A proposed banking regulation that could have negatively affected the interest proceeds legal services for the poor receive from lawyer trust accounts was revised following 500 comments asking the Federal Deposit Insurance Corp. to revise the regulation.
The FDIC, an independent federal agency that protects against the loss of deposits at insured U.S. financial institutions, decided Nov. 21, to make a narrow exception in a temporary rule that would provide unlimited government protection of funds in non-interest-bearing accounts and provide $250,000 of government protection per owner of other accounts for interest on lawyer trust accounts, or IOLTA. IOLTA accounts also will receive unlimited government backing.
The American Bar Association, the Pennsylvania Bar Association and the Philadelphia Bar Association, among many other legal groups, submitted comments to the FDIC seeking a revision in the rule.
Without the exception, legal services predict a drop in IOLTA funding because IOLTA accounts with balances over $250,000 wouldn't be backed by government insurance, and lawyers would have to favor non-interest-bearing accounts in order to obtain governmental deposit insurance for their clients' money. The ABA also has expressed concern that some states that mandate attorneys maintain IOLTA accounts might suspend that requirement because of the new FDIC program.
The FDIC Board of Directors made a final decision about the rules for the "Temporary Liquidity Guarantee Program" Nov. 21. According to the FDIC's final rule, the FDIC wishes to maintain a distinction between noninterest-bearing accounts and interest-bearing accounts. But the FDIC decided to make an exception for IOLTA accounts because the interest earned on IOLTA accounts doesn't go to attorneys or their clients, but to legal nonprofits.
"From the perspective of the law firm and the clients, the account produces the same economic result as a noninterest-bearing transaction account. For this reason, the FDIC has amended the definition of 'noninterest-bearing transaction account'’ to include IOLTAs," the final rule said.
"With today’s action by the FDIC, IOLTA programs can continue make a real difference in the lives of low-income Americans," said H. Thomas Wells Jr., president of the American Bar Association, in a statement.
-- Amaris Elliott-Engel, Staff Reporter