From being able to compete with banks to assuring business members that their funds are insured, there could be several long-term benefits for credit unions if a bill involving insurance coverage becomes law.
Introduced Nov. 13, the House Financial Services Committee approved the bill, the Credit Union Share Insurance Fund Parity Act (H.R. 3468), by a voice vote Nov. 14. The legislation would establish parity with banks for escrow accounts including extending share insurance coverage to interest on lawyers trust accounts.
With IOLTAs, attorneys routinely hold funds in trust for clients to pay costs related to legal services such as court filings, depositions and business transactions. Interest from the short-term trust accounts is typically paid to a nonprofit foundation for programs to provide legal services to the poor, elderly and disabled.
According to iolta.org, more than 5,500 financial institutions maintain the accounts, including roughly 100 credit unions. Those numbers could significantly increase if H.R. 3468 becomes law.
The $268 million Maine Savings Federal Credit Union is one of 10 credit unions in the state that maintain IOLTAs, said Vanessa Madore, assistant vice president of risk management. The Hampden, Maine-based credit union is the only “Prime Partner” among the Maine Bar Foundation’s eight financial institutions that offer IOLTAs, according to the foundation.
Prime Partner institutions are those that go above and beyond the eligibility requirements of to support the IOLTA program in its mission to ensure that low-income Maine residents have access to critically needed legal aid, the Maine Bar Foundation said. The partners pay a net interest rate on all IOLTA funds of at least 75% of the Federal Funds Target Rate or 2.00% annual percentage rate, whichever is higher.
Madore said Maine Savings FCU started looking at IOLTAs in 2009 because some of its business members were clients of a local attorney. After a 2007 Maine Supreme Court ruling that allowed the acceptance IOLTA deposits for all deposits at low-income designated credit unions, Madore wondered if there was a chance that some of those relationships with business members would be lost if the Maine Savings FCU didn’t offer IOLTAs, she recalled.
After some discussions with the credit union’s president/CEO, John Reed, and the Maine Bar Foundation, the cooperative began offering the accounts in June 2009 to eliminate the possibility of severed alliances with some of its business members. Maine Savings FCU currently offers three IOLTAs, which are primarily used for real estate transactions.
Madore said passage of H.R.3468 would have a far-reaching impact for credit unions and their efforts to woo and keep business members.
“It’s a simple fact that the share insurance fund does not cover non-member accounts. That was something we had to let our members know about,” Madore said. “That being said, we’ve had a number of calls from attorneys wanting to establish the accounts. In full disclosure, we share the part about the insurance coverage and that seals the deal for them to go the local bank competitor.”
Prior to the Maine Supreme Court ruling, the Maine Credit Union League fought heavy opposition against a false perception that consumers would think putting money in a credit union was somehow less secure and safe than other financial institutions, the league said at the time.
Rod Rovzar, outside general counsel to the Maine CU League and an attorney with Norman, Hanson & DeTroy LLC in Lewiston, Maine, said credit unions have been yearning for a bill such as H.R. 3468.
“It’s a long time coming and it’s another step that helps level the playing field,” Rovzar said. “Particularly, in Maine, we have large areas of the state that are not served by financial institutions yet, there is good credit union coverage. This would be a boon to consumers and businesses, especially law firms and real estate brokers.”
Insured IOLTAs could potentially boost credit union account growth including more mortgage lending opportunities, Rovzar offered. While Maine credit unions' IOLTAs have nearly quadrupled from three to 10 since the state’s Supreme Court ruling, he said there is still much more room for involvement.
“Some of the credit unions have looked at IOLTAs off and on. If this new legislation can wind its way through Congress, frankly, I see more credit unions participating,” Rovzar said. “I don’t think it’s a secret that there will be miles to go before we sleep.”
Next Page: Resistance in Washington State
Washington credit unions faced similar resistance a few years ago when the Washington Credit Union League fought to keep credit unions on a list of financial institutions eligible to offer IOLTAs despite opposition from the Washington State Bar Association.
In August 2006, Washington credit unions faced similar resistance a few years ago when the Washington Credit Union League fought to keep credit unions on a list of financial institutions eligible to offer IOLTAs despite opposition from the Washington State Bar Association. In August 2006, the Washington Supreme Court ruled credit unions could continue their IOLTA use.
The WSBA argued at the time that because trust accounts must be insured and the NCUA only insured attorney trust accounts holding client funds belonging to credit union members, the association believed that NCUA would not insure accounts that held non-credit union member funds even though the trust accounts belonged to a credit union member, for example, the attorney. The WSBA also believed that since only a very small number of Washington attorneys housed their trust accounts in credit unions, it was recommended that credit unions be removed from the list of financial institutions allowed to offer IOLTAs.
The Washington CU League merged with the Oregon Credit Union League in 2011 to become the Northwest Credit Union Association. Lynn Heider, vice president of public relations and communications of the merged association, said after checking, there wasn’t any regional information to add on account activity. According to the Legal Foundation of Washington, approximately six credit unions in Washington maintain IOLTAs.
The $2.2 billion Coastal Federal Credit Union in Raleigh, N.C., had some interest in IOLTAs but decided not to pursue them due to concerns with regulatory hurdles involving the lack of insurance unless the funds belonged to members, said Willard Ross, senior vice president and chief retail officer. The credit union currently has one IOLTA that contains members’ funds with an attorney who handles many of Coastal’s mortgage closings.
According to the North Carolina State Bar, all attorneys that hold money in trust for the clients must obtain an IOLTA. On Oct. 11, 2007, the North Carolina Supreme Court ordered the NCSB to implement a mandatory IOLTA program for lawyers that went into effect Jan. 1, 2008. Under revised rules, except for certain exemptions, lawyers must certify annually that all general client trust accounts maintained by the lawyer or law firm are IOLTAs, the NCSB said.
Ross said the House Financial Services Committee’s recent voice vote approving the bill that would extend share insurance coverage to IOLTAs is a promising step.
“I do think it could have a positive effect for credit unions because it can provide a low-cost source for significant deposits,” Ross said. “More and more credit unions are getting loaned up again. I know we’re up there. It’s time to grow deposits. The legislation would be very positive.”