In their best interest

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A penny saved is a penny earned, but at this time of year that notion is easier said than done.

When it comes to legal services for the poor, Benjamin Franklin’s proverb rings true as organizations around the nation are re-evaluating regulations for Interest on Lawyer Trust Accounts (IOLTA).

Specifically, the requirement of banks to provide IOLTA accounts with interest rates similar to other business accounts. Several states found that banks were offering substantially lower rates compared to other accounts.

“Across the nation, the phrase ‘interest comparability’ has been coined in regards to the belief that IOLTA accounts should be treated the same as any other business account, provided they meet similar criteria,” said De Ette Tomlinson, executive director of the Wisconsin Trust Account Foundation (WisTAF).

States including Florida and Michigan have revised language in the laws which allow IOLTA accounts to earn interest at a rate similar to other accounts. In some cases the revenue generated for legal services has doubled after the interest rate increase.

IOLTA Interest

While some states do not have specific laws pertaining to IOLTA interest, Wisconsin does under Supreme Court Rule 20:1.15(e)(3), though wording is vague in regards to interest standards on accounts.
It reads as follows:

(e) Operational requirements for trust accounts.

(3) Interest requirements. An interest-bearing trust account shall bear interest at a rate of not less than that applicable to individual accounts of the same type, size, and duration and in which withdrawals or transfers can be made without delay when funds are required, subject only to any notice period that the depository institution is required to observe by law.

“Banks interpret the language in a reasonable manner in that the wording is unclear, and therefore IOLTA accounts are considered unique,” said Tomlinson. “Under bank assumptions, those accounts are not subjected to the same interest rate levels.”

Rose M. Oswald Poels, senior vice president of the Wisconsin Bankers Association (WBA) was unaware of any banks purposely subjecting IOLTA accounts to lower interest rates, but admitted that the WBA does not poll banks on that issue.

“Certainly, I know that WisTAF has been disappointed with returns, but only until recently have rates begun to increase,” said Poels. “We have 98 percent of banks in the state as members and I am not aware of any that intentionally have a lowed interest rate for IOLTA accounts.”

Poels added that some interest rates may depend on account balance minimums and banks may impose certain fees, though some often waive additional charges on IOLTA accounts.

Funding Legal Services

Tomlinson estimated that the average interest rate on IOLTA accounts in Wisconsin is 1 percent, which will generate between $1.6 and $1.8 million this year for legal services.

“Certainly if that total could be doubled, I’m all for it, but interest rates are on the rise and the economy is doing fairly well, so that is a decent total,” said Tomlinson.

Mary Kay Bean, a representative from Chase Bank said that the company offers a standard 0.8 percent interest rate for IOLTA accounts which exceeds the 0.55 percent rate for business accounts in excess of $25,000.

The rates are applicable in much of Southeastern Wisconsin and Bean noted that it is because of the unique nature of IOLTA accounts, that they receive a higher interest rate from Chase.

Poels wondered if regular depository business accounts were the best comparison for IOLTA accounts. The Wisconsin State Department of Financial Institutions Division of Banking has set the 2007 interest rate for escrow accounts at 0.94 percent, a figure closer to the current interest average for IOLTA.

“I’m not sure business accounts, because you are not dealing with individual deposits, are the best comparison in terms of interest rates,” said Poels.

A teleconference is scheduled with representatives from the American Bar Association and Tomlinson hopes to explore options for Wisconsin. Assessment of time and money are prominent factors in determining the best approach to any law revisions.

“I expect the board will take a look at any information we have in January and go from there,” said Tomlinson. “Even if
nothing is done in the near future, this is an issue which will remain on the radar.”