Todd 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. I have to give it to you, Tom, for having a great sock game today, and Paul for having a fantastic shirt-tie combination. Good morning to both of you. Please start whenever you are ready.
Tom Zels: Thank you so much. Good morning, Chairman Harper and Vice Chairman Houtman. 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 am 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 NCOA 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 will now discuss specifics of the general rule. I will turn it over to Paul so that he can discuss the changes to the trust account coverage.
Paul Dibble: Thank you, Tom. Good morning, Chairman Harper. Good morning, Vice Chairman Poppin. 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 N2A efforts to address confusion related to trust accounts, the N2A 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 N2A has been appointed as liquidating agent. The FDIC, which has deposit insurance, covers rules that are comparable to the N2A'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-depth accounts, formal revocable trust accounts, and irrevocable trust accounts. The final rule also treats irrevocable trusts like revocable trusts in 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 for the potential for increased coverage depending on whether the members set up revocable or irrevocable trust. 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 trust, 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 share 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 currently used for revocable trusts for five or fewer beneficiaries. An account holder's trust account will be insured in the amount up to $250,000, multiplied 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 NCAA 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 would provide the NCAA 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.
Tom Zels: Thanks, Paul. In terms of comments on the trust account changes, all 11 substantive comments that the NCAA 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 NCAA 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 NCAA 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 NCAA'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, the NCAA'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. This is identical to the treatment under the FDIC's recent final rule. The NCAA 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 NCAA's record-keeping regulations for share insurance coverage. These changes are favorable to members and provide more flexibility to the NCAA 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 NCAA 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 NCAA 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.
Todd 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 to bring this final rule before the NCAA Board today. 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, 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 funds 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 NCAA's share insurance fund specialists who, sorry, share insurance specialists who during the last five years have fielded thousands of calls, as you've noted, Paul, about share insurance coverage for different types of trust accounts. This rule change will also lead to greater efficiency in the NCAA'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 the NCAA 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, we've sometimes had to spend months sorting through trust records to determine just how much exactly we've had to pay in 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. 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 stakes 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 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 or operation of state law?
Tom Zels: No, it should not. The rule really just affects the NCUA's coverage of share insurance and should have no impact on state law.
Todd 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, many credit union staff members, staff and members rely on the NCUAs 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?
Paul Dibble: I can take that. We're fully committed to updating the year insured 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 the necessary updates and assuming the board approves this final rule today we will immediately start an update and all the relevant materials.
Todd Harper: And if I recall though you're insured funds for sure is it's a lengthy document. So it may take a little 36 pages
Paul Dibble: Yeah currently. We also recognize the important of developing materials that accommodate the delayed effective date for both for the trust account changes. We're committed to making sure that those resources are available that both help clarify existing share insurance coverage and what future share insurance coverage 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 that staff and credit union members may have.
Todd Harper: Yeah, and I know that the FDIC provided for a long timeframe for implementation of its change. Are we providing equally a long timeframe?
Paul Dibble: Yes, I believe it's almost identical to the FDIC.
Todd Harper: Great, thank you. 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?
Tom Zels: Sure. So 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. Additionally, commenter input addressing this issue agreed that the $1.25 million per grantor cap was unlikely to be too low as the vast majority of accounts are well below that level. This aligns with, you know, staff's general experience as well. That commenter did, however, ask 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 amounts in liquidations, if any, and can further, can explore further changes if that should become warranted.
Todd Harper: And in fact, the call report changes that the vice chairman and I have been both talking about. I have changes related to uninsured shares. Thank you for those answers. That concludes my remarks. I now recognize the vice chairman.
Kyle Hauptman: Thank you, sir. What was 46 meters?
Paul Dibble: You're insured funds brochure don't I didn't get somewhere on there. That's a pretty lengthy. It's lengthy. Yeah
Kyle Hauptman: Today's rule I was looking at 72 pages. I know it can be 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 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 is Determined solely by those who have to follow them not that those of us who write them Nca 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 of trust accounts that does not include increase We got via email. It does not include inquiries from my credit union gov Or inquiries received by NC way 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 we're too nervous to tell their regulator about it that by definition happens more often than regulators realize So today's action is smart regulatory relief. We at the NC way are still being 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 who submitted comments these comments were universally supported provided some chest suggestions for some changes they appreciate the benefits of a simper 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 NC way staff are better able to serve the public the ultimate beneficiaries should be credit union members One last thing on this topic directly the way we really help small credit unions Is 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 NC way 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 That concludes my remarks directly on this except just to make a public service announcement, which is folk. 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 Got the money quickly to Dave Ramsey says you know the one thing you want to leave your heirs is peace and simplicity 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 Moral of story update beneficiaries you know so a Couple questions all right remember has a trust account worth over one and a quarter million right 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
Paul Dibble: I can take that question. It's true that there may be some instances where a single member with more than 1.25 million in trust a single credit you may see their coverage reduced. However because of some of the simplifications of what are currently insured as irrevocable trust accounts coverage could actually increase in some cases too. Regarding restructuring accounts members with funds in excess of the maximum insured amount would have until the new trust account covered provisions go into effect to restructure their accounts. The trust account changes in the final rule would not go into effect until December 1st, 2026 over two years from now. The delayed effective date mirrors the one the FDIC provided 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 the excess funds are insured under a different insurance category such as the single ownership account category. In the rare event a member has a share 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 union. 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 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 federally insured credit union. That concludes my response.
Kyle Hauptman: One of the commenters suggested grandfathering existing trust. What's the reasoning for not doing the grandfathering?
Tom Zels: I can take that one. So that's correct. We had three commoners that expressed support for some form of grandfathering of existing accounts. In discussing this, the final rule of preamble refers to this as legacy coverage. Those comments were strongly considered. However, its staff view that providing legacy coverage for existing accounts poses complications and burdens to federally insured credit unions, account holders, and the NCOA that makes such a system largely unworkable. You know, in short summary, legacy coverage would undo the benefits of simplifying the proposed rule. 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 rules, 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 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, NCOA credit unions and members would then first have to ask whether an account was in existence at the time the NCOA 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. So, it would basically add yet another complication to an already complicated set of rules. I also want to reiterate that the NCOA has consistently tried to make sure that where it's possible there's parity between NCOA 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. Our hope is that by providing a substantially delayed effective day, 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 essentially make legacy accounts not necessary.
Kyle Hauptman: I think the comment is not unreasonable. It's one we sort of expected, right? But I get it. 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, you know And it also creates some strange situations where maybe you want to take your business elsewhere But you've tied in to this old legacy count. You don't want to disturb that So I agree not a person who sent that in not a strange request grandfathering is routinely done in state and federal law But our purpose here is simplification and I think it's the right call And where are we just give me a rundown updates to the forums the website our internal training because people are gonna Maybe ask questions about this change Where are we on preparing people for that?
Paul Dibble: We have the scope to find. So as soon as, assuming you approve the rule, today we'll get started on creating those materials right away.
Kyle Hauptman: Thank you.
Todd Harper: Both for that back to you mr. Chairman thank you mr. vice chairman is there a motion yes
Kyle Hauptman: Sir, I move that the Board approve Final Rule Part 745 of NCA's Rules and Regulations as attached to the Board Action Memorandum.
Todd 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 to to zero
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