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One More Reason to Pay Close Attention to Your Bank AccountDisturbing Problems at Two Credit Unions And Lessons For Your Deposits
News reports have released interesting details of two problem credit unions. The most recent case involves Vensure Federal Credit Union in Mesa, Arizona. As I reported on April 15th, the NCUA placed Vensure FCU into conservatorship. The NCUA didn't say much in its April 15th press release. Since that time, more details have come out in the news. This Credit Union Journal article shows that most of the credit union's earnings came from processing online poker bets. According to the article:
Vensure is on pace to earn $4 million this year handling poker bets for its largest depositor Trinity Global Commerce, which processes bets for the two biggest online poker sites, PokerStars.com and FullTiltPoker.com. With no loans on its books, that amounts to 99% of its income.
This credit union appeared to be directly affected by the recent action of the Justice Department in their crack down of online poker websites and the financial institutions that supported their financial transactions.
Access to Deposits During Conservatorship
It should be noted that Vensure FCU is still in NCUA conservatorship. It has not yet been liquidated as of today. In my opinion the NCUA has not been clear about the impact of members' uninsured deposits when credit unions are placed into conservatorship. It has always appeared that members have full access to all of their deposits even those above the NCUA limits. However, I have not seen this clearly stated in NCUA reports.
The Vensure FCU news reports include an interesting example that members do have access to all of their deposits during conservatorship. The article reported that one board member of Vensure FCU was the credit union's largest depositor, and that person withdrew $600,000 from the credit union after it was placed into conservatorship. So this shows conservatorships don't affect members' deposits. However, this also shows that a conservatorship can create a run on deposits.
Liquidation and Loss of Uninsured Deposits
A conservatorship doesn't always mean the credit union will be liquidated. If the NCUA can get the credit union back into sound financial shape, a liquidation can be avoided. However, if there are serious issues, a liquidation often occurs, and it can occur quickly. An example of this happened last year at St. Paul Croatian Federal Credit Union that was based in Eastlake, Ohio. This credit union was placed into conservatorship on April 23, 2010, and after only one week, it was liquidated. As you might expect, this credit union had serious issues, and those issues are coming out in recent news. According to this Credit Union Journal article, Millions In Looted CU Funds Traced To The Balkans:
NCUA estimates the fraud will cost the National CU Share Insurance Fund as much as $170 million in losses, making it the biggest credit union fraud ever.
St. Paul Croatian FCU liquidation did affect several members who had over $250,000 in deposits. Some of the details were described in this Credit Union Journal article Legal Battle Breaks Out Over Uninsured CU Deposits
In a suit filed Friday in federal court in Cleveland an elderly couple claims NCUA’s payout of $860,000 in five carefully structured accounts at St. Paul Croatian FCU is not adequate under the new deposit insurance law and the agency still owes them $165,000.
The issue appears to be with how the couple structured the joint accounts. A quote at the bottom of the article provides an important warning for those trying to extend their deposit insurance coverage:
NCUA insists it is not responsible if members were poorly informed about their rights under deposit insurance coverage. “Furthermore,” said NCUA in one of the appeals, “statements made by credit union employees (are not binding).”
So if your credit union makes a mistake in how they structure the accounts, the liability comes back to you.
Deposit Insurance References
With deposits at both credit unions and banks, it's up to you to ensure that your deposits are under the NCUA and FDIC limits. You can insure more than $250,000 at one institution, but you have to be careful.
FDIC
A good reference for bank accounts is this FDIC Comprehensive Seminar on Deposit Insurance Coverage For Bankers. This is dated March 23, 2011 so it includes the deposit insurance changes that have occurred in the last few years. If you are using beneficiaries to insure more than $250K, pages 31 to 68 are very informative. I learned some new information on account titling on page 33. The FDIC has expanded its definition of the account title. According to this page,
For purposes of this requirement, “title” includes the electronic deposit account records of the institution. (For example, the FDIC would recognize an account as a revocable trust account even if the title of the account signature card does not designate the account as a revocable trust account as long as the institution’s electronic deposit account records identify (through a code or otherwise) the account as a revocable trust account)
Another useful reference is the FDIC's Electronic Deposit Insurance Estimator (EDIE). This can help you ensure all of your deposits are covered.
NCUA
I haven't been able to find any NCUA reference as detailed as the above FDIC document. The best that I can find at the NCUA is only for consumers. It's titled NCUA Share Insurance and You - Maximize Your Insurance Coverage. (Note: this NCUA reference document is no longer available. The most applicable current NCUA reference can be found here.) The NCUA keeps its deposit insurance very similar to the FDIC, but there are some small differences. For example, the NCUA doesn't appear to have the same account title requirements to prove a POD account. As you can see on page 10, the NCUA doesn't appear to be as strict as the FDIC:
A POD account shows the intent of the account’s owner that upon his or her death the funds will pass to one or more named beneficiaries. Typically, this intent is shown in the titling of the account by using words such as: in trust for or payable on death to.
At the end of the document, the NCUA provides a contact where you can get more details:
NCUA's Consumer Assistance Center between 8 a.m. and 6 p.m. (EDT) at 1-800-755-1030, press 1 for share insurance questions.
Like the FDIC, the NCUA has a tool to help you ensure all of your deposits are covered. It's called the The Electronic Share Insurance Calculator (E-Calculator).
I was informed that this is only on personal funds and not IRA accounts. That IRA accounts regardless of how many beneficaries you add will only be covered to $250,000 per name (social security number).
As most of my funds are in IRA's I have tried to keep the amounts under the max IE: 250K to take advantage of the insurance coverage. It would be more convenient if I could add more funds to each account.
Please advise how you extend the coverage on IRA accounts.
Thank You
"Common Misunderstanding! For deposits under this category like IRAs, the deposit insurance coverage cannot and does not increase for any beneficiaries who may be named in the bank records"
Most people are not aware of this, but in many credit unions and banks you can change the respective percentages for each of the beneficiaries in your POD account. For example, you do not have to have your money divided equally between two beneficiaries. You can leave 99.9% of your money to one beneficiary and .1% to the other. The benefit of structuring it this way is it allows you to increase your insurance to $500,000 and still leave all your money to one beneficiary. In fact, you can do this up to 5 beneficiaries and insure $1,250,000 of your money and essentially leave it all to one beneficiary. In this example, you would have 99.6% of your money going to one beneficiary and .1% to the other 4. Also, remember that beneficiaries do not have to be related to you; anybody who is breathing qualifies. So you could leave 99.6% of your money to your child and .4% to anyone you know. Many people don't know this and think they are unable to have the money go where they want it after their death while having all the money insured. Furthermore, if a bank doesn't allow you to vary the percentages in the manner I just described, you can open two Pod accounts and have one for $499,950 with one beneficiary and another POD with $50 to a friend you don't want to leave your money. In this situation, the FDIC or NCUA will aggregate the accounts and insure your deposits up to $500,000 and allow you to leave $499,950 to the person of your choice. I know this gets very complicated, but it is worth knowing if you have a lot of money and would like to have it all insured, and at the same time leave it to the people of your choosing.
"... you can open two Pod accounts and have one for $499,950 with one beneficiary and another POD with $50 to a friend you don't want to leave your money. In this situation, the FDIC or NCUA will aggregate the accounts and insure your deposits up to $500,000 and allow you to leave $499,950 to the person of your choice."
Citation for aggregating separate account benficiaries please.
http://www.youtube.com/watch?v=1USv2JfpnH8
In this Marinations program we interview Fran Quittel about how she and a small group of depositors who found each other on the web used internet tools like Google Groups, Blogs, etc. combined with conventional organizing techniques to recover over $ 270 million for some 9500 depositors from the FDIC. --
Note: the FDIC maintained that DEPOSITORS themselves were responsible for errors in their account paperwork . . . HOWEVER, AT the same time, the FDIC allowed this particular bank to backdate a key capital infusion of $80 million from May 2008 to March 2008, AND subsequently arranged the sale of IndyMac to Goldman Sachs moguls under quite favorable circumstances that led to a rise in the equity value of these Goldman Sachs folks by $1.6 Billion in year 1. . ..
Actually, at first glance Lou is wrong. The FDIC will aggregrate accounts, but it is for the purpose of capping any beneficiary's coverage to 250K, no more.
"FDIC insurance limits apply to all revocable trust deposits — including all POD/ITF and living trust accounts — that a trust owner has at one insured bank. In applying the $250,000 per beneficiary insurance limit, the FDIC combines an owner's POD accounts with the living trust accounts that name the same beneficiaries at the same bank.
https://www.fdic.gov/edie/fdic_info.html
When a revocable trust owner names five or fewer beneficiaries, the owner’s share of each trust account is added together and the owner receives up to $250,000 in insurance coverage for each different beneficiary.
- Paul share: $350,000 (50% of Account 1)
- Lisa’s share: $800,000 (50% of Account 1 & 100% of Account 2)
Because Paul named two different beneficiaries, his maximum insurance coverage is $500,000 ($250,000 times two beneficiaries). Since his share of account 1, $350,000, is less than $500,000, he is fully insured.Because Lisa has named three different beneficiaries between accounts 1 and 2, her maximum insurance coverage is up to $750,000 ($250,000 times three beneficiaries). Since her share of both accounts, $800,000, exceeds $750,000, she is uninsured for $50,000.
You have used an excellent example to demonstrate how to set up separate POD accounts to exceed the $250,000. As you can see, those accounts are aggregated to determine each owner's share. I actually stumbled upon this by accident because I needed to exceed the $250,000 threshold, but I wanted to leave my money to certain people. I was experimenting with the FDIC and NCUA calculators and stumbled upon this. I spoke with attorneys with NCUA and FDIC and they agreed this was how the insurance limits were calculated for POD accounts. Interestingly, the CSR who answered the phone for these agencies were not aware that the amount of insurance from each owner of a POD account is aggregated from all POD accounts in which they are listed as as an owner. When you understand this, you can see the possibilites by adding a beneficiary with a .01% interest in a POD account or purchasing a $500 CD with multiple beneficiaries. It will allow you to do the things I suggested in my prior post.
The NCUA-Safe public awareness campaign notes that coverage at NCUA-insured and FDIC-insured institutions is virtually identical. NCUA protects the money deposited in a credit union account up to $250,000, same as FDIC protects money in a bank account. Both are backed by the full faith and credit of the U.S. government. So no matter what happens, the money deposited at a federally insured credit union is safe, provided individuals stay within the coverage limits. And last year’s Dodd-Frank Act made this $250,000 coverage limit permanent.
The Share Insurance Estimator on NCUA’s website (http://webapps.ncua.gov/ins/) allows individuals to estimate their share insurance coverage. Once an individual inputs the required data, the Share Insurance Estimator produces a report with detailed explanations of insurance coverage.
Members with additional questions about their insurance coverage may contact NCUA’s Consumer Assistance Center toll free at 800-755-1030. The center answers calls Monday through Friday between 8:00 a.m. and 6:00 p.m. Eastern Daylight Time. Individuals may also visit NCUA’s website (http://www.mycreditunion.gov/protect-your-savings/is-my-money-safe.html) at any time for more information about insurance coverage.
Thank you for clarifying the insurance rules for credit unions placed into conservatorship. It is reassuring to all us that you do not change the rules for insured and uninsured deposits for conserved credit unions.
I don't know if you are aware of a recent event that has upset many readers of this website. Fort Knox Credit Union recently changed their early withdrawal penalty for their certificates retroactively. When we purchase a CD, we don't expect the Credit Union to change the terms of the CD for existing CD holders; otherwise, the CD would be no different from a liquid account, and many of us under this scenario would be very reluctant to puchase CD's. We all understand that Credit Unions are allowed to change their terms prospectively, but we always assumed they would protect the existing CD holders from these changes. The CD is a contract, where the CD owner is promised a specific interest rate for definite term with the ability to withdraw the money early at the agreed upon penalty. The benefit for the Credit Union is that they have these deposits for an agreed upon time at a fixed rate. I know many of us would not feel comfortable puchasing CD's if these contracts can be unilaterally violated by the Credit Union. Can you please look into this for us and let us know if Fort Knox is willing to abide by the terms of their CD agreement for existing CD owners. Thank you in advance for your help in this matter.
Apart from the legalities, it's a basic principle of fairness and fair dealing that the terms of a CD when it is taken out should be binding on both the CU and the depositor.... and the CU should not be able to unilaterally change such a significant economic term of the contract in mid-stream -- absent consent from the account holder.
If the NCUA were to allow that kind of CU behavior to persist, what's the next step... a CU saying well, yes, you took out a 5 year CD at 3%, but now after a year we've decided to lower your interest rate to 1%... Sorry...
I certainly hope the NCUA will protect the interests of CU depositors and members by not allowing Fort Knox's behavior to go un-challenged.
If a CU wants to change their EWP, they certainly can...for all new CDs issued from the point they make the EWP change forward into the future. But allowing that to be done retroactively against existing CDs is offensive and an affront to fair dealing.