Equitable Interest Rates and IOLTA: The emergent need for an IOLTA account interest rate comparability rule

by WSBA President Mark Johnson

There are certain well-known casualties of our very difficult economic climate: homes, jobs, savings, and pensions lost; businesses, banks, and other financial institutions failed. Probably entirely off the damage assessment inventory of the general public, and perhaps most lawyers, is that IOLTA revenues, a significant source of support for our civil indigent legal service system, have been devastated by the poor economy. Set out below is a comparison, by month, of IOLTA revenues from 2006 through September 2008:

It is a certainty that IOLTA revenues for 2008 will fall millions of dollars below those of the past two years and, as a result, civil legal aid programs will face significant cuts.
 
While IOLTA losses resultant from the poor economy, primarily the petrified real estate market, will take some time to recover, the losses are compounded by the woeful interest rates that banks pay on IOLTA accounts — some as low as .10 percent.

Twenty states and the District of Columbia have IOLTA “comparability” rules, RPCs which require lawyers to deposit trust account funds only in banks which treat IOLTA account deposits equally to other accounts of the same type. The Legal Foundation of Washington (LFW), a 501(c)(3) corporation established by order of the Washington State Supreme Court in 1984, and which has the authority to collect IOLTA funds in Washington state and to distribute those funds to grantees providing civil legal aid services, is preparing a proposed amendment to RPC 1.15A to require lawyers to do so.

According to a GR 9 cover memo prepared by the LFW, states with comparability rules have experienced a 50–100 percent increase in IOLTA revenues. The memo also provides that not a single bank in any of the states that have enacted comparability rules have thereafter declined to participate in the IOLTA program; a recognition of the economic power that lawyers have with financial institutions — they want to keep our business.

Caitlin Davis Carlson, the executive director of the LFW, stressed the importance of a comparability rule, particularly given our present financial circumstances: “The current economic environment has sharply reduced IOLTA revenue, thus jeopardizing the Legal Foundation’s ability to provide stable support for civil legal aid programs in Washington state. A comparability rule would ensure that IOLTA accounts are treated equitably by financial institutions, thus maximizing the IOLTA revenue available to help meet the critical legal needs of low-income people.”

The IOLTA money distributed by the LFW goes to providing direct legal services to the economically disadvantaged. Last year, according to the LFW’s annual report, it distributed 8.3 million dollars in grants to 32 recipient organizations, including Columbia Legal Services, the Northwest Immigrant Rights Project, and pro bono legal aid programs in multiple counties. Given the remarkable downturn in the economy, cuts in legal services grants are inevitable.

IOLTA revenues are indispensable for civil legal aid, and the interest rates paid on the accounts are not fair. Access to civil legal aid for the economically disadvantaged has never been more important, and the poor economy has devastated IOLTA revenues. A comparability rule for IOLTA accounts will raise interest rates to a fair level, and the WSBA should support the LFW’s comparability rule. 

WSBA President Mark Johnson can be reached at 206-386-5566 or mark@johnsonflora.com.