Insurability of Escrow Funds

May 5, 1992

Louis R. Ravetti
President
Ent Federal Credit Union
805 N. Murray
Colorado Springs, CO 80935

Re: Escrow Funds Insurability (Your Letter of March 25, 1992)

Dear Mr. Ravetti:

You have requested an opinion regarding the insurability of certain real estate escrow accounts at Ent Federal Credit Union ("FCU"). It is our opinion that unless the owners of the funds are FCU members, the real estate escrow accounts are not insurable as escrow accounts. Neither are they insurable as unincorporated association accounts.

ANALYSIS

The Ent FCU accounts are presently structured as escrow accounts. Escrow is defined as "[a] writing, deed, money, stock or other property delivered by the grantor, promisor or obligor into the hands of a third person, to be held by the latter until the happening of a contingency or performance of a condition, and then by him delivered to the grantee, promisee or obligee." Black's Law Dictionary (5th ed., 1979). As funds held from the buyer of property for the seller of property by a real estate broker in a FCU until the sale is consummated or terminated, the escrow account is deemed an account held by agent for NCUSIF insurance purposes. See 12 C.F.R. ~745.3(a)(2); see also NCUA Opinion Letter from me to Jeff Rodman, Actors FCU, re: Share Insurance of Escrow Accounts, dated June 4, 1990 (enclosed); NCUA Opinion Letter from me to C.S. Smebakken, U.S. Dept. of Agriculture, re: Insurance of Market Agency Accounts, dated April 3, 1989 (enclosed); and NCUA Opinion Letter from James J. Engel, Deputy General Counsel, to Steven D. Eimert, Esq., Sherin and Lodgen, re: Share Insurance Coverage, dated November 30, 1988 (enclosed). As these opinion letters state, the membership status of the escrow agent is irrelevant for NCUSIF insurance purposes, and the membership status of the buyer (owner of the funds) is determinative. In this case the real estate buyers are presumably not members of the FCU, and so the escrow accounts are not insured.

Even if the real estate escrow accounts were restructured to be corporate or unincorporated association accounts they would remain uninsured. In order to obtain separate NCUSIF insurance coverage, a corporation or unincorporated association must be engaged in an "independent activity", that is, "an activity other than one directed solely at increasing insurance coverage." 12 C.F.R. ~745.6. As only the form, but not the substance, of the accounts would change in this scenario, the account would be "deemed to be owned by the person or persons ... comprising such ... unincorporated association." Id. Therefore, the nonmember owners of the funds in the account would remain uninsured.