FDIC Federal Register Citations

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.