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IndyMac Depositors Are Still Out of Luck - Review of Deposit Insurance Changes Since IndyMac's Closure


The last major bank failure in which many depositors lost their uninsured deposits was when IndyMac was closed in July 2008. Not all uninsured deposits were lost. The FDIC immediately paid out 50 cents on the dollar of uninsured deposits. Even with this payout, uninsured depositors lost a substantial amount. Many found out the hard way that they had uninsured deposits. They thought their accounts were structured to qualify for the higher coverage. As I described, using POD and joint accounts to increase your coverage has complications.

Uninsured IndyMac depositors organized and created the IndyMac Depositors website. There was some recent hope that they would get back that 50% of their uninsured money. A California Congresswoman introduced legislation that would retroactively increase the FDIC insurance limit to $250,000 beginning July 11, 2008, the date that IndyMac failed. But this didn't pass. According to the San Bernardino County Sun,
The House of Representatives Rules Committee voted 8 to 4, with one abstention, to reject the amendment that would have been part of a massive financial reform bill.

So IndyMac depositors won't be getting any help from Congress. Would you have voted for the amendment?

In addition to the increase of the basic deposit insurance limit to $250,000 (that's scheduled to go back to $100K at the end of 2013), there has been one other change that makes it easier to increase your coverage. This is related to POD accounts. You can increase the basic coverage with revocable trust accounts. An example of these accounts is a Payable-on-Death (POD) Account. According to the FDIC, the owner of a POD account is insured up to $250,000 for each beneficiary if certain requirements are met. One of the requirements used to be that the beneficiary had to be an immediate family member. Now a beneficiary must be a person, charity or another non-profit organization. There is no more family requirement. However, it's important to note that if the beneficiary dies, you immediately lose the additional coverage. Also, the bank must properly document the POD designation (in the account title) and the beneficiaries must be in the bank's deposit account records.

As you can see, there remains many potential gotchas of relying on PODs to increase your deposit insurance. Fortunately, the vast majority of bank failures since IndyMac have been all-deposit transfers in which the buyers of the failed banks agree to assume all deposits, even those above the FDIC limit. There have been a few cases in which the FDIC wasn't able to find a buyer, so the coverage limits came into play.

Most credit union accounts are insured by the NCUA with coverage very similar to what the FDIC provides. The same complications of joint and POD accounts exist, and as this article shows, don't rely on the word of the institution's representative:
At least one credit union member who lost money beyond the $100,000 insurance limit at the time of the institution's failure filed an appeal looking for restitution of more money. The NCUA denied the claim.

The female credit union member had four joint accounts with her husband and two children, and had requested $54,458.47 in extra insurance payouts. The claimant, who was unidentified, argued credit union personnel had assured her that the joint-account arrangement would fully protect her assets, but the NCUA said "statements made by credit union personnel are not binding."

Thanks to the reader who noted this article in the comments.

For more info on deposit insurance coverage, refer to:

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  |     |   Comment #1
The uninsured depositors should be going after Charles Schumer who leaked his Indymac letter to the press, resulting in a run on the bank that led to its collapse.
  |     |   Comment #2
Why? Uninsured depositors that lost money have no one to blame but themselves. Everyone should have known what the FDIC insured limits were at the time they chose to exceed them.
  |     |   Comment #3
You cannot rely on some words spoken by a representative from the financial institution even if it was made in good faith. The actual contract or terms and conditions take precedence over any oral agreement.
  |     |   Comment #4
The failure of IndyMac has nothing to do with the ineptitude of its depostors in failing to get their insurance coverage straight. It's hard to sympathize with depositors who could have avoided the whole problem either by contacting the FDIC directly for more information or, more simply, by diversifying their myriad accounts across a number of banks. The sad fact is that most of these guys were greedy and deliberately over-deposited in IndyMac to get above market deposit rates. Moreover, the Uninsured Depositors' website is nothing more than a forum for a bunch disgruntled depositors who can't stand to recognize that they're still responsible for their own financial affairs. Nice try guys, but you did this to yourselves.

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