With troubled financial institutions in the news, many companies are paying closer attention to their cash deposits, the stability of the banks holding those deposits, and the Federal Deposit Insurance Corporation (FDIC) insurance or other protections available in the event of bank failure. Companies holding deposits of their customers in escrow or trust accounts have special considerations beyond those of the ordinary depositor.
Escrow Accounts and the FDIC
- Has the company made arrangements to ensure that it has available funds to return to customers in the event that a financial institution holding funds in escrow fails? Funds may be needed if there is a delay in receiving money from the FDIC and/or if the account is not fully insured.
- Does the company have escrow deposits (for customers) at the same financial institution where the customer also has his/her own deposits? Beware: A company's escrow deposits for a particular customer will be counted toward that customer's FDIC insurance limit.
- Does the company have different divisions or units that maintain deposits at the same bank? Beware: The deposits of divisions or units that are not incorporated separately are aggregated with the deposits of the company, potentially resulting in reduced FDIC coverage.
- Is the company's fiduciary status disclosed properly in the deposit account records of the bank?
- If the company uses a pooled escrow account that contains deposits for multiple customers, are the interests of each individual customer ascertainable from the records maintained in the ordinary course of business by either the bank or the company?
- Does the company's escrow account consist only of funds held in escrow, and not of funds owned by the company?
- Do the funds held in escrow actually "belong" to the customer of the company, rather than to the company? For example, the terms of the contract between a developer and real estate purchasers may result in the funds being deemed to be owned by the developer, potentially resulting in reduced FDIC coverage.
Special Deposits
- If the company's own deposits exceed the FDIC insurance coverage limits, does the company have a "special deposit agreement" with the bank that segregates the company's accounts from those of general depositors? This agreement increases the likelihood that the company would receive all of its funds back in the event of bank liquidation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.