Home > Regulation & Examinations >
Laws & Regulations > FDIC
Federal Register Citations
FDIC Federal Register Citations
From: Phil D. Mitchell [mailto:firstname.lastname@example.org]
Subject: RIN # 3064-AD37; Request to Support Full FDIC Insurance Coverage
for Attorney's IOLTA Accounts
Thank your for your time in addressing this urgent issue. I am the Alabama State Bar Commissioner for the 8th Alabama Judicial Circuit. I represent the bar of Morgan County, Alabama, which is comprised of approximately 110 attorneys, before our statewide bar association. An issue has recently arisen in connection with the FDIC insurance coverage limits for attorney's client trust accounts that needs your immediate attention.
The Federal Deposit Insurance Corporation (FDIC) announced on October 14, 2008 the Temporary Liquidity Guarantee Program (TLGP). The FDIC created this program to "strengthen confidence and encourage liquidity in the banking system by, among other things, providing full coverage of non-interest bearing deposit transaction accounts (such as payroll accounts used by business) regardless of dollar amount". On October 23, 2008, the FDIC Board adopted an Interim Rule and released it for public comment.
The Interim Rule does not provide full coverage for Interest on Lawyers Trust Accounts (IOLTA), which are similar to these transaction accounts. The Alabama Supreme Court has required all attorneys in Alabama utilize an IOLTA Account for their Client Trust Accounts. The unintended consequence of this Interim Rule: a client's total funds in one financial institution including the amount among the IOLTA account exceeding $250,000 are eligible for unlimited insurance only if they are moved to a covered "non-interest bearing deposit transaction account". In response to concerns raised by the American Bar Association (ABA) and others, the FDIC Board requested interested parties to submit comments regarding extending coverage of the TLGP. I am submitting these comments in support of providing full FDIC insurance coverage to IOLTA Accounts for the reasons herein outlined.
As a result of the unintended consequence of the Interim Rule limiting the amount of coverage a client would have in the IOLTA account, which Alabama attorneys are required to maintain by the Alabama Supreme Court rules, Alabama attorneys are faced with complying with the Supreme Court's rule which may place client funds in an account not fully insured for the client or to violate the rule and obtain unlimited FDIC insurance in a non-interest bearing account. Faced with this dilemma, on Friday, October 31, 2008 the Alabama State Bar Commission painstakingly adopted a resolution to request the Alabama Supreme Court to suspend its rule requiring all Alabama attorneys' client trust accounts be maintained as interest bearing IOLTA accounts until such time as the FDIC extends full insurance coverage to these accounts. This resolution will be presented to the Alabama Supreme Court this week. It is my hope that the FDIC Board will act quickly to correct the result of the Interim Rule and to extend full FDIC insurance coverage to IOLTA accounts before the Alabama Supreme Court must act upon the State Bar Commission's resolution.
The Alabama State Bar Commission and the American Bar Association urges Congress to support expanding the TLGP to provide full coverage for IOLTA Accounts, regardless of dollar amount, and to convey this support to the FDIC, because:
IOLTA Accounts are effectively the same as the covered transaction accounts. IOLTA Accounts act as clearing accounts for pooled client funds. Funds are placed in IOLTA Accounts because they cannot earn interest for an individual client net of banking charges and administrative fees. Client funds pooled in an IOLTA Account are either nominal in amount or significant amounts held only long enough for a check to clear or for the attorney to disburse the funds. Typical funds held by a lawyer on behalf of clients including court filing fees, real estate escrows, settlements and retainers.
FDIC and Federal Reserve exceptions permit banks to pay interest on these otherwise similar transaction accounts. Almost 30 years ago, the FDIC and Federal Reserve granted an exception to banking regulations that prohibited the payment of interest on demand accounts. This exception was instrumental for states establishing IOLTA programs, including Alabama, because it allowed interest to be paid for charitable purposes to a third party, the IOLTA programs. Today, IOLTA programs exist in all 50 states; 37 states including Alabama require lawyers to deposit client funds that cannot earn net interest for the client in IOLTA Accounts. Interest generated from IOLTA Accounts is paid to IOLTA Programs that issue grants for the provision of civil legal aid to the poor, the administration of justice, and law-related education -- which are vital to our democratic system's guarantee of equal access to justice for all.
TLGP coverage is vital for IOLTA Accounts, which may hold funds for a client that could exceed the $250,000 coverage limit. IOLTA Accounts may hold large amounts of client funds for short periods of time, such as real estate transactions and large settlements for multiple clients prior to distribution. Establishing multiple accounts at various financial institutions for amounts over $250,000 for a client is not a viable solution; attorneys cannot know whether a client may later deposit additional funds of its own at a particular bank, and it is not practical to separate a large deposit that would be in the IOLTA account just long enough for the check to clear.
Now is not the time to force lawyers to abandon a program that provides much needed revenue for legal aid for the poor, especially now with increases in foreclosures and evictions. While the need for IOLTA-generated income is great, a lawyer's paramount responsibility is his fiduciary duty to maintain security of client funds. Alabama lawyers holding significant client funds must now consider whether to continue to use their IOLTA Accounts, as required by the Alabama Supreme Court rules, or to place their client funds in a fully insured non-interest bearing deposit transaction account. The current TLGP Interim Rule has required our State Bar Commission to ask the Alabama Supreme Court to remove the requirement for IOLTA Accounts, which if passed will certainly cause Alabama lawyers to move clients' funds from IOLTA accounts to non-interest bearing accounts in compliance with their client fiduciary duty to obtain the unlimited "non-interest bearing account" FDIC insurance. This will obviously greatly reduce the interest income received by Alabama's two IOLTA programs, which are the second largest source of funding for civil legal aid for the poor in Alabama.
I trust that the FDIC will quickly correct this unintended omission of IOLTA Accounts from the full insurance coverage intended for transactional accounts and expand the TLGP to provide full coverage for IOLTA Accounts, regardless of dollar amount, as soon as possible. If you have any questions, or desire any additional information, please do not hesitate to contact me.
With warmest personal regards, I am,
Phil D. Mitchell
|Last Updated 11/03/2008||Regs@fdic.gov|