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4000 - Advisory Opinions

Insurance Coverage of Commingled Funds


December 21, 1988

Roger A. Hood, Assistant General Counsel

This is in response to your letter of December 6, 1988 inquiring about deposit insurance.

We understand from your letter that various entities borrow money from your agency to develop apartment units for rent to low and moderate income tenants. Your agency imposes certain accounting requirements for each apartment complex or project (presumably during the term of the loan), and is considering allowing owners (or managing agents) of "separate projects" to commingle funds in one bank deposit; you are specifically interested in how deposit insurance would apply in such cases.

We surmise that the funds at issue are owned by the respective borrowers, who are also the apartment complex owners. In general, deposit insurance for an account held by a custodian and comprised of funds owned by several entities runs pro-rata to each such entity as if it had made a direct deposit in the bank, provided that the deposit account records of the bank reveal that the account is held by a custodian (or agent) and, provided also, the records maintained in good faith and in the regular course of business by either the nominal depositor (custodian) or the bank disclose the ownership interest of each entity in the account. See 12 C.F.R. § 330.1(b). When the applicable requirements are met, the ownership interest of each entity in the account will be combined with other deposits owned by that entity (in the same "right and capacity") in the same bank and insured to $100,000 in the aggregate. See 12 C.F.R. § 330.2(b); § 330.5.

It should be emphasized that deposit insurance is a function of ownership of the funds on deposit and that, accordingly, the deposit insurance for a given entity, say a corporation or partnership for example, is not increased by virtue of that entity owning more than one apartment complex or project. Further, while the deposit accounts of a corporation are insured separately from those owned by its shareholders, and the deposit accounts of a partnership are insured separately from the accounts owned by those comprising the partnership (assuming that neither entity was formed solely to increase deposit insurance and each, therefore, is bona fide in the sense of 12 C.F.R. § 330.7), there is, however, no separate insurance for funds owned by an individual and used in a proprietorship. See 12 C.F.R. 330.2(a). Finally, each corporation and each partnership that is bona fide in the sense described above is entitled to its own separate deposit insurance even though it is under common ownership and control with another such entity.

We are not in a position to comment on the effect that commingling of funds of several owner/borrowers may have on financial and administrative control and loss of funds through manipulation and embezzlement without having greater familiarity with the entire transaction. In any event, that is a matter beyond the scope of the functions of the FDIC. I would just add the brief observation that so long as one person or entity has control of the books and records of several projects or owner/borrowers, as well as of their bank accounts, it would not seem to increase the risk greatly to combine the bank accounts into one.

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