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October 29, 2008
Robert E. Feldman
Subject: Interim Rule on Temporary Liquidity Guarantee Program (TLGP)
Dear Mr. Feldman:
On behalf of the 9th Congressional District of Illinois, which I represent, I would like to recommend a change in the interim rule announced on October 23, 2008 to govern the recently-created Temporary Liquidity Guarantee Program (TLGP). I believe a change is needed in order to expand coverage to include Interest on Lawyer Trust Accounts (IOLTA) as non-interest bearing transaction accounts for the purposes of the TLGP.
A number of my constituents have contacted me with concerns that IOLTAs administered through third-party, non-profit programs should be treated as non-interest bearing transaction accounts under the TLGP. IOLTAs are interest-bearing client fund accounts that lawyers use to hold funds on behalf of their clients and are effectively similar to payroll accounts. IOLTA accounts not only provide ethical protections for lawyers and their clients when it comes to holding legal funds but also provide revenues to fund low-income legal aid. It is therefore vital that these accounts are provided full coverage under the TLGP program.
The IOLTA program exists as a responsible and ethical way of addressing how to use the interest generated from legal client fund accounts. Lawyers are mandated in 37 states, including the state of Illinois, to deposit their clients’ funds in IOLTA accounts. Lawyers place their clients’ funds into a single account, because it would be too complicated and costly to have separate accounts for each legal client and would also make it complicated (and perhaps unethical) to deposit into a lawyer or law firm’s own account. Traditionally, these accounts were non-interest bearing checking accounts, but with changes in banking law and the explicit permission of federal regulators, that funds have been placed into accounts that generate interest. Under the IOLTA program, the interest generated by the interest in IOLTA accounts goes towards funding legal education and legal aid for those who cannot afford it. This is especially important now because of the increase in foreclosures and evictions in our current economic situation which created the necessity for TLGP.
Under the new TLGP, IOLTA accounts in excess of the $250,000 guaranteed limit are eligible for unlimited insurance if they are removed from IOLTA accounts and are placed into “non-interest bearing deposit transaction accounts” covered by the TLGP. This creates an unintended dilemma for lawyers who strive to protect their clients funds in today’s turbulent economy – they can either continue to hold funds in legally-mandated IOLTA accounts that are not permitted TLHP protection or place them into non-interest bearing accounts so as to qualify for the new insurance and protect their clients’ funds.
The TLGP, as currently configured, has the potential to drain IOLTA accounts as lawyers place their clients’ funds into insured accounts, thereby reducing interest received by IOLTAs and threatening the homeless, low-income, elderly, women and children who rely on legal services. This is a concern that has not only been voiced by lawyers in my district who seek to protect their clients’ funds and meet their legal mandate, but also by those who are concerned about the effect it would have on protecting those who require legal protection the most.
The FDIC has traditionally had an exception in the past which applied to IOLTA, in recognition of its unique nature. The current TLGP, however, does not recognize that IOLTA accounts are materially similar to non-interest bearing transaction accounts which are identified for increased insurance under TLGP. Therefore, it is in my recommendation that the FDIC explicitly recognize IOLTAs as eligible for TLGP or provide an exception so that TLGP coverage is extended to IOLTAs.
I appreciate your consideration of these comments..
|Last Updated 10/29/2008||Regs@fdic.gov|