Agency uses opinion letter to provide example of ‘pass-through’ insurance eligibility for account

A specific “lease security account” qualifies for pass-through share insurance coverage based on credit union membership of a landlord or account holder, a legal opinion letter from the federal credit union regulator states.

However, the opinion holds only for the account described in the letter, the National Credit Union Administration (NCUA) stated in its Feb. 1 note to ESL Federal Credit Union of Rochester, N.Y. The agency stated that while not all accounts known as lease security accounts would qualify for pass-through share insurance coverage, the subject account does based on the specific facts offered.

NCUA said it was issuing the opinion on the specific account offered by ESL FCU to “help federally insured credit unions: (1) better understand the concept of ‘other similar escrow accounts’; and (2) identify accounts eligible for pass-through share insurance coverage.”

In its analysis of the account, the agency pointed out that pass-through share insurance is available to “interest on lawyers trust accounts” (IOLTAs) and “other similar escrow accounts.” However, NCUA noted that the account “clearly is not an IOLTA,” and the question is then whether it fits the definition of “other similar escrow accounts.”

The letter noted that the account does meet the three requirements under the definition. First, it satisfies the membership requirement of a “licensed professional or other individual” element of the definition. Second, it satisfies the requirement that the account holder is “serving in a fiduciary capacity” if the funds in the lease security account are held “pursuant to such a relationship and meet state and other applicable law requirements and rules of professional conduct.” Third, the account meets the requirement that the account holder/agent “hold funds for the benefit of a client or principal as part of a transaction or business relationship.”

Even though the account met those three requirements, NCUA noted “to be fully eligible for coverage, the subject lease security account must also comply with all applicable state and federal law.” The letter pointed specifically to recordkeeping requirements, which (under NCUA rules) require that “the account records of an insured credit union shall be conclusive as to the existence of any relationship pursuant to which the funds in the account are deposited and on which a claim for insurance coverage is founded.”

Other Similar Escrow Account Share Insurance Coverage