to qualify for pass-through share insurance
coverage as an escrow account similar to an IOLTA. However, the Board
encouraged comments and requested information about prepaid card
programs that commenters thought may be sufficiently similar to IOLTAs
for share insurance purposes.
E. Insurance for Prepaid Cards Outside of the Insurance Parity Act
Context
The Board explained in the proposed rule that, under certain
circumstances, some prepaid card programs currently may be entitled to
pass-through share insurance coverage under other aspects of part 745
unrelated to IOLTAs and the Insurance Parity Act. For example, if funds
in a prepaid card program deposited in a federally insured credit union
qualify as a share account that can be traced back to a specific owner
in a specific dollar amount and the owner is a member of the credit
union where the funds are kept, then those funds would be entitled to
share insurance pursuant to the current terms and limits of part 745.
F. What recordkeeping requirements must be met to receive share
insurance on IOLTAs and other similar escrow accounts?
As noted in the proposed rule, FDIC's deposit insurance regulations
provide that the FDIC will recognize a claim for insurance coverage
based on a fiduciary relationship (such as an IOLTA or escrow account)
only if the relationship is expressly disclosed, by way of specific
references, in the deposit account records of the insured depository
institution.\18\ FDIC's deposit insurance regulations further provide
that if the deposit account records of an insured depository
institution disclose the existence of a relationship which might
provide a basis for additional insurance, then the details of the
relationship and the interests of other parties in the account must be
ascertainable either from the deposit
[[Page 80638]]
account records of the insured depository institution or from records
maintained, in good faith and in the regular course of business, by the
depositor or by some person or entity that has undertaken to maintain
such records for the depositor.\19\
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\18\ 12 CFR 330.5(b)(1).
\19\ 12 CFR 330.5(b)(2).
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Similarly, NCUA's current share insurance regulations provide that
the account records of an insured credit union shall be conclusive as
to the existence of any relationship pursuant to which the funds in the
account are deposited and on which a claim for insurance coverage is
founded. Examples of such relationships include those involving
trustees, agents, and custodians.\20\ These kinds of accounts also
include IOLTAs and other escrow accounts similar to IOLTAs. NCUA will
not recognize a claim for insurance based on such a relationship in the
absence of such disclosure. Further, NCUA's share insurance regulations
provide that if the account records of an insured credit union disclose
the existence of a relationship which may provide a basis for
additional insurance, then the details of the relationship and the
interests of other parties in the account must be ascertainable either
from the records of the credit union or the records of the member
maintained in good faith and in the regular course of business.\21\
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\20\ 12 CFR 745.2(c)(1).
\21\ 12 CFR 745.2(c)(2).
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IOLTAs and other similar escrow accounts exemplify the kinds of
accounts in which a relationship exists upon which a claim for
insurance coverage could be founded. They are among the kinds of
accounts that NCUA's regulations are intended to cover. Accordingly,
based on NCUA's current share insurance regulations, for IOLTAs and
other similar escrow accounts to receive the share insurance coverage
to which they are entitled, the recordkeeping provisions of NCUA's
share insurance regulations must be satisfied. No additional
recordkeeping requirements are imposed by the Insurance Parity Act.
Therefore, the Board did not propose any regulatory changes or
additions in this regard, but nonetheless welcomed comments on this
topic.
G. Does the enhanced share insurance coverage provided by the Insurance
Parity Act affect the BSA requirements for insured credit unions?
The proposed rule did not intend to discuss in detail an insured
credit union's BSA requirements. Rather, NCUA intended it to remind
insured credit unions of their continued BSA responsibilities with
respect to IOLTAs and other similar escrow accounts. This is especially
true given that IOLTAs and other similar escrow accounts will begin to
contain funds for nonmembers which are likely not known by the credit
unions in which the accounts are kept. The Board did not propose to
make any regulatory changes in this regard, but nonetheless welcomed
comments.
F. Do nonmember funds kept in a credit union as a result of the
enhanced share insurance coverage provided by the Insurance Parity Act
count towards a federal credit union's limit on the receipt of payments
on shares from nonmembers pursuant to Sec. 701.32 of NCUA's
regulations?
The Insurance Parity Act provides that IOLTAs and other similar
escrow accounts are considered member accounts if the attorney
administering the IOLTA or the escrow agent administering the escrow
account is a member of the insured credit union in which the funds are
held. In the proposed rule, the Board stated that if an IOLTA or other
similar escrow account satisfies the above requirement and, therefore,
is treated by the Insurance Parity Act as a member account, then the
IOLTA or other similar escrow account also should be considered a
member account for purposes of Sec. 701.32 of NCUA's regulations.
Therefore, funds in those member accounts do not count towards a
federal credit union's limit on the receipt of payments on shares from
nonmembers pursuant to Sec. 701.32 of NCUA's regulations.\22\
Accordingly, the Board did not propose any regulatory changes in this
regard, but nonetheless welcomed comments.
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\22\ 12 CFR 701.32.
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III. Public Comments on the April 2015 Proposed Rule
NCUA received eighteen comment letters on the proposed rule: four
from credit unions; three from national trade associations; nine from
credit union leagues; one from an attorney; and one from a credit card
company. Below is a summary of those comments.
A. General Comments
Generally, all of the commenters supported the proposed rule.
However, as explained in more detail below, several commenters offered
suggestions for additional types of escrow accounts that they believed
should be afforded enhanced pass-through share insurance coverage. In
addition, most commenters advocated for pass-through share insurance
coverage on prepaid cards but did not provide legal analysis to support
such expanded coverage.
B. Definition of ``Pass-Through Share Insurance''
All of the commenters that addressed this definition supported the
proposed use of the statutory definition of ``pass-through share
insurance.'' Accordingly, this final rule adopts the proposed
definition without change.
C. Other Similar Escrow Accounts and Prepaid Cards
As a preface to the following discussion of the commenters'
positions on escrow accounts and prepaid cards, a reminder of how NCUA
currently insures those accounts and how that might change as a result
of the Insurance Parity Act will provide additional clarity. In the
written comments received and in other forms of communications NCUA has
had with various stakeholders on this topic, there appears to be some
degree of misunderstanding.
Accordingly, the Board reiterates and emphasizes that, even in the
absence of the Insurance Parity Act, it currently insures certain
escrow accounts and prepaid cards under current share insurance
provisions. The Insurance Parity Act amends the membership requirements
associated with covering those kinds of accounts, but it does not
organically create or authorize such coverage as though such authority
did not previously exist.
The membership requirements in the Insurance Parity Act shift the
focus from the membership status of the principals, the actual owners
of the funds, to the membership status of: (1) The attorney
administering the IOLTA; (2) the escrow agent administering the escrow
account; and (3) if prepaid cards are deemed ``other similar escrow
accounts,'' then the party associated with a prepaid card that is
acting in a similar capacity as the attorney or escrow agent. As
discussed more fully below, in many instances, the shift in whose
membership status matters will make it logistically easier for certain
kinds of accounts to obtain enhanced pass-through coverage, for example
IOLTAs. However, for some kinds of accounts including certain prepaid
cards if they are determined to qualify, this shift in focus could
actually make it significantly more difficult to obtain enhanced pass-
through coverage.
Further, any increase in an insured credit union's total amount of
insured shares as a result of the enhanced coverage provided by the
Insurance Parity Act will require that credit union to increase
proportionally the 1%
[[Page 80639]]
deposit it is required to maintain with the National Credit Union Share
Insurance Fund (NCUSIF) pursuant to the Act.\23\ Finally, the Board
notes that the shift in membership focus in the Insurance Parity Act
represents a rare departure from the Act's general requirement that
share insurance coverage be provided only to credit union members.
Accordingly, this final rule respects the major implications of such an
exception in interpreting congressional intent.
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\23\ 12 U.S.C. 1782(c)(1).
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1. Escrow Accounts
Several commenters suggested other types of accounts that they
believed satisfies the definition of ``other similar escrow accounts''
and, therefore, should be afforded pass-through share insurance
coverage in the same manner as an IOLTA, specifically meaning that the
membership status of the principal, the owner of the funds, is
irrelevant provided the escrow agent is a member of the credit union in
which the founds are held. Those suggestions included: (1) Agent-trust
fiduciary accounts such as vacation rental security accounts and
cemetery trust accounts; (2) any escrow account used to facilitate a
purchase transaction such as the purchase of boats, commercial vessels,
and planes; (3) any account established by a licensed or registered
escrow agent; (4) landlord/tenant accounts; and (5) public adjuster
accounts and education disbursement accounts.
As indicated in the proposed rule, there are many escrow accounts
currently in use that are similar to IOLTAs and entitled to the
enhanced pass-through insurance contemplated by the Insurance Parity
Act. The Board supports providing enhanced insurance coverage for those
accounts. In the proposal, the Board requested that commenters
specifically identify the attributes of those accounts they believe
should receive enhanced pass-through coverage and to define the essence
of those accounts. Such a detailed description would help NCUA identify
certain accounts as similar to IOLTAs without the need for a case-by-
case analysis of escrow accounts. Unfortunately, while commenters
identified broad and general categories of escrow accounts, they did
not provide specifics in a way that allows NCUA to eliminate the need
for case-by-case review. This is not surprising as there is a lack of
universally accepted titles to describe certain kinds of escrow
accounts. Further, there are many kinds of escrow accounts that are
similar to each other but which are not structurally or functionally
identical which further hampers precise labeling.
It is this lack of uniformity in language, function, and
organizational structure that makes it difficult for NCUA to promulgate
regulations that identify by name the escrow accounts eligible for
enhanced share insurance coverage. Despite this obstacle, NCUA will
provide enhanced share insurance coverage to certain escrow accounts,
in addition to real estate escrow accounts and prepaid funeral accounts
as proposed, on a case-by-case basis, provided such escrow accounts
satisfy the definition of ``other similar escrow account'' as defined
in both the proposed rule and this final rule.\24\ Specifically,
``other similar escrow account'' means an account where a licensed
professional or other individual serving in a fiduciary capacity holds
funds for the benefit of a client as part of a transaction or business
relationship, such as real estate escrow accounts and prepaid funeral
accounts.
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\24\ 80 FR 27109, 27114 (May 12, 2015). In the proposed rule,
NCUA used the term ``realtor'' account to describe what is being
called in this final rule a ``real estate escrow'' account. NCUA is
changing terminology in this final rule at the suggestion of two
commenters, who have indicated that the term ``realtor'' is a
federally registered collective membership mark. NCUA agrees it is
better to use the more generic term, but confirms that there is no
substantive change being made from the proposed rule to the final.
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Two commenters advocated a less restrictive definition of ``other
similar escrow account'' that would consider the existence of a
fiduciary relationship as an indicia of evidence of an ``other similar
escrow account,'' but would not make it a determinative factor. These
commenters stated that a less restrictive definition would allow for
inclusion of accounts that, while not rising to the level of a
fiduciary relationship, exhibit trust and confidence and involve the
holding of funds on behalf of another. The commenters offered landlord/
tenant accounts as examples of accounts that would fall into that
broader definition. However, several other commenters disagreed with
having a broader definition of ``other similar escrow account.''
Instead, these commenters preferred NCUA's proposed requirement that an
actual fiduciary relationship exist. The Board agrees with those
commenters supporting the proposed definition that makes a fiduciary
relationship a required component for enhanced share insurance.
Congress made it clear that only escrow accounts that are similar to
IOLTAs are to be provided with enhanced pass-through coverage. The
lawyer-client relationship is largely characterized by the fiduciary
duty lawyers owe their clients. Accordingly, requiring the fiduciary
component to be present with respect to providing enhanced pass-through
insurance coverage for ``other similar escrow accounts'' comports with
congressional intent.
Two commenters stated that NCUA should clarify that real estate
escrow accounts and prepaid funeral accounts qualify as ``other similar
escrow accounts'' that are eligible for enhanced insurance coverage,
but that the universe of ``other similar escrow accounts'' is not
limited to those two named accounts. The Board made this clear in the
proposed rule, but, as discussed above, the Board reiterates it here
nonetheless.
One commenter argued that enhanced pass-through coverage should be
expanded to include accounts held and administered by entities, such as
law firms, real estate agencies, and funeral homes. This commenter
stated that, as written, the proposed rule could be read as only
permitting pass-through share insurance for accounts opened and held by
individuals such as a lawyer or real estate agent, but not by their
firms or brokerages. The Board agrees with the commenter that coverage
should not be limited to accounts held and administered only by
individual professionals but not their firms, and confirms the proposed
rule did not have that effect. However, accounts opened by a law firm
instead of an individual attorney, for example, will still need to
satisfy the fiduciary relationship requirement. Accordingly, law firms
and other entities administering the accounts must comply with all
relevant law to maintain that relationship, which may or may not
require an individual lawyer or escrow agent to also be named on the
account.
Further, the Insurance Parity Act did not eliminate the membership
requirement to obtain share insurance. Rather, it shifted the
membership requirement from the owner of funds to the administrator of
the IOLTA or escrow account. That means, for example, that a law firm
that wishes to open an escrow account at a credit union must meet the
credit union's field of membership criteria. NCUA recognizes, however,
that a law firm, as an entity, may have difficulty meeting the
membership criteria of the credit union of its choosing. Accordingly,
if the firm itself does not qualify for membership in a particular
credit union, but one of its lawyers does, then the firm may maintain
an IOLTA in that credit union if the eligible lawyer joins the credit
union. This is consistent with congressional intent to place credit
[[Page 80640]]
unions on a more level playing field with banks with respect to IOLTAs
and other similar escrow accounts. It is the responsibility of the law
firm or other entity wishing to establish an escrow account, however,
to first determine if state and other applicable law and rules of
professional conduct allow for such an arrangement. This final rule
does not authorize any parties to create an illegal or unethical
account relationship.
2. Prepaid Cards
Generally, all of the commenters that addressed prepaid cards
believed NCUA should include them as ``other similar escrow accounts.''
However, the commenters did not provide sufficient legal analysis to
support their positon. Rather, these commenters generally suggested
that NCUA should offer the same insurance coverage as FDIC on prepaid
cards and that failure to do so would place credit unions at a
competitive disadvantage. In this regard, no commenters acknowledged
that NCUA currently insures some prepaid cards held by members and
that, except for the membership requirement, NCUA's analysis for
calculating this coverage is essentially the same as the FDIC's
analysis.
One commenter provided a detailed analysis of the prepaid card
industry and suggested ways in which NCUA could offer pass-through
share insurance coverage on these accounts. This commenter divided
prepaid cards into two categories: general-purpose reloadable cards
(GPRs) and cards that allow for the disbursement of funds. The
commenter stated that GPRs function like checking or share draft
accounts, without checks or drafts, and allow a member to add or load
additional funds onto the card. Cards for the disbursement of funds are
used by employers and governments to distribute salaries and other
benefits. The commenter did not specifically explain why these
mechanisms for accessing funds are escrow accounts or how the
distributors of such products would obtain the required credit union
membership under the Insurance Parity Act.
This commenter went on to state that prepaid account funds are
typically, but not always, deposited in omnibus accounts in a bank or a
credit union in a master account held in the name of the prepaid card
program for the benefit of the individual accountholders in the
program. Individual cardholder funds are typically, but not always,
tracked on a subaccount basis and recorded by the prepaid card issuer,
processor, or prepaid program manager. The commenter acknowledged that
while an attorney-client fiduciary relationship is not present, the
Electronic Fund Transfer Act \25\ imposes the same or similar type of
fiduciary obligations on the issuer with respect to disbursing and
safeguarding funds in accordance with the instructions of the account
holder. The commenter argued that, as a result, NCUA should provide
pass-through share insurance on prepaid cards even where the cardholder
is not a member of the credit union where the funds are held. The Board
notes that Regulation E, which implements portions of the Electronic
Fund Transfer Act, views escrow accounts and certain prepaid cards such
as payroll cards as quite different for regulatory purposes, which
further highlights the dissimilarities between certain prepaid cards
and escrow accounts.
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\25\ 15 U.S.C. 1693 et seq.
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One commenter stated that pass-through coverage should be provided
on cards where the owners of those cards are members of the credit
union where the funds are held. As noted above, NCUA currently does
this under appropriate circumstances.
Several commenters argued that NCUA currently, and irrespective of
the Insurance Parity Act, has the authority to permit prepaid cards to
be considered member accounts. These commenters stated that the FCU Act
provides the Board with broad latitude in defining a member account and
that NCUA regulations and legal opinions have created a precedent for
allowing insurance coverage to nonmembers in certain instances. We
agree that these statements are true but only in certain instances as
discussed above.
These commenters further reasoned that any account opened at a
credit union is a ``member account,'' thereby allowing the Board to
authorize insurance coverage for payroll cards or other accounts
established by credit union members that hold nonmember accounts. The
Board does not agree that this statement is legally accurate.
One commenter stated that NCUA should provide pass-through share
insurance coverage on prepaid cards where a fiduciary relationship can
be clearly established and the fiduciary is a member of the credit
union. Another commenter stated that NCUA should provide pass-through
share insurance coverage only on those prepaid card accounts that have
the characteristics of ``other similar escrow accounts.'' This
commenter suggested that NCUA could stipulate that a qualifying prepaid
card account must meet the proposed record keeping requirements for
escrow accounts, thereby eliminating those prepaid card accounts that
lack the characteristics of escrow accounts because the record keeping
requirements are not part of the business model of these types of
products. Conversely, the commenter reasoned that prepaid card accounts
that meet the record keeping requirements would present similar
characteristics of escrow accounts. Because ``other similar escrow
accounts,'' as that term is defined in this rule, are entitled to
enhanced pass-through insurance under the Insurance Parity Act, a
prepaid card satisfying that definition would be entitled to such
treatment. However, prepaid cards currently do not satisfy that
definition.
Two other commenters also advocated pass-through share insurance on
prepaid card accounts that establish a similar relationship as escrow
accounts and have similar characteristics, including payroll cards and
prepaid gift cards. These commenters, however, did not elaborate on how
to assess those characteristics or the level of similarity.
Finally, one commenter suggested that NCUA should simply stipulate
that credit unions can exercise the same powers authorized for banks
under 12 CFR part 300 or allow credit unions to request to have all of
the same trust powers that are exercised by banks. This would exceed
NCUA's authority under the FCU Act and the Insurance Parity Act.
For many years, the credit union industry has requested that NCUA
and Congress enable the NCUSIF to insure IOLTAs on a pass-through basis
without regard to the membership status of the lawyer's clients. The
essential purpose of the Insurance Parity Act is to provide that relief
with respect to IOLTAs. Further, the Insurance Parity Act granted
additional enhanced coverage for escrow accounts similar to IOLTAs,
which is relief the credit union industry historically has not
requested.
The Insurance Parity Act limits enhanced coverage to a narrow
universe of accounts. The Insurance Parity Act is not intended to
eliminate every distinction between banks and credit unions or alter
how every kind of credit union account may be created, structured, and
insured. The fact that credit unions, generally speaking, must only
serve their members is a critical distinction between banks and credit
unions. While there are some statutory exemptions from the membership
requirements applicable to accounts the NCUSIF may insure, the general
principle of share insurance coverage is that coverage is member-based.
Accordingly, in interpreting whether prepaid cards are to be considered
[[Page 80641]]
``other similar escrow accounts'' for purposes of the Insurance Parity
Act, NCUA must respect the statutory limitations in place and interpret
the Insurance Parity Act in a responsible, justifiable, and not overly
broad manner.
NCUA's research on prepaid cards has yielded results similar to
those of the Federal Financial Institutions Examination Council and the
FDIC, although those two entities may use different terminology to
discuss prepaid cards. Prepaid cards are an ever expanding vehicle in
the financial services marketplace, and they seem to be constantly
evolving into new shapes and forms. They come in many varieties and are
structured in many different ways. This variety and continuous
evolution makes it difficult to devise a single, universal, and useful
definition that applies to all prepaid cards.
In its General Counsel's Opinion No. 8, the FDIC discussed prepaid
products, in relevant part as follows:
Stored value products, or ``prepaid products,'' may be divided
into two broad categories: (1) Merchant products; and (2) bank
products.
A merchant card (also referred to as a ``closed-loop'' card)
enables the cardholder to collect goods or services from a specific
merchant or cluster of merchants. Generally, the cards are sold to
the public by the merchant in the same manner as gift certificates.
Examples are single-purpose cards such as cards sold by book stores
or coffee shops. Another example is a prepaid telephone card.
Merchant cards do not provide access to money at a depository
institution. When a cardholder uses the card, the merchant is not
paid through a depository institution. On the contrary, the merchant
has been prepaid through the sale of the card. In the absence of
money at a depository institution, no insured ``deposit'' will exist
under section 3(l) of the FDI Act. See FDIC v. Philadelphia Gear
Corporation, 476 U.S. 426 (1986).
Bank cards are different. Bank cards (also referred to as
``open-loop'' cards) provide access to money at a depository
institution. In some cases, the cards are distributed to the public
by the depository institution itself. In many cases, the cards are
distributed to the public by a third party. For example, in the case
of ``payroll cards,'' the cards often are distributed by an employer
to employees. In the case of multi-purpose ``general spending
cards'' or ``gift cards,'' the cards may be sold by retail stores to
customers.
A bank card usually enables the cardholder to effect transfers
of funds to merchants through point-of-sale terminals. A bank card
also may enable the cardholder to make withdrawals through automated
teller machines (``ATM's''). In other words, a bank card provides
access to money at a depository institution. The money is placed at
the depository institution by the card distributor (or other company
in association with the card distributor), but is transferred or
withdrawn by the cardholders. In some cases, the card is
``reloadable'' in that additional funds may be placed at the
depository institution for the use of the cardholder.
This General Counsel's opinion does not address merchant cards
because such cards do not involve the placement of funds at insured
depository institutions. The applicability of this General Counsel's
opinion is limited to bank cards and other nontraditional access
mechanisms, such as computers, that provide access to funds at
insured depository institutions.\26\
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\26\ FDIC General Counsel's Opinion No. 8--Insurability of Funds
Underlying Stored Value Cards and Other Nontraditional Access
Mechanisms; 74 FR 67155 (November 13, 2008).
Merchant cards, as discussed above, do not involve a deposit of
funds at a financial institution by the card holder as the value is
prepaid and stored directly on the cards. Accordingly, this kind of
vehicle is clearly not insurable under the Insurance Parity Act as
there is no account held at a federally insured credit union.
Because open loop cards, which FDIC refers to as bank cards,
provide access to money at an insured depository institution such as a
federally insured credit union, NCUA has examined these instruments
carefully to determine if they should be insured as escrow accounts
similar to IOLTAs. The Board noted in the proposed rule that open loop
cards are currently insured by the NCUSIF under certain circumstances,
which include the requirement that the cardholder be a member of the
federally insured credit union in which the funds are held. The Board
also noted in the proposed rule that prepaid card programs, including
open loop cards such as payroll cards, should not be considered escrow
accounts similar to IOLTAs for share insurance purposes because, among
other reasons, the characteristics that define an attorney's
relationship with, and the fiduciary duties owed to, the attorney's
clients are typically absent in the open loop prepaid card scenario.
Commenters argued that there is some element of a trust relationship in
the prepaid card scenario but generally acknowledged that it does not
rise to the level of an attorney-client relationship. NCUA's ongoing
research of prepaid cards supports the position NCUA took in the
proposed rule that an IOLTA and a prepaid card program serve very
different purposes for the client and card holder and have drastically
different structures.
In addition to the structural and functional dissimilarities
between open loop cards and IOLTAs, open loop cards are not escrow
accounts as that term is commonly understood and contemplated in the
Insurance Parity Act. Further, in evaluating prepaid card products, the
FDIC has determined that while not all prepaid card programs are
structured the same, it generally views companies that sell or
distribute general purpose prepaid cards as deposit brokers and the
funds they deposit as brokered deposits. While this does not directly
address whether open loop cards are escrow accounts similar to IOLTAs,
FDIC's position on open loop cards supports NCUA's determination in
this regard. More specifically, a deposit broker serves a drastically
different purpose than an attorney representing a client, and a
brokered deposit placed in a depository institution to obtain a high
investment yield also is drastically different from funds a client
places in trust with its lawyer as part of their legal relationship.
The fact that the characteristics and purposes of an IOLTA and a
brokered deposit are so dissimilar supports NCUA's conclusion that open
loop cards are not escrow accounts similar to IOLTAs for purposes of
the Insurance Parity Act and, therefore, not entitled to pass-through
coverage unless the cardholder is a member of the federally insured
credit union in which the funds are deposited and satisfies other
criteria discussed above.
In conducting this analysis, NCUA paid particular attention to
payroll cards as many in the credit union industry seemed particularly
interested in those accounts. NCUA's research shows that there are
several different kinds of payroll card products, including some that
while called a ``payroll card'' may actually be a debit card product
sponsored by a third party vendor that is not the cardholder's
employer. NCUA's analysis revealed that many of the same barriers to
enhanced pass-through coverage that exists for other types of prepaid
cards also apply to payroll cards. More specifically, the structure and
characteristics of a payroll card are not that of an escrow account
that is similar to an IOLTA. The Board notes, however, that even
without the special membership treatment provided by the Insurance
Parity Act, the NCUSIF currently insures on a pass-through basis those
payroll cards that satisfy NCUA's regular account and membership
requirements as discussed above.
In conclusion, NCUA will expand its insurance coverage pursuant to
the Insurance Parity Act for IOLTAs and other accounts that satisfy the
definition of ``other similar escrow account,'' as defined herein. NCUA
also will continue to insure on a pass-through
[[Page 80642]]
basis those prepaid card products and escrow accounts that are not
similar to IOLTAs as it currently does based on the provisions of part
745, but will not afford those accounts enhanced coverage under the
Insurance Parity Act. NCUA will continue to monitor the prepaid card
industry and its evolution and may revisit this subject in the future
if necessary.
E. Recordkeeping Requirements
Only two commenters addressed this topic. One commenter fully
supported the proposed language, while one commenter recommended that
specific fields be included on the 5300 Call Report to capture the
value of negotiable instruments, IOLTAs, and prepaid cards. This
commenter believed that the additional fields would assist in accurate
reporting of balances covered by federal insurance. This final rule
maintains the recordkeeping requirements as proposed.
IV. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires NCUA to prepare an
analysis to describe any significant economic impact a regulation may
have on a substantial number of small entities.\27\ For purposes of
this analysis, NCUA considers small credit unions to be those having
under $50 million in assets.\28\ This rule implements the Insurance
Parity Act, which enhances share insurance coverage for IOLTAs and
other similar escrow accounts. Accordingly, NCUA certifies the rule
will not have a significant economic impact on a substantial number of
small credit unions.
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\27\ 5 U.S.C. 603(a).
\28\ On September 24, 2015, the Board published Interpretative
Ruling and Policy Statement 15-1, which amends the definition of
small credit unions for purposes of the RFA to credit unions with
assets of less than $100 million. 80 FR 57512 (Sept. 24, 2015). This
change, however, does not take effect until November 23, 2015, which
is after the date this rule was issued by the Board.
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Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency by rule creates a new paperwork burden on regulated
entities or modifies an existing burden.\29\ For purposes of the PRA, a
paperwork burden may take the form of either a reporting or a record-
keeping requirement, both referred to as information collections. This
rule, which enhances share insurance coverage for IOLTAs and other
similar escrow accounts, will not create new paperwork burdens or
modify any existing paperwork burdens.
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\29\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. In
adherence to fundamental federalism principles, NCUA, an independent
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies
with the executive order. This rule will not have a substantial direct
effect on the states, on the connection between the national government
and the states, or on the distribution of power and responsibilities
among the various levels of government. NCUA has determined this rule
does not constitute a policy that has federalism implications for
purposes of the executive order.
Assessment of Federal Regulations and Policies on Families
NCUA has determined that this rule will not affect family well-
being within the meaning of Section 654 of the Treasury and General
Government Appropriations Act, 1999.\30\
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\30\ Public Law 105-277, 112 Stat. 2681 (1998).
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List of Subjects in 12 CFR Part 745
Credit, Credit unions, Share insurance.
By the National Credit Union Administration Board on December
17, 2015.
Gerard Poliquin,
Secretary of the Board.
For the reasons stated above, NCUA amends 12 CFR part 745 as
follows:
PART 745--SHARE INSURANCE AND APPENDIX
0
1. The authority for part 745 continues to read as follows:
Authority: 12 U.S.C. 1752(5), 1757, 1765, 1766, 1781, 1782,
1787, 1789; title V, Pub. L. 109-351; 120 Stat. 1966.
0
2. Add Sec. 745.14 to subpart A to read as follows:
Sec. 745.14 Interest on lawyers trust accounts and other similar
escrow accounts.
(a)(1) Pass-through share insurance. The deposits or shares of any
interest on lawyers trust account (IOLTA) or other similar escrow
account in an insured credit union are insured on a ``pass-through''
basis, in the amount of up to the SMSIA for each client and principal
on whose behalf funds are held in such accounts by either the attorney
administering the IOLTA or the escrow agent administering a similar
escrow account, in accordance with the other share insurance provisions
of this part.
(2) Pass-through coverage will only be available if the
recordkeeping requirements of Sec. 745.2(c)(1) of this part and the
relationship disclosure requirements of Sec. 745.2(c)(2) of this part
are satisfied. In the event those requirements are satisfied, funds
attributable to each client and principal will be insured on a pass-
through basis in whatever right and capacity the client or principal
owns the funds. For example, an IOLTA or other similar escrow account
must be titled as such and the underlying account records of the
insured credit union must sufficiently indicate the existence of the
relationship on which a claim for insurance is founded. The details of
the relationship between the attorney or escrow agent and their clients
and principals must be ascertainable from the records of the insured
credit union or from records maintained, in good faith and in the
regular course of business, by the attorney or the escrow agent
administering the account. NCUA will determine, in its sole discretion,
the sufficiency of these records for an IOLTA or other similar escrow
account.
(b) Membership requirements and treatment of IOLTAs. For share
insurance purposes, IOLTAs are treated as escrow accounts. IOLTAs and
other similar escrow accounts are considered member accounts and
eligible for pass-through share insurance if the attorney administering
the IOLTA or the escrow agent administering the escrow account is a
member of the insured credit union in which the funds are held. In this
circumstance, the membership status of the clients or the principals is
irrelevant.
(c) Definitions. (1) For purposes of this section:
(i) Interest on lawyers trust account and IOLTA mean a system in
which lawyers place certain client funds in interest-bearing or
dividend-bearing accounts, with the interest or dividends then used to
fund programs such as legal service organizations who provide services
to clients in need.
(ii) Other similar escrow account means 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.
(iii) Pass-through share insurance means, with respect to IOLTAs
and other similar escrow accounts, insurance coverage based on the
interest
[[Page 80643]]
of each person on whose behalf funds are held in such accounts by the
attorney administering the IOLTA or the escrow agent administering a
similar escrow account.
(2) The terms ``interest on lawyers trust account'', ``IOLTA'', and
``pass-through share insurance'' are given the same meaning in this
section as in 12 U.S.C. 1787(k)(5).
[FR Doc. 2015-32164 Filed 12-24-15; 8:45 am]
BILLING CODE 7535-01-P