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Best Practices

Credit Unions Provide Insurance Coverage for Escrow Accounts

February 28, 2013

While the FDIC coverage on trust accounts reverted back to $250,000 after the Transaction Account Guarantee (TAG) program was not extended at the end of 2012, title professionals should note they can also get coverage on escrow accounts held at credit unions.

According to Michael McKenna, the general counsel for the National Credit Union Administration, generally speaking, FDIC coverage and the insurance program (National Credit Union Insurance Fund) for credit unions are kept as similar possible.

The National Credit Union Insurance Fund is the federal fund created by Congress in 1970 to insure member's deposits in federally insured credit unions. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act permanently established the National Credit Union Administration’s standard maximum share insurance amount at $250,000.

McKenna said the difference in coverage between an FDIC-lending institution and a credit union is that you must be a member of the credit union to get insurance coverage on an account. So for escrow accounts, say a title company is holding money for 100 people, and 60 of these consumers are members and 40 are not. The 60 would get the same pass-through coverage you would get at an FDIC insured bank. Each member would be insured up to $250,000. The 40 non members would not be entitled to the full $250,000 coverage. All their money would be lumped together and insured for a total of $250,000.

Click here to find a specific credit union.

ALTA’s “Title Insurance and Settlement Company Best Practices” says escrow trust accounts should be maintained in federally insured financial institutions, unless directed by the beneficial owner. Title professionals can verify if a lender is FDIC-insured by clicking here.

As a reminder, the FDIC permits pass-through deposit insurance on properly structured escrow accounts. This means the insurance passes through the escrow agent to the owner(s) of the funds if certain requirements are met. These include:

  1. The fiduciary status of the accountholder must be clearly stated in the depository institution’s account records. To satisfy this requirement each escrow account opened at a bank (or other insured institution) must be named in the bank’s records as "____________ Title Company, as Escrow Agent", "___________ Title Company Escrow Account", "____________, Attorney at Law, Trust Account", or the like, which makes clear the named company or depositor is acting as a fiduciary for others who are actual owners of the account funds.
  2. The identity of the actual owners of the account funds, and their respective interests in the funds, must be ascertainable either (a) from the bank’s account records or (b) from records maintained by the escrow agent in its regular course of business. To satisfy this requirement, the escrow agent can include the names of the actual owners of the account, a reference to the particular file number and the dollar amount or percentage interest belonging to each owner at the time it opens the account so that this information appears in the bank’s records. On the other hand, if this is impractical (i.e., the owners are too numerous and/or constantly changing such as for a general escrow account covering many files and closings) the escrow agent must open and name the account in accordance with the first requirement set forth above and then must meticulously keep its own records as to each escrow account up-to-date with the owners’ names and the amount of account funds belonging to each. This is something all Associates should be doing in any event but everyone needs to remind all to be diligent in following these practices.
  3. The account funds must actually belong to the owners named in either the bank’s or the escrow agent’s records. This final requirement is a factual matter that depends upon the specific facts and circumstances of the transaction for which the particular escrow account was established.

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