Make Sure Your Trust Account Is Properly Insured

Thanks to Nerino Petro for posting a great article on his Compujurist blog account FDIC insurance changes for interest on lawyer trust accounts (IOLTA).

Many US attorneys have started receiving letters from their IOLTA providing banks that the IOLTA accounts no longer receive unlimited FDIC insurance as they had since enactment of the FDIC's Transaction Account Guarantee Program. This change and the reason for the notices is a direct result of the new Dodd-Frank Wall Street Reform and Consumer Protection Act as IOLTA accounts were not included in the enacting provisions for accounts that received this insurance. Many Wisconsin Attorneys have started to receive letters similar to the following:

December 14, 2010

Dear IOLTA Account Customer,

As you know, the IOLTA account that you currently have with State Bank Financial receives unlimited FDIC insurance protection through December 31, 2010, because our institution is a participant in the FDIC’s Transaction Account Guarantee Program (TAGP). However, the TAGP program ends after December 31, 2010, therefore your insurance coverage will be changing.

Under the Dodd-Frank Act provisions recently enacted by Congress, beginning January 1, 2011, the account(s) you have with us will no longer be eligible for unlimited deposit insurance coverage. The following notice describes the change in greater detail.

NOTICE OF CHANGES IN TEMPORARY FDIC INSURANCE

COVERAGE FOR TRANSACTION ACCOUNTS

All funds in a “noninterest-bearing transaction account” are insured in full by the Federal Deposit Insurance Corporation from December 31, 2010, through December 31, 2012. This temporary unlimited coverage is in addition to, and separate from, the coverage of at least $250,000 available to depositors under the FDIC’s general deposit insurance rules.

The term “noninterest-bearing transaction account” includes a traditional checking account or demand deposit account on which the insured depository institution pays no interest. It does not include other accounts, such as traditional checking or demand deposit accounts that may earn interest, NOW accounts, money-market deposit accounts, and Interest on Lawyers Trust Accounts (“IOLTAs”).

For more information about temporary FDIC insurance coverage of transaction accounts, visit www.fdic.gov.

If you have questions regarding the information provided in this letter, or your insurance coverage generally with any account you have with our institution, please do not hesitate to contact your account officer or myself.

Sincerely,

Jane Hostrawser

AVP/Mgr Deposit Operations

State Bank Financial

This question came to light on the State bar of Wisconsin's Practice411 elist last week and today on itsSolo & Small Firm Practice elist. Since I became aware of this action I have undertaken some investigation which has confirmed that this change is due to the recently enacted Dodd-Frank Act.

The original and temporary unlimited increase was put into effect at the beginning of the recent financial crisis under the FDIC’s Transaction Account Guarantee Program (TGAP). However, under the new Dodd-Frank Act, IOLTA accounts are no longer included under the provision that still provides this coverage for certain accounts as had been the case under TGAP. IOLTA accounts are now back to the $250K limit. There is a movement to have this modified, but until it actually happens the FDIC has to use what has actually been enacted into law and not what some members of Congress are trying to do to amend this. (According to the latest information that our Public Affairs Director, Lisa Roys has obtained, the amendment to re-include IOLTA account s has passed the House, but is holding in the Senate.) I contacted the office of the FDIC Supervisory Counsel Joe DiNuzzo (who has worked on this matter for the FDIC and who is listed as a contact on the document I link to in the next section) and received a voice message back confirming this information. While this affects the unlimited coverage for IOLTAs, it doesn't affect the coverage for IOLTAs at the $250,000 level.

The FDIC and others have made a number of statements (confirmed by different groups including various bar associations) that most IOLTA accounts should be covered up to the maximum allowed of $250K per each client that has funds in an IOLTA account. Here is part of the October 26, 2010 Supplemental Information document from the FDIC website

http://www.fdic.gov/news/board/Nov9no4.pdf , on the page numbered 13 of that document, which provides:

Importantly, under the FDIC's general deposit insurance rules, IOLTAs may qualify for

"pass-though" deposit insurance coverage, so long as the regulatory requirements are

met. 12 CFR Section 330.7. That means each client for whom a law firm holds funds in

an IOL TA may be insured up to $250,000 for his or her funds. In addition, the accrued

interest to which a legal services entity or program is entitled may be separately insured

for $250,000. For example, if a law firm maintains an IOLTA with $250,000 attributable

to Client A, $150,000 to Client B and $75,000 to Client C, and the accrued interest of

$5,000 is payable to a legal services program, the account likely would be fully insured.

If the clients or the legal services entity have other funds at the same IDI, those funds

would be added to their respective ownership interest in the IOL T A for insurance

coverage purposes. But, coverage is available, generally, on a per-client basis; thus, a

generous amount of deposit insurance coverage is available for IOLTAs, absent the

availability of unlimited coverage for IOLTAs under either the TAGP or Section 343

So the only thing that is changing is the reduction from unlimited coverage for any amounts held in an IOLTA to a max of $250K for each client that has funds in a IOLTA account.

I hope this helps to explain why everyone is getting these notices.

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