4000 - Advisory Opinions
Deposit Insurance Coverage on Principal and Interest and Taxes and Insurance Accounts Maintained by Issuers of Government National Mortgage Association Securities
November 16, 1984
John C. Murphy, Jr., General Counsel
Your letter of October 9, 1984 to Chairman Isaac has been referred to me for reply. You request clarification of the deposit insurance coverage on principal and interest (P&I) and taxes and insurance (T&I) accounts maintained by issuers of Government National Mortgage Association (GNMA) securities.
Your letter indicates that P&I custodial accounts are established through a letter agreement (Form HUD 11709) which requires the mortgage servicer1 to deposit the collected funds into an account entitled:
"[Name of Mortgage Servicer] Trustee of Principal and Interest Custodial Account for Various GNMA Mortgage-Backed Securities Pools or Loan Packages"
The P&I payments for more than one pool may be commingled in one custodial account if the funds for each pool are separately accounted for. Records identifying the security holders are maintained by the issuer and by Chemical Bank, GNMA's transfer agent. Some security holders have their securities held in "Street" or nominee name. On a designated date each month, the mortgage servicer remits the collected funds directly to the security holders in proportion to their interest in the underlying pool(s). You ask for clarification on how the FDIC will determine insurance coverage on the funds on deposit in a P&I account established and operated as described above.
Based on these facts, it appears that each of the individual security holders would be entitled to insurance protection up to $100,000, determined by combining the funds owned by the security holders which are on deposit in all P&I accounts in the same depository and are held in the same right and capacity, regardless of the number of underlying mortgage pools.
For example, assume that a person individually owns interest in three separate mortgage pools serviced by the same bank. The bank deposits into two separate P&I accounts the P&I payments collected from the mortgages underlying the three pools. The aggregate insurance coverage will be determined by combining the funds owned by the security holders in both P&I accounts. It should be noted that if the same person jointly owns additional securities in the same pools these funds also will be combined and separately insured in the aggregate up to $100,000. In either case, the funds appear to be "trust funds" and, as such, would be insured in addition to other accounts that may be eligible for separate insurance coverage.
The legal basis for these conclusions is as follows: Under section 12(c) of the Federal Deposit Insurance Act (the "Act"), a claim for deposit insurance must be based on a recognizable ownership interest. 12 U.S.C. § 1822(c). Further, the deposit records of the bank "shall be conclusive as to any relationship . . . on which a claim for insurance" is based. 12 C.F.R. § 330.1(b)(1). The "details of the relationship and interests of other parties in the account must be ascertainable . . . from the records of the bank . . . maintained in good faith and in the regular course of business." 12 C.F.R. § 330.1(b)(2).
Therefore, before deposit insurance coverage can be determined, the owner of the funds must be identified. In this situation, since the liability of the mortgagor is extinguished when the payment is made to the servicer, the mortgagor is not the owner of the funds. Moreover, the deposit records of the bank indicate that the bank is trustee of the funds, holding them for the benefit of the securityholders. This relationship is confirmed not only by the fact that the servicing bank maintains records showing the identity of the individual security holders and their interest in specific pools but also by the fact that the servicing bank remits the funds directly to the security holders. Based on these facts and analysis, it is our opinion that the security holders are the owners of the funds, that their interests are ascertainable from the records of the bank and that the security holders are the insured parties.
We turn now to the question of whether these funds are entitled to insurance protection in addition to other coverage to which the security holder may be entitled. It is our opinion that the funds are trust funds and therefore all such funds of the holder held in the same right and capacity are separately insured to a maximum of $100,000.
The definition of "trust funds" in section 3(p) of the Act includes funds held by a bank as a trustee.2 Since the records of the bank and the details of the relationship between the bank and the holders both indicate that the bank is a trustee, the funds qualify for treatment as trust funds within the meaning of section 3(p). Such trust funds are "insured in an amount not to exceed $100,000 for each trust estate." 12 U.S.C. § 1817(i). Since the FDIC has consistently interpreted the term "trust estate'' to mean the beneficial interest of each owner of the funds, each security holder is insured to a maximum of $100,000 on these funds. The interests of each owner held in the same right and capacity are combined and insured in the aggregate to a maximum of $100,000, in addition to the insurance provided to other types of deposit accounts. 12 C.F.R. § 330.10.
You indicate that some security holders have their securities held in street or nominee name. In this situation, the security holder's interest would be insured as outlined above provided that (i) the records of the bank reflect that the nominee or holder in street name is acting in a custodial capacity; and (ii) the holder's name and interest in the specified P&I account is disclosed on the record of the person in whose name the deposit is maintained (in this case probably the dealer); and (iii) such records are maintained in good faith and in the regular course of business. 12 C.F.R. §§ 330.1(b)(2), 330.101(b).
In summary, it is our opinion that each security holder would be an owner of the funds held in the P&I account in proportion to the holder's interest in the underlying mortgage pools. Therefore, the security holder would be entitled to aggregate insurance coverage up to $100,000 on all such funds held in a particular bank by that owner in the same right and capacity provided that the records of the bank disclose the ascertainable interest of the holder. These funds would be insured in addition to other deposits that may be eligible for separate insurance coverage. Where the security is held in Street or nominee name, the insurance would flow through to the security holder if the bank's records reflect this custodial arrangement and the person in whose name the deposit is held maintains the records required by the FDIC rules and regulations.
Your letter indicates that the T&I accounts are established through a letter agreement (Form HUD 11720) which requires the mortgage servicer to deposit the collected payments into an account entitled:
"[Name of Mortgage Servicer] Trustee of Servicer's Escrow Custodial Account for Various Mortgagor's, GNMA Mortgage-Backed Securities"
The servicer collects the T&I payments from the mortgagor and holds the funds until they are used to pay, on behalf of the mortgagors, taxes and insurance premiums due on the properties securing the pooled mortgages. The T&I payments from several different mortgage pools may be deposited into one T&I account if the deposits attributed to each pool are separately accounted for. It is our assumption that the mortgagor's liability to pay the insurance and taxes is extinguished when the payment is received by the insurance company or the taxing authority.
Based on these facts and assumptions, it is our opinion that the individual mortgagors would be entitled to insurance protection up to $100,000, determined by combining the funds owned by the mortgagor which are deposited in all T&I accounts in the same depository and are held in the same right and capacity, regardless of the number of underlying mortgages. Further, the funds appear to be trust funds and, as such, would be insured in addition to other accounts that may be eligible for separate insurance coverage.
The legal reasoning is the same as outlined above for P&I accounts: The insurance coverage flows to the owner of the funds. 12 U.S.C. 1822(c). The details of the relationship and interests of other parties (e.g. mortgagors) must be ascertainable from the records of the bank and the records of the bank are conclusive in this regard. 12 C.F.R. § 330.1(b)(1), (2).
The situation posed indicates that the T&I payments are owned by the individual mortgagors, the parties who are legally liable for payment of the taxes and insurance. The bank records appear to show the ownership interest of each individual mortgagor in the T&I account. Further, since the deposit records indicate that the bank is the trustee, each mortgagor, as the beneficial owner of each trust estate, would therefore be entitled to insurance up to $100,000 for funds held in the same right and capacity in all T&I accounts in the same depository, regardless of the number of underlying mortgages. 12 U.S.C. § 1813(p), 1817(i); 12 C.F.R. § 330.10.
We stress that these conclusions are limited to the facts as we understand them to be. Should the facts or assumptions differ from those we have described or circumstances change in the future, the opinions set out in this letter are subject to change.
1 For purposes of this discussion the terms "servicer" and "issuer" are used interchangeably. Go back to Text
2 12 U.S.C. § 1813(p) in pertinent part states that: