ALEXANDRIA, Va.—By a pair of 3-0 votes, the NCUA board Thursday passed a final rule covering interest on lawyer trust accounts (IOLTAs) and certain other escrow accounts involving prepaid cards, as well as putting out for comment two broad categories of its rules.
Following President Obama’s signing of the Credit Union Share Insurance Fund Parity Act late last year, share insurance coverage is now provided for nonmembers who pay into lawyers' trust accounts. NCUA's new final rule adds share insurance coverage for nonmembers who pay into real estate agents' escrow accounts and funeral directors' escrow accounts. The new and very detailed rule also leaves open the possibility of adding share insurance coverage for nonmembers who pay into "other similar escrow accounts" under the law.
However, NCUA determined that prepaid cards do not legally qualify as "other similar escrow accounts" under the law. So only members' funds in prepaid cards will continue to receive share insurance coverage, according to the rule. (Click here for the final IOLTA rule.)
As NCUA Chair Debbie Matz noted during the board meeting, the issue being discussed is a very narrow one, which is what is the status of deposit insurance on prepaid cards in the event of a credit union’s failure.
In Thursday’s meeting, Matz said the key question facing the board is whether the final rule should extend insurance coverage to nonmembers in certain situations.
Addressing commenters’ letters, Matz said some suggested that nonmembers holding prepaid cards from a failed credit union should be paid out as well as members.
“However, I’m concerned that healthy credit unions could pay a price for such a policy. Because to make the commenters’ idea work, all credit unions would first have to take on a new burden—tracking the balances of covered prepaid cards held by nonmembers, as well as members,” Matz said.
Balances May Be Small
Matz added that credit unions with traceable prepaid card balances would have to pay the statutory 1% deposit to cover those nonmembers’ balances in the Share Insurance Fund.
“The balances of nonmembers’ prepaid cards tied to accounts at federally insured credit unions may be very small, however, tracking those nonmembers’ balances could prove to be difficult and costly for many credit unions,” said Matz, “and it would bring little benefit in the event a credit union fails.”
Matz reminded that when a CU fails, NCUA must verify that payouts are made on insured accounts.
“For example, if a non-member claims to have funds insured at a failed credit union, but that non-member cannot prove those funds were in an authorized insured account, NCUA must not make that insurance payout,” Matz said. “I take NCUA’s payout responsibility very seriously on behalf of all federally insured credit unions that pay into the Share Insurance Fund. And I think this board should be very careful to avoid defining insurance coverage too loosely.”
Avoiding Overextending Coverage To Nonmembers
Matz cautioned that if the agency “overextends” coverage to nonmembers who have no verifiable connection to an authorized insured account, NCUA “would be doing a disservice to all credit unions” that pay into the NCUSIF.
“Even if the exposure is small, as a public policy matter, I cannot in good conscience support taking Share Insurance Fund money, which was contributed by credit unions on behalf of their members, and then paying it out to nonmembers — unless NCUA has proof of qualified insurance coverage for the account,” stated Matz.
Matz continued that the challenge with the rule is to define which types of escrow accounts are similar to lawyers’ trust accounts, and therefore eligible for pass-through insurance.
“Dozens of ‘other similar escrow accounts’ may exist, in addition to escrow accounts maintained on behalf of clients by real estate brokers and funeral directors,” said Matz. “For example, in certain states, accounts that some landlords hold on behalf of tenants could have a similar structure to lawyers’ trust accounts. Yet in other states with different laws, landlord/tenant accounts might not be similar.”
For that reason, Matz said she supports the approach to list certain principles of “other similar escrow accounts,” instead of spelling out a finite list of covered account categories in this final rule.
“This principles-based approach leaves the door open for ‘other similar escrow accounts’ to be established in the future,” she said. “In general, if a person pays into an insured account held by a member — and if the member has a fiduciary duty to save the funds as a lawyer, real estate broker, or funeral director does on behalf of clients — then the account could be treated as an ‘other similar escrow account.’
“In such a case, I could support pass-through coverage so that the insured account held by the member covers everyone who paid into that account — including members and nonmembers,” concluded Matz
Matz acknowledged that the final rule is very “nuanced,” and the agency must walk a “fine line” between the membership requirements in the Federal Credit Union Act and the exceptions provided in the Insurance Parity Act.
“That’s why I have asked staff to develop guidance, written in ‘plain English,’ to be distributed to examiners and credit unions.
Matz said the guidance would be issued before the effective date of this final rule in late January of 2016.
Earlier this year, NASCUS stated strongly that in its view NCUA should exercise its authority to extend pass-through coverage to the prepaid card accounts.
In its request for comments, NCUA acknowledged that some prepaid card accounts have similar characteristics to escrow and IOLTA accounts – yet the agency denied the entire class of accounts because others do not have the similar features.
“A better approach would be to allow those prepaid card accounts that have the conforming characteristics and decline to provide pass-through coverage for those that do not,” NASCUS stated.
Prior to the vote taking place, NCUA staff told the board there will likely be a bit of “uncertainty” once the rule goes into effect, but over time both credit unions and examiners will develop a better understanding.
More Rules Out For Comment
Separately, the NCUA board also voted in favor of putting out for comment certain portions of its rules as part of the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA). That law requires all agency rules to be reviewed and opened to comment every 10 years; this is the fourth time in that 10-year period NCUA has put out certain rules for comment, in this case it will be rules of procedures and rules related to safety and soundness.
The comment being sought is separate from the rolling one-third of its rules NCUA reviews every year.
To date, NCUA said it has received 17 comments as part of EGRPRA, with staff saying the comment received to date has been “comprehensive.”
NCUA staff said comment is being particularly sought on any rules judged to be outdated, unneeded or unduly burdensome.
So far in 2015 NCUA Chair Debbie Matz said the agency has provided regulatory relief by:
- Raising the asset threshold for regulatory flexibility for small credit unions to $100 million.
- Issuing a final rule to automatically add 12 categories of associations to qualifying federal credit unions’ fields of membership.
- Following up with an even more comprehensive field of membership proposal to expand options for community charters and occupational charters.
- For low-income credit unions, facilitating secondary capital with a more flexible policy to attract investors.
- Working to propose a rule next year to authorize supplemental capital for complex credit unions to count toward risk-based capital.
- Changing the way its Office of Consumer Protection handles consumer complaints.
- Receiving and reviewing a variety of ideas from EGRPRA commenters on member business loans.
“I have said since the very first round of EGRPRA that we are not waiting until the end of the process to act. So as we wrap up 2015 as a ‘Year of Regulatory Relief,’ we look forward to more comments, and we pledge to continue improving NCUA regulations in 2016.”