OLYMPIA, Wash. — Their purpose can go far in helping the poor who cannot afford legal services and supporting improvements to the justice system.
Interest on lawyers trust accounts or IOLTAs, are a unique type of trust account that works like this: a lawyer who receives funds that belong to a client must place those funds in a trust account separate from the lawyer's own money. Client funds are deposited in an IOLTA when the funds cannot otherwise earn enough interest for the client to be more than the cost of securing that income. The client–and not the IOLTA program–receives the interest if the funds are large enough or will be held for a long enough period of time to generate net interest that is sufficient to allocate directly to the client. The interest generated from the accounts is used in a variety of ways, but mainly to help state legal foundations provide pro bono work to poor families.
Credit unions in Washington came very close to being removed from a list of financial institutions that could offer IOLTAs, but a July state Supreme Court decision allowed them to remain. Several Washington credit unions, including $6.6 billion BECU, and the Washington Credit Union League wrote letters to the Washington Supreme Court urging it to allow attorneys to house their IOLTA accounts at credit unions. There are currently 21 Washington CUs that offer IOLTAs, according to the league.
The Washington State Bar Association sought to have credit unions removed after a 2003 comprehensive review concluded that because trust accounts must be insured and 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. NCUA has since said nothing in the Federal Credit Union Act nor do NCUA's rules prohibit IOLTAs at credit unions, although membership requirements for account insurance coverage limit coverage. Attorneys can set up IOLTA accounts at credit unions and account insurance will be available for client funds in these accounts as long as the clients are members of the credit union.
The $23 million Olympia Credit Union currently has one IOLTA and considers the Supreme Court decision a win. "We're not hurting anybody," said Marlisa Johnson, president/CEO. "Credit unions are not for profit. The idea of interest on the account going to the legal foundation, which is also a nonprofit, is a good fit."
At one point, Olympia had two IOLTAs with its current one being housed at the credit union for at least 10 years, Johnson said. The attorney who opened the IOLTA has all of his business and personal accounts at Olympia.
"It's a fairly active account," Johnson said. "Attorneys that have a lot of money will open a separate account for specific clients. The funds are kept in the account for a short time and the interest goes to the legal foundation. It works for everybody."
The league said because credit unions often pay higher rates on accounts and because interest earned on an IOLTA goes directly to the Legal Foundation of Washington administered by the WSBA, the Supreme Court's decision will result in additional funds for those who can't afford to pay for legal services.
The amount of IOLTA income depends on interest rates paid on the accounts, according to the National Association of IOLTA Programs and the American Bar Association on IOLTA. More than 5,500 financial institutions participate in IOLTAs.
When rates drop and stay low, as they did from the beginning of 2001 until the middle of 2003, IOLTA revenue declined, NAIP said. Though interest rates slowly increased in 2005, the effects of the historically low interest rates will be felt for some time. As a result, many IOLTA programs have been forced to reduce grants to legal aid providers, in many cases by very large percentages. To offset revenue declines, IOLTA programs throughout the country negotiate with financial institutions to reduce service charges and increase interest rates on IOLTA accounts. Working with banks, credit unions and attorneys, NAIP helps ensure that IOLTA generates as much funding as possible for legal aid for those who have nowhere else to turn, according to NAIP.
Social & Health Services Credit Union in Olympia, Wash., had to close "a very large" IOLTA due to regulatory intervention from NCUA, said Edward Danz, president, who did not want to go into specific details. The $41 million credit union has two IOLTAs and Danz anticipates more credit unions will start to offer them.
"It's a good thing," Danz said. "As more credit unions get into business lending–there are so many attorneys out there–this could be a way for them to bring in more business."
The bottom line is the credit union doesn't want to turn away members and if offering an IOLTA keeps them from leaving or establishing new business relationships then keeping credit unions on the list that can offer the accounts is good for the long term.
"We have members that don't want to go anywhere else," Danz said.
The $832 million Spokane Teachers Credit Union wrote a comment letter back in 2005 to the Washington Supreme Court urging it to keep credit union IOLTA participation intact, said Teresa Wilhelm, compliance manager. Spokane Teachers CU has about 20 IOLTAs.
"They're not barnburners and we don't have a lot of them," Wilhelm said on IOLTAs. "We had been offering them and there's just no reason not to offer them. It would have put credit union members at a disadvantage. We just wanted to keep an equal playing field."
Wilhelm was proud of the effort that Washington's credit unions put forth to make their voices heard on the possibility of being removed from the IOLTA list.
"We get so busy implementing final rules, that we don't always take the time to get involved in issues like these," Wilhelm said. "In this case, our efforts paid off." –msamaad@cutimes.com
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