In December, the Washington Supreme Court adopted a new provision to the Interest on Lawyer Trust Accounts (IOLTA) rule proposed by the Legal Foundation of Washington and the Washington State Bar Association. When fully implemented, the rule will yield significant additional financial resources for programs that provide civil legal aid to low-income people in Washington.
The new rule requires attorneys to establish and maintain IOLTA accounts only with financial institutions that pay IOLTA accounts the highest rates generally paid to other, similarly situated customers at that financial institution. This rule is consistent with a national trend requiring equitable treatment of IOLTA accounts with other similar depository instruments. Twenty-four states and Washington, D.C. have already amended their IOLTA rules to contain a comparability requirement similar to the rule adopted here.
In addition to its authority and responsibility to collect, administer and disburse IOLTA funds, the Legal Foundation of Washington (LFW) is also authorized to work to expand funding for civil legal aid services under its Supreme Court-approved charter. In recent years, LFW has actively exercised this authority by managing the Washington State Equal Justice Coalition (EJC), which educates public and governmental leaders about efforts to expand funding for civil legal aid.
LFW also serves as the administrative host for the Legal Aid for Washington (LAW) Fund and the Campaign for Equal Justice, as well as the Endowment for Equal Justice, which are statewide efforts dedicated to increasing private, charitable support for civil legal aid. In 2005, LFW and the Washington Supreme Court’s Access to Justice Board (ATJ Board) requested the Supreme Court amend Civil Rule 23 to direct 25 percent of residuals from class action lawsuits in state court to LFW. The Court approved this rule amendment, which has generated additional funding for civil legal aid.
The grants made by LFW are the primary source of discretionary funding to the more than 25 legal aid programs that make up Washington Alliance for Equal Justice. In making decisions about how to allocate the resources available to it, LFW is guided by the ATJ Board’s “Hallmarks of an Effective Legal Services Delivery System” (2004) and “State Plan for the Delivery of Civil Legal Services to Low Income People in Washington State” (revised May 2006). Over the past five years, LFW’s grant-making decisions have also been guided by the “Civil Legal Needs Study” published by the Supreme Court’s Task Force on Civil Equal Justice Funding (October 2003).
The Need and Rationale for Comparability
The degree to which low-income people who experience civil legal problems are forced to face the justice system without any help is staggering. The “Civil Legal Needs Study” documents that:
- Eighty-seven percent of low-income households in our state experience a civil legal problem each year. Almost nine out of 10 face their legal problems without any assistance.
- Low-income women and children experience a disproportionate number of unmet civil legal needs. Domestic violence victims experience the greatest number of civil legal problems.
- The most common civil legal needs are in areas involving basic human needs such as housing, personal safety, security and public safety. Many legal needs experienced by persons with disabilities and members of minority groups also involve concerns about differential treatment and discrimination.
- Legal assistance is the key to securing effective outcomes. Nearly two-thirds of those who secure legal assistance feel that they obtain a fair resolution to their legal problems, while only one-quarter of those who do not secure legal assistance are satisfied with the outcome of their problems.
- The lack of adequate legal assistance for those who are poor or vulnerable erodes public confidence in the fairness of the state’s civil justice system. Nearly three-quarters of those who do not secure legal assistance have negative attitudes toward the civil justice system.
Even in better times, IOLTA revenues lagged behind where they should be. The problem is that approved depository institutions historically have not paid market rates on IOLTA accounts. The rates paid on IOLTA accounts fall substantially below those of other similarly situated accounts.
Previously, only NOW accounts (interest-bearing checking accounts) were used for the deposit of IOLTA funds. In today’s banking landscape, this creates disparities because even IOLTA accounts, which — as pooled accounts — regularly carry very large balances, receive only basic checking (NOW) account interest rates from virtually every IOLTA depository.
In Washington, many banks routinely pay one-tenth of 1 percent (.10%) interest on IOLTA accounts, while at the same time paying 75 percent of the target federal funds rate — more than 10 times what is paid on IOLTA accounts — on other similarly sized accounts. Some banks have paid higher rates, but only out of their own goodwill. The new rule makes it clear that banks must pay comparable rates on comparable balances to participate in IOLTA.
The IOLTA rule, RPC 1.15A, simply states: (i) Trust accounts must be interest-bearing and allow withdrawals or transfers without any delay other than notice periods that are required by law or regulation.
In the absence of any requirement to pay more than a minimal level on interest-bearing accounts, it is not surprising that financial institutions did not automatically provide return on IOLTA accounts like they do on comparable accounts. Traditional efforts in Washington focused on voluntary measures to persuade banks to pay higher rates.
However, even with some banks paying acceptable interest rates with respect to the targeted federal funds rate, most financial institutions have chosen to maintain IOLTA accounts at substantially lower rates. The money that IOLTA funds have failed to earn is an “opportunity cost” that directly results in fewer civil legal aid services to vulnerable and low-income people in Washington.
What Does Comparability Mean?
The comparability rule requires lawyers to maintain IOLTA accounts at eligible financial institutions that treat pooled, interest-bearing trust accounts on an equal footing with other similarly sized demand accounts, i.e., comparability of treatment. The new rule offers financial institutions that maintain IOLTA accounts five different instruments with which to structure IOLTA accounts and meet the terms of comparability.
It also gives financial institutions the option of how to meet the comparable rate requirements — by establishing the IOLTA account as the comparable higher-rate product; by instead paying that rate on the existing IOLTA account; or by paying a “benchmark” percentage named in the rule. The rule also authorizes LFW to determine which institutions are successfully meeting the requirements of comparability and sets forth significant safety standards to ensure that pooled client funds are adequately protected.
Finally, the new rules shift responsibility for receipt and administration of trust account notification agreements from the WSBA Disciplinary Board to LFW. Previously, administrative functions related to the IOLTA program were performed by both LFW and WSBA. It is appropriate, in order to avoid duplication of effort and potential confusion, for LFW to maintain a master list of all authorized financial institutions.
The financial institutions will still be required to file overdraft notification agreements (though they will now be filed with LFW rather than the Disciplinary Board) and to report trust account overdrafts to WSBA, but the LFW will manage all of the clerical and administrative aspects of this process. This change will improve the administration of the IOLTA program with no perceptible drawbacks.
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Washington financial institutions have until March 1 to make any necessary changes to their IOLTA products. For complete text of the rule, please visit www.legalfoundation.org.
Caitlin Davis Carlson is the executive director of the Legal Foundation of Washington.
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