Share Insurance and Appendix

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 745

Share Insurance and Appendix

AGENCY: National Credit Union Administration (NCUA).

ACTION: Interim final rule with request for comments.

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SUMMARY: This interim rule simplifies NCUA's share insurance

regulations on testamentary accounts, frequently referred to as

revocable trust accounts or payable on death accounts, and joint

ownership accounts. These amendments are similar to those adopted by

the Federal Deposit Insurance Corporation (FDIC) for its deposit

insurance regulations. The first amendment increases available share

insurance coverage on payable on death accounts by adding parents and

siblings to the list of relatives for whom a member may receive

separate coverage. The second amendment simplifies the method for

determining the amount of insured funds a person may have in one or

more joint accounts by eliminating the first of two steps used to make

such determinations. These amendments are adopted as an interim rule to

provide parity between NCUA and FDIC insurance regulations on commonly

held accounts, and to aid the public and prevent confusion over the

amount of federal insurance available on those accounts.

DATES: Effective April 22, 1999. Comments must be received on or before

July 15, 1999.

ADDRESSES: Comments should be directed to Becky Baker, Secretary of the

Board. Mail or hand-deliver comments to: National Credit Union

Administration, 1775 Duke Street, Alexandria, VA 22314-3428. Fax

comments to (703) 518-6319. E-mail comments to [email protected].

Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: James J. Engel, Deputy General

Counsel, at the above address, or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

In accordance with NCUA's regulatory review process, at year end

1998, NCUA staff identified part 745 as one of the regulations in need

of updating, clarification and simplification. Part 745 was included in

NCUA's Semi-Annual Agenda of Regulations that will appear in the April

1999, Unified Agenda of Federal Regulatory and Deregulatory Actions

published by the Regulatory Information Service Center, GSA. Work on

this project is to begin in late summer. However, due to recent deposit

insurance rule changes for joint accounts and revocable trust accounts

adopted by the Board of Directors of the Federal Deposit Insurance

Corporation (FDIC), the NCUA Board believes it is in the public

interest to adopt similar changes for two basic reasons. First, the

FDIC's recent action to simplify its rules and provide added protection

for bank customers warrants similar action by the NCUA Board to

maintain parity between the coverage provided by both federal programs.

Both revocable trust accounts and joint accounts are types of accounts

commonly used by members of the public for the future transfer of

ownership of family assets without loss of control during the owner's

life. Traditionally, the owners of these accounts have been afforded

the same protection through similar Congressionally created federal

insurance funds, whether the accounts are maintained in banks or credit

unions.

Second, changes are needed to reduce, and hopefully avoid,

confusion about the application of NCUA's insurance rules to these

types of accounts, and also to avoid confusion regarding any

differences between NCUA insurance on credit union accounts and FDIC

insurance on similar accounts at bank and savings associations. The

NCUA Board is aware that there is confusion, both on the part of credit

union members and credit union employees about the current rules

regarding these accounts. This confusion has been brought to the

Board's attention through appeals filed under subpart B of part 745. It

is especially apparent when family members open several different joint

accounts, or joint owners use combinations of joint accounts and

revocable trust accounts. The FDIC had noted that its previous joint

account and payable on death account rules were frequently

misunderstood by bank depositors. It also looked at surveys conducted

by public interest research groups that showed that bank employees too

shared depositors' confusion. The action taken by FDIC provides needed

clarification and simplification for customers of its insured

institutions. The same benefits are extended to credit unions and their

members by the Board's adoption of this interim rule.

In order to expedite this process, the Board has chosen to make

minimum changes to the existing language of its regulations and not a

full scale rewrite or format revision at this time. Further, the NCUA

Board has not attempted to duplicate the studies conducted by or

reviewed by the FDIC prior to its adoption of the recent final rule.

The Board recognizes that its payout experience on revocable trust and

joint accounts has not been of the magnitude of that cited by the FDIC.

B. Current Rules

Testamentary Accounts (Revocable Trust Accounts)

These are accounts that evidence an intention on the part of the

owner to pass funds on to one or more beneficiaries upon the owner's

death. They include payable-on-death accounts (POD accounts), and

tentative or ``Totten'' trust accounts. These accounts are insured

separately from other accounts of the owner if the beneficiary is a

spouse, child or grandchild. There can be more than one beneficiary,

and if each beneficiary is either the spouse, a child or grandchild,

the account will be insured up to $100,000 for each such beneficiary.

For example, if an account is held by a husband ``in trust for'' his

wife and three children, the account will be insured for $400,000. This

coverage will be separate from any insurance the husband, wife or

children may have on their own accounts. For these accounts, insurance

is provided on a per beneficiary basis for the spouse,

[[Page 19686]]

child or grandchild. If, however, a credit union member names a parent

or sibling as a beneficiary, a common practice particularly for single

individuals, then the account will be added to the individual account

of the member and insured up to $100,000. There is no per beneficiary

protection in that case even though there is a close familial

relationship.

As the FDIC noted, by adding parents and siblings to the list of

family members who qualify as beneficiaries for additional coverage,

most of the customers who misunderstand the current rules will be

protected. The Board believes that same level of protection should be

provided to credit union members and, therefore, has adopted a similar

amendment. This interim rule also clarifies that the degree of kinship

for named beneficiaries includes relationships through blood, adoption,

or by virtue of remarriage. FDIC has a similar provision.

Joint Accounts

NCUA's current regulation does not expressly refer to a two step

process in determining insurance coverage on joint accounts as did the

FDIC's rule. However, where an individual had several joint accounts,

some with different joint owners, insurance coverage was determined by

applying two subsections. First, under subsection 745.8(d), joint

accounts with the same combination of owners are aggregated and insured

up to $100,000. Even though there is more than one account, if the

owners are the same, the accounts are treated as one account. Then,

under subsection 745.8(e), a person's interest in all joint accounts

with different combinations of owners joint is aggregated and insured

up to $100,000. Thus, NCUA followed the same type of two step process

used by the FDIC

The application of this process results in certain inequities. If a

person has ownership interests in several different joint accounts,

each with a different combination of joint owners, his or her interest

in each of those accounts will be added together and insured to

$100,000. The same will be done for each of the other joint owners as

well. If instead, that person has one or more joint accounts with the

same combination of joint owners, the maximum insurance available to

all of those joint owners combined will be limited to $100,000. Thus,

in one instance, each joint owner's interest can be insured up to

$100,000, while in the other, total coverage on the account is limited

to $100,000, notwithstanding the amount of each of the joint owner's

interest.

Through this interim final rule, the Board is taking the same

approach to simplify coverage on joint accounts as did the FDIC. It

will no longer be necessary to aggregate all joint accounts owned by

the same combination of individuals. With this amendment, each person's

interest in all qualifying joint accounts will be aggregated and

insured to a maximum of $100,000. The rule also eliminates the

signature requirement for share certificates, a matter that has

presented problems in the past, and for accounts maintained by certain

fiduciaries for joint owners as long as the credit union's records

reflect that there are joint owners. FDIC has a similar provision.

C. Interim Rule--Amendments

For purposes of this interim rule, the Board has not changed the

current format used in part 745. Instead, minor modifications have been

made to keep the amendments simple while accomplishing the desired

change. It is expected that more substantial changes to part 745 will

be made when agency staff undertakes a more comprehensive review of all

of its provisions and after receiving comments as a result of this

request for comments.

1. Section 745.4

The title of this section has been changed from ``Testamentary

Accounts'' to ``Revocable Trust Accounts,'' the section title the FDIC

adopted when it issued uniform rules for banks and savings associations

previously insured by the former Federal Savings and Loan Insurance

Corporation (FSLIC). See 55 FR 20111 (May 15, 1990). This nomenclature

will be more reflective of the types of accounts that members will be

using in the future and that the Board anticipates will be addressed in

subsequent action on part 745. Substantively, this interim rule extends

insurance coverage by adding parents and siblings to the list of

relatives who may be named as beneficiary on a revocable trust account

and for whom per beneficiary insurance coverage will be provided. The

rule also adds a new subsection (d) to define the degree of kinship for

named beneficiaries to include relationships through blood, adoption,

or by virtue of remarriage, such as a step-child or step-sister.

2. Section 745.8 Joint Accounts

This amendment adds language to subsection (a) to provide that a

co-owner's interest in all joint accounts will be added together and

insured up to a maximum of $100,000. It also removes subsections (d)

and (e). These changes eliminate the two step process for determining

insurance coverage on joint accounts. Language is also added to

subsection (b) to eliminate the signature requirement for share

certificates and accounts maintained for joint owners provided the

credit union records reflect the nature of the accounts.

D. Request for Comments

This interim rule only affects those provisions in part 745 and the

appendix that relate to joint accounts and revocable trust accounts. As

noted above, the Board is not amending or proposing any specific

amendments to other provisions of Part 745. Also, the Board is not

adopting in this interim rule a change similar to that adopted by the

FDIC regarding insurance coverage of accounts held by agents or

fiduciaries. However, the Board is interested in comments on part 745

in its entirety, including style and format and suggestions for

simplification or clarification. NCUA currently uses a separate

appendix to provide examples of insurance coverage, whereas FDIC

provides examples within some of the specific provisions of its rules.

Is either format preferable, or should NCUA add an additional appendix

with staff interpretations, similar to that used in part 707 for Truth

in Savings?

When reviewing part 745, the Board suggests commenters look to the

simplification of deposit insurance rules amendments adopted by the

FDIC (63 FR 25750, May 11, 1998; 64 FR 15653, April 1, 1999). Many of

those changes, with or without additional modification, may be

appropriate for Board consideration. The Board invites comments on how

to address insurance on living trusts, or the need for guidance on any

account insurance related areas they may be unique to credit unions. Of

particular importance are suggestions on ways to make the share

insurance regulations more easily understandable to members and

employees.

E. Effective Date

Under the Administrative Procedure Act, a substantive rule is to be

published 30 days before its effective date unless it meets one of that

Act's exceptions. The NCUA Board has determined that this interim rule

falls within the ``good cause'' exception of that Act, 5 U.S.C. 553(d),

and, therefore, it is made effective immediately upon publication in

the Federal Register. ``Good cause'' exists because the rule benefits

credit union members and employees by simplifying how to determine the

amount of coverage available on commonly used accounts; it increases

the amount of coverage that

[[Page 19687]]

is available for the benefit of credit union members; it does not

prejudice credit union members or credit unions; and it provides

immediate protection for members whose interests might otherwise be

jeopardized if an insured credit union were to fail within the normal

thirty day delayed effective date period.

Regulatory Procedures

Regulatory Flexibility Act

This interim final rule applies to all federally-insured credit

unions but does not impose new reporting, recordkeeping or other

compliance requirements on those institutions. Therefore, the Board has

determined and certifies that this rule will not have a significant

economic impact on a substantial number of small credit unions.

Accordingly, the NCUA Board has determined that a Regulatory

Flexibility Analysis is not required.

Paperwork Reduction Act

This interim rule does not impose any paperwork requirements and,

therefore, no information has been submitted to the Office of

Management and Budget.

Executive Order 12612

Although this interim rule applies to federally-insured state-

chartered credit unions, it has no affect on the regulation of those

credit unions.

List of Subjects in 12 CFR Part 745

Credit unions, Pension plans, Share insurance, Trustee.

By the National Credit Union Administration Board, this 15th day

of April, 1999.

Becky Baker,

Secretary, NCUA Board.

For the reasons stated in the preamble, NCUA amends 12 CFR chapter

VII as follows:

PART 745--SHARE INSURANCE AND APPENDIX

1. The authority citation for part 745 is revised to read as

follows:

Authority: 12 U.S.C. 1752(5), 1757, 1765, 1766, 1781, 1782,

1787, 1789.

2. Section 745.4 is revised to read as follows:

Sec. 745.4 Revocable trust accounts.

(a) For purposes of this part, the term ``revocable trust account''

includes a testamentary account, tentative or ``Totten'' trust account,

``payable-on-death'' account, or any similar account which evidences an

intention that the funds shall pass on the death of the owner of the

funds to a named beneficiary.

(b) If the named beneficiary of a revocable trust account is a

spouse, child, grandchild, parent, brother or sister of the account

owner, the account shall be insured up to $100,000 in the aggregate as

to each such beneficiary, separately from any other accounts of the

owner or beneficiary, regardless of the membership status of the

beneficiary.

(c) If the named beneficiary of a revocable trust account is other

than the spouse, child, grandchild, parent, brother or sister of the

account owner, the funds in such account shall be added to any

individual accounts of the owner and insured up to $100,000 in the

aggregate.

(d) For purposes of this section, the term ``child'' includes the

biological, adopted or step-child of the owner; the term ``grandchild''

includes the biological, adopted or step-child of any of the owner's

children; the term ``parent'' includes the biological, adoptive or

step-parent of the owner; the term ``brother'' includes a full brother,

half brother, brother through adoption or step-brother; and the term

``sister'' includes a full sister, half sister, sister through adoption

or step-sister.

3. Section 745.8 is revised to read as follows:

Sec. 745.8 Joint ownership accounts.

(a) Separate insurance coverage. Qualifying joint accounts, whether

owned as joint tenants with right of survivorship, as tenants by the

entireties, as tenants in common, or by husband and wife as community

property, shall be insured separately from accounts individually owned

by any of the co-owners. The interest of a co-owner in all qualifying

joint accounts shall be added together and the total for that co-owner

shall be insured up to $100,000.

(b) Qualifying joint accounts. A joint account is a qualifying

joint account if each of the co-owners has personally signed a

membership or account signature card and has a right of withdrawal on

the same basis as the other co-owners. The signature requirement does

not apply to share certificates, or to any accounts maintained by an

agent, nominee, guardian, custodian or conservator on behalf of two or

more persons if the records of the credit union properly reflect that

the account is so maintained.

(c) Failure to qualify. A joint account that does not meet the

requirements for a qualifying joint account shall be treated as owned

by the named persons as individuals and the actual ownership interest

of each such person in such account shall be added to any other

accounts individually owned by such person and insured up to $100,000

in the aggregate. An account will not fail to qualify as a joint

account if a joint owner is a minor and applicable state law limits or

restricts a minor's withdrawal rights.

(d) Nonmember joint owners. A nonmember may become a joint owner

with a member on a joint account with right of survivorship. The

nonmember's interest in such accounts will be insured in the same

manner as the member joint-owner's interest.

4. Part B of the Appendix to Part 745 is amended by revising the

heading of Part B and first three sentences of the introductory

paragraph to read as follows:

Appendix to Part 745--Examples of Insurance Coverage Afforded

Accounts in Credit Unions Insured by the National Credit Union

Share Insurance Fund

* * * * *

B. Revocable Trust Accounts

The term ``revocable trust account'' includes a testamentary

account, tentative or ``Totten'' trust account, ``payable-on-death''

account, or any similar account which evidences an intention that

the funds shall pass on the death of the owner of the funds to a

named beneficiary. If the named beneficiary is a spouse, child,

grandchild, parent, brother or sister (as defined in subsection

745.4(d)) of the owner, the funds in all such accounts are insured

for the owner up to $100,000 in the aggregate as to each such

beneficiary. If the beneficiary of such an account is other than the

spouse, child, grandchild, parent, brother or sister of the owner,

the funds in the account are, for insurance purposes, added to any

other individual (single ownership) accounts of the owner and

insured up to $100,000 in the aggregate. * * *

5. Part B of the Appendix to Part 745 is amended by revising

Example 2 to read as follows:

* * * * *

B. Revocable Trust Accounts

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Example 2

Question: Member H invests $100,000 in each of four ``payable-

on-death'' accounts. Under the terms of each account contract, H has

the right to withdraw any or all of the funds in the account at any

time. Any funds remaining in the account at the time of H's death

are to be paid to a named beneficiary. The respective beneficiaries

of the four accounts are H's wife, his mother, his brother, and his

nephew. H also holds an individual account containing $100,000. What

is the insurance coverage?

Answer: The accounts payable on death to H's wife, mother and

brother are each

[[Page 19688]]

separately insured to the $100,000 maximum (Sec. 745.4(b)). The

account payable to H's nephew is added to H's individual account and

insured to $100,000 in the aggregate, leaving $100,000 uninsured

(Sec. 745.4(c)).

* * * * *

6. Part F of the Appendix to Part 745 is amended by removing the

five introductory paragraphs and adding four introductory paragraphs in

their place to read as follows:

* * * * *

F. Joint Accounts

The interest of a co-owner in all accounts held under any form

of joint ownership valid under state law (whether as joint tenants

with right of survivorship, tenants by the entireties, tenants in

common, or by husband and wife as community property) is insured up

to $100,000. This insurance is separate from that afforded

individual accounts held by any of the co-owners.

An account is insured as a joint account only if each of the co-

owners has personally signed a membership card or an account

signature card and possesses the same withdrawal rights as the other

co-owners. (The signature requirement does not apply to share

certificates, or to any accounts maintained by an agent, nominee,

guardian, custodian or conservator on behalf of two or more persons.

However, the records of the credit union must show that the account

is being maintained for joint owners. There is also another

exception in the case of a minor discussed below.) An account owned

jointly which does not qualify as a joint account for insurance

purposes is insured as if owned by the named persons as individuals.

In that case, the actual ownership interest in the account of each

person is added to any other accounts individually owned by such

person and insured up to $100,000 in the aggregate.

Any individual, including a minor, may be a co-owner of a joint

account. Although, generally, each co-owner must have signed an

account signature card and must have the same rights of withdrawal

as other co-owners in order for the account to qualify for separate

joint account insurance, there is an exception for minors. If state

law limits or restricts a minor's withdrawal rights--for example, a

minimum age requirement to make a withdrawal--the account will still

be insured as a joint account.

The interests of a co-owner in all joint accounts that qualify

for separate insurance coverage are insured up to the $100,000

maximum. For insurance purposes, the co-owners of any joint account

are deemed to have equal interests in the account, except in the

case of a tenancy in common. With a tenancy in common, equal

interests are presumed unless otherwise stated on the records of the

credit union.

7. Part F of the Appendix to Part 745 is amended by removing

Example 6 and by revising Examples 1 through 5(b) to read as follows:

* * * * *

F. Joint Accounts

* * * * *

Example 1

Question: Members A and B maintain an account as joint tenants

with right of survivorship and, in addition, each holds an

individual account. Is each account separately insured?

Answer: If both A and B have signed the membership or signature

card and possess equal withdrawal rights with respect to the joint

funds, their interests in the joint account are separately insured

from their interests in the individual accounts. (Sec. 745.8 (a) and

(b).) If the joint account is represented by a share certificate,

their individual signatures are not required for that account.

Example 2

Question: Members H and W, husband and wife, reside in a

community property state. Each holds an individual account and, in

addition, they hold a qualifying joint account. The funds in all

three accounts consist of community property. Is each account

separately insured?

Answer: Yes. An account in the individual name of a spouse will

be insured up to $100,000 whether the funds consist of community

property or separate property of the spouse. A joint account

containing community property is separately insured. Thus, community

property can be used for individual accounts in the name of each

spouse and for a joint account in the name of both spouses. In this

example, each individual account is insured up to $100,000

(Sec. 745.3(a)(1)), and the interests of both the husband and wife

in the joint account are each insured up to $100,000

(Sec. 745.8(a)).

Example 3

Question: Two accounts of $100,000 each are held by a member

husband and his wife under the following names: John Doe and Mary

Doe, husband and wife, as joint tenants with right of survivorship.

Mrs. John Doe and John Q. Doe (community property). How much

insurance do the husband and wife have?

Answer: They have $200,000 of insurance. Both the husband and

wife are deemed to have a one half interest ($50,000) in each

account. (Sec. 745.2(c)(4).) The husband's interest in both accounts

would be added together and insured for $100,000. The wife's

insurance coverage would be determined the same way.

(Sec. 745.8(a).)

Example 4

Question: The following accounts are held by members A, B and C,

each of whom has personally executed signature cards for the

accounts in which he has an interest. Each co-owner of a joint

account possesses the necessary withdrawals rights.

1. A, as an individual--$100,000.

2. B, as an individual--$100,000.

3. C, as an individual--$100,000.

4. A and B, as joint tenants w/r/o survivorship--$90,000.

5. A and C, as joint tenants w/r/o survivorship--$90,000.

6. B and C, as joint tenants w/r/o survivorship--$90,000.

7. A, B and C, as joint tenants w/r/o survivorship--$90,000.

What is the insurance coverage?

Answer: Accounts numbered 1, 2 and 3 are each separately insured

for $100,000 as individual accounts held by A, B and C, respectively

(Sec. 745.3(a)(1)). The interest of the co-owners of each joint

account are deemed equal for insurance purposes (Sec. 745.2(c)(4)).

A's interest in accounts numbered 4, 5, and 7 are added together for

insurance purposes (Sec. 745.8(e)). Thus, A has an interest of

$45,000 in account No. 4, $45,000 in account No. 5 and $30,000 in

account No. 7, for a total joint account interest of $120,000, of

which $100,000 is insured. The interest of B and C are similarly

insured.

Example 5(a)

Question: A, B and C hold accounts as set forth in Example 4.

Members A and B are husband and wife; C, their minor child, has

failed to sign the signature card for Account No. 7. In Account No.

5, according to the terms of the account, C cannot make a withdrawal

without A's written consent. (This is not a limitation imposed under

state law.) In Account No. 6, the signatures of both B and C are

required for withdrawal. A has provided all of the funds for

Accounts numbered 5 and 7 and under state law has the entire actual

ownership interest in these two accounts. What is the insurance

coverage?

Answer: If any of the co-owners of a joint account have failed

to meet any of the joint account requirements, the account is not a

qualifying joint account. Instead, the account is treated as if it

consisted of commingled individual accounts of each of the co-owners

in accordance with his or her actual ownership interest in the

funds, as determined under applicable state law. (Sec. 745.8(c).)

Account No. 5 is not a qualifying joint account because C does

not have equal withdrawal rights with A. Based on the terms of the

account, C can only make a withdrawal if he has A's written consent.

Account No. 7 is not a qualifying joint account because C did not

personally sign the signature card. Therefore, all of the funds in

Accounts 5 and 7 are treated as individually owned by A and added to

A's individual account, Account No. 1. For insurance purposes then,

A has $280,000 in one individual account that is insured for

$100,000, leaving $180,000 uninsured.

Account 6 is a qualifying joint account for insurance purposes

since each co-owner has the right to withdraw funds on the same

basis. Account 4 is also a qualifying joint account. A's interest in

Account 4 is insured for $45,000. B's interest of $45,000 in Account

4 is added to her interest of $45,000 in Account 6 and insured for

$90,000. C's interest in Account 6 is insured for $45,000.

Example 5(b)

Question: Assume the same accounts as Example 5(a) except that,

on Account No. 5, C's right to make a withdrawal is limited by state

law which precludes a minor from making a withdrawal without the co-

owner's written consent. What is the insurance coverage?

Answer: In this situation, Accounts 4, 5, and 6 all qualify as

joint accounts. A, B, and

[[Page 19689]]

C will each have $90,000 of insured funds based on: A's interest in

Account 4 ($45,000) and 5 ($45,000), B's interest in Accounts 4

($45,000) and 6 ($45,000), and C's interest in Accounts 5 ($45,000)

and 6 ($45,000). As in Example 5(a), Account No. 7 does not qualify

as a joint account and would be added to A's individual account for

insurance purposes.

* * * * *

[FR Doc. 99-9930 Filed 4-21-99; 8:45 am]

BILLING CODE 7535-01-U