4000 - Advisory Opinions
Insurance Coverage of Cash Letter Items Deposits for Collection by Credit Unions
October 10, 1986
Patti C. Fox, Attorney
In your letters of July 11 and August 19, 1986, you requested information regarding the insurance coverage of cash letter items deposited for collection by credit unions in an FDIC-insured bank. Initially, you proposed a situation in which *** (a credit union for credit unions) would act as a correspondent institution for its member credit unions. *** would maintain a bank account in which the individual credit unions would deposit their cash letters for collection on a daily basis. After collecting the funds the bank would credit the account of *** who would remit the funds to its members. You have indicated an intent to construct a correspondent arrangement whereby the bank is acting solely as an agent for collection on behalf of the credit unions and ***. Essentially, the bank would take the place of the Federal Reserve in the collection process.
The amount of deposit insurance coverage provided to any depositor is a function of the rights and capacities in which deposits are held. Deposits held in the same right and capacity by a depositor are added together and insured to $100,000 in the aggregate. 12 U.S.C. § 1813(m)(1). If, however, the deposit account holder is acting as agent on behalf of a third party who is the actual owner of the funds, insurance coverage passes through the agent to the third party provided certain recordkeeping requirements are met. These requirements provide that the deposit account records of the insured bank must disclose the existence of a relationship which may provide a basis for additional insurance; the details of the relationship and the interests of other parties in the account must be ascertainable either from the records of the bank or of the depositor maintained in good faith and in the regular course of business. 12 C.F.R. §§ 330.1(b) and 330.2(b).
A bank account established in *** name without an indication on bank records that *** was acting in an agency capacity would be treated as owned by *** and insured to $100,000. On the other hand, if bank deposit account records reflect that *** is acting as agent for its member credit union, and, in addition, the details of the relationship, as well as the interests of each credit union in the account are ascertainable from *** records then the deposits are insured to $100,000 as to each credit union.
A third possibility exists if the credit union, including ***, were recognized as agents for collection under the collection provisions of the Uniform Commercial Code ("UCC"). Insurance coverage would then pass through *** and the credit unions to the individual owners of the deposits. However, the credit unions and *** would have to be acknowledged as banks under the UCC as adopted by the state of ***. Moreover, a contractual agreement delineating the relationship between the participating entities and setting forth the intent that the bank, ***, and the credit unions are agents for collection would be necessary to meet the recordkeeping requirements for FDIC regulations.
For example, *** agrees to act as a correspondent bank for the credit unions and maintains a deposit account with the bank for this purpose. By contract, the bank agrees to act as the agent for collection on behalf of *** and acknowledges that the individual credit unions are acting as agents for collection on behalf of their shareholder-depositors. If *** and the various credit unions are banks within the meaning of the UCC as adopted by ***, then deposit insurance coverage flows through *** (the deposit account holder and agent for collection) to the credit unions (as agents for collection) to their shareholder members who deposited the funds. If the UCC does not recognize the status of credit unions as banks, then the credit unions as principals would each be separately insured to $100,000 for the funds in the *** account at the time the bank closed based on the agency relationship between *** and the credit unions. Similarly, where the credit unions instead of *** maintained individual accounts at the bank, insurance coverage would benefit each credit union to $100,000 in the aggregate.
Pursuant to the UCC, "bank' means any person engaged in the business of banking and solely for the purposes of Section 3 and 4 of the Act includes any depository institution as defined by federal law." *** ***. We have been unable to find any case law which discusses whether a credit union is a depository institution under this section, and, thus, a bank for collection purposes. The Legal Division declines to make a determination regarding the status of a credit union as a bank under section ***.
As can be seen, the recognition of agency status in an account relationship materially affects the aggregate amount of available insurance coverage. Two other principles also affect insurance coverage: the UCC rules for collection and the status of items as deposits during the collection process.
Only deposits as defined by section 3(l) of the Federal Deposit Insurance Act ("FDI Act") are insured. 12 U.S.C. § 1813(l) Section (3)(l)(1) provides, in part, that a deposit is "the unpaid balance of money or its equivalent received or held by a bank in the usual course of business and for which it has given or is obligated to give credit, either conditionally or unconditionally. . . ." Items must be recognized as money or its equivalent in order to be deposits. For example, collection drafts are not money or its equivalent; a bank simply passes these instruments along for collection to the maker and does not give provisional credit for the item to the depositor. From your letter, I am unable to determine if food coupons would be the equivalent of money, and thus deposits. The other items you listed may or may not be deposits depending upon their status in the collection process at the time the bank fails.
In the event of the failure of a collecting bank acting as correspondent on behalf of other banks, the deposit insurance consequences of insured deposits during the collection process are illustrated by the following examples. Assume the following facts:
Customers of Bank B deposit in Bank B checks drawn on Banks C, D, and E. Bank B (Depository Bank) forward the items to its correspondent, Bank A (Intermediary Bank) to be forwarded directly or indirectly to Banks C, D and E (Payor Banks) for payment. Bank A is declared insolvent and is closed.
The deposit insurance consequences are dependent on the status of the collection process at the time Bank A is closed, and on the instructions given to Bank A by Bank B or the understanding or custom existing between the banks. The various situations are described below.
1. Bank A has received the items from Bank B, but has not forwarded them to the payor banks.
Section 4-214(1) of the UCC provides that any item in or coming into the possession of a collecting bank (including an intermediary bank) which suspends payment and which item is not finally paid shall be returned by the receiver, trustee, or agent to the presenting bank or the closed bank's customer. In this situation, the items would be returned to Bank B which could present them to Banks C, D and E though alternate channels.
2. Bank A has forwarded the items to Banks C, D, and E which have not settled for the items at the time Bank A is declared insolvent.
Section 4-201 of the UCC provides that unless a contrary intent clearly appears, and prior to the time that a settlement given by a collecting bank becomes final, the bank is an agent of sub-agent or Bank B which, in turn, is the agent of the owner. Funds (whether cash or another form of settlement) coming into the hands of the agent bank, or its receiver after closing, would not constitute assets of that bank available for its general creditors, but belong to the owners of the items and would properly be passed along by the receiver to Bank B for ultimate payment to the owners of the items.
3.a. Bank A has received funds from Banks C, D and E, but has failed to remit to Bank B as required by instructions or practice.
Section 4-214(4) of the UCC provides that if a collecting bank receives from subsequent parties settlement for an item which settlement becomes final and suspends payments without making final settlement for the item with its customer, the owner of the item has a preferred claim against the collecting bank. This rule would give the owner of the item (acting through its agent, Bank B) a preferred claim against Bank A's assets. The official comment to this section of the UCC notes that Federal Deposit Insurance affects materially the result of bank failures or holders of items and banks, but states that no attempt is made to vary the rules of the section by reason of such insurance.
Section 330.12 of FDIC regulations, which would be applicable to this situation, provides that, where a closed bank has become obligated for the payment of items forwarded for collection by a bank acting solely as agent, the owner of such items will be recognized for all purposes of claim for insured deposits to the same extent as if his or her name and interest were disclosed on the records of the bank. 12 C.F.R. § 330.12. For example, assume that *** and the credit unions are recognized as banks under the UCC and, thus as agents for collection. If the correspondent bank became obligated for payment of items forwarded for collection, the owner of the item under section 330.12 is recognized for all purposes of claim and *** and the credit unions would be recognized as the agents of the owners for purposes of making as assignment of rights and receiving payment. Without recognition of the collection agency status, *** as the account holder would be a depositor with a preferred claim.
It would appear that the owners of the item may have a choice of claiming a preference against the receivership assets or claiming FDIC insurance if Bank A were a state bank. Because preferences are not recognized in national bank receiverships, only the insurance remedy would be available if Bank A were a national bank.
3.b. Bank A has received funds from Banks C, D and E, and has credited those funds to Bank B's correspondent account with Bank A in accordance with Bank B's instructions or their general practice.
The agency status of the collecting bank created by section 4-201 of the UCC continues until a settlement given by a collecting bank for an item is or becomes final. In addition, section 4-213(3) of the UCC continues until a settlement given by a collecting bank for an item is or becomes final. Section 4-213(3) provides that if a collecting bank receives a settlement for an item which is or becomes final, the bank is accountable to its customer for the amount of the item and any provisional credit given for the item in the customer's account becomes final. Under these rules, Bank A's agency status would have terminated upon receipt of funds or settlement prior to its closing. The collection process would have been concluded and Bank A's deposit liability would run only to Bank B for the balance of the correspondent account. Bank B is insured to the maximum amount of $100,000 for its deposit in Bank A. Where *** is simply a deposit account holder and no agency relationship exists, this rule would not apply.
As can be seen from the UCC collection rules, only examples 3.a. and 3.b. have deposit insurance consequences. Whether the actual owners of the items receive deposit insurance coverage under example 3.a. is dependent upon the status of *** and the credit union as banks under the UCC, and their recognition as agents for collection. I am unable to address your proposal in which the bank would collect items on behalf of the credit unions maintaining their own accounts in the bank and remit the collected funds by wire to *** without further details regarding the proposed wire transfer system.