4000 - Advisory Opinions
Pass-through insurance with respect to deposits held under security agreements between credit banks and cardholders
March 13, 1996
Christopher L. Hencke, Counsel
This is in response to your letters dated February 5, 1996 and February 28, 1996. In those letters, you described an arrangement between a credit card bank and its cardholders whereby the obligations of the cardholders will be secured by collateral. Specifically, under a "security agreement" between the parties, the credit card bank will receive funds from each cardholder to serve as security for the payment of the cardholder's debt. Pending such payment, the funds will be held by the credit card bank at a depository institution insured by the FDIC. The account at the depository institution will be opened in a name such as "the credit card bank for itself and as custodian for the benefit of others."
After satisfaction of his/her obligations, a cardholder will be entitled to the return of his/her funds under section 8 of the security agreement. If the cardholder defaults in the performance of his/her obligations, however, the funds will be withdrawn by the credit card bank and applied against the cardholder's debt under section 7.
The question posed by your letters is whether the deposit at the insured depository institution--consisting of the collateral contributed by the cardholders--will be insured on a "pass-through" basis. In other words, you have inquired whether the deposit will be insured up to $100,000 for the interest of each cardholder (in possible aggregation with any other accounts owned by the cardholder at the depository institution, depending upon the types of accounts).
As noted in your letters, the arrangement described above is similar to the arrangements addressed by the FDIC in certain advisory opinions. For example, in Advisory Opinion 92--6 (January 31, 1992), the FDIC stated that deposits held by a landlord but contributed by tenants (as security for the tenants' obligations) would be insured on a "pass-through" basis up to $100,000 for the interest of each tenant. The FDIC cited 12 C.F.R. § 330.6 (dealing with "Accounts held by an agent, nominee, guardian, custodian or conservator") as the regulatory basis for such "pass-through" insurance. In pertinent part, 12 C.F.R. § 330.6 provides as follows:
Funds owned by a principal or principals and deposited into one
or more deposit accounts in the name of an agent, custodian or nominee
shall be insured to the same extent as if deposited in the name of the
Two other sections of the regulations warrant discussion. The first of these sections is 12 C.F.R. § 330.11, which governs the insurance of "trust interests" arising under irrevocable trust agreements. A "trust interest" is defined as "the interest of a beneficiary in an irrevocable express trust . . . but does not include any interest retained by the settlor." 12 C.F.R. § 330.11(c)(1). Here, the interest of the credit card bank could not be insured as a "trust interest" under 12 C.F.R. § 330.11 because the settlors (i.e., the cardholders) will retain interests in the money (i.e., the right to recover the money after satisfaction of the cardholders' obligations). In the absence of any "trust interests," the FDIC would insure the deposit to the settlors with the retained interests (i.e., the cardholders). Thus, deposit would be insured up to $100,000 for the interest of each cardholder (in possible aggregation with any other accounts owned by the cardholder) even if the FDIC viewed the security agreement as an "irrevocable trust agreement" under 12 C.F.R. § 330.11.
The second section that warrants discussion is 12 C.F.R. § 330.10. The regulation at 12 C.F.R. § 330.11 (discussed above) is displaced by 12 C.F.R. § 330.10 when the trustee of the irrevocable trust agreement at issue is an insured depository institution. According to your letters, the credit card bank is an insured depository institution. Under 12 C.F.R. § 330.10, "[t]rust funds held by an insured depository institution in its capacity as trustee of an irrevocable trust, whether held in its trust department, held or deposited in any other department of the fiduciary institution, or deposited by the fiduciary institution in another insured depository institution, shall be insured up to $100,000 for each owner or beneficiary represented." 12 C.F.R. § 330.10(a). In applying this rule, the FDIC would insure the trust funds to the settlors as owners when the owners have retained interests in all of the funds. In other words, insurance under 12 C.F.R. § 330.10 would be similar to insurance under 12 C.F.R. § 330.11. In this case, the deposit would be insured up to $100,000 for the interest of each cardholder (as owner) even if the FDIC viewed the security agreement as an "irrevocable trust agreement" with an insured depository institution as trustee under 12 C.F.R. § 330.10.
For the reasons presented above, there is no need to classify the deposit at issue as an agency account (subject to analysis under 12 C.F.R. § 330.6) or an irrevocable trust account (subject to analysis under 12 C.F.R. § 330.11) or an irrevocable trust account with an insured depository institution as trustee (subject to analysis under 12 C.F.R. § 330.10). Under any of these classifications, the FDIC would provide insurance up to $100,000 for the interest of each cardholder (in possible aggregation with other accounts). Please note, however, that the FDIC's recordkeeping requirements at 12 C.F.R. § 330.4 must be satisfied. Specifically, under 12 C.F.R. § 330.4(b)(1), the account records of the depository institution must disclose the agency or fiduciary relationship between the credit card bank and the cardholders. For this purpose, the title of the account (previously mentioned) will be sufficient. Under 12 C.F.R. § 330.4(b)(2), "[t]he details of the relationship and the interests of [the cardholders] . . . must be ascertainable either from the deposit account records of the insured depository institution or from records maintained, in good faith and in the regular course of business, by the [credit card bank] or by some person or entity that had undertaken to maintain such records for the [credit card bank]."
If you have any questions regarding the above information, please feel free to contact me.