Samantha: Hello, this is Samantha Shares.
This episode covers N C U Aâs September 20 24 Board Meeting
regulation Simplifying Share Insurance.
Earlier this week we provided the entire long rule in my voice.
Today is the NCUA Board and staff in their own words and voices.
This podcast is educational and is not legal advice.
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And now the rule.
Chairman Harper: The second item of business is final rule part 745,
simplification of insurance rules.
Staff presenting are Tom Zells.
Senior Staff Attorney, Office of General Counsel, and Paul Dibble, Consumer
Access Program Officer, Office of Credit Union Resources and Expansion.
Um, I have to give it to you, uh, Tom for having a great soccer
game today, and Paul for having a fantastic shirt tie combination.
Uh, good morning to both of you.
Please start whenever you are ready.
staff (3): Thank you so much.
Uh, good morning, Chairman Harper and Vice Chairman Hauptman.
We are here today to present a final rule to amend Part 745 of the NCOA's
Regulations Governing Share Insurance.
The primary intent of the final rule is to simplify the NCOA's share insurance
coverage rules related to trust accounts.
Before we get into the specifics about the final rule, I'm going to provide a little
bit of background on how the Federal Credit Union Act, or FCU Act, addresses
share insurance and a general description of the current share insurance rules.
Under the FCU Act, the NCUA is responsible for paying share insurance to any person
with funds lawfully held in a member account in the event of a federally
insured credit union's failure up to the standard maximum share insurance amount,
which is currently set at 250, 000.
In general, the FCU Act is not overly prescriptive on how the share
insurance process works, but does specify specific treatments for a
few types of accounts, for example, accounts held by government depositors
and certain retirement accounts.
Otherwise, the FCU Act provides substantial discretion to the NCOA.
The NCOA has implemented share insurance requirements in Part 745 of its rules.
Generally, the NCOA determines whether a member account is insured by grouping
particular categories of accounts held by a member, such as single
ownership accounts, joint ownership accounts, revocable trust accounts,
and irrevocable trust accounts.
If an account meets the requirement for a particular category, the account
is insured up to the 250, 000 limit.
Separately from shares held by the member in a different account category at the
same federally insured credit union, for example, provided all requirements
are met, shares in the single ownership category will be separately insured
from shares in the joint ownership category held by the same member at the
same federally insured credit union.
We'll now discuss specifics of the final rule.
I'll turn it over to Paul so that he can discuss the changes
to the trust account coverage.
Thank you, Tom.
Good morning, chairman Harper.
Good morning, vice Chairman.
Good morning.
staff (4): Uh, the share insurance process is fairly straightforward
for most types of accounts.
One exception, however, is trust accounts.
The N2A's current regulations recognize two different types of
insurance categories for funds held in connection with trust.
Revocable trusts and irrevocable trusts.
The share insurance rules include additional complexity related to
the number of beneficiaries that would receive funds, from revocable
trusts and whether irrevocable trusts include certain contingencies.
Despite previous NTU A efforts to address confusion related to trust accounts,
the NTU A has received over 8, 500 share insurance questions related to
trust accounts since the end of 2019.
Additionally, the complexity also causes a potential for delay in
insurance payouts when the NTU A has been appointed as liquidating agent.
The FDIC, which has deposit insurance coverage rules that are
comparable to the NQA's rules, has experienced similar issues related
to its rules on trust accounts.
The final rule makes several changes to simplify the treatment of trust accounts.
First, the final rule merges the revocable and irrevocable trust categories
into a new trust accounts category.
This new category includes informal revocable trust accounts, such
as payable on death accounts.
Formal revocable trust accounts and irrevocable trust accounts.
The final rule also treats irrevocable trusts like revocable trusts and
the fact that contingencies would no longer impact potential coverage.
While the change creates simplicity as all trust accounts, regardless of
legal form will be treated the same, it has the potential to reduce share
insurance coverage as the existing rule provides per the potential for
increased coverage, depending on whether the member is set up revocable.
So, for members who establish both large revocable trusts and large irrevocable
trusts to the same beneficiaries, the final rule may result in reduced coverage.
However, for other members with irrevocable trusts, the final rule
could result in increased insurance coverage as irrevocable trusts with
contingencies to multiple beneficiaries will now have greater insurance coverage.
Second, the rule simplifies the treatments for shares held in trust
with more than five beneficiaries.
Under the final rule, additional share insurance coverage would not
be provided if a member leaves trust funds to more than five beneficiaries,
regardless of the number of trusts that establish those funds.
Therefore, the maximum amount of share insurance coverage for trust
funds under the final rule would be 1.
25 million.
This change streamlines the rule, but has the potential to reduce share
insurance coverage for certain members.
The proposed rule included a question on the potential effect of this change.
As expressed in the proposed rule, we do not believe in practical
terms that this change will have a substantial effect on the shared
insurance coverage for most members.
The comments received also did not provide an indication to the contrary.
Therefore, under the final rule, the calculation of insurance coverage for
trust accounts is similar to the rule, to the rule currently used for revocable
trust for five or fewer beneficiaries.
An account holder's trust account will be insured in the amount
up to 250, 000 multiplied by.
By the number of trust beneficiaries not to exceed five, this is regardless
of whether the trust is revocable or irrevocable, or regardless of
contingencies or the allocation of funds among the beneficiaries.
This, in effect, limits coverage for each grantor's trust accounts at each federally
insured credit union to a total of 1.
25 million.
This treatment of trust for share insurance purposes creates more
parity between the NCOA and the new trust rules adopted by the FDIC that
became effective on April 1st, 2024.
The final rule adopts the changes recommended in the
proposed rule as proposed.
Under the final rule, the effective date of the trust account changes will
be delayed until December 1st, 2026.
This delayed effective date provides a very similar implementation timeline
to the one provided by the FDIC.
And we'll provide the NCUA staff at credit unions and credit union members
necessary time to prepare for the changes.
I will now hand it back to Tom so that he can discuss the comments received on the
proposed trust account changes and some other changes made by the final rule.
staff (3): Thanks, Paul.
In terms of comments on the trust account changes, all 11 substantive
comments that the NCUA received indicated support for the changes.
Common reasons that the commenters provided for supporting the rule
included providing parity with FDIC coverage and reducing confusion
regarding coverage of trust accounts.
As noted, commenters did not express real concern with the new
trust rules effectively limiting each grantor to a maximum of 1.
25 million in coverage for their trust account funds.
One commenter specifically stated that they did not think the 1.
25 million per grantor cap was too low, as the vast majority of accounts
are well below the level, but did ask the NCA to track liquidations
to ensure it is not too low.
Other issues commenters addressed included membership requirements for
trust accounts, reporting of insured shares on the call report, and whether
the NCOA should provide a delayed effective date or otherwise insure
already existing accounts or legacy accounts under the current rules.
The final rule also makes a few other changes in addition to the
simplified approach to trusts.
The final rule clarifies the coverage provided to mortgage
servicing accounts for funds that the mortgage servicer or another party
deposits on behalf of the borrower.
The NCOA's current rules include a separate insurance category for mortgage
servicing accounts that are comprised of principal and interest funds.
The current regulations, however, do not address funds paid in to
a mortgage servicing account by someone other than the borrower.
By not treating funds deposited by the servicer the same as funds
deposited by the member, NCOA's current rules result in inconsistency
in the potential for instability during periods of economic stress.
The final rule clarifies that these funds receive similar share insurance treatment,
The This is identical to the treatment under the FDIC's recent final rule.
The NCUA received six comments specifically addressing this change.
All of these comments supported the change.
The final rule makes no alterations to the changes recommended in the proposed rule.
As this change would provide more expansive coverage and should not
impose additional burden on credit unions or account holders, the final
rule does not delay its effect.
It would become effective 30 days after the final rule is
published in the Federal Register.
The final rule also makes some changes to the NCOA, NCOA's record keeping
regulations for share insurance coverage.
These changes are favorable to members and provide more flexibility to the
NCOA to include additional documentation evidencing the intent of the account when
making share insurance determinations.
These changes pose no additional burden to credit unions.
The NCUA received seven comments specifically addressing these changes.
All of these comments supported the changes.
The final rule makes no substantive changes to the changes
recommended in the proposed rule.
As these changes only explicitly clarify the flexibility the NCUA has in terms
of records the agency can look to in evaluating share insurance coverage
and would not impose additional burden on credit unions or account holders.
The final rule does not delay its effect.
It would become effective 30 days after the final rule was
published in the Federal Register.
That concludes our presentation.
We are happy to answer any questions you may have.
Chairman Harper: Thank you, Tom and Paul, for your presentation on the
final rule to simplify certain share insurance requirements related to
trust accounts and mortgage servicing accounts, among other things, such as
the record keeping you just mentioned.
And thank you to the many team members across the agency
who worked collaboratively.
It's a common sense package of regulatory changes that I fully support.
By establishing a unified trust accounts category that treats coverage
of funds in both revocable trusts and irrevocable trusts deposited at
federally insured credit unions in the same manner, I fully support.
This final rule simplifies the share insurance regulations and brings the
National Credit Union Share Insurance Fund into greater alignment with the
Federal Deposit Insurance Corporation's Deposit Insurance Fund's rules.
That's a positive change not only for credit union staff who will have
streamlined procedures when working on such trust accounts, but it's also a
benefit for credit union members who will better understand their coverage options.
It's also a time saver for the NCUA's Share Insurance Fund, uh, Fund
Specialists who, I'm sorry, Share Insurance Specialists who during the
last five years have fielded thousands of calls, as you've noted, Paul, uh,
about share insurance coverage for different types of trust accounts.
This rule change will also lead to greater efficiency in the NCUA's
Asset Management Assistance Center when managing future liquidations.
Specifically, the final rule, as I mentioned, eliminates distinct and
separate sets of rules and insurance coverage calculations for shares of
revocable trusts and irrevocable trusts.
Those rules led to public confusion about the share insurance coverage
of trust accounts maintained at federally insured credit unions.
This final rule aligns the coverage standards for both types of trust accounts
and establishes a simplified formula for calculating coverage for funds deposited
at federally insured credit unions.
This final rule also allows for more time for share insurance, more timely
share insurance fund determinations by NCUA trust, by the NCUA of trust
accounts, which will facilitate faster payments to account holders in the
event of a credit union liquidation.
In fact, Paul, as I understand, uh, we've sometimes had to spend
months sorting through trust records to determine just how much.
Exactly what we've had to pay and a payout.
In addition, this rule provides members at federally insured credit unions with
the same protections as consumers who use trust accounts at banks and thrifts.
Yes, such parity between the two federal deposit insurance
programs promotes greater public confidence in the dual systems for
protecting shares and deposits.
And as one commenter noted, such parity is crucial for maintaining consistency
and fairness in the financial system.
I couldn't agree more.
Public trust in our financial system must never be taken for granted.
We saw firsthand the effects on consumers and turmoil in the markets caused by
several large bank failures last year.
Deposit insurance at federally insured credit unions and banks is
vital as it stabilizes the financial system during periods of economic
uncertainty and financial stress.
More importantly, it gives consumers confidence to entrust their hard
earned savings and nest eggs to a federally insured financial institution.
Additionally, the final rule modifies the treatment of share insurance
coverage for mortgage servicing accounts, bringing those standards for
the credit union system into greater alignment with the banking system when
it comes to deposit insurance coverage.
Credit unions have had pronounced increases in their mortgage lending
and servicing in the 16 years since we last updated this portion of the
share insurance coverage rule in 2008, so this change is an important one.
By giving credit union members Um, credit union members and members of
the public who use trust accounts and credit unions who service mortgage
accounts in the same level of protection, whether the accounts are maintained at
federally insured credit unions or banks.
We must ensure parity to the extent possible and maintain confidence in our
nation's credit union and banking systems.
I therefore support this change to our rule.
That said, before closing, I do have several questions.
First, will the merger of revocable and irrevocable trust categories
into one single group for share insurance affect the application,
um, of, or operation of state law?
staff (3): No, it should not.
The rule really just affects the NCUA's coverage of share insurance and
should have no impact on state law.
Chairman Harper: So, federalism standards, states can still set their own laws.
This is just for ourselves.
Thank you.
It's good to know that our regulatory change will not
affect state law in any way.
Second, um, many credit union staff members, um, staff and members rely
on the NCUA's Your Insured Funds brochure, as well as MyCreditUnion.
gov to answer questions about share insurance coverage.
Once we publish these regulatory changes in the Federal Register.
How quickly do we anticipate having both resources updated?
staff (4): We can take that.
Um, we're fully committed to updating the year insured, um,
funds brochure and mycreditunion.
gov as quickly as possible.
Appreciate the importance of those resources to credit
union staff and members.
Staff have already started working on the scope of defining, uh, the
necessary updates and assuming, um, the board approves this final rule
today, we will immediately start an update on all the relevant materials.
Chairman Harper: And if I recall though, your insured funds brochure
is, it's a lengthy document, so it may take a little bit of time.
Forty six
staff (4): pages, I think.
Yeah.
Apparently.
Um, we also recognize the importance of developing materials that accommodate
the delayed effective date for both, uh, for the trust account changes.
We're committed to making sure that those resources are available.
Um, that both help clarify existing share insurance coverage and, uh, what future
share insurance coverage will, will be.
We plan to post the updated materials as they are ready.
CURE staff will also continue to be available to answer any share
insurance questions, um, that staff and crediting members may have.
Chairman Harper: Yeah.
And I know that the FDIC provided for a long time frame for
implementation of its change.
Are we providing, uh, equally a long time frame?
staff (4): Yes.
I believe it's almost identical.
Yes.
It's almost identical to the FDIC one.
Great.
Thank you.
Chairman Harper: I know that I would like to have the updated resources in
place as soon as possible and appreciate the hard work of the NCUA team that
will go into completing those tasks.
Finally, in the preamble to this rule, we note that the 1.
25 million per grantor cap is unlikely to be too low.
What evidence do we have for reaching that conclusion, Tom?
What, for example, is the median size of a trust fund or the
amount of the average inheritance?
staff (3): Sure.
So, uh, the final rule actually cites survey data indicating that the median
size of a trust fund is around 285, 000, which is obviously well short of the
maximum coverage available under the rule.
Uh, additionally, comment or input addressing this issue agreed that the 1.
25 million per grant or cap was unlikely to be too low as the vast majority of
accounts are well below that level.
Uh, this aligns with, you know, staff's general experience as well.
Um, that commenter did, however, ask that the NCOA track liquidations to ensure
the cap is not too low, and the final rule actually notes that the agency does
plan to continue to track uninsured, uh, amounts in liquidations, if any, and
can further, uh, Uh, can explore further changes if that should become warranted.
And in fact,
Chairman Harper: the call report changes that the Vice Chairman and I
have been both talking about, uh, have changes related to uninsured shares.
Um, thank you for those answers.
That concludes my remarks.
I now recognize the Vice Chairman.
VC Hauptman: Thank you, sir.
Chairman Harper: Uh, what was 46 pages?
staff (4): You mentioned?
Uh, your insured funds brochure.
Uh, don't, um, don't quote me.
I think it's somewhere on there.
Oh, yeah.
That's a pretty lengthy guidance.
It's lengthy.
VC Hauptman: Today's, uh, rule.
I was looking at 72 pages.
I know it can be a, it gives me pause.
Hey, we're simplifying things.
Here's a 72 page government document on the simplification.
It can feel a little weird, but I will, um, I think this is a positive change.
I'm going to be supporting it.
I'll say regulatory relief can come in a lot of forms.
The best kind is what we're doing today, which is regulatory relief
that isn't taking on more risk.
Or reducing government oversight.
It's just adding clarity.
I think this is a good time to remind ourselves that the question of how easy
it is to follow the rules It's determined solely by those who have to follow
them, not those of us who write them.
NCUA insurance specialists in the last five years have
received over 17, 000 calls.
Staff estimates that over half of those are related to coverage for trust
accounts, revocable and irrevocable.
And that 17, 000 Again, just over half we think are related
to this issue, trust accounts.
That does not include inquiries we got via email.
It does not include inquiries from MyCreditUnion.
gov or inquiries received by NCUA staff directly.
It also doesn't include credit unions that had questions but got the answer from
another credit union, nor does it include credit unions that had questions but
were too nervous to tell their regulator.
That, by definition, happens more often than regulators realize.
So today's action is Smart Regulatory Relief.
We at the NCUA are also saving ourselves time and effort.
Both rules on today's board agenda provide much needed improvements on
consistency, simplification, and clarity.
Today's final rule on insurance coverage is substantially
unchanged from the proposed rule.
Thank you to the 13 stakeholders who put, uh, who submitted comments.
These comments were universally supported.
It provides some suggestions for some changes.
They appreciate the benefits of a simpler calculation and being at parity
essentially with what the FDIC does.
This rule simplifies and reduces the number of rules governing
the treatment for trust accounts.
The regulation establishes a single category for trust accounts
using a common calculation for both revocable and irrevocable.
The final rule is also intended to streamline the currently
time consuming trust review process and facilitate faster.
Payouts to beneficiaries by reducing unclear and confusing
elements of this rule.
Credit unions, their employees and NCA staff are better able to serve the public.
The ultimate beneficiary should be credit union members.
Uh, one last thing on this topic directly, uh, the way we
really help small credit unions.
It's not by increasing our budget and adding lots of more exam
hours to answer questions about our own rules that we wrote.
The way to help is you make it less burdensome to operate and
start a small credit union.
Succession planning is also easier when NCUA can help make the job of running a
small credit union a more attractive job.
Sometimes these are labors of love in some small credit unions and it
could be a little bit more than that.
Um, that concludes my remarks directly on this, except just to make a public
service announcement, which is, folks, please update your beneficiaries.
When my mother passed away of her three children, for some reason, I was the one
that had to do all the paperwork, and she didn't have a whole lot of money.
But boy, was it easier that the three of us were named as beneficiaries,
including her credit union account.
Um, got the money quickly to, Dave Ramsey says, uh, you know, the
one thing you want to leave your heirs is peace and simplicity.
Um, so, my mother thankfully updated beneficiaries, that was
a good scenario, and nobody wants to be, you know, the worst case.
If you remember Atlanta 2016, woman hired a guy, had her new husband
killed for the insurance money, but the check went to the ex wife.
You know,
staff: so,
VC Hauptman: moral of the story, update your beneficiaries.
You know, so.
A couple questions, uh, all right, a member has a trust account worth over
one and a quarter million, right?
Mm hmm.
Got more than five beneficiaries at a single credit union.
Is there a mechanism to allow credit unions and members the
ability to restructure their accounts to accommodate the changes?
I can
staff (4): take that question.
Uh, it's true that there may be some instances where a single
member, um, with more than 1.
25 million in trust at a single credit union may see their coverage reduced.
However, because of some of the simplifications, um, of what are currently
insured as irrevocable trust accounts.
Um, Regarding restructuring accounts, members with funds in excess of
the maximum insured amount would have until the new trust account
coverage provisions go into effect to restructure their accounts.
The trust account changes in the Final Rule would not go into effect until
December 1, 2026 over two years from now.
The delayed effective date mirrors the one the FDIC provided in, in their own rule.
Members with funds over the insured limit have multiple potential options for
rearranging their accounts depending on their specific facts and circumstances.
They may just want to move the excess funds into a different federally
insured credit union to ensure that all of their funds are insured.
Alternatively, they may be able to restructure their funds within their
current federally insured credit union so that the excess funds are insured under
a different insurance category, such as the single ownership account category.
Uh, in the rare event a member has a sheriff's certificate that exceeds
a two year delayed effective date and has trust funds that are over 1.
25 million that would be uninsured, the member may need to work with their
credit unit to determine the best path to restructuring the impacted funds
in advance of December 1st, 2026.
I do also want to stress that I'm only referring to the
restructuring of trust accounts at a federally insured credit unit.
The final rules impact should be limited to the insurance coverage of
those accounts, Should not require an individual's actual formal
trust document to be restructured.
Finally, I think it's worth noting that where two individuals are co
owners of a trust account, such as a payable unduty account with updated
beneficiaries and correct beneficiaries, each co owner is entitled to up to 1.
25 million in coverage if they have at least five beneficiaries.
In other words, a couple could have as much as 2.
5 million in coverage of their trust accounts at one
federal insurance credit union.
That concludes my response.
staff: Whew.
VC Hauptman: Gotcha.
Uh, um, one of the commenters suggested grandfathering existing trusts.
What's the reasoning for not doing the grandfathering?
staff (3): Sure.
I can, uh, take that one.
So, that's correct.
We had three commenters that expressed support for some form of
grandfathering of existing accounts.
Um, in discussing this, the final rule of preamble refers
to this as legacy coverage.
Those comments were strongly considered.
However, it's staff view that providing legacy coverage for existing accounts
poses complications and burdens to federally insured credit unions,
account holders, and the NCUA that makes such a system largely unworkable.
Uh, you know, in short summary, legacy coverage would undo the benefits
of simplifying the proposed rule.
Uh, to provide legacy coverage, the NCOA would have to effectively
maintain two sets of rules, the new simpler trust rules and also the
entire current regime of trust, uh, which have generated so much confusion
and resulted in so many questions.
With two sets of rules in place, there's yet another step which would
need to, which would involve, uh, adding the multiple existing account.
Which would add to the multiple existing steps we already have under
the current rules for trust accounts.
So, in evaluating coverage, NCUA, credit unions, and members would
then first have to ask whether an account was in existence at the time
the NCUA adopted this new rule, or the new trust account coverage rule.
Accounts that did exist at that time would still have the existing complicated
analysis applied to their funds.
In addition to largely undermining the simplification, clarity, and burden
reduction benefits the rule would provide, legacy coverage would also pose
yet new questions that could further complicate share insurance rules.
So just by example, the rule would need to address what impact change in
beneficiary, an account restructuring, or other similar action meant for
the legacy status of the account.
Um, so basically add yet another complication to an already
complicated set of rules.
I also want to reiterate that the NCUA has consistently tried to make
sure that where it's possible there's parity between NCUA coverage and
FDIC deposit insurance coverage.
If we were to provide a, you know, legacy account situation, we would
then not have complete parity with what FDIC is currently doing.
Uh, our hope is that by providing a substantially delayed effective date,
which is in excess of two years, federally insured credit unions and
their account holders should have enough time to make any needed changes
to their accounts to, uh, essentially make legacy accounts not necessary.
Yeah,
VC Hauptman: I think that's a fair answer.
I think the comment is not unreasonable.
It's one we sort of expected.
Right.
But I get it.
Uh, we're trying to reduce everybody's effort and somebody
would say, well, my neighbor just told me they don't have to do this.
And then we'd have to explain that to them.
The person answering this question would have to know that way back in the day.
I mean, this conversation could be in 20 years.
Yeah.
Um, and it also creates some strange situations where maybe
you want to take your business elsewhere, but you're tied in.
Right.
To this old legacy account.
You don't want to disturb that.
Um, so I agree, uh, not a person who sent that in, not a strange request.
Grandfathering is routinely done.
Uh, in state and federal law, uh, but our purpose here is simplification,
and I think it's the right call.
Um, and where are we, just give me a rundown, uh, updates to the forms, the
website, uh, our internal training, because people are going to maybe
ask questions about this change.
Where are we on preparing people for that?
staff (4): We have the scope defined, um, so as soon as, you
know, assuming you approve the rule, today we'll get started, um, on
creating those materials right away.
Thank
VC Hauptman: you both
Chairman Harper: for that.
Back to you, Mr.
Chairman.
Uh, thank you, Mr.
VC Hauptman: Vice Chairman.
Is there a motion?
Yes, sir.
I move that the board approve final rule part 745 of N2A's rules and regulations as
attached to the board action memorandum.
Chairman Harper: I second the motion.
All those in favor say aye.
Aye.
All those opposed say nay.
Let the record show that the ayes have it and the motion passes two to zero.
Samantha: This concludes the N C U Aâs September 20 24 Board Meeting action on
regulation Simplifying Share Insurance
If your Credit union could use assistance with your exam, reach out to Mark Treichel
on LinkedIn, or at mark Treichel dot com.
This is Samantha Shares and we Thank you for listening.