Home > Regulation & Examinations >
Laws & Regulations > FDIC
Federal Register Citations
FDIC Federal Register Citations
Dear Sir or Madam:
I am an attorney in Columbia, South Carolina. I practice in a six lawyer law firm. It has come to my attention that the Federal Deposit Insurance Corporation (FDIC) announced on October 14, 2008 the Temporary Liquidity Guarantee Program (TLGP). It is my understanding that the FDIC created the TLGP 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 businesses) regardless of dollar amount."
It is my further understanding that on October 23, 2008, the FDIC Board adopted an Interim Rule that does not provide full coverage for Interest on Lawyer Trust Accounts (IOLTA), which are similar to these transaction accounts. The unintended consequence of this Interim Rule is that a client’s total funds in one financial institution including the amount in an IOLTA account exceeding $250,000 are eligible for unlimited insurance only if they are moved to a covered "non-interest bearing deposit transaction account." This unintended consequence needs to be remedied.
IOLTA accounts are effectively the same as the covered transactions. 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 disperse the funds. Typical funds held by a lawyer on behalf of clients include court filing fees, real estate escrows, settlements and retainers.
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 because it allowed interest to be paid for charitable purposes to a third party, the IOLTA program. 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 large amounts of client funds that could exceed $250,000 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.
While the need for IOLTA-generated income is great, a lawyer’s paramount responsibility is her fiduciary duty to maintain security of client funds. Lawyers holding significant client funds must consider whether to continue to use their IOLTA accounts, as required by supreme court rule or legislation in many states, or to place their client funds in a fully insured, non-interest bearing deposit transaction account. The current TLGP Interim Rule might encourage lawyers to move their trust accounts; this would greatly reduce the interest income received by IOLTA programs, which are the second largest source of funding for civil legal aid for the poor.
As an attorney who deals with workers' compensation claimants and social security disability applicants, I am aware of how this recession has effected indigent South Carolinians. With tough times ahead, IOLTA grants will allow non-profits to continue to operate and provide services to those who may otherwise not be served: simply put, some profits would not be able to survive on individual donations alone especially when there will be less for individuals to contribute. Please provide unlimited FDIC insurance coverage for IOLTA accounts to insure funding for civil legal aid to the poor.
Margaret "Marti" Bluestein
|Last Updated 11/12/2008||Regs@fdic.gov|