FDIC Proposes New Requirements for Custodial Accounts to Qualify for Pass-Through

Background

The FDIC approved a Proposal that would establish new recordkeeping requirements for IDIs with respect to "custodial deposit accounts with transactional features." The Proposal would apply to IDIs' bank deposits received from third-party, non-bank companies that accept such deposits on behalf of their customers. 

The Proposal would amend existing FDIC regulations governing pass-through deposit insurance. These pass-through rules allow the FDIC's insurance coverage of $250,000 to apply to individual subaccounts held in an omnibus custodial account in specified circumstances. One of the current requirements is that a ledger be kept that records the amounts belonging to each underlying depositor. The current rule does not require, however, that the IDI maintain this ledger.

The Proposal

The Proposal would mandate additional recordkeeping requirements for IDIs offering pooled "custodial accounts with transactional features" in order for these arrangements to qualify for pass-through insurance coverage.  IDIs would be required to maintain records identifying the beneficial owners of those deposits, the balance attributable to each beneficial owner, and the "ownership category" in which the deposited funds are held. Alternatively, a third-party could maintain the records, as long as the IDI has unrestricted access to the records and reconciles the records on a daily basis. 

Additionally, the IDI must complete an annual certification of compliance, listing the account holders that maintain the custodial deposit accounts, the total balance of the custodial deposit accounts, and the total number of beneficial owners. The Proposal also provides for FDIC oversight and enforcement authority to ensure and compel compliance with the requirements.

The stated goals of the Proposal are to address risks related to third-party arrangements with non-bank companies (including risks arising from potential failures of those companies), extend FDIC protections to beneficial owners and depositors, and promote public confidence in FDIC-insured deposits. According to the FDIC, the Proposal would promote the FDIC's ability to promptly make deposit insurance determinations and pay deposit insurance claims "as soon as possible," if an IDI holding custodial accounts with transactional features fails. 

The Proposal is the latest in a recent series of agency efforts to regulate IDI-fintech arrangements, including updates to the FDIC's and other banking agencies' guidance on third-party risk management and a request for information on the nature of arrangements between IDIs and fintech companies. 

Impacts

The Proposal could have significant impacts on both IDIs and non-banks. As IDI-fintech arrangements will continue to increase in importance, both sides should consider how the Proposal could impact their businesses. 

For one thing, the Proposal may have unintended consequences. Most securitizations involve custodial accounts, and the Proposal would require the "beneficial owners" of such custodial accounts to be disclosed to the IDI holding the custodial account. Although there are a list of exemptions, including "[a]ccounts maintained by a mortgage servicer in a custodial or other fiduciary capacity" and "[a]ccounts only holding trust deposits," the Proposal does not include an explicit exemption for custodial accounts used in securitizations. 

Fintech firms that partner with IDIs to offer deposit products should consider whether the Proposal could have a significant (and costly) impact on their innovative products, such as prepaid cards, digital wallets and mobile payments, and other fintech-related deposit offerings. Although the Proposal would not transform fintech firms and non-bank entities into FDIC-regulated entities, it could substantially increase oversight of such firms by IDIs during the onboarding process and throughout the relationship.

Interested IDIs or fintech firms must submit comments by December 2, 2024.