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September 4, 2008

FDIC Legal Division Counsel issues Advisory Opinion on FDIC coverage of Escrow Accounts

On September 4, 2008, ALTA received a response from FDIC counsel to ALTA's request that FDIC clarify its insurance coverage of deposit accounts related to real estate transactions.  ALTA sought clarification of FDIC coverage for good funds deposited in a title agency's escrow account in the event of a bank failure.

FDIC's letter confirmed that any account in a failed bank holding over $100,000 is at risk for uninsured loss and further underscored how important it is that title companies that conduct closings or escrow ensure that their bank is in financially sound and operating well above its regulatory capital requirements. In its letter, FDIC indicated that escrow deposits are covered only up to $100,000 (a limit which was prescribed by Congress and cannot be waived,) that coverage applies only to accounts expressly opened as custodial or escrow accounts, and that the beneficiary of any insured funds lost prior to the closing transaction is the buyer of the property, not the seller.

To be eligible for up to $100,000 of coverage for each beneficiary, title companies must disclose the custodial nature of the escrow account by naming the account as "XYZ Title Company as Custodian" or "XYZ Title Company Escrow Account." In addition, the title company's custodial relationship must be genuine and the deposit owned by the named owners and not by the agent or custodian and must be ascertainable from the account records of the bank or the records maintained in good faith by the title agent.

FDIC suggests title companies may or may not want to consider placing escrow funds in several insured depository institutions with no more than $100,000 of an owner's funds at any one institution to ensure coverage over $100,000.

ALTA will continue to explore how to protect good funds deposited in escrow in the event of bank failure.



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