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IOLTA to benefit from increased FDIC protection

Attorneys need not be unduly concerned about the financial strength of the banks that hold their trust accounts – at least until December 2009.

On Nov. 21, the Federal Deposit Insurance Corp. approved regulations making non-interest bearing accounts an exception to the $250,000 limit on its coverage for deposits in a single institution.

The original proposal frightened proponents of legal aid because they feared that lawyers would switch their trust accounts from IOLTA accounts to non-interest bearing accounts because that would provide more protection for them and their clients.

However, the American Bar Association and such organizations as the National Association of IOLTA programs persuaded the FDIC staff and board that IOLTA accounts are the functional equivalent of non-interest bearing accounts because neither the attorneys nor their clients benefit from the interest.

In fact, some clients might prefer the insurance protection to the interest that would be available when the amount is large enough or held long enough that legal ethics generally would require a separate interest-bearing account.

The regulations are part of the FDIC’s Temporary Liquidity Guarantee Program, 12 CFR 370, designed to increase confidence in lenders. The rules, effective until the end of next year, and the report describing them are here. The discussion of IOLTA begins on page 44.

By Alan Cooper

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