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4000 - Advisory Opinions
Deposit Insurance Coverage on Principal and Interest
and Taxes and Insurance Accounts Maintained by Issuers of Government
National Mortgage Association Securities
FDIC-84-21
November 16, 1984
John C. Murphy, Jr., General Counsel
Your letter of October 9, 1984 to Chairman Isaac has been referred
to me for reply. You request clarification of the deposit insurance
coverage on principal and interest (P&I) and taxes and insurance (T&I)
accounts maintained by issuers of Government National Mortgage
Association (GNMA) securities.
P&I ACCOUNTS
Background
Your letter indicates that P&I custodial accounts are established
through a letter agreement (Form HUD 11709) which requires the mortgage
servicer 1
to deposit the collected funds into an account entitled:
"[Name of Mortgage Servicer] Trustee of
Principal and Interest Custodial Account for Various GNMA
Mortgage-Backed Securities Pools or Loan Packages"
The P&I payments for more than one pool may be commingled in one
custodial account if the funds for each pool are separately accounted
for. Records identifying the security holders are maintained by the
issuer and by Chemical Bank, GNMA's transfer agent. Some security
holders have their securities held in "Street" or nominee name.
On a designated date each month, the mortgage servicer remits the
collected funds directly to the security holders in proportion to their
interest in the underlying pool(s). You ask for clarification on how
the FDIC will determine insurance coverage on the funds on deposit in a
P&I account established and operated as described above.
Discussion
Based on these facts, it appears that each of the individual
security holders would be entitled to insurance protection up to
$100,000, determined by combining the funds owned by the security
holders which are on deposit in all P&I accounts in the same depository
and are held in the same right and capacity, regardless of the number
of underlying mortgage pools.
For example, assume that a person individually owns
interest in three separate mortgage pools serviced by the same bank.
The bank deposits into two separate P&I accounts the P&I payments
collected from the mortgages underlying the three pools. The aggregate
insurance coverage will be determined by combining the funds owned by
the security
{{4-28-89 p.4163}}holders in both P&I accounts. It should
be noted that if the same person jointly owns additional
securities in the same pools these funds also will be combined and
separately insured in the aggregate up to $100,000. In either case, the
funds appear to be "trust funds" and, as such, would be insured
in addition to other accounts that may be eligible for separate
insurance coverage.
The legal basis for these conclusions is as follows: Under section
12(c) of the Federal Deposit Insurance Act (the "Act"), a claim
for deposit insurance must be based on a recognizable ownership
interest. 12 U.S.C. § 1822(c). Further, the deposit records of the
bank "shall be conclusive as to any relationship . . . on which a
claim for insurance" is based. 12 C.F.R. § 330.1(b)(1). The
"details of the relationship and interests of other parties in the
account must be ascertainable . . . from the records of the bank . . .
maintained in good faith and in the regular course of business." 12
C.F.R. § 330.1(b)(2).
Therefore, before deposit insurance coverage can be determined, the
owner of the funds must be identified. In this situation, since the
liability of the mortgagor is extinguished when the payment is made to
the servicer, the mortgagor is not the owner of the funds. Moreover,
the deposit records of the bank indicate that the bank is trustee of
the funds, holding them for the benefit of the securityholders. This
relationship is confirmed not only by the fact that the servicing bank
maintains records showing the identity of the individual security
holders and their interest in specific pools but also by the fact that
the servicing bank remits the funds directly to the security holders.
Based on these facts and analysis, it is our opinion that the security
holders are the owners of the funds, that their interests are
ascertainable from the records of the bank and that the security
holders are the insured parties.
We turn now to the question of whether these funds are entitled to
insurance protection in addition to other coverage to which the
security holder may be entitled. It is our opinion that the funds are
trust funds and therefore all such funds of the holder held in the same
right and capacity are separately insured to a maximum of $100,000.
The definition of "trust funds" in section 3(p) of the Act
includes funds held by a bank as a
trustee. 2
Since the records of the bank and the details of the relationship
between the bank and the holders both indicate that the bank is a
trustee, the funds qualify for treatment as trust funds within the
meaning of section 3(p). Such trust funds are "insured in an amount
not to exceed $100,000 for each trust estate." 12 U.S.C.
§ 1817(i). Since the FDIC has consistently interpreted the term
"trust estate'' to mean the beneficial interest of each owner
of the funds, each security holder is insured to a maximum of
$100,000 on these funds. The interests of each owner held in the same
right and capacity are combined and insured in the aggregate to a
maximum of $100,000, in addition to the insurance provided to other
types of deposit accounts. 12 C.F.R. § 330.10.
You indicate that some security holders have their securities held
in street or nominee name. In this situation, the security holder's
interest would be insured as outlined above provided that
(i) the records of the bank reflect that the nominee or holder in
street name is acting in a custodial capacity; and (ii) the
holder's name and interest in the specified P&I account is disclosed on
the record of the person in whose name the deposit is maintained (in
this case probably the dealer); and (iii) such records are
maintained in good faith and in the regular course of business. 12
C.F.R. §§ 330.1(b)(2), 330.101(b).
In summary, it is our opinion that each security holder would be an
owner of the funds held in the P&I account in proportion to the
holder's interest in the underlying mortgage pools. Therefore, the
security holder would be entitled to aggregate insurance coverage up to
$100,000 on all such funds held in a particular bank by that owner in
the same right and capacity provided that the records of the
bank disclose the ascertainable interest of the
{{4-28-89 p.4164}}holder. These funds would be insured in
addition to other deposits that may be eligible for separate insurance
coverage. Where the security is held in Street or nominee name, the
insurance would flow through to the security holder if the bank's
records reflect this custodial arrangement and the person in whose name
the deposit is held maintains the records required by the FDIC rules
and regulations.
T&I Accounts
Background
Your letter indicates that the T&I accounts are established through
a letter agreement (Form HUD 11720) which requires the mortgage
servicer to deposit the collected payments into an account entitled:
"[Name of Mortgage Servicer] Trustee of Servicer's Escrow
Custodial Account for Various Mortgagor's, GNMA Mortgage-Backed
Securities"
The servicer collects the T&I payments from the mortgagor and holds
the funds until they are used to pay, on behalf of the mortgagors,
taxes and insurance premiums due on the properties securing the pooled
mortgages. The T&I payments from several different mortgage pools may
be deposited into one T&I account if the deposits attributed to each
pool are separately accounted for. It is our assumption that the
mortgagor's liability to pay the insurance and taxes is extinguished
when the payment is received by the insurance company or the taxing
authority.
Discussion
Based on these facts and assumptions, it is our opinion that the
individual mortgagors would be entitled to insurance protection up to
$100,000, determined by combining the funds owned by the mortgagor
which are deposited in all T&I accounts in the same depository and are
held in the same right and capacity, regardless of the number of
underlying mortgages. Further, the funds appear to be trust funds and,
as such, would be insured in addition to other accounts that may be
eligible for separate insurance coverage.
The legal reasoning is the same as outlined above for P&I accounts:
The insurance coverage flows to the owner of the funds. 12 U.S.C.
1822(c). The details of the relationship and interests of other parties
(e.g. mortgagors) must be ascertainable from the records of the bank
and the records of the bank are conclusive in this regard. 12 C.F.R.
§ 330.1(b)(1), (2).
The situation posed indicates that the T&I payments are owned by the
individual mortgagors, the parties who are legally liable for payment
of the taxes and insurance. The bank records appear to show the
ownership interest of each individual mortgagor in the T&I account.
Further, since the deposit records indicate that the bank is the
trustee, each mortgagor, as the beneficial owner of each trust estate,
would therefore be entitled to insurance up to $100,000 for funds held
in the same right and capacity in all T&I accounts in the same
depository, regardless of the number of underlying mortgages. 12 U.S.C.
§ 1813(p), 1817(i); 12 C.F.R. § 330.10.
We stress that these conclusions are limited to the facts as we
understand them to be. Should the facts or assumptions differ from
those we have described or circumstances change in the future, the
opinions set out in this letter are subject to
change.
1 For purposes of this discussion the terms "servicer"
and "issuer" are used interchangeably. Go Back to Text
2 12 U.S.C. § 1813(p) in pertinent part states that:
[t]he term "trust funds" means funds held by an
insured bank in a fiduciary capacity and includes . . . funds held as
trustee . . . or agent.
Since the definition includes funds held by a bank as a trustee or
an agent, it is unnecessary in this case to determine whether the
technical relationship between the bank and the security holder is one
of trustee and beneficiary or principal and agent. Go Back to Text
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