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Federal Deposit Insurance Corp
Dear Federal Deposit Insurance Corp:
I am writing with regard to a critical unintended consequence in the Federal Deposit Insurance Corporation's (FDIC) new Temporary Liquidity Guarantee Program (TLGP). Simply put, the new program would not cover New York's Interest on Lawyer Accounts (IOLA) in order to provide unlimited insurance coverage for those accounts. Since 1983, the accumulating interest on money in those accounts has been earmarked for the New York's IOLA Fund. The IOLA Fund has been, and continues to be, an important source of funds for programs that provide civil legal services to New Yorkers who are unable to afford them.
It is important that the FDIC to construe IOLA as non-interest bearing transaction accounts under TLGP. Alternatively, the FDIC should grant an exception in the TLGP rules explicitly stating that funds in IOLA accounts have unlimited deposit insurance coverage regardless of dollar amounts. Additional information below explains the impact of this new rule on New York's IOLA Fund.
PROTECTING IOLA IS CRITICAL
Protecting IOLA revenue is critical. In 2008, for example, the IOLA Fund provided $25 million in grants to New York's civil legal services programs. In 2007, civil legal service attorneys served nearly 430,000 low-income clients. Ensuring full coverage of the IOLA funds under the TLGP requires your immediate action because:
• Absent protection of individual lawyer accounts, lawyers may be inclined to abandon their IOLA accounts in favor of protected client accounts rather than risk those funds; • The FDIC has stated that funds which are placed in non-interest bearing accounts will receive full protection; • The unintended consequence of the TLGP is to create a situation in which client funds currently held in IOLA accounts are eligible for unlimited insurance only if they are removed from the IOLA account and placed in "non-interest bearing deposit transaction accounts;" • This leaves lawyers in a dilemma as to whether to continue to use their IOLA account or to place their client funds in a non-interest bearing deposit transaction account in order to qualify for the new insurance. Lawyers are fiduciaries and want to give the client funds in their care as much protection as possible; • Interest generated from IOLA accounts is used to issue grants for the provision of civil legal services to the poor, the administration of justice, and law-related education, all of which are vital to our democratic system's guarantee of equal access to justice for all. If IOLA accounts are not protected, millions of dollars for the provision of legal services to the poor that prevent homelessness, protect women and children from violence and help the elderly will be lost; • Now is not the time to abandon a program that provides much needed revenue for legal aid for the poor, especially with the ever-increasing filing of foreclosure and eviction actions; and, • New York State faces a projected budget deficit of $47 billion over the next 3 1/2 years. The prospect of fewer state funds for civil legal services programs increases the importance IOLA funds for those services.
HOW THE IOLA FUND WORKS
• Individual IOLA accounts are transaction accounts, effectively the same as payroll accounts;
• IOLA accounts contain funds transferred to a lawyer by a client or by a third-party on behalf of a client to be held for a particular purpose (client funds). The funds are nominal in amount or held for a short period of time and cannot earn interest for the client net of banking charges and administrative fees;
• Typical funds held by a lawyer on behalf of clients include such things as court filing fees, real estate closings, settlements and retainers;
• Prior to the 1980s, lawyers placed nominal or short-term client funds in non-interest bearing checking accounts. Lawyers routinely pooled these funds in one account because it would have been prohibitively expensive to open and maintain a separate account for each client. Under IOLA, these same nominal or short-term funds are still pooled into one account. The only difference is that, with changes in the banking laws and the explicit permission of federal regulators, banks remit interest on these pooled accounts to non-profit organizations that provide legal services, the IOLA program; and,
• Thirty-Seven (37) states, including New York, require lawyers to deposit client funds that cannot earn net interest for the client in these interest-bearing accounts. (Other states refer to Interest on Lawyer Trust Accounts, or "IOLTA.")
Because the interest on IOLA accounts cannot inure to the benefit of either the client or lawyer, neither lawyer account holders nor the ever-changing list of clients whose funds are in IOLA accounts have any expectation of earning interest. Instead, IOLA accounts produce interest on the aggregate of funds that could not otherwise benefit depositors for the benefit of low-income individuals who receive free legal services; therefore, an IOLA account is properly construed as a non-interest bearing transaction account for purposes of the TLGP.
The FDIC has carved out an exception in the past that applied to IOLA. In recognition of the unique nature of IOLA and its charitable purposes, an exception to Regulation D (prohibiting the payment of interest on demand accounts) was granted by the Federal Reserve. The FDIC was instrumental for states establishing IOLA programs. But for the exception allowing interest, IOLA accounts are materially similar to the non-interest bearing transaction accounts which will receive the increased insurance under TLGP.
As a result, the FDIC should explicitly continue to recognize IOLA accounts as eligible for TLGP protection, or an exception should once again be made for IOLA so that TLGP coverage is extended to it.
ACTION REGARDING TLGP
I urge the FDIC to construe IOLA as non-interest bearing transaction accounts under TLGP. Alternatively, I urge the FDIC to grant an exception in the TLGP rules explicitly stating that funds in IOLA accounts have unlimited deposit insurance coverage regardless of dollar amounts.
|Last Updated 11/10/2008||Regs@fdic.gov|