Alert October 21, 2008

FDIC Simplifies and Expands Insurance Coverage for Mortgage Servicing Accounts

The FDIC issued an interim final rule designed to simplify and expand deposit insurance coverage for mortgage servicers’ accounts to relieve investor anxiety about possible losses in the event of a bank failure.

In the FDIC’s press release accompanying the rule, FDIC Chairman Sheila C. Bair was quoted as saying: “[t]his simplification of the coverage rules for mortgage servicing accounts will help prevent losses to otherwise insured depositors and prevent withdrawals of deposits for principal and interest payments from depository institutions.”

Accounts maintained by a servicer may include funds paid by borrowers for principal, interest and escrowed amounts for taxes and insurance premiums. Prior to the interim final rule, funds representing payments of principal and interest in a servicing account were insured in the name of the owner (lender, investor or security holder) and funds representing payments of taxes and insurance were insured on a pass-through basis to each borrower. Because principal and interest payments were insured in the name of the owner, amounts on deposit for the benefit of an owner that exceeded the insurance limits for the owner were not guaranteed.

Under the interim rule, the insurance coverage of the principal and interest payments in a mortgage servicing account will be based on each borrower’s payments of principal and interest, up to the maximum deposit insurance amount per borrower (currently, through December 31, 2009, $250,000 per borrower). The interim rule provides that the principal and interest payments in a mortgage servicing account are insured for the cumulative balance paid into the account by the borrowers, up a limit of $250,000 per borrower. Deposits representing payments of taxes and insurance remain insured on a pass-through basis to each borrower. 

The interim rule was effective on the date of its issuance, October 10, 2008. Comments on the interim rule must be received by the FDIC by December 26, 2008. Click here for the interim rule and here for its accompanying press release.