A program that fully insures non-interest-bearing transaction accounts, including Interest on Lawyers’ Trust Accounts (IOLTA) funds that are channeled to legal services programs, is set to expire Dec. 31 after a vote to extend the program was blocked over a budgetary point of order.
S. 3637 would have extended the Transaction Account Guarantee (TAG) program for two years. The Senate failed by a 50-42 vote to garner the 60 votes necessary to waive budget rules and vote on the bill after Sen. Patrick J. Toomey (R-Pa.) pointed out that the Congressional Budget Office has stated that industry fees that fund the TAG program would fall short of potential insurance payouts.
The Federal Deposit Insurance Corporation (FDIC) created the TAG program in 2008 during a time of severe instability in the U.S. financial system. Normally, the FDIC insures each individual’s funds held at a given financial institution up to a maximum of $250,000, but TAG fully insures non-interest-bearing transaction accounts for the entire amount. As a result of advocacy by the ABA, state and local bar associations and other legal groups, IOLTA programs have been covered the TAG program since its inception.
Once the TAG program expires, IOLTAs and all other accounts currently enjoying full protection will revert back to the $250,000 per person and per institution limit for FDIC protection.
IOLTA accounts contain client funds held by a lawyers on behalf of a client that are nominal in amount or large sums held for a short period of time and typically include court filing fees, real estate closings, settlements and retainers.
More than 30 years ago, the FDIC and Federal Reserve granted an exception to banking regulations that allowed interest to be paid for charitable purposes to a third party such as the IOLTA program. Today, all 50 states, the District of Columbia and the Virgin Islands have established IOLTA programs; 46 jurisdictions require lawyers to deposit into IOLTA those client funds that cannot earn net interest for the client. The interest from these pooled accounts is paid to IOLTA programs for grants to provide free civil legal services to the poor, administration of justice and law-related education.