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New FDIC Rule Averts IOLTA Trouble

Government action assures that client funds are insured

Marcia Coyle

The National Law Journal

December 02, 2008

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The Federal Deposit Insurance Corp. has announced that, effective immediately, client funds deposited in Interest on Lawyer Trust Accounts -- regardless of amount -- are eligible for full deposit insurance coverage under the Temporary Liquidity Guarantee Program through Dec. 31, 2009.

The American Bar Association, state and federal lawmakers, community and consumer groups, law firms and individual lawyers had mounted a nationwide campaign to persuade the FDIC to include IOLTA funds in the expanded insurance program.

The TLGP guarantees newly issued senior unsecured debt of banks, thrifts and certain holding companies, and provides full coverage of noninterest-bearing deposit transaction accounts. The FDIC adopted the program on Oct. 13 because of disruptions in the credit market, particularly interbank lending, which reduced banks' liquidity and impaired their ability to lend.

ABA President H. Thomas Wells Jr. said that if the FDIC had failed to expand full coverage for IOLTA, lawyers would have had to consider abandoning IOLTA for fully insured, noninterest-bearing accounts or moving IOLTA funds from community banks to the larger "too big to fail" banks. "Abandoning IOLTA would have been catastrophic for IOLTA programs in all 50 states, which provide funding for legal aid for the poor," said Wells. "Moving the accounts to larger banks would have defeated the FDIC's purpose in creating the TLGP."

In a letter to the FDIC, the chairs of the boards of directors of 50 IOLTA programs throughout the country said establishing multiple accounts at various financial institutions for amounts greater than $250,000 was not a viable solution.

"The lawyer may not even know whether a client's cumulative funds deposited in a single institution exceed the $250,000 ceiling for insured funds, and it is not practical to separate a large deposit that is simply in the IOLTA account just long enough for the check to clear," they wrote.

If lawyers moved their IOLTA-eligible trust account funds to noninterest-bearing accounts, they added, the interest income received by IOLTA programs would be greatly reduced. "IOLTA programs nationwide provided more than $212 million in 2007 for the provision of civil legal services to the poor, making it the second largest source of such funding in the country," the letter said, calling the FDIC decision "critical" to the program's survival.

U.S. Senators Benjamin Cardin, D-Md., and Arlen Specter, R-Pa., authored a bipartisan letter to FDIC Chairwoman Sheila Bair urging that the FDIC provide full deposit insurance coverage for IOLTA accounts. The letter was signed by 17 other senators. IOLTA programs have been established by the Supreme Courts or Legislatures of all 50 states; 37 states require lawyers to deposit client funds that cannot earn net interest for the client in IOLTA accounts.

 



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