The FDIC protects bank deposits
In light of multiple bank failures, sellers and buyers should understand how the FDIC protects bank deposits, including title agency funds, escrow funds and independent customer funds.
The following outlines government guidance and citations and should not be considered legal advice.
What Is FDIC Insurance?
The FDIC provides insurance in the event of a bank failure for deposit products, such as checking, savings, money market, CDs, cashier and money orders at FDIC insured banks. This insurance is automatically applied to any FDIC bank’s deposit products. The FDIC does not provide coverage for stocks, bonds and other listed investments.
What are the Limits of FDIC Insurance?
The current amount of insurance for a depositor is $250,000 per account ownership category (e.g., a single account is a different ownership category than a revocable trust or a joint account), per insured bank. All deposits in the ownership category are added together to determine the deposit amount at the institution for that depositor in that ownership category.
Note that escrow accounts are not listed as a separate account ownership category. As an example, the amount of John Doe’s personal deposits at a FDIC bank may be aggregated with the amounts that are held in escrow in John Doe’s name, resulting in an unexpected balance exceeding the $250,000 limit that’s covered.
Deposits at credit unions are not FDIC insured, but covered by the National Credit Union Administration.
How Does This Affect Escrow Accounts Used to Hold Customer Funds?
Real estate escrow accounts are a type of fiduciary account where the entity opening does not have an ownership in the deposit. Fiduciary accounts are not insured as a separate ownership category. Because of this, the total amount of deposits may be aggregated across personal deposits and escrow in that same person’s name.
It is important that fiduciary accounts are set up correctly. One of those reasons is that an escrow account that is not set up correctly could potentially have aggregated amounts related to the amount of funds held by the title agent, instead of each trust deposit being allocated to the principal who is the owner of the funds. Accounts should be labeled and opened as Escrow Accounts or Trust Accounts.
What Should you, the customer, know?
If you have deposits at the same bank that handles the escrow account, there may be unexpected aggregation limits. Other deposits you may have at the same institution may be aggregated with your escrow funds for determining the limits of FDIC insurance.
Title Junction is a full service real estate title company serving the area of Fort Myers, Cape Coral and the entire state of Florida since 2005. The company handles a number of real estate title services for both commercial and residential properties.
Have questions? Give us a call at 239.415.6574.
In case you missed it, check out our last Title Junction post: Preparing to Get to the Closing Table