IOLA “Comparability” Regulations Proposed

June 1, 2007

Author: Anne Erickson

Proposed changes to the IOLA regulations could result in a $45 million infusion into legal services in New York State, restoring the system to its early 1990s capacity.

In announcing the proposed changes, Governor Eliot Spitzer said the increase in revenue “will provide New Yorkers with greater access to civil legal services.  With IOLA, New York has attempted to make up for the lack of federal funds for necessary civil legal services, and yet programs have remained under-funded.”

The proposed regulations come on the heels of the Governor’s first state budget in which he worked with Legislative leaders to increase state funding for civil  legal services.  Cut significantly after 9/11 and pretty much frozen since then, New York’s state funding for legal services was among the lowest in the country on a per poor person basis.

As noted by Assembly Judiciary Committee Chair Helene Weinstein, “for more than a decade the Assembly has stood alone in the struggle to ensure access to critical legal services for low income New Yorkers….  It is a refreshing change to have a partner like Gov. Spitzer who believes that the words ‘liberty and justice for all’ should have meaning for all New Yorkers.”

Commending the Governor for his leadership in these efforts, IOLA Executive Director Lorna Blake noted that payments to IOLA for civil legal assistance should increase several times over.

Leadership in the New York State Bar Association, long a staunch supporter of civil legal services and one of the driving forces behind the creation of IOLA in New York also applauded the governor.  “Access to justice for all, not just those who can afford it, has been and will continue to be a key Association priority,” said Kathryn Grant Madigan, President Elect of the Bar.

Following months of review, analysis and investigation into other states’ practices, the IOLA Board recently voted to amend its regulations as they relate to the interest rates paid on IOLA accounts.  IOLA – Interest on Lawyer Account – is the process through which lawyers and law firms place client funds that are in small amounts or will be held for short periods of time into pooled accounts.  The interest from these IOLA accounts is combined into a special fiduciary or trust fund and is used to support the delivery of civil legal services.

The IOLA concept was created in the early 1980’s and is now part of the core funding for civil legal services in every state across the country.  Since its inception, IOLA directors and trustees, state bar associations and state policy makers have worked with the banking industry to ensure that IOLA accounts generated the best possible returns in order to provide the greatest public good.

In recent years, the national legal services and bar communities have been frustrated by the increasingly low interest rates paid on IOLA accounts relative to other accounts.  Pegged to checking or NOW account rates, the interest paid on IOLA accounts, has lagged considerably behind the rates paid on other similar accounts.  Over the past several years, states have begun to work with banks to ensure “comparable” rates – or “interest rate comparability.”

As noted by Jane E. Curran, a member of the American Bar Association’s Commission on IOLTA[1] and long time director the Florida Bar Foundation, “Interest rate comparability for IOLTA accounts may seem a jumble of vague concepts, but the result is clear.  First embraced in Alabama, Florida and Ohio in the early 2000s, comparability is yielding significant increases in IOLTA revenue.”[2]

As of late 2006, Alabama, Connecticut, Florida, Massachusetts, Michigan, Mississippi, New Jersey and Ohio have all incorporated “interest rate comparability” into their IOLA rules, statutes or regulatory guidelines.

The New York effort, jumped-started by Governor Eliot Spitzer who has taken an strong leadership role in expanding access to justice in his first year in office, is focused on amending the IOLA regulations.  The proposed amendments, announced in the May 30th State Register, are currently in the 45 day public comment period which ends July 16.

Prior to the publication of the regulatory changes, the Governor, his key policy staff and key IOLA staff met with a number of the leading banks in New York State to urge their early and voluntary compliance with the new standards.  To its credit, Chase Bank – the largest IOLA participating bank - led the way, pledging to adopt the new standards voluntarily prior to their effective date.

The Changes

While the long-standing IOLA regulations required banking institutions to pay “not less than the rate paid by the banking institution on similar accounts,” as a practical matter banks would point to low interest checking accounts or passbook savings accounts as “similar” accounts.  This may have made sense when IOLA was established in New York in 1983, but clearly the banking industry and its products have changed dramatically in the ensuing 27 years.

The variations in products and interest rates are significant.  Current rates offered on IOLA accounts in New York range from a high of 3.6% to a low of 0.2%.[3]  According to the impact statements accompanying the proposed regulations, the weighted average interest paid on IOLA accounts currently stands 0.57%.  In contrast, some of the same banking institutions paying less than 1% on IOLA accounts are aggressively offering rates of 4% and 5% to their other banking customers.

While IOLA cannot regulate banks or dictate the interest offered on any product, it can determine which banks are eligible to hold IOLA accounts.  The new regulations would deem a bank “eligible” to hold IOLA accounts if it complies with the regulations and is approved by the IOLA Board of Trustees.  To be considered eligible, the banking institution must agree to pay “the highest yield available… to its best customers… on similarly-sized accounts maintained at that institution.”  The regulations then define the various types of accounts that might be offered by the banking institution.

Given that an estimated $3.1 billion are currently held in IOLA accounts in New York State, the banking industry will presumably have every incentive to remain eligible to hold these accounts.

The Impact

According to estimates from IOLA and the Governor’s office, this regulatory change and the resulting adjustment to “comparable” rates paid on IOLA accounts could generate between $45 million and $55 million in new funding for civil legal services.

This would put New York well on its way to restoring the capacity of the delivery system to its early 1990s level and allow it to meet more of the growing legal needs of the poor.

Indeed, it was ten years ago that the Legal Services Project created by Chief Judge Judith Kaye estimated that $40 million in a permanent and dedicated funding stream was needed annually to meet the basic civil legal needs of eligible New Yorkers.  According to the report issued by the Project, “[a]gainst the need and the principles at stake, $40 million is a small down payment toward access to justice, and obtaining a substantial measure of justice is a bargain at this price.”

Adjusting that $40 million target for inflation and recognizing the growth in poverty and the increasing legal needs of the poor, advocates have urged the state to secure an additional $50 million in funding for legal services.  And, they have noted, this infusion would simply restore the community to the capacity it had in the early 1990s before interest rates in general took a nose dive and the federal government cut back dramatically on its investment in legal services.

This restoration has been true in the other states that took the lead on “interest rate comparability.”  Florida, for example, saw an increase in its IOTA funds from $22.7 million in 2004-05 to $67.3 million in 2005-06 according to the American Bar Association.  The first use of the new funds was to restore cuts of more than 30% the Florida legal services programs had suffered since the late 1990s.

“A combination of too many years of static funding levels, increased numbers of people living in poverty and gnawing inflation mean, in effect, that the sudden influx of cash brings little more than parity with the highest level of IOL/TA funding back in the early 1990’s,” notes Ms. Curran.[4]

The Need

In New York as in the rest of the country, IOLA funding supports the delivery of civil legal services to those in need.  Despite the best efforts of the community to increase funding and expand access to justice, every indication is that New York is meeting – at best – 20% of the legal needs of the poor.[5]

Compounding this problem is the growth in the number of people living in poverty, along with the increasing complexity in the laws, rules and regulations that govern the services these individuals so desperately need.

Indeed, access to justice touches on the most basic of needs and the most fundamental rights:

• The elderly may have a “right” to appeal a denial of their prescription drugs under the massively confusing Medicare Part D program but no one to help them do so;
• A young mother struggling to hold onto her new job may have a “right” to challenge denial of her child care assistance but she has neither the means nor ability to do so;
• The victim of domestic violence desperately seeking to free herself from an abuser may have special protections afforded under law but these protections are meaningless if she cannot afford an attorney to help secure them;
• The disabled adult, confused and panicked over the termination of his health benefits, has a “right” to appeal his denial but without access to legal assistance may have no way to exercise that right.

As Chief Judge Kaye wrote in creating the Legal Services Project in 1997:

“A justice system that allows disparities in justice based on the ability to pay is inconsistent with a fundamental principle of our free democratic society – equal justice for all.”

With these simple but powerful changes to the IOLA regulations, New York will significantly strengthen the legal services delivery system and further ensure that the inability to pay is not a barrier to justice.

Footnotes

1  Most states use the term Interest on Lawyer Trust Accounts, hence IOLTA.  New York’s program is Interest on Lawyer Account or IOLA.

2  A New Frontier for IOLTA:  Interest Rate Comparability, Dialogue/Summer 2006.

3  See: www.iola.org rates are noted by banking institution as of March 1, 2007.

4  Expressing Their Interest, ABA Journal, June 2007.

5  Documenting the Justice Gap, Legal Services Corporation, September 2005, http://tinyurl.com/2a76oh.