98-18830. Deposit Insurance Regulations; Joint Accounts and ``Payable-on- Death'' Accounts  

  • [Federal Register Volume 63, Number 137 (Friday, July 17, 1998)]
    [Proposed Rules]
    [Pages 38521-38524]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 98-18830]
    
    
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    FEDERAL DEPOSIT INSURANCE CORPORATION
    
    12 CFR Part 330
    
    RIN 3064-AC16
    
    
    Deposit Insurance Regulations; Joint Accounts and ``Payable-on-
    Death'' Accounts
    
    AGENCY: Federal Deposit Insurance Corporation (FDIC).
    
    ACTION: Notice of proposed rulemaking.
    
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    SUMMARY: The FDIC is proposing to amend its regulations governing the 
    insurance coverage of joint ownership accounts and revocable trust (or 
    payable-on-death) accounts. These proposed amendments to the insurance 
    regulations would supplement the revisions adopted by the FDIC in a 
    final rule published in May 1998. The purpose of these amendments is to 
    increase further the public's understanding of the insurance 
    regulations through simplification. The proposed rule would make two 
    amendments to the regulations. First, it would eliminate step one of 
    the two-step process for determining the insurance coverage of joint 
    accounts. Second, it would change the insurance coverage of ``payable-
    on-death'' accounts by adding parents and siblings to the current list 
    of ``qualifying beneficiaries.''
    
    DATES: Written comments must be received on or before October 15, 1998.
    
    ADDRESSES: Written comments should be addressed to the Office of the 
    Executive Secretary, Federal Deposit Insurance Corporation, 550 17th 
    Street, N.W., Washington, D.C. 20429. Comments may be hand-delivered to 
    the guard station at the rear of the 17th Street Building (located on F 
    Street) on business days between 7:00 a.m. and 5:00 p.m. Also, comments 
    may be sent by FAX ((202) 898-3838) or e-mail (comments @FDIC.gov). 
    Comments will be available for inspection in the FDIC Public 
    Information Center, Room 100, 801 17th Street, N.W., Washington, D.C., 
    on business days between 9:00 a.m. and 5:00 p.m.
    
    FOR FURTHER INFORMATION CONTACT: Christopher L. Hencke, Counsel, (202) 
    898-8839, or Joseph A. DiNuzzo, Senior Counsel, (202) 898-7349, Legal 
    Division, Federal Deposit Insurance Corporation, 550 17th Street, N.W., 
    Washington, D.C. 20429.
    
    SUPPLEMENTARY INFORMATION:
    
    I. Simplifying the Insurance Regulations
    
        Federal deposit insurance plays a critical role in assuring 
    stability and public confidence in the nation's financial system. At 
    the same time, deposit insurance may reduce the incentive for 
    depositors to monitor and discipline banks for excessive risk-taking. 
    At present, the only depositors who will impose a degree of market 
    discipline are those with deposits over the $100,000 insurance limit.
        All depositors should understand the rules governing the 
    application of the $100,000 limit. Confusion regarding these rules 
    could lead to a loss of funds by some depositors and an erosion in 
    public confidence. In addition, depositors over the $100,000 limit will 
    impose no market discipline if they do not realize that their deposits 
    are partly uninsured. For these reasons, the deposit insurance rules 
    should be as simple as possible.
        Unfortunately, recent evidence indicates that some of the insurance 
    rules are misunderstood by a large percentage of the employees of 
    depository institutions. This evidence includes surveys conducted in 
    three states by public interest research groups (PIRGs). These surveys 
    involved the FDIC's rules governing the insurance coverage of joint 
    accounts and ``payable-on-death'' (POD) accounts. Of the bank employees 
    included in the PIRG surveys, 63% to 80% misunderstood the joint 
    account rules and 59% to 83% misunderstood the POD rules. (Copies of 
    the PIRG survey results may be obtained by contacting the FDIC.)
        Two years ago, in May 1996, the FDIC sought comments on amending 
    the rules governing joint and POD accounts in an advance notice of 
    proposed rulemaking (ANPR). See 61 FR 25596 (May 22, 1996). In May 
    1997, the FDIC published a proposed rule. See 62 FR 26435 (May 14, 
    1997). The amendments involving joint and POD accounts were not 
    included in the proposed rule because the FDIC, at that time, did not 
    possess sufficient information regarding the amendments' potential 
    costs.
        In May 1998, the proposed rule became a final rule. See 63 FR 25750 
    (May 11, 1998). Through this final rule, the FDIC made a number of 
    important changes that will make the insurance regulations more 
    understandable to the public. (A detailed explanation of these changes 
    is set forth in the preamble of the Federal Register final rule.) In 
    the preamble, the FDIC also stated that it would continue to study the 
    policy, economic and other implications of amending the rules governing 
    joint and POD accounts. The staff's study of those issues has resulted 
    in the proposed rule published today.
    
    II. The Proposed Rule
    
        The proposed rule would amend two sections of the deposit insurance 
    regulations: the new Sec. 330.9 (former Sec. 330.7), governing the 
    insurance of joint ownership accounts; and the new Sec. 330.10 (former 
    Sec. 330.8), governing the insurance of revocable trust (or POD) 
    accounts.1
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        \1\ ``New'' sections refer to the section numbers resulting from 
    the recent final rule. The ``new'' sections became effective on July 
    1, 1998.
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    A. Joint Accounts
    
        Under the current rules, qualifying joint accounts are insured 
    separately from any single ownership accounts maintained by the co-
    owners at the same insured depository institution. See 12 CFR 330.9(a) 
    (former 330.7(a)). A joint account is a ``qualifying'' joint account if 
    it satisfies certain requirements: (1) the co-owners must be natural 
    persons; (2) each co-owner must personally sign a deposit account 
    signature card; and (3) the withdrawal rights of the co-owners must be 
    equal. See 12 CFR 330.9(c)(1) (former 330.7(c)(1)). The requirement 
    involving signature cards is inapplicable if the account at issue is a 
    certificate of deposit, a deposit obligation evidenced by a negotiable 
    instrument, or an account maintained for the co-owners by an agent or 
    custodian. See 12 CFR 330.9(c)(2) (former 330.7(c)(2)).
        Assuming these requirements are satisfied, the current rules 
    provide that the $100,000 insurance limit shall be applied in a two-
    step process. First, all joint accounts owned by the same combination 
    of persons at the same insured depository institution are added 
    together and insured to a limit of $100,000. Second, the interests of 
    each person in all joint accounts, whether owned by the same or some 
    other combination of persons, are added together and insured to a limit 
    of $100,000. See 12 CFR 330.9(b) (former 330.7(b)). The effects of this 
    two-step process are: (1) no joint account can be insured for more than 
    $100,000; (2) no group of joint accounts owned by the same combination 
    of persons can be insured for more than $100,000; and (3) no person's 
    combined interest in all joint accounts can be insured for more than 
    $100,000.
    
    [[Page 38522]]
    
        The two-step process for insuring joint accounts often is 
    misunderstood by bankers (as indicated by the PIRG studies) as well as 
    consumers. This widespread confusion has resulted in the loss by some 
    depositors of significant sums of money. For example, at one failed 
    depository institution, three joint accounts (and no other types of 
    accounts) were maintained by three siblings. The interest of each 
    sibling was less than $100,000. The siblings chose to place all of 
    their funds in joint accounts so that each of them would have access to 
    the money in the event of an emergency or sudden illness. When the 
    institution failed, step one of the two-step process required the 
    aggregation of the three joint accounts. The amount in excess of 
    $100,000 was uninsured.
        In this example, all of the funds owned by the siblings could have 
    been insured if the funds had been held in individual accounts as 
    opposed to joint accounts. Thus, the depositors did not suffer a loss 
    because they placed too much money in a single depository institution 
    that failed. Rather, they suffered a loss simply because they 
    misunderstood the FDIC's regulations.
        Another example is provided by Sekula v. FDIC, 39 F.3d 448 (3d Cir. 
    1994). That court case involved six joint accounts owned by a husband 
    and wife. The combined balance of these accounts was almost $170,000. 
    Of this amount, only $100,000 was found to be insured. The court 
    rejected the argument made by the depositors that they were entitled to 
    insurance up to $200,000 (i.e., $100,000 for each owner). The court 
    stated, however, that the two-step process for insuring joint accounts 
    is unclear.
        In order to simplify the coverage of joint accounts, the FDIC is 
    proposing to eliminate the first step of the two-step process. Under 
    this proposed amendment, the maximum coverage that any one person could 
    obtain for his/her interests in all qualifying joint accounts would 
    remain $100,000. The maximum insurance coverage of a particular joint 
    account, however, would no longer be $100,000. In the case of a joint 
    account owned by two persons, for example, the maximum coverage would 
    increase from $100,000 to $200,000 (i.e., $100,000 for each owner).
        The effects of the proposed amendment are subject to debate. For 
    some depositors, such as the three siblings in the example, the 
    amendment would result in an expansion of coverage. On the other hand, 
    many or most such depositors could obtain the same level of coverage 
    without the proposed amendment if they understood the regulations. The 
    potential cost to the FDIC of the proposed amendment is discussed in 
    greater detail below.
    
    B. POD Accounts
    
        Under the current rules, qualifying revocable trust (or POD) 
    accounts are insured separately from any other types of accounts 
    maintained by either the owner or the beneficiaries at the same insured 
    depository institution. See 12 CFR 330.10(a) (former 330.8(a)). A POD 
    account is a ``qualifying'' POD account if it satisfies certain 
    requirements: (1) the beneficiaries must be the spouse, children or 
    grandchildren of the owner; (2) the beneficiaries must be specifically 
    named in the deposit account records; (3) the title of the account must 
    include a term such as ``in trust for'' or ``payable-on-death to'' (or 
    any acronym therefor); and (4) the intention of the owner of the 
    account (as evidenced by the account title or any accompanying 
    revocable trust agreement) must be that the funds shall belong to the 
    named beneficiaries upon the owner's death. If the account has been 
    opened pursuant to a formal ``living trust'' agreement, the fourth 
    requirement means that the agreement must not place any conditions upon 
    the interests of the beneficiaries that might prevent the beneficiaries 
    (or their estates or heirs) from receiving the funds following the 
    death of the owner. Such conditions are known as ``defeating 
    contingencies.''
        Assuming these requirements are satisfied, the $100,000 insurance 
    limit is not applied on a ``per owner'' basis. Rather, the $100,000 
    insurance limit is applied on a ``per beneficiary'' basis to all POD 
    accounts owned by the same person at the same insured depository 
    institution. For example, a POD account owned by one person or a group 
    of POD accounts owned by one person could be insured up to $500,000 if 
    the qualifying beneficiaries (i.e., spouse, children and grandchildren) 
    were five in number.
        If one of the named beneficiaries of a POD account is not a 
    qualifying beneficiary (i.e., not a spouse, child or grandchild), the 
    funds corresponding to that beneficiary are treated for insurance 
    purposes as single ownership funds of the owner (i.e., the account 
    holder). In other words, they are aggregated with any funds in any 
    single ownership accounts of the owner and insured to a limit of 
    $100,000. See 12 CFR 330.10(b) (former 330.8(b)).
        On a number of occasions, depositors have lost money upon the 
    failure of an insured depository institution because they believed that 
    POD accounts were insured on a simple ``per beneficiary'' or ``per 
    family member'' basis. They did not understand the difference between 
    qualifying beneficiaries and non-qualifying beneficiaries. Typically, 
    in such cases, the named beneficiary has been a parent or sibling. In 
    the absence of a qualifying beneficiary, the POD account has been 
    aggregated with one or more single ownership accounts.
        In response to such cases, the FDIC is proposing to add siblings 
    and parents to the list of qualifying beneficiaries. This approach 
    would protect most depositors who misunderstand the current rules 
    without abandoning the basic concept that insurance for POD accounts is 
    provided up to $100,000 on a ``per qualifying beneficiary'' basis. The 
    potential cost to the deposit insurance funds is discussed below.
    
    III. The Cost of the Proposed Rule
    
        At the request of the Board of Directors, the FDIC staff recently 
    conducted a study of the potential cost of eliminating step one of the 
    two-step process for insuring joint accounts. The study also addressed 
    the potential cost of adding parents and siblings to the list of 
    ``qualifying beneficiaries'' for POD accounts. Copies of this study may 
    be obtained from the FDIC.
        The FDIC study was based upon depositor files from ten banks that 
    failed during the past decade. At each of these banks, depositors 
    suffered losses as a result of owning deposits over the $100,000 
    insurance limit. The advantage of studying the accounts at such failed 
    banks is that the accounts were subject to actual insurance 
    determinations. Also, as a depository institution weakens, some 
    depositors may withdraw their deposits in order to protect themselves. 
    For this reason, in determining the cost to the FDIC of a change in the 
    insurance regulations, an analysis of the accounts at failed banks is 
    more useful than an analysis of accounts at healthy institutions.
        The total of all deposits at the ten banks at the time of failure 
    was $6.7 billion, of which $57 million (0.85%) was determined to be 
    uninsured. The FDIC's analysis involved the files of 1,300 depositors, 
    each of whom maintained account(s) in excess of $100,000.
        As discussed below, the FDIC's study suggests that the cost of the 
    proposed rule would be minimal compared with the potential benefits. 
    Depositors would benefit by not losing funds through misconceptions 
    regarding the scope of their insurance coverage; the financial system 
    would benefit through increased public confidence.
    
    [[Page 38523]]
    
    A. Joint Accounts
    
        At the ten failed banks in the FDIC's study, uninsured joint 
    account deposits totaled $13 million. Of this amount, $12 million was 
    uninsured under step one of the current two-step process. This figure 
    represented 21.5% of all uninsured deposits but only 0.18% of total 
    deposits. The impact of eliminating step one can be estimated by 
    applying this 0.18% figure to failed bank data from 1988 (the costliest 
    year in recent history).
        In 1988, the FDIC assumed the obligation to pay insurance on 
    deposits in the amount of $38 billion. This figure does not represent 
    the FDIC's losses for the year because the FDIC (as subrogee of the 
    insured depositors) recovered a significant amount of money through the 
    liquidation of the assets of the failed institutions. The losses for 
    the year amounted to $6.8 billion, representing a loss ratio of 18%.
        Increasing $38 billion (the deposit obligations assumed by the FDIC 
    in 1988) by 0.18% (the increase that would result from the elimination 
    of step one) yields additional insured funds in the amount of $69.8 
    million. Applying a loss ratio of 18% to this $69.8 million (18% being 
    the FDIC's loss ratio in 1988) yields additional losses in the amount 
    of $12.6 million. In other words, in 1988, the absence of step one of 
    the two-step process for insuring joint accounts would have resulted in 
    estimated additional losses to the FDIC of $12.6 million (an increase 
    of 0.18%).
        In 1993, the Federal Reserve Board found that the elimination of 
    step one of the current joint account rules would have increased the 
    amount of insured deposits in all FDIC-insured institutions by about 
    $22 billion (out of a total deposit base at that time of $3.273 
    trillion). In its own study, the FDIC came to a different conclusion. 
    Currently, the level of domestic deposits at all FDIC-insured 
    institutions is $3.6 trillion. If the 0.18% figure discussed above is 
    applied to this $3.6 trillion, the conclusion follows that the 
    elimination of step one would increase the amount of insured deposits 
    by $6.5 billion--not $22 billion as found in the Federal Reserve study. 
    The difference between the two studies may be attributable to the fact 
    that the FDIC's study was limited to failed banks that produced actual 
    losses for depositors. In any event, in measuring the impact of a 
    change in the insurance regulations, the important question is not the 
    increase in the amount of insured deposits ($6.5 billion versus $22 
    billion) but the increase in possible losses to the FDIC. As discussed 
    above, in 1988 (the costliest year in recent history), the absence of 
    step one of the two-step process would not have resulted in additional 
    losses amounting to billions of dollars. Rather, the additional loss 
    suffered by the FDIC would have amounted to approximately $12.6 
    million.
    
    B. POD Accounts
    
        At the ten bank sample, the total deposit base was $6.7 billion. Of 
    this amount, depositors with more than $100,000 in total deposits held 
    $22.2 million in POD accounts for the benefit of non-qualifying 
    beneficiaries. In accordance with the FDIC's regulations, these funds 
    in the amount of $22.2 million were treated as single ownership 
    accounts. In this category, most of the funds were insured. Only $6.3 
    million was uninsured.
        From this type of study, it is difficult to draw firm conclusions 
    about the consequences of changing the insurance rules applicable to 
    POD accounts. The problem is the impossibility of predicting how 
    depositors might alter their accounts in response to any such changes. 
    In any event, the results of the FDIC's study indicate that POD 
    accounts are not a significant component of a typical bank's deposit 
    portfolio. For this reason, any change in the rules governing the 
    insurance coverage of POD accounts should not produce a significant 
    impact on the FDIC.
    
    IV. Request for Comments
    
        The Board of Directors of the FDIC (Board) is seeking comments on 
    the proposed amendments to the regulations governing the insurance 
    coverage of joint accounts and POD accounts. In addition, the Board is 
    seeking comments on any other possible means of simplifying the 
    insurance coverage of joint or POD accounts.
    
    V. Paperwork Reduction Act
    
        The proposed rule would simplify the FDIC's deposit insurance 
    regulations. It would not involve any collections of information under 
    the Paperwork Reduction Act (44 U.S.C. 3501 et seq.). Consequently, no 
    information has been submitted to the Office of Management and Budget 
    for review.
    
    VI. Regulatory Flexibility Act
    
        The proposed rule would not have a significant impact on a 
    substantial number of small businesses within the meaning of the 
    Regulatory Flexibility Act (5 U.S.C. 601 et seq.). The amendments to 
    the deposit insurance rules would apply to all FDIC-insured depository 
    institutions and would impose no new reporting, recordkeeping or other 
    compliance requirements upon those entities. Accordingly, the Act's 
    requirements relating to an initial and final regulatory flexibility 
    analysis are not applicable.
    
    List of Subjects in 12 CFR Part 330
    
        Bank deposit insurance, Banks, banking, Reporting and recordkeeping 
    requirements, Savings and loan associations, Trusts and trustees.
    
        The Board of Directors of the Federal Deposit Insurance Corporation 
    hereby proposes to amend part 330 of chapter III of title 12 of the 
    Code of Federal Regulations as follows:
    
    PART 330--DEPOSIT INSURANCE COVERAGE
    
        1. The authority citation for part 330 continues to read as 
    follows:
    
        Authority: 12 U.S.C. 1813(l), 1813(m), 1817(i), 1818(q), 
    1819(Tenth), 1820(f), 1821(a), 1822(c).
    
        2. In Sec. 330.9, paragraph (b) is revised to read as follows:
    
    
    Sec. 330.9  Joint ownership accounts.
    
    * * * * *
        (b) Determination of insurance coverage. The interests of each co-
    owner in all qualifying joint accounts, whether owned by the same or 
    different combinations of persons, shall be added together and the 
    total shall be insured up to $100,000. (Example: ``A&B'' have a 
    qualifying joint account with a balance of $60,000; ``A&C'' have a 
    qualifying joint account with a balance of $80,000; and ``A&B&C'' have 
    a qualifying joint account with a balance of $150,000. A's combined 
    ownership interest in all qualifying joint accounts would be $120,000 
    ($30,000 plus $40,000 plus $50,000); therefore, A's interest would be 
    insured in the amount of $100,000 and uninsured in the amount of 
    $20,000. B's combined ownership interest in all qualifying joint 
    accounts would be $80,000 ($30,000 plus $50,000); therefore, B's 
    interest would be fully insured. C's combined ownership interest in all 
    qualifying joint accounts would be $90,000 ($40,000 plus $50,000); 
    therefore, C's interest would be fully insured.)
    * * * * *
        3. In Sec. 330.10, paragraph (a) is revised to read as follows:
    
    
    Sec. 330.10  Revocable trust accounts.
    
        (a) General rule. Funds owned by an individual and deposited into 
    an account evidencing an intention that upon the death of the owner the 
    funds shall belong to one or more qualifying beneficiaries shall be 
    insured in the amount of up to $100,000 in the
    
    [[Page 38524]]
    
    aggregate as to each such named qualifying beneficiary, separately from 
    any other accounts of the owner or the beneficiaries. For purposes of 
    this provision, the term ``qualifying beneficiaries'' means the owner's 
    spouse, child/children, grandchild/grandchildren, parent/parents or 
    sibling/siblings. (Example: If A establishes a qualifying account 
    payable upon death to his spouse, sibling and two children, assuming 
    compliance with the rules of this provision, the account would be 
    insured up to $400,000 separately from any other different types of 
    accounts either A or the beneficiaries may have with the same 
    depository institution.) Accounts covered by this provision are 
    commonly referred to as tentative or ``Totten trust'' accounts, 
    ``payable-on-death'' accounts, or revocable trust accounts.
    * * * * *
        By order of the Board of Directors.
    
        Dated at Washington, D.C., this 7th day of July, 1998.
    
    Federal Deposit Insurance Corporation.
    James LaPierre,
    Deputy Executive Secretary.
    [FR Doc. 98-18830 Filed 7-16-98; 8:45 am]
    BILLING CODE 6714-01-P
    
    
    

Document Information

Published:
07/17/1998
Department:
Federal Deposit Insurance Corporation
Entry Type:
Proposed Rule
Action:
Notice of proposed rulemaking.
Document Number:
98-18830
Dates:
Written comments must be received on or before October 15, 1998.
Pages:
38521-38524 (4 pages)
RINs:
3064-AC16: Deposit Insurance Regulations; Joint Accounts and "Payable on Death" Accounts
RIN Links:
https://www.federalregister.gov/regulations/3064-AC16/deposit-insurance-regulations-joint-accounts-and-payable-on-death-accounts
PDF File:
98-18830.pdf
CFR: (3)
12 CFR 330.8)
12 CFR 330.9
12 CFR 330.10