Credit Union Legal Update – Spring 2015
What is an IOLTA?
Interest on Lawyers Trust Accounts (IOLTA) is a unique and innovative way to increase access to lawyers for individuals and families who do not have the financial means and eventually, improve the judicial system. Without taxing the public, and at no cost to lawyers or their clients, interest from lawyer trust accounts (IOLTA) is pooled to provide civil legal aid to the poor and support improvements to the judicial system.
Under the Code of Professional Responsibility, a lawyer who receives funds that belong to a client must place the funds in a trust account separate from the lawyer’s own money. Client funds are usually deposited in an IOLTA. The client (and not the IOLTA program) receives the interest if the funds are large enough, or they will be held for a long enough period of time to generate significant net interest to the client. Usually, the local State IOLTA program receives the interest.
So in summary, IOLTAs are deposit accounts established by attorneys to pool funds on behalf of their clients for future use, such as real estate settlement funds, fees advanced for services not yet performed (retainers) or money to pay for various court fees, while earning interest on the deposit. The interest earned is remitted to the particular states IOLTA fund and is utilized for charitable reasons such as offering legal services to low income residents or grants to help improve the justice system in that state. Every state, along with the District of Columbia, operates an IOLTA program. In 2009, IOLTA programs nationwide generated more than $ 124.7 million.
In late December, President Obama signed the Credit Union Share Insurance Fund Parity Act into federal law, which will help create credit union parity with bank escrow accounts such as IOLTAs. Most view this as a major win for credit unions. For the past few years I have been working with credit union clients to seek a means, or create a loophole, so they can offer IOLTAs. The only loophole found pertained to credit unions whose membership included the underserved. Historically, NCUA had opined that a federal credit union could only accept funds from members. Attorneys seeking to make deposits in a credit union were told they needed to prove their clients were members, or were qualified for membership. If the membership status of the lawyers client was not within the field of membership, an IOLTA could not be opened.
After this new federal law was signed by the President, NCUA was asked to take immediate action, which they did. Chairman Matz announced that, effective immediately, credit unions will have parity with banks so all attorney trust accounts (IOLTAs) would be insured for up to $250,000 for each fund owner. This was something that was not available before.
Previously, an attorney who was a member of a credit union where a trust account was opened had to use a bank. Now the attorney has a choice of financial institutions for that trust (IOLTA) account. For credit unions seeking deposits, this is now a magnificent opportunity. For credit unions seeking to expand business relationships and business accounts with law firms, this is now a wonderful opportunity. For credit unions that want to offer a community service and truly be full service to all businesses in the community, this is truly a good thing. Today IOLTAs are now available to all credit unions and I encourage you to seriously consider this as a new product for 2015.
Of course, there may continue to be hurdles. You should check with your local state bar association to determine if there are any unique rules or requirements for that state bar association with regard to IOLTAs and credit unions. There is also an American Bar Association Commission on IOLTA Programs. You should also check with attorneys that are regularly doing closings for your credit union and see if they will open an IOLTA with your credit union. You should have your business services representatives educated in IOLTA accounts so that they can promote the concept throughout. You may also need to modify the signature cards and all related account-opening policies and procedures.
IOLTAs should be seriously considered as part of a credit unions 2015 business plan.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2021.