Credit Unions and IOLTA: Why the Time May Be Right
Credit Unions have existed in the United States for more than one hundred years and today boast nearly 100 million members and hold over $1 trillion of member assets in more than 6,600 institutions nation– wide.1 In the five years since the onset of the financial crises, credit unions have seen dramatic growth and rising popularity of their product offerings which typically include lower loan rates, higher deposit rates, and few and lower service fees2. Despite their increasing popularity and utility in the current banking environment, credit unions have remained at best a marginal player in most state Interest on Lawyer Trust Account (IOLTA/IOLA) programs due to a critical difference in federal deposit insurance rules. That marginal role could be substantially altered, however, if new legislation proposed by the House Financial Services Committee to correct the deposit insurance issue becomes law later this year.
An Opportunity for IOLTA Programs
Although key economic indicators such as housing, consumer credit, and unemployment are showing solid improvement in recent months, and the Federal Reserve is now on the threshold of beginning to unwind its historic interventions, national IOLTA revenue remains mired at its painful lows and the first glimmer of IOLTA rate increases remain stubbornly on the horizon. Bank lending remains very conservative, even as most banks are awash in cash. Until those dynamics materially change there is little incentive for the majority of banks to pay rates on their short–term (including IOLTA) deposits higher than what they currently do. 3
Given the current banking backdrop, the alternative presented by the credit union proposition is an attractive one. Financial institutions (the credit unions) that are actively seeking IOLTA business and that have a history of paying higher deposit account rates could provide a short–term boost to IOLTA programs that are positioned to take advantage of this potential change.
History of Credit Unions: A Primer
At the turn of the century, it was difficult for most American to find access to loans when needed, and so often fell victim to unscrupulous lenders (recall Mr. Potter in It's A Wonderful Life). In response, the first credit union in the United States, St. Mary's Cooperative Credit Union in Manchester, New Hampshire opened its doors in 1909. 5 Today, credit unions exist in every state and the District of Columbia and provide a full array of financial products and services to their members.
- U.S. credit unions are not–for–profit financial cooperatives, organized solely to meet the needs of their members. Credit Unions do not issue stock and are not operated to maximize profit—excess earnings are returned to members in the form of dividends. 6
- Potential credit union members must be part of a field of membership, which is typically based on one's employment, community, or membership in an association or organization. Credit Unions in the U.S. range in size from local community credit unions with less than $1 million in assets7, to Navy Federal Credit Union, the largest U.S. credit union which serves over four million members of the military and their families, and has over $55 billion in assets8.
- Like banks, credit unions can have either a state or federal charter. Ninety–five percent of all credit unions are insured by the National Credit Union Administration (NCUA), which offers deposit insurance similar (but not identical) to Federal Deposit Insurance Corporation (FDIC) coverage. Like the FDIC Deposit Insurance Fund, the National Credit Union Share Insurance Fund is backed by the full faith and credit of the United States government. 9
There is a critical difference, however, in how the FDIC and NCUA apply insurance coverage to client funds held in an attorney's IOLTA account, and that difference is likely the primary reason credit unions have not, thus far, been more widely adopted as depositories for IOLTA accounts.
The Problem: Disparate Treatment
- As the IOLTA community is well aware, FDIC insurance allows for so called "pass–through" coverage on an attorney's IOLTA account (categorized as a "fiduciary account" for FDIC purposes) to the individual clients whose funds are deposited in the account. As a result, an IOLTA account provides insurance coverage for all individual client deposits in the account, generally up to the maximum deposit insurance amount of $250,000 per client (less any other funds the client may have outside the IOLTA), per institution, so long as the account is properly titled and client ownership can be demonstrated through attorney records. 10
- NCUA insurance, on the other hand, only provides coverage for members of the credit union (unless the credit union is designated as "low–income")11. For most account types (called "shares" in credit union parlance) this is not a problem, since the account owner is required to be a member of the credit union before ever opening the account. In the case of an attorney IOLTA account however, the individual client whose funds the attorney is holding in trust may or may not be a member of the credit union at the time the attorney accepts their funds. If the attorney were to deposit non–member client funds into the IOLTA, those funds would not covered by federal deposit insurance, under current law12.
- Due to this insurance anomaly, some states have not authorized credit unions as depositories for attorney IOLTA funds. Other states have allowed attorneys to utilize credit unions for their IOLTA funds, and in those states it is up to the attorney to insure each client whose funds they deposit in a credit union IOLTA is (or becomes) a credit union member (again, if the credit union is not low–income designated). Both scenarios are less than ideal and the disparate treatment has undoubtedly been a major deterrent to attorneys who would otherwise utilize credit unions as their IOLTA depository.
The Solution: Parity
- On November 14, 2013, the House Financial Services Committee approved on voice vote H.R. 3468, the Credit Union Share Insurance Fund Parity Act, which along with technical implementations, "Requires coverage for an account established by a member to be consistent with Federal Deposit Insurance Corporation (FDIC) coverage, regardless of the membership status of the owner of the funds deposited in an account established by a credit union member".13
- H.R. 3468 would eliminate the current federal insurance disparity for pass–through coverage, and require coverage for an account established by a credit union member to be consistent with Federal Deposit Insurance Corporation (FDIC) coverage, regardless of the membership status of the owner of the funds deposited in the account. The bill specifically provides for coverage of IOLTA accounts.
- The bill is supported by the leading national credit union trade organizations, including the Credit Union National Association (CUNA), and, the National Association of Federal Credit Unions (NAFCU). Both organizations considered the IOLTA insurance problem such an important issue that they included it as a key element of their regulatory relief priorities for 2013.14
- Current Status: Having passed the House Committee on Financial Services, the bill must now go before the full House and Senate and will likely be part of a larger banking bill.
For IOLTA programs and participating lawyers and law firms, the benefits of the proposed legislative "fix" include:
- For attorneys with existing IOLTA's in federally insured credit unions not designated as low–income, eliminating the administrative issues and potential risks of the current deposit insurance limitations
- Providing new opportunities for Leadership/Prime Partner institutions that agree to pay preferred rates on IOLTA accounts
- Providing much needed competition for deposits in local markets
- Providing greater diversity of products and cost structures from local financial institutions
- The potential for partnerships with credit unions in overlapping client delivery areas15
In addition to the benefits to IOLTA, the legislation is clearly well supported and the change would have demonstrable benefits to the credit union community if adopted, including:
- Providing a new source of relatively low cost, higher balance funding
- Opening up attorneys and law firms as a new area of credit union membership outreach
- Partnering with state IOLTA programs to communicate the benefits of credit union membership to the legal community
What Happens Next
The proposed legislation is still in the early stages of the process and even though its goal is simply to correct a technical disparity between the way IOLTAs are federally insured in banks and credit unions, its future is far from certain. As the process unfolds, there are several things IOLTA programs may want to consider along the way:
- Follow the bill and be ready to respond to any requests for support.
- For states that currently do now allow credit union IOLTA participation, determine what changes might be required and what processes undertaken to revise enabling legislation to allow their participation.
- Most states have a credit union "League" charged with promoting the advancement of credit unions in the state; consider communicating with them early on.16
- Find individual credit unions in your state that may be interested in offering IOLTAs17 and have early discussions about the requirements and opportunities of participation, including Leadership/Prime Partner options and other promotional efforts.18
- Consider ways to educate lawyers and law firms on the benefits of credit unions and the new opportunities available should the current legislation be adopted.
From their beginnings, a key part of the mission of credit unions in the U.S. has been to assist low and moderate income consumers with products, services and education/literacy they might not otherwise afford or have access to—a mission that should resonate strongly within the IOLTA community. Given the current effort to eliminate a long–standing barrier to greater participation, the time may finally be right time for credit unions and IOLTA programs to move forward, to the benefit of them both.
Steve Casey has been CFO for the Massachusetts IOLTA Committee for over twenty years. He has worked extensively on FDIC coverage issues for IOLTA accounts nationally, and is a Past President and former Board Member of the National Association of IOLTA programs. Steve is also a former credit union manager, and a former banker.
Disclaimer: The materials contained herein represent the opinions of the authors and editors and should not be construed to be those of either the American Bar Association or the Commission on Interest on Lawyers' Trust Accounts unless adopted pursuant to the bylaws of the Association. Nothing contained herein is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. These materials and any forms and agreements herein are intended for educational and informational purposes only.
4 Source: American Bar Association, Commission on IOLTA, "IOLTA Handbook", 2013.
5 Later that year merchant and philanthropist Edward Filene and Banking Commissioner Pierre Jay were instrumental in establishing the Massachusetts Credit Union Act, which served as the basis for subsequent state credit union laws and the national Federal Credit Union Act, which became law 25 years later. In 1920, Filene hired Roy Bergengren, a poverty lawyer, to manage the Massachusetts Credit Union Association and to promote the development of credit unions. Within a year, Massachusetts chartered 19 new credit unions. National Credit Union Administration, "A Brief History of Credit Unions". http://www.ncua.gov/about/history/Pages/CUHistory.aspx
6 Each credit union is governed by its members. The membership elects unpaid, volunteer officers and directors who establish the policies under which the credit union operates. Officials must be from within the credit union's membership. Voting is one person, one vote. This means that every member has an equal voice regardless of the amount of savings or loans they have with the credit union. ^2
9 95% of all credit unions are federally insured by NCUA; the remainder are state charted institutions with private insurance. National Association of State Credit Union Supervisors: http://www.nascus.org/facts–figures/index.php
11 There is an exemption for credit unions designated as "low income", which are authorized to accept deposits of non–members and have those deposits insured. IOLTA accounts in low income designated credit unions are insured up to the standard deposit amount, per client. As of August, 2013, there were 1,961 credit unions designated as low income. For additional information see: http://www.ncua.gov/News/Pages/NW20130807LowIncome.aspx
17 In particular, identify any credit unions designated as "low–income" in your state, since they can already provide full federal deposit insurance for non–member IOLTA deposits. Use the NCUA credit union research tool and filter on your state and low income designation, here: http://researchcu.ncua.gov/Views/FindCreditUnions.aspx