IOLTA Program Changes: Information for Michigan Financial Institutions

For 15 years Michigan bankers and lawyers have participated in an important partnership. Through the Interest on Lawyers’ Trust Accounts (IOLTA) program, over $18 million has been distributed for law-related charitable projects that improve the administration of justice and support civil legal aid for low-income families. For example, nonprofit legal aid programs that receive IOLTA grants resolve critical legal problems every day, such as protecting people from domestic violence, assisting veterans and others who need access to healthcare, keeping seniors from being victimized by unscrupulous contractors, ensuring support for children, and addressing other needs. Many banks have received local and statewide recognition for waiving all IOLTA fees to make more grant dollars available.

On October 18, 2005, the Michigan Supreme Court issued amendments to the IOLTA rule which primarily update the interest or dividend rate provisions under Rule 1.15 of the Michigan Rules of Professional Conduct to allow higher rate products for qualifying IOLTA accounts. The 1990 IOLTA rule provided for interest rate parity for similar accounts, which pegged IOLTA to low-rate interest checking accounts, even when balances exceeded minimum requirements for higher rate products. The rule change requires higher rate options for qualifying IOLTA accounts, but financial institutions do not have to create new products if the higher rate products are not already available to their other customers. A number of IOLTA programs in other states have similar rate parity provisions. The Court also approved an Attorney IOLTA Guidelines Brochure which further defines the changes, including eligible financial institutions and permissible products for IOLTA accounts.

PLEASE NOTE: Most IOLTA accounts will not be affected, so not all banks will be affected by the rule changes. Institutions which will be affected hold high balance IOLTA accounts (generally those with balances consistently above $100,000—less than 10% of IOLTA accounts) and/or pay checking account interest rates based on balance size. Banks do not have to create new products if these are not already offered to other customers.

Participation in IOLTA remains voluntary for financial institutions, but a lawyer may not keep an IOLTA account at a financial institution that does not participate or meet IOLTA requirements.

Help for Financial Institutions. Institutions with accounts which may be affected by the amendments will be contacted by the Foundation as soon as feasible. The Foundation will work with financial institutions to facilitate implementation of the new requirements and asks that financial institutions contact the Foundation with questions before taking action. The Foundation also invites requests for help with implementation, including technical assistance or other support.

Help for Attorneys. The Foundation's work with financial institutions can facilitate smoother implementation and avoid frantic calls from law firms to your branch personnel. The Foundation has asked lawyers to call the Foundation with questions before taking action. Financial institutions are encouraged to refer questions from attorneys to the Foundation at 800-968-6723.

Documents Required. IOLTA forms currently on file for existing accounts remain in effect. For affected accounts, the Foundation will work with banks when additional forms or standard documents for higher rate products may need to be signed. A new Notice to Eligible Financial Institutions Form for new or changed accounts is available on the Foundation's web site. A new remittance form providing the required information regarding account balances and interest and dividend rates will be used; a number of banks are providing this information already. An updated IOLTA Financial Institutions Handbook is also available.

Permits the use of government money market funds for IOLTA accounts. The rule authorizes the use of sweep options for IOLTA accounts, where appropriate. However, the use of sweep options for IOLTA accounts is not required if the financial institution does not offer sweep accounts to other customers or the institution chooses to simply pay the sweep or other applicable product rates (e.g., through the use of tiered rates) on existing IOLTA interest-bearing accounts instead of setting up sweep products for IOLTA accounts. Benefits of this approach may include ease of administration and the option to keep IOLTA funds on their bank's operations balance sheet. Due to minimum balance requirements the sweep option is only available to accounts identified by the eligible institution and the Michigan State Bar Foundation.

Defines institutions that may hold IOLTA funds as banks, savings and loan associations, or open-end investment companies that pay qualifying IOLTA accounts the highest interest rates generally available at their own institution to non-IOLTA customers with comparable balances.

More clearly defines allowable fees which may be assessed against the interest or dividends earned on an IOLTA account; any other fees are the responsibility of the lawyer account holder. Fees which may be deducted from interest or dividends on an IOLTA account include per check charges, per deposit charges, a fee in lieu of a minimum balance, federal deposit insurance fees, sweep fees and a reasonable administrative or maintenance fee. However, financial institutions are encouraged to continue their Honor Roll status, which includes frequent publicity to Michigan lawyers noting those banks that waive all fees on IOLTA accounts to provide more funding for the IOLTA charitable purposes. To further acknowledge such contributions (waiving all fees or voluntarily providing a higher net yield on IOLTA accounts), the Foundation can provide sample or customized information for inclusion in the bank's Community Reinvestment Act (CRA) Statement and will assure other public recognition as appropriate.

Lists remittance information to be reported to the Michigan State Bar Foundation and provides for a report to the lawyer or law firm in accordance with normal procedures for reporting to depositors. In addition to the account number, the information to be reported to the Foundation (shown on the revised IOLTA Remittance Form) includes the name of the lawyer or law firm, the amount of the remittance attributable to each account maintained by each lawyer or law firm, the rate and type of interest or dividends applied, the amount of interest or dividends earned, the amount and type of fees deducted, if any, and the average account balance for the period for which the report is made.

MORE INFORMATION OR QUESTIONS: See www.msbf.org/iolta, email questions to iolta@msbf.org or call the Foundation at 800-968-6723.