September 13,2010

MEMORANDUM TO: The Board of Directors \~ ~

Sandra L. Thompson Cb \ Y\

Director, Division of Supervision and

Consumer Protection ./

~ard J. Ostrman, Jr. ~1i . /2~

o Acting General Counsel ¿J

FROM:

SUBJECT: NPR on Deposit Insurance of

Noninterest-Bearing Transaction Accounts

RECOMMENDATION:

We recommend that the Board of Directors authorize the Executive Secretary to publish in the

Federal Register a Notice of Proposed Rulemaking that would amend the FDIC's deposit

insurance regulations to provide for the full deposit insurance of noninterest-bearing transaction

accounts from December 31, 2010 through December 31, 2012 ("Proposed Rule"), as provided

for in section 343 ofthe Dodd-Fran Wall Street Reform and Consumer Protection Act ("DoddFran" Act).!

DISCUSSION:

The Dodd-Frank Act and the FDIC's TAGP

Section 343 of the Dodd-Frank Act amends the Federal Deposit Insurance Act to provide full

deposit insurance coverage (beyond the Standard Maximum Deposit Insurance Amount

("SMDIA") of $250,000) for the net amount held in a noninterest-bearing transaction account by

any depositor at an insured depository institution ("IDI"). Section 343 of the Dodd-Fran Act is

similar to the FDIC's Transaction Account Guaranty Program ("TAGP") (which is scheduled to

terminate at year-end), but differs from it in three significant ways. First, unlike under the

TAGP, section 343 applies to all IDls. IDls are not required to take any action (i.e., opt in or opt

out) to obtain coverage provided under section 343. Second, section 343 covers only traditional,

noninterest-bearing demand deposit accounts. Unlike the TAGP, section 343 does not include

within the definition of non interest-bearing transaction account either low-interest NOW

accounts or Interest on Lawyers Trust Accounts ("IOL TAs"). And, third, unlike under the

TAGP, there is no separate FDIC assessment for the insurance of noninterest-bearing transaction

accounts under section 343. Section 343 of the Dodd-Frank Act is effective from December 31,

2010, through December 31,2012.2

i Pub. L. No. 111-203 (July 21, 2010).

2 Because of overlapping termination and effective dates, on December 31, 2010, there will be overlapping coverage

of the TAGP and section 343 of the Dodd-Frank Act. On January 1,2011, coverage under the TAGP wil have
The TAGP was originally set to expire on December 31, 2009. The Board extended the TAGP,

first, through June 30, 2010, and then through December 31, 2010. The rule implementing this

final extension also provided for the possibility of an additional extension not to exceed

December 31, 2011, at the discretion of the FDIC Board of Directors upon a finding of continued

need for the TAGP? The rule also provided that the Board would anounce any decision to

implement such a fuher extension no later than October 29,2010. The Proposed Rule would

serve as a vehicle for the Corporation to anounce that it will not continue the T AGP beyond

December 31,2010. Staff proposes that this anouncement also be included in the Financial

Institution Letter issued when the Proposed Rule is published.

The Proposed Rule

The Proposed Rule would revise the Corporation's deposit insurance regulations to include

noninterest-bearing transaction accounts as a new temporary deposit insurance account category.

The Proposed Rule would explain that all fuds held in noninterest-bearing transaction accounts

would be fully insured, without limit, and that this unlimited coverage would be separate from,

and in addition to, the coverage provided to depositors with respect to other accounts held at an

IDI.

Definition of non interest-bearing transaction account

The Proposed Rule would follow the definition of noninterest-bearing transaction account in

section 343 of the Dodd-Fran Act, which does not include any interest-bearing accounts. The

section 343 definition of non interest-bearing transaction account encompasses only traditional,

noninterest-bearing demand deposit (or checking) accounts that allow for an unlimited number of

deposits and withdrawals at any time, whether held by a business, an individual or other type of

depositor.

The Proposed Rule would expressly state that low-interest NOW accounts and IOL TAs, which

are covered under the TAGP, would not be covered under this definition of non interest-bearing

transaction account.

Disclosure and notice requirements

The Proposed Rule would impose three notice and disclosure requirements to ensure that IDls

and depositors are aware of and understand what types of accounts will be covered by this

temporary deposit insurance coverage for noninterest-bearing transaction accounts. As

explained in more detail below: (1) IDls must post a prescribed notice in their main office, each

branch and, if applicable, on their Website; (2) IDls currently participating in the TAGP must

notify individual NOW account depositors (that are curently protected under the TAGP) and

ended, but the deposit insurance coverage under section 343 of the Dodd-Frank Act wil remain through December

31,2012.

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IOLTA depositors that, beginning Januar 1,2011, those accounts no longer wil be eligible for

unlimited protection; and (3) IDls must notify customers individually of any action they take to

affect the deposit insurance coverage of fuds held in noninterest-bearing transaction accounts.

1. Posted notice

The Proposed Rule would require each IDI to post, prominently, a copy of the following notice

in the lobby of its main office, in each domestic branch and, if it offers Internet deposit services,

on its Website:

NOTICE OF CHANGES IN TEMPORARY FDIC INSURACE COVERAGE

FOR TRANSACTION ACCOUNTS

In accordance with the Dodd-Fran Wall Street Reform and Consumer Protection

Act, from December 31,2010, through December 31, 2012, all funds in

"noninterest-bearing transaction accounts" are insured in full by the Federal

Deposit Insurance Corporation. This unlimited coverage is in addition to, and

separate from, the coverage of at least $250,000 available to depositors under the

FDIC's general deposit insurance rules.

The term "noninterest-bearng transaction account" includes a traditional

checking account (or demand deposit account) on which the insured depository

institution pays no interest. It does not include any transaction account that

may earn interest, such as a negotiable order of withdrawal ("NOW") account,

money-market deposit account, or Interest on Lawyers Trust Account ("IOL TA"),

even if checks may be drawn on the account.

The temporar full insurance coverage of "noninterest-bearng transaction

accounts" expires on December 31, 2012. After December 31,2012, funds in

noninterest-bearing transaction accounts will be insured under the FDIC's general

deposit insurance rules, subject to the Standard Maximum Deposit Insurance

Amount of $250,000.

For more information about FDIC insurance coverage oftransaction accounts,

visit ww.fdic.gov.

2. Notice to depositors protected under the TAGP but not under the Dodd-Fran

provision

As discussed above, low-interest NOW accounts and all IOLTAs are protected in full under the

T AGP. These accounts, however, are not eligible for unlimited deposit insurance coverage

under the Dodd-Fran provision. Thus, staring January 1,2011, all NOW accounts and IOLTAs

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will be insured under the general deposit insurance rules and no longer will be eligible for

unlimited protection. Because of the potential depositor confusion about this change in the

FDIC's treatment ofNOWs and IOLTAs, the Proposed Rule would require IDls curently

participating in the TAGP to provide individual notices to depositors with NOW accounts (which

due to their interest rate restrictions are currently protected in full under the TAGP) and IOLTAs

that those accounts wil not be insured under the new temporary insurance category for

noninterest-bearing transaction accounts, but instead will be insured under the general insurance

rules up to the SMDIA of $250,000. IDls would be required to provide such notice to

applicable depositors by mail no later than December 31,2010.

3. Notice to sweep account and other depositors whose coverage on noninterest-bearing

transaction accounts is affected by an IDI action.

Under the TAGP regulations, if an IDI offers an account product in which fuds are

automatically transferred, or "swept," from a noninterest-bearing transaction account to another

account (such as a savings account) or bank product that does not qualify as a noninterestbearing transaction account, it must inform those customers that, upon such transfer, the fuds

wil no longer be fully protected under the TAGP. The Proposed Rule contains a similar, though

somewhat more expansive, requirement, mandating that IDls notify customers of any action that

affects the deposit insurance coverage of their fuds held in noninterest-bearng transaction

accounts. This notice requirement is intended primarily to apply when IDls begin paying interest

on demand deposit accounts, as will be permitted beginning July 22,2011, under section 627 of

the Dodd-Fran Act. Thus, under the proposed notice requirements, if an IDI modifies the terms

of its demand deposit account agreement so that the account may pay interest, the IDI must

notify affected customers that the account no longer will be eligible for full deposit insurance

coverage as a noninterest-bearing transaction account.

Comment Period

The Proposed Rule would provide for a 1 5-day comment period. This limited time is

necessitated by section 343's year-end effective date and the consequent need to publish a final

rule as close as possible to November 1,2010, so insured depository institutions will have

adequate time to comply with the notice and disclosure requirements by December 31, 2010.

Staff members knowledgeable about this case:

Kathleen G. Nagle

Division of Supervision and Consumer

Protection (x8654 1)

J ames V. Deveney

Division of Supervision and Consumer

Protection (x86687)

Joseph A. DiNuzzo

Legal Division (x87349)

Walter C. Siedentopf

Legal Division (x22744)

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