A Federal Deposit Insurance Corp. proposal released last week would add principal and interest funds advanced by a servicer to borrower coverage calculations.
Currently deposit insurance covers up to $250,000 of payments of principal and interest at the mortgagor level, but not certain funds that servicers must advance on borrowers’ behalf when consumers aren’t paying, which are applied at the corporate level with that same limit. The proposal issued July 20 would extend the mortgagor coverage to payments that servicers advance, expanding the amount potentially insured.
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“This inconsistent treatment of principal and interest amounts could result in financial instability during times of stress, and could further complicate the insurance determination process,” the FDIC said.
Servicers almost exclusively work with large banks to hold custodial accounts, and the biggest institutions have increased record-keeping duties under the FDIC that could be complicated by the recategorization of advances in line with the proposal.
“I’m guessing that’ll be a source of friction,” said Jeffrey Naimon, a partner in the Washington office of Buckley LLP.
The FDIC has not simplified its deposit insurance rules since 2008, and the resulting disarray that followed more recently led to greater record-keeping requirements for bigger institutions. Escrow funds, which servicers collect from borrowers to pay consumers’ property taxes and insurance on consumers’ behalf, also get advanced, and have received coverage at the mortgagor level. However, advanced P&I payments have not, he said.
The proposed change in the treatment of servicer advances may require relatively complicated servicing system logic to map to existing and new data fields and extract the information needed for banks to ingest into their separate platforms used to comply with FDIC deposit insurance calculations.
“It’s a complex determination, but it is a matter of working through it,” said Vicki Vidal, a senior vice president at servicing system provider Black Knight, adding that the proposal is a positive clarification.
Servicers are still working through deposit insurance determinations for mortgage servicing assets because P&I custodial and advance balances are maintained at the pool level or investor level, whereas deposit insurance for MSAs is calculated on a borrower level. As a result, some of the data would have to be converted from the investor or pool level to individual borrowers, Vidal said.
Among other changes in the advance notice of proposed rule-making is a simplification of distinctions between revocable and irrevocable trusts. If the change is made, depositors would be insured for up to $250,000 and up to five beneficiaries regardless of the trust’s status. Revocable trusts can be changed at will whereas irrevocable ones cannot without the beneficiaries’ consent.
An unusual amount of inquiries related to trust accounts prompted the FDIC to decide to simplify coverage, according to the FDIC. More than half of the 20,000 inquiries the FDIC has been receiving per year have been related to trust accounts.
When IndyMac failed during the Great Recession’s housing crash, it affected 34,206 trust accounts and $2.6 billion in deposits, according to the FDIC.
