The NCUA’s rule codifies the insurance coverage pursuant to the Insurance Parity Act for IOLTAs and other accounts that satisfy the definition of “other similar escrow accounts.” The Credit Union Share Insurance Fund Parity Act was passed in December 2014, and provides coverage to IOLTA and “other similar escrow accounts.” Credit unions raised many questions about what qualifies as an “other similar escrow account,” which this final rule also attempts to clarify. The final rule does not provide additional coverage to prepaid cards, but does for real estate escrow accounts, prepaid funeral accounts, as well as IOLTAs.
The Rule states that “NCUA also will continue to insure on a pass-through basis those prepaid card products and escrow accounts that are not similar to IOLTAs as it currently does based on the provisions of part 745, but will not afford those accounts enhanced coverage under the Insurance Parity Act.” (Emphasis added) Currently, if funds in a prepaid card program deposited in a federally insured credit union qualify as a share account that can be traced back to a specific owner in a specific dollar amount and the owner is a member of the credit union where the funds are kept, then those funds would be entitled to share insurance pursuant to the current terms and limits of part 745.
The Rule also changes the basis of membership for IOLTA accounts to be based on the attorney opening the account eligibility, rather than the clients of the attorney. The clients will no longer have to have additional individual accounts.
Deposit brokers and prepaid cards do not receive additional insurance eligibility. The NCUA also states that “a deposit broker serves a drastically different purpose than an attorney representing a client, and a brokered deposit placed in a depository institution to obtain a high investment yield also is drastically different from funds a client places in trust with its lawyer as part of their legal relationship.”
The Rule was passed by the NCUA on December 17, 2015 and will become effective 30 days after publication in the Federal Register.
- 745.14 Interest on lawyers trust accounts and other similar escrow accounts.
(a)
- Pass-through share insurance. The deposits or shares of any interest on lawyers trust account (IOLTA) or other similar escrow account in an insured credit union are insured on a “pass-through” basis, in the amount of up to the SMSIA for each client and principal on whose behalf funds are held in such accounts by either the attorney administering the IOLTA or the escrow agent administering a similar escrow account, in accordance with the other share insurance provisions of this part.
- Pass-through coverage will only be available if the recordkeeping requirements of §745.2(c)(1) of this part and the relationship disclosure requirements of §745.2(c)(2) of this part are satisfied. In the event those requirements are satisfied, funds attributable to each client and principal will be insured on a pass-through basis in whatever right and capacity the client or principal owns the funds. For example, an IOLTA or other similar escrow account must be titled as such and the underlying account records of the insured credit union must sufficiently indicate the existence of the relationship on which a claim for insurance is founded. The details of the relationship between the attorney or escrow agent and their clients and principals must be ascertainable from the records of the insured credit union or from records maintained, in good faith and in the regular course of business, by the attorney or the escrow agent administering the account. NCUA will determine, in its sole discretion, the sufficiency of these records for an IOLTA or other similar escrow account.
(b) Membership requirements and treatment of IOLTAs. For share insurance purposes, IOLTAs are treated as escrow accounts. IOLTAs and other similar escrow accounts are considered member accounts and eligible for pass-through share insurance if the attorney administering the IOLTA or the escrow agent administering the escrow account is a member of the insured credit union in which the funds are held. In this circumstance, the membership status of the clients or the principals is irrelevant.
(c) Definitions. For purposes of this section:
- Interest on lawyers trust account and IOLTA mean a system in which lawyers place certain client funds in interest-bearing or dividend-bearing accounts, with the interest or dividends then used to fund programs such as legal service organizations who provide services to clients in need.
- Other similar escrow account means an account where a licensed professional or other individual serving in a fiduciary capacity holds funds for the benefit of a client or principal as part of a transaction or business relationship. Examples of such accounts include, but are not limited to, real estate escrow accounts and prepaid funeral accounts.
- Pass-through share insurance means, with respect to IOLTAs and other similar escrow accounts, insurance coverage based on the interest of each person on whose behalf funds are held in such accounts by the attorney administering the IOLTA or the escrow agent administering a similar escrow account.
The terms “interest on lawyers trust account”, “IOLTA”, and “pass-through share insurance” are given the same meaning in this section as in 12 U.S.C. 1787(k)(5).
https://www.ncua.gov/About/Documents/Agenda%20Items/AG20151217Item2b.pdf
Washington State Requirements for Offering IOLTA Accounts:
Before opening IOLTA accounts, the Legal Foundation of Washington (LFW) must first certify the credit union as eligible to offer IOLTA accounts. A list of currently authorized financial institutions is available here. In order to be certified, the credit union must submit a completed Compliance Statement to the LFW. The Compliance Statement is also available on this page from the LFW.
The LWF has restrictions on fees and interest requirements for these accounts. Before offering these accounts, credit unions will want to:
- Review the limitations and requirements for these accounts before deciding if and what services they will offer, and
- Consider the time and cost involved for monthly reporting and submission to the LFW when establishing any maintenance fees.
Below are highlights regarding IOLTA accounts:
Account Establishment
IOLTA accounts must be set up using the tax ID number of the LFW: 91-1263533.
Limits on Interest and Fees (ELC 15.7(e)(1-5))
IOLTA accounts must earn interest comparable to other accounts offered with similar balance requirements. Alternatively, the credit union can pay the benchmark rate equal to 75% of the Federal Funds Target Rate as of the first business day of the month, or 0.75%, whichever is higher.
Reasonable account fees may only include per deposit charges, per check charges, a fee in lieu of minimum balances, sweep fees, and a reasonable IOLTA account administration fee. No service charges or fees other than the allowable, reasonable fees may be assessed against the interest or dividends on an IOLTA account. Any service charges or fees other than allowable reasonable fees must be the sole responsibility of, and may be charged to, the lawyer, law firm, LPO (Limited Practice Officer), or Closing Firm maintaining the IOLTA account. Fees or charges in excess of the interest or dividends earned on the account must not be deducted from interest or dividends earned on any other account or from the principal.
Monthly Reporting and Interest Payments (ELC 15.7 (e)(2))
Credit unions must report and submit interest paid on IOLTA accounts monthly to the Legal Foundation of Washington by the 15th of the following month. The remittance reports are filed electronically, and are also submitted along with payment to:
PO Box 84383
Seattle Terminal Annex
Seattle WA 98124-5683
The remittance reports include the name of the lawyer or law firm, the amount being remitted, the rate of interest applied, the balance used to compute the interest, and amount of service charges.
Overdrafts (ELC 15.4 & ELPOC 15.4)
The credit union must report any overdrafts on the IOLTA account within five business days to the LFW.
Tax Reporting
The attorney’s Request to Establish IOLTA Account form states that the LFW is a section 501(c)(3) charitable organization and a 1099 should not be completed for the account(s). Credit unions will want to verify this with their tax professionals and confirm that their computer system will comply.
CTRs on IOLTA accounts
The beneficiaries of deposits are the clients whose money is in the account. Thus, when completing a CTR for a cash deposit of over $10,000, all of the clients’ information should be obtained from the attorney. Many attorneys do not understand this requirement, and you may wish to disclose this at account opening in order to avoid potential conflicts if ever having to obtain this information.
From FIN-1989-R005:
No. 3. Dorothy Green, a partner at a law firm, makes a $ 50,000 cash deposit into the firm’s trust account. n1 The bank knows that this is a trust account. The $ 50,000 represents cash received from three clients.
n1 This type of account is sometimes called a trust account, attorney account or special account. It is an account established by an attorney into which commingled funds of clients may be deposited. It is not necessarily a “trust” in the legal sense of the term.
No. 3. Dorothy Green’s cash deposit of $ 50,000 into the law firm’s trust account clearly is being done on behalf of someone else. The bank should ask Ms. Green to identify the clients on whose behalf the transaction is being conducted. Because Ms. Green is acting both on behalf of her employer and the clients, the names of the three clients and the law firm should be included on the CTR filed by the bank.
Other links available from the LFW:
Frequently Asked Questions for Financial Institutions
Managing Client Trust Accounts
ELC 15.7 – TRUST ACCOUNTS AND THE LEGAL FOUNDATION OF WASHINGTON
(a) Legal Foundation of Washington. The Legal Foundation of Washington (Legal Foundation) was established by Order of the Supreme Court of Washington to administer distribution of Interest on Lawyer’s Trust Account (IOLTA) funds to civil legal aid programs.
(1) Administrative Responsibilities. The Legal Foundation is responsible for assessing the products and services offered by financial institutions operating in the state of Washington and determining whether such institutions meet the requirements of this rule, ELC 15.4, and ELPOC 15.4. The Legal Foundation must maintain a list of financial institutions authorized to establish client trust accounts and publish the list on a website maintained by the Legal Foundation for public information. The Legal Foundation must provide a copy of the list to any person upon request.
(2) Annual Report. The Legal Foundation must prepare an annual report to the Supreme Court of Washington that summarizes the Foundation’s income, grants and operating expenses, implementation of its corporate purposes, and any problems arising in the administration of the IOLTA program.
(b) Definitions. The following definitions apply to this rule:
(1) United States Government Securities. United States Government Securities are defined as direct obligations of the United States Government, or obligations issued or guaranteed as to principal and interest by the United States or any agency or instrumentality thereof, including United States Government-Sponsored Enterprises.
(2) Daily Financial Institution Repurchase Agreement. A daily financial institution repurchase agreement must be fully collateralized by United States Government Securities and may be established only with an authorized financial institution that is deemed to be “well capitalized” under applicable regulations of the Federal Deposit Insurance Corporation and the National Credit Union Association.
(3) Money Market Funds. A money market fund is an investment company registered under the Investment Company Act of 1940, as amended, that is regulated as a money market funder under Rules and Regulations adopted by the Securities and Exchange Commission pursuant to said Act, and at the time of the investment, has total assets of at least five hundred million dollars ($500,000,000). A money market fund must be comprised solely of United States Government Securities or investments fully collateralized by United States Government Securities.
(c) Authorized Financial Institutions. Any bank, savings bank, credit union, savings and loan association, or other financial institution that meets the following criteria is eligible to become an authorized financial institution under this rule:
(1) is insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration;
(2) is authorized by law to do business in Washington;
(3) complies with all requirements set forth in section (d) of this rule and in ELC 15.4; and
(4) if offering IOLTA accounts, complies with all requirements set forth in section (e) of this rule.
The Legal Foundation determines whether a financial institution is an authorized financial institution under this section. Upon a determination of compliance with all requirements of this rule and ELC 15.4, the Legal Foundation must list a financial institution as an authorized financial institution under section (a)(1). At any time, the Legal Foundation may request that a listed financial institution establish or certify compliance with the requirements of this rule or ELC 15.4. The Legal Foundation may remove a financial institution from the list of authorized financial institutions upon a determination that the financial institution is not in compliance.
(d) Requirements of All Trust Accounts. All trust accounts established pursuant to RPC 1.15A(i) or LPORPC 1.12A(h) must be insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration up to the limit established by law for those types of accounts or be backed by United States Government Securities. Trust account funds must not be placed in stocks, bonds, mutual funds that invest in stock or bonds, or similar uninsured investments.
(e) IOLTA Accounts. To qualify for Legal Foundation approval as an authorized financial institution offering IOLTA accounts, in addition to meeting all other requirements set forth in this Rule, a financial institution must comply with the requirements set forth in this section.
(1) Interest Comparability. For accounts established pursuant to RPC 1.15A, authorized financial institutions must pay the highest interest rate generally available from the institutions to its non- IOLTA account customers when IOLTA accounts meet or exceed the same minimum balance or other account eligibility qualifications, if any. In determining the highest interest rate generally available to its non-IOLTA customers, authorized financial institutions may consider factors, in addition to the IOLTA account balance, customarily considered by the institution when setting interest rates for its customers, provided that such factors do not discriminate between IOLTA accounts and accounts of non-IOLTA customers and that these factors do not include that the account is an IOLTA account. An authorized financial institution may satisfy these comparability requirements by selecting one of the following options:
(i) Establish the IOLTA account as the comparable interest-paying product; or
(ii) Pay the comparable interest rate on the IOLTA checking account in lieu of actually establishing the comparable interest-paying product; or
(iii) Pay a rate on IOLTA equal to 75% of the Federal Funds Targeted Rate as of the first business day of the month or IOLTA remitting period, or .75%, whichever is higher, and which rate is deemed to be already net of allowable reasonable service charges or fees.
(2) Remit Interest to Legal Foundation of Washington. Authorized financial institutions must remit the interest accruing on all IOLTA accounts, net of reasonable account fees, to the Legal Foundation monthly, on a report form prescribed by the Legal Foundation. At a minimum, the report must show details about the account, including but not limited to the name of the lawyer, law firm, LPO, or Closing Firm for whom the remittance is sent, the rate of interest applied, the amount of service charges deducted, if any, and the balance used to compute the interest. Interest must be calculated on the average monthly balance in the account, or as otherwise computed in accordance with applicable state and federal regulations and the institution’s standard accounting practice for non-IOLTA customers. The financial institution must notify each lawyer, law firm, LPO, or Closing Firm of the amount of interest remitted to the Legal Foundation on a monthly basis on the account statement or other written report.
(3) Reasonable account fees. Reasonable account fees may only include per deposit charges, per check charges, a fee in lieu of minimum balances, sweep fees, FDIC insurance fees, and a reasonable IOLTA account administration fee. No service charges or fees other than the allowable, reasonable fees may be assessed against the interest or dividends on an IOLTA account. Any service charges or fees other than allowable reasonable fees must be the sole responsibility of, and may be charged to, the lawyer, law firm, LPO, or Closing Firm maintaining the IOLTA account. Fees or charges in excess of the interest or dividends earned on the account must not be deducted from interest or dividends earned on any other account or from the principal.
(4) Comparable Accounts. Subject to the requirements set forth in sections (d) and (e), an IOLTA account may be established as:
(i) A business checking account with an automated investment feature, such as a daily bank repurchase agreement or a money market fund; or
(ii) A checking account paying preferred interest rates, such as a money market or indexed rates; or
(iii) A government interest-bearing checking account such as an account used for municipal deposits; or
(iv) An interest-bearing checking account such as a negotiable order of withdrawal (NOW) account, business checking account with interest; or
(v) Any other suitable interest-bearing product offered by the authorized financial institution to its non-IOLTA customers.
(5) Nothing in this rule precludes an authorized financial institution from paying an interest rate higher than described above or electing to waive any service charges or fees on IOLTA accounts.
ELC 15.4 – TRUST ACCOUNT OVERDRAFT NOTIFICATION
(a) Overdraft Notification Agreement Required. To be authorized as a depository for lawyer trust accounts referred to in RPC 1.15A(i) or LPO trust accounts referred to in LPO RPC 1.12A(i), a financial institution, bank, credit union, savings bank, or savings and loan association must file with the Legal Foundation of Washington an agreement, in a form provided by the Washington State Bar Association, to report to the Washington State Bar Association if any properly payable instrument is presented against a lawyer, LPO or closing firm trust account containing insufficient funds, whether or not the instrument is honored. The agreement must apply to all branches of the financial institution and cannot be canceled except on 30 days’ notice in writing to the Legal Foundation of Washington. The Legal Foundation of Washington must provide copies of signed agreements and notices of cancellation to the Washington State Bar Association.
(b) Overdraft Reports.
(1) The overdraft notification agreement must provide that all reports made by the financial institution must contain the following information:
(A) the identity of the financial institution;
(B) the identity of the (1) the lawyer or law firm, or (2) the limited practice officer or closing firm;
(C) the account number; and
(D) either:
(i) the amount of overdraft and date created; or
(ii) the amount of the returned instrument(s) and the date returned.
(2) The financial institution must provide the information required by the notification agreement within five banking days of the date the item(s) was paid or returned unpaid.
(c) Costs. Nothing in these rules precludes a financial institution from charging a particular lawyer or law firm for the reasonable cost of producing the reports and records required by this rule, but those charges may not be a transaction cost charged against funds payable to the Legal Foundation of Washington under RPC 1.15A(i)(1) and ELC 15.7(e).
(d) Notification by Lawyer. Every lawyer who receives notification that any instrument presented against his or her trust account was presented against insufficient funds, whether or not the instrument was honored, must promptly notify the Office of Disciplinary Counsel of the Association of the information required by section (b). The lawyer must include a full explanation of the cause of the overdraft.
RULES FOR ENFORCEMENT OF LIMITED PRACTICE OFFICER CONDUCT (ELPOC)
TITLE 1 – SCOPE, JURISDICTION, AND DEFINITIONS
ELPOC 15.4 TRUST ACCOUNT OVERDRAFT NOTIFICATION
(a) Overdraft Notification Agreement Required. To be authorized as a depository for LPO trust accounts, a bank, credit union, savings and loan association, or qualified public depository must file with the Legal Foundation of Washington (Legal Foundation) an agreement as provided for under ELC 15.4(a) and (b). The Legal Foundation maintains a list of financial institutions authorized to establish LPO trust accounts and publishes the list on a website maintained by the Legal Foundation for public information.
(b) Costs. Nothing in these rules precludes a financial institution from charging a particular LPO or Closing Firm for the reasonable cost of producing the reports and records required by this rule, but those charges may not be a transaction cost charged against funds payable to the Legal Foundation of Washington under LPORPC 1.12A(i)(1).
(c) Notification by LPO. Every LPO or Closing Firm who receives notification that any instrument presented against the LPO’s or Closing Firm’s trust account was presented against insufficient funds, whether or not the instrument was honored, must promptly notify the Clerk of the Limited Practice Board of the following information:
(A) the identity of the financial institution;
(B) the identity of the LPO or Closing Firm;
(C) the account number; and
(D) either:
(i) the amount of overdraft and date created; or
(ii) the amount of the returned instrument(s) and the date returned. The LPO or Closing Firm must include a full explanation of the cause of the overdraft.
