4000 - Advisory Opinions
Insurance Coverage Afforded Beneficial Interest Holders in Mortgage Revenue Bonds Issued by a Housing Development Authority
June 24, 1991
Claude A. Rollin, Counsel
This is in response to your letter of April 3, 1991 concerning the insurance coverage afforded to beneficial interest holders in mortgage revenue bonds issued by your client, a housing development authority. I apologize for the delay in responding to your inquiry, but we have been receiving so many letters on deposit insurance coverage that we have not been able to respond to them as quickly as we would like.
Based on the facts set forth in your letter and our subsequent telephone conversation, it is my understanding that your client, the *** Housing Development Authority ("Authority"), issues single-family mortgage revenue bonds through a modified book-entry system. Under this system, the Authority issues a jumbo bond in the name of *** as nominee for Midwest Securities Transfer Corporation ("MSTC"), a securities depository. MSTC is a pass-through entity acting as agent for its participants who, in turn, are acting as agents for the beneficial interest holders of the Authority's mortgage bonds.
The Authority is required to use qualifying local lenders to originate and service the mortgage loans funded through bond proceeds. The Authority holds title to the mortgage purchased from the originator with the proceeds of the bonds. The principal and interest payments on the bonds constitute part of the "revenue funds" established under the bond Resolution and are pledged to *** [Bank] as Trustee for all series of the Authority's mortgage bonds. The Trustee, in turn, holds any principal and interest payments made by the mortgage servicers for the benefit of the Authority's bondholders. The Trustee remits those funds to a paying agent designated by the Authority pursuant to prior agreement between it, the Trustee and the Authority. The paying agent then pays MSTC as payments are due for the various bonds issues. MSTC, in turn, credits the accounts of its participants who, in turn, credit the accounts of their sub-participants and customers for the debt-service payments made.
You wish to ascertain whether deposit insurance would "pass through" to the beneficial interest holders of the bonds in the event of the insolvency of an insured depository institution holding deposit accounts consisting of principal and interest funds collected from Authority mortgages in custodial accounts as described above.
This type of arrangement, as we discussed, is governed by the FDIC's regulations for mortgage servicing accounts. Pursuant to section 330.6(d) of the FDIC's amended regulations (which became effective October 27, 1990), accounts maintained by a mortgage servicer in a custodial or other fiduciary capacity, which are comprised of payments by mortgagors of principal and interest, will be added together and insured in the amount of up to $100,000 for the interest of each owner (mortgagee, investor, or security holder) in such accounts. 12 C.F.R. § 330.6(d) (1991). In order to obtain this insurance coverage, however, certain recordkeeping requirements must be met.
Subsections 330.4(b)(1) and (b)(2) of the amended regulations provide that the deposit account records of an insured depository institution must disclose the nature of any relationship that may provide a basis for additional insurance coverage. In the case of a mortgage servicing account, this requires clearly identifying the deposit as being held in a custodial capacity. The account designation which you have indicated in your letter, "XYZ mortgage servicer, as Trustee for the *HDA 19 ____________________________________________ Series _______ P&I Custodial Account," appears to satisfy this requirement. In addition, records of either the insured depository institution or the depositor, maintained in good faith and in the regular course of business, must reveal the name and interest of each owner (mortgagee, investor or security holder) in the principal and interest accounts. See 12 C.F.R. § 330.4(b)(1), (2) (1991).
If these requirements are met, it is my opinion that the interests of each beneficial owner in the principal and interest accounts held at any given insured depository institution would be added together and insured up to $100,000. It may be useful to note that under section 7(i) of the Federal Deposit Insurance Act, where a bank acts as a fiduciary depositor (in this case, as a mortgage servicer), any individually-owned account(s) of the owner held at the same depository institution would not be aggregated with the interest of the owner in the principal and interest accounts. 12 U.S.C.§ 1817(i).
I hope that the foregoing information has been helpful. If you have further questions, please write or call me at (202) 898-3985.