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FDIC will back full amount of IOLTA accounts

The Federal Deposit Insurance Corp. will cover the full amount of lawyers’ IOLTA accounts, under new regulations adopted Nov. 21.

The regulations are part of the agency’s transaction account guarantee program, which in turn is part of its Temporary Liquidity Guarantee (TLG) program that is designed to enhance confidence in lenders through December 2009.

The original proposal would have provided full coverage only for non-interest bearing accounts, but the American Bar Association and such organizations as the National Association of IOLTA Programs contended that limiting it to only non-interest bearing accounts would be disastrous for legal aid organizations.

Legal aid groups derive much of their funding from Interest on Lawyer Trust Accounts, or IOLTA, programs.

Attorneys might well shift their trust accounts from the IOLTA program to non-interest bearing accounts to protect themselves and their clients, IOLTA proponents contended.

The FDIC staff, in recommending coverage for IOLTA accounts, said, “Such a transfer would adversely affect funding for law-related public service programs that rely heavily on the interest from IOLTAs and could result in the loss of legal services to low-income populations.”

The staff said it is fair and reasonable for IOLTA accounts to be treated in the same way as non-interest bearing accounts because neither attorneys nor their clients receive the interest. Rather, interest is generated from an account composed of money held by an attorney for multiple clients. The amount held for an individual client is too small or held for too short a time to generate interest greater than bank fees and administrative costs.

Mark D. Braley, executive director of the Legal Services Corp. of Virginia and the outgoing president of the National Association of IOLTA Programs, said legal aid programs in Virginia received about $3.8 million from IOLTA last year. The decline in interest rates and in the real estate market probably will cut that amount in half this fiscal year, he said.

The new regulations provide substantially more protection for attorneys and their clients. Formerly, the FDIC covered only $250,000 per client, and then only if the account was clearly designated as a trust account and attorneys kept detailed records of which clients had money in the account.

In fact, James McCauley, ethics counsel for the Virginia State Bar, said attorneys should confer with their clients in those instances in which an attorney holds a large enough amount for a long enough time that ethics generally would require a separate interest-bearing account.

Clients might elect to forgo the interest to get full protection for their money, McCauley noted. Attorneys would properly discharge their obligations to their clients if they explain the choice, he added.

Braley said the decline in IOLTA revenue is a disappointment because legal aid proponents won a major victory in the last session of the General Assembly. The legislature approved an increase in the filing fees in civil cases that will generate about $4 million annually for legal aid.

The increase in one area and decrease in another reflects the history of funding for legal aid, Braley said. “We make great strides in one area and suffer in another.”

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