Maryland Bar Bulletin
Publications : Bar Bulletin : April 2008

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On April 1, the new IOLTA Comparability Rule, requiring banks participating in IOLTA to provide the same rates of return to their IOLTA customers as they do to their commercial customers, took effect. Last December, the Court of Appeals of Maryland amended Rule 16-610 of the Maryland Rules of Procedure, governing attorney trust accounts, “to ensure that financial institutions that participate in the IOLTA program pay interest rates on IOLTA deposits comparable to other similarly situated accounts.” This amended Rule – the new Comparability Rule – was endorsed by MSBA’s Board of Governors in April 2007.

MSBA supported this new Rule as it will generate additional funding for civil legal services to the state’s poor. Over the years, the Association has consistently supported Interest on Lawyer Trust Accounts (IOLTA) measures because they fund civil legal services to Maryland’s indigent. MSBA has backed IOLTA-friendly legislation and court rules to enhance revenue for the poor and encouraged its members to conduct law firm businesses at state banks offering the highest interest rates for IOLTA accounts. In 2002, MSBA, in conjunction with the Maryland Legal Services Corporation (MLSC), created an Honor Roll to recognize financial institutions that support IOLTA with higher-than-required interest rates.

IOLTA Comparability Rules are a recent innovation in IOLTA programs across the country; 18 states have enacted a Comparability Rule in recent years. Maryland’s new Comparability Rule, patterned after those of other states, requires participating financial institutions to pay interest rates comparable to other similarly situated accounts. The new Rule was designed to ensure that fair rates of return are generated on these deposits, used to help fund legal aid for the poor. “The Rule is about fairness,” asserts MLSC Executive Director Susan Erlichman.

“A Maryland IOLTA Comparability Rule will ensure that Maryland attorneys earn no less on IOLTA accounts than the rate of return generally paid to the financial institution’s non-IOLTA customers on comparable accounts,” she declares. “This new Rule should enhance IOLTA revenue and improve the ability of legal services providers to meet the legal needs of low-income Marylanders.” IOLTA funds are distributed in the form of grants to nonprofit organizations throughout the state to help Marylanders in critical matters such as child custody, domestic violence, housing, employment, public benefits, education, health and other important civil legal issues.

The new Comparability Rule will ultimately enhance the role MSBA/MLSC’s Honor Roll plays in generating IOLTA revenue earmarked for the poor. The Honor Roll lists and commends financial institutions which surpass IOLTA eligibility requirements and pay higher interest rates on IOLTA accounts. These members go above and beyond the rule’s requirements in their treatment of IOLTA accounts to help ensure that low-income Marylanders have access to critically-needed legal aid.

“In light of the new Rule, MSBA and MLSC have revised the Honor Roll, and its members have agreed to pay a net yield of 65 percent or more of the federal funds target rate on IOLTA deposits,” states Erlichman, praising these financial institutions for their support (see below). “These Honor Roll banks demonstrate in a very concrete way their support for the IOLTA Program and their commitment to access to legal aid for all Marylanders.”

Background

IOLTA was actually created by the Maryland General Assembly in 1982, and remains one of the state’s primary funding sources for civil legal services for Maryland’s low-income citizens today. At the time of the program’s inception, interest rates paid on IOLTA accounts averaged approximately 5.5 percent. When interest rates began slipping, IOLTA account rates also dropped, causing painful cuts in legal services funding for the indigent.

In mid-2003, short-term federal funds rate dropped to an unprecedented low of 1 percent along with rates on IOLTA accounts. The net yield paid on IOLTA deposits at fell to approximately .5 percent, and revenue dropped precipitously. In 2004, the Maryland General Assembly passed an increase in court filing fee surcharges to help fund civil legal services. This averted a crisis.

When the interest rate environment began to turn around at the end of 2004, the Federal Reserve Board steadily raised its short-term target rate and it hit 4.75 percent – its highest level in five years. Yet, Maryland IOLTA rates did not bounce back, remaining at only .59 percent. In 2006, when MSBA issued an attorney alert asking Maryland attorneys to encourage their banks to raise IOLTA interest rates and support legal services to the poor, many attorneys complied. In the end, several banks raised their IOLTA interest rates, but most did not.

Now, with the interest rates significantly dropping, IOLTA revenue is once again suffering the consequences of a troubled economy, so even with the new Comparability Rule, the need for the MSBA and MLSC Honor Roll is greatly enhanced. “The Comparability Rule will ultimately enhance our ability to fund legal services for the poor,” Erlichman emphasizes, “but IOLTA revenue will always be subject to the vagaries of the economy. This underscores the importance of the MSBA/MLSC Honor Roll and the need for all attorneys to support the financial institutions who are members.”

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Publications : Bar Bulletin: April 2008

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