On February 18, 2011, the FDIC adopted updated final rules, regarding the unlimited insurance coverage, through December 31, 2012, for deposits held in Interest on Lawyers Trust Accounts (IOLTAs).  These accounts were previously covered by the FDIC’s Temporary Liquidity Guarantee Program, but were subsequently left out of Dodd-Frank’s expanded insurance coverage.

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 conference report of the Dodd-Frank Wall Street Reform and Consumer Protection Act contains a number of changes to FDIC Insurance limits.  The Dodd-Frank Act will also effectively make permanent the FDIC guarantee currently provided under the FDIC’s Transaction Account Guarantee program, with a few modifications.

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).

On June 22, 2010, the FDIC Board of Directors adopted a final rule extending the Transaction Account Guarantee (TAG) component of the Temporary Liquidity Guarantee Program (TLGP) through December 31, 2010, for insured depository institutions (IDIs) currently participating in the program. The TAG program guarantees all funds held at participating IDIs in qualifying noninterest-bearing transaction accounts beyond the recently increased $250,000 deposit insurance limit. This final rule preserves the interim rule’s assessment fee structure and 25 basis-point interest rate limit for NOW accounts guaranteed by the program.

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.”

On April 13, 2010, the FDIC extended the Transaction Account Guarantee (TAG) portion of the Temporary Liquidity Guarantee Program for another six months, through December 31, 2010, and preserved the flexibility to further extend the Transaction Account Guarantee through December 31, 2011 without further rule making.  In addition to extending the expiration date of the TAG program, the FDIC’s final rule (1) maintains the current assessment fees for participation, except that the calculation will now be based on an average daily balance rather than quarter-end balances; (2) reduces the maximum interest rate limit for NOW accounts guaranteed under the program from 50 basis points to 25 basis points; and (3) provides an opportunity for participating institutions to opt out of the program as of July 1, 2010.

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.

As a reminder, the FDIC has extended the Transaction Account Guarantee portion of the Temporary Liquidity Guarantee Program until June 30, 2010.  Institutions that have not previously opted-out of the program will automatically continue in the program (at increased costs) unless they pro-actively opt-out of the extension.

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.

Update: On April 13, 2010, the FDIC granted a further extension until December 31, 2010.

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.)

On June 23, 2009, the FDIC voted to seek comment on whether to extend the Transaction Account Guarantee under beyond its current expiration date of December 31, 2009.  The Transaction Account Guarantee provides unlimited deposit insurance for funds held in noninterest-bearing accounts (as well as IOLTA accounts and certain NOW accounts).  The Transaction Account Guarantee is part of the FDIC’s Temporary Liquidity Guarantee Program.

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).

On May 20, 2009, President Obama signed the Helping Families Save Their Homes Act of 2009 (Senate Bill 896).  Among other things, the Act:

• 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.

On May 6, 2009, the FDIC provided updated opt-out lists for the Debt Guarantee Program and Transaction Account Guarantee Program.  The decision to opt-out of either program was a binding decision as of December 5, 2008, and the FDIC has not given any explanation for why the opt-out lists have been updated, other than a generic statement that “entities may be added as we finalize the election submissions.”

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.

On January 30, 2009, Rob Klingler presented An Update on All Things TARP at the Alabama Bankers Association Community Bank Directors College.  The presentation gives an overview of the TARP Capital Purchase Program and FDIC’s Temporary Liquidity Guarantee Program.