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Temporary Unlimited FDIC Coverage for Noninterest-Bearing Transaction Accounts (Including IOLTA Accounts)

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Implementation of the Dodd-Frank Deposit Insurance Provision
Section 627 of the DFA (Eliminating the Prohibition on the Payment of Interest on Demand Deposit Accounts)
Disclosure Requirements of the Dodd-Frank Deposit Insurance Provision
Notice Requirement for Account Modifications (including Modifications to Demand Deposit Accounts to Allow Interest Accrual) and Sweep Accounts

Notice Requirement for Account Modifications (including Modifications to Demand Deposit Accounts to Allow Interest Accrual) and Sweep Accounts

31. What type of action by an IDI would trigger the notification requirement under 12 C.F.R. § 330.16(c)(3)?

Section §330.16(c)(3) provides that if an IDI “uses sweep arrangements, modifies the terms of an account, or takes other actions that result in funds no longer being eligible for full coverage” under the Dodd-Frank Deposit Insurance Provision, the IDI “must notify the affected customer and clearly advise them, in writing, that such actions will affect their deposit insurance coverage.” 

This notice requirement is intended primarily to apply to IDIs that, on or after July 21, 2011, begin paying interest on DDAs, as is permitted under Section 627 of the DFA.  If an IDI modifies the terms of its DDA agreement so that the account may pay interest, the IDI must notify affected customers and clearly advise them in writing that the account no longer will be eligible for full deposit insurance coverage as a noninterest-bearing transaction account. 

This provision also applies to “sweep accounts” where funds are swept from a noninterest-bearing transaction account to an interest-bearing deposit account.

32. Are there any specific requirements regarding the timing, form and/or content of the 12 C.F.R. § 330.16(c)(3) notice to depositors? 

No.  Although notifications are mandatory, 12 C.F.R. § 330.16(c)(3) does not impose specific requirements regarding the timing, form and/or content of the notice.  Rather, the FDIC expects IDIs to act in a commercially reasonable manner and to comply with applicable state and federal laws and regulations in informing depositors of changes to their account agreements.

33. Does 12 C.F.R. § 330.16(c)(3) require customer notification if on or after July 21, 2011 an IDI offers a new interest-earning DDA product (but makes no changes to any existing noninterest-bearing demand deposit agreements)?

No. The notice requirement in 12 C.F.R. § 330.16(c)(3)is triggered only if an IDI uses sweep arrangements or when deposit insurance coverage on existing accounts are affected by account modifications or other actions initiated by the IDI.  Please note that an IDI is not required to provide any FDIC mandated disclosures in connection with the opening of a business, interest-bearing DDA.  Only new consumer accounts require disclosures under the Truth in Savings Act and its implementing regulation, Regulation DD. 

34.  How is a “sweep account” defined for purposes of the 12 C.F.R. § 330.16(c)(3) notice requirement?

For purposes of the 12 C.F.R. § 330.16(c)(3)>notice requirement, the FDIC considers a “sweep account” to be an account held pursuant to a contract between an IDI and a customer involving the pre-arranged, automated transfer of funds from a deposit account that qualifies as a noninterest-bearing transaction account to an interest-bearing deposit account.  This definition is intended to include sweep arrangements providing for the automated, recurring movement of funds, typically daily, between a noninterest-bearing transaction account and an interest-bearing account (for example, a savings account such as an MMDA).  This definition does not include, for example, non-automated, customer-initiated transfers and transactions used to amortize a loan according to a designated payment schedule.  So-called "target-balance" sweeps where, upon reaching a designated balance, funds are swept from a noninterest-bearing transaction account to an interest-bearing account would come within this definition of "sweep account."     

35. Does 12 C.F.R. § 330.16(c)(3) require IDIs to notify existing and future sweep account customers that funds swept from a noninterest-bearing transaction account to an interest-bearing account will no longer be eligible for unlimited coverage under the Dodd-Frank Deposit Insurance Provision? 

Yes.  Pursuant to 12 C.F.R. § 330.16(c)(3), IDIs must notify existing and future sweep account customers, whose funds are swept from a noninterest-bearing transaction account to an interest-bearing deposit account, that the swept funds will not be eligible for unlimited coverage.
 
Sweep arrangements requiring this notice include the following:

  • "Target-balance" sweeps where, upon reaching a designated balance, funds are swept from a noninterest-bearing transaction account to an interest-bearing account.
  • Automated, recurring transfers of funds from a noninterest-bearing transaction account to an interest-bearing account specifically provided for in a deposit agreement signed by the customer.

The following types of arrangements will not require notification under Section 330.16(c)(3):

  • Ad hoc transfers of funds (not provided for in the deposit agreement) from a noninterest-bearing transaction account to an interest-bearing account, where the transfer is initiated by the customer, whether on-line or in-person at the IDI.
  • “Round-up” arrangements consisting of small transfers of funds to a consumer savings account based solely on debit card usage.
  • Pre-arranged periodic transfers of funds initiated by the customer, whether on-line or in- person, that are not part of the deposit agreement (for example, where a customer establishes a noninterest-bearing transaction account and thereafter opts to have funds transferred on a monthly basis to an interest-bearing account).
  • Prearranged periodic sweeps or transfers from a noninterest-bearing transaction account to make loan or other bill payments.
  • Transfers initiated by an IDI for overdraft purposes.
  • Sweeps to repurchase accounts or money market mutual funds. (These are covered under 12 C.F.R. § 360.8(e).)
36. Do the 12 C.F.R. § 330.16(c)(3) notice requirements apply in cases where funds are swept from a noninterest-bearing transaction account to a non-deposit account, such as a repurchase agreement or money market mutual fund outside the IDI? 

No.  The 12 C.F.R. § 330.16(c)(3) notice requirements do not extend to such sweep products; however, a customer notification regarding such sweep accounts is required annually under Section 360.8(e) of the FDIC’s regulations (12 C.F.R. § 360.8(e)). 

37. Will funds swept out of a noninterest-bearing transaction account to a noninterest-bearing savings account such as a noninterest-bearing MMDA (also known as a “Reserve Sweep”) receive temporary full deposit insurance coverage under the Dodd-Frank Deposit Insurance Provision?

Yes.  Such noninterest-bearing savings accounts into which funds are swept would be considered noninterest-bearing transaction accounts and would be fully insured under the Dodd-Frank Deposit Insurance Provision.



Last Updated 08/09/2011 Online Customer Assistance Form