IBA Compliance Connection

Your go to source for compliance!

For our portfolio consumer mortgage loans, when borrowers receive insurance claim checks, we deposit the checks into escrow accounts from which we disburse funds directly to repair contractors. How should we set up these accounts? Currently, we set them up as savings accounts under the customer’s name, with our bank listed as the custodian. This creates some issues, because when we search our accounts in response to a subpoena or levy or for unpaid child support data matching, these accounts will be listed under the customer’s name, even though the funds in these accounts technically don’t belong to the customer. Should we instead set up the accounts using our bank’s TIN? Should they be deposit or savings accounts?

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We recommend reviewing your mortgage notes and related documents, which may specify your bank’s obligations as to insurance claim proceeds. For example, the Fannie Mae standard note states that the lender is not required to pay interest on property insurance claim proceeds. If your bank’s mortgage notes or other agreements include similar language, then your bank is free to set up these accounts in non-interest-bearing deposit accounts.

If these accounts are to accrue interest, your bank must provide a taxpayer identification number (TIN) for them in accordance with the IRS requirements for reporting interest on a 1099-INT form. In that case, we recommend using the bank’s TIN on these accounts while flagging the accounts with the borrower’s TIN to ensure that interest is properly reported for the borrower (if your system has this capability).

If these accounts do not accrue interest, then we recommend using the bank’s TIN due to the issues with levies and data match and subpoena searches, as you mentioned.

For deposit insurance recordkeeping purposes, we would recommend treating these accounts as custodial accounts, with the bank listed as custodian and the borrower listed as beneficiary.

For resources related to our guidance, please see:

  • Fannie Mae Security Instrument, Illinois, Section 5, Property Insurance (“Unless an agreement is made in writing or Applicable Law requires interest to be paid on such insurance proceeds, Lender shall not be required to pay Borrower any interest or earnings on such proceeds. . . .”)
  • IRS, General Instructions for Information Returns, Part J — Recipient Names and Taxpayer Identification Numbers (TINs) (“TINs are used to associate and verify amounts you report to the IRS with corresponding amounts on tax returns. Therefore, it is important that you furnish correct names, social security numbers (SSNs), individual taxpayer identification numbers (ITINs), employer identification numbers (EINs), or adoption taxpayer identification numbers (ATINs) for recipients on the forms sent to the IRS.”)
  • FDIC Guide to Deposit Insurance, Fiduciary Accounts, III. Requirements for Fiduciary Accounts (“Deposits held by a fiduciary on behalf of one or more principals are insured on a pass-through basis as the deposits of the principal (the actual owner) to the same extent as if the deposits were deposited directly by the principal, provided all of the following three requirements are met:

(1) Funds must be in fact owned by the principal and not by the third party who set up the account (i.e., the fiduciary or custodian who is placing the funds). To confirm the actual ownership of the deposit funds, the FDIC may review: (a) The agreement between the third party establishing the account and the principal [or] (b) The applicable state law

(2) The IDI’s account records must indicate the agency nature of the account (e.g., XYZ Company as Custodian, XYZ For the benefit of (FBO), Jane Doe UTMA John Smith, Jr.)

(3) The records of the IDI, the fiduciary or a third party must indicate both the identities of the principals as well as the ownership interest in the deposit.”)