May 23, 2014 – A bill making its way through Congress would give attorneys the ability to house their interest-bearing client trust accounts in credit unions.
HR 3468, or the Credit Union Share Insurance Fund Parity Act, would grant attorneys far more leeway in choosing where to keep their Interest on Lawyers’ Trust Accounts (IOLTAs), which generate funds that are used to support civil legal services in the state.
“Wisconsin attorneys are not currently able to hold trust accounts in credit unions because of the differences between client members and non-members,” said Wisconsin Trust Account Foundation, Inc. Executive Director De Ette Tomlinson. “Funds held in a trust account for credit union members are federally insured, similar to funds in banks that are insured through the Federal Deposit Insurance Corp. (FDIC), but funds held by an attorney for a client who is not a member of the credit union are vulnerable, and if the credit union failed, could be lost without any chance of recovery.”
Tomlinson said that there is one exception to the member versus non-member issue, as lawyers can currently hold trust accounts in federally recognized low-income credit unions. All deposits held in these credit unions are federally insured up to $250,000, regardless of whether the customer is a member of the credit union.
Supreme Court rule requires Wisconsin lawyers to keep certain client funds in a pooled interest-bearing or dividend-paying draft trust account. An IOLTA account must be held at a financial institution that pays interest rates on IOLTA accounts that are at least as high as the rates they pay to non-IOLTA customers. Typical funds that would be placed in an IOLTA include earnest monies, proceeds from loans, collections and settlements, cost advances, and advance payments for fees that have not yet been earned.
Tomlinson’s organization, WisTAF, manages all IOLTA funds in the state, which are used to issue grants and provide legal aid to persons of limited means.
Passage of HR 3468, or a similar bill, would have a significant impact on the scope of services WisTAF is able to provide to needy Wisconsin residents.
“Since credit unions are nonprofits, they tend to pay higher interest rates to their members than banks pay to their customers,” Tomlinson said. “The amount of interest that could be generated by funds held in a credit union IOLTA account could be substantially higher than the interest generated by a similar account held in a bank – sometimes as much as five to ten times more.”
Every extra penny of IOLTA account interest ensures that Tomlinson and the rest of WisTAF will be able to provide civil legal services to Wisconsin residents in all 72 counties.
But Tomlinson is concerned that unless IOLTA can transition into a more stable source of funding, the grant money will run out.
To make ends meet, WisTAF is paying IOLTA grants out of an emergency reserve fund, designed to support the organization during hard times.
“Until 2005, 100 percent of civil legal services funds came from IOLTA,” said Tomlinson. “But this number has fluctuated quite a bit because IOLTA income is generated by an interaction of interest rates and principal balances, modified to some extent by allowable fees that banks can charge against IOLTA interest.”
Tomlinson pointed out that the majority of banks in Wisconsin waive all fees on IOLTA accounts.
Today, IOLTAs pay for roughly 25 percent of WisTAF’s programs and services for low-income residents.
Katie Stenz is the public affairs coordinator with the State Bar of Wisconsin. She can be reached at org kstenz wisbar wisbar kstenz org, or by phone at (608) 250-6145.
To keep business afloat, banks have partnered with WisTAF to help alleviate some traditional banking fees. Prime Partner banks have pledged to pay Wisconsin IOLTA trust accounts 0.5 percent more than they pay their other best customers.
“We cannot thank our Prime Partners enough, plus all of the lawyers who have chosen to hold their IOLTA accounts in these banks,” said Tomlinson. “Some lawyers have even asked their banks to become Prime Partners, and for that, we are grateful.”
HR 3468 passed the House on May 6. The next step for the bill is to be scheduled for a vote in the Senate.
For a full list of IOLTA participating financial institutions and prime partners, visit WisTAF.org.