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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 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.

• 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 
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.
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

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