IOLTA Accounts May Lose FDIC Protection

Trust accounts set up by lawyers to hold client funds are scheduled to lose protection by the Federal Deposit Insurance Corp. after Dec. 31, in a change that the American Bar Association says could have consequences for civil legal aid to the poor.

Those accounts — formally known as Interest on Lawyer Trust Accounts, or IOLTA — have enjoyed deposit insurance coverage for two years. In 2008, during the financial crisis, the FDIC announced the coverage as part of a program to boost liquidity in the credit markets.

The coverage is about to run out, unless Congress extends it or makes it permanent. In November, the House passed a bill that would have made it permanent by piggy-backing on a section of the newly enacted Wall Street regulatory overhaul, known as Dodd-Frank. The section protects “noninterest-bearing transaction accounts.”

The Senate has not acted on the proposal. Sen. David Vitter (R-La.) is holding up the legislation for reasons that are not publicly clear, according to a Louisiana political columnist. A spokesman for Vitter did not return messages requesting comment today.

All 50 states have IOLTA programs, and according to the ABA, 42 states and the District of Columbia require lawyers to deposit client funds that cannot earn net interest for the client in IOLTA accounts. The interest that is earned in the accounts is pooled to pay for civil legal services for the poor.

The American Bar Association supported the FDIC change two years ago in part because not having the deposit insurance would put many lawyers in an awkward position: either keep client funds in uninsured IOLTA accounts or abandon IOLTA for insured, noninterest-bearing accounts that would not benefit legal aid programs.

Update (12/23): The Senate has approved the extension, sending it to President Barack Obama for his signature. (This post has also been updated to correct the number of states requiring IOLTA accounts.)

Comments

[Ken Kapner]

Lee Lundy is correct. An IOLTA account is a trust account, and I understand a trust is a separate legal entity subject to its own FDIC limits protections. The only change I foresee is from unlimited coverage back to pre-crisis limits of $100K FDIC protection (unless the protection stays at the increased $250K limits).

[Kathie]

If this passes, I don't see how state bars can mandate that lawyers keep client trust funds in IOLTA accounts, because that puts the lawyer in the position of leaving their client unprotected - which would be a breach of fiduciary duty. So we would be left in a position of either having to violate the bar rules or violate our duty to our client.

[Lee Lundy]

I thought the 2008 change only instituted FDIC insurance in unlimited amounts for IOLTA accounts. I thought these were previously covered, under FDIC advisory opinions in 1992 and 1998, up to the FDIC insurance amount for each client (as if each client were a separate depositor. If this is true, the change (going back to $250K of coverage per client) will affect only a few clients.

[AngelaTC]

We got by without it until 2008, we can get by without it again.

[Michael Eisenberg]

I don't think this is good. It puts client's moneys at risk and an undue burden on lawyer representation.