Texas Supreme Court Advisory
January 13, 2009
Contact: Osler McCarthy, staff attorney for public information, 512.463.1441
Court Orders New Calculation for Interest on IOLTA Accounts, Amends Rule 7 for Access to Justice Foundation
The Texas Supreme Court amended rules Tuesday that govern interest on lawyer-trust accounts to battle dramatically declining interest income that helps finance state legal-assistance programs.
In 2006 the Court required banks holding Interest on Lawyer Trust Accounts (IOLTA) to pay comparable rates to those accounts as they do for similar interest-bearing accounts. Among the alternatives to achieve that, banks could utilize a "safe harbor" that pegged interest to the Federal Reserve Bank's rate for overnight loans among banks.
But the Federal Reserve Bank's Federal Funds Transfer Rate - one benchmark by which banks may pay interest on lawyer-trust accounts - is now set as a range from one-quarter of 1 percent to zero. "Because the federal overnight bank-loan 'rate' is no longer a rate but a range, it no longer provides a reasonable benchmark for comparability," said Justice Harriet O'Neill, the Court's liaison to the Texas Access to Justice Foundation. The Court created the foundation to raise money for legal-assistance programs and to supervise its distribution among legal-aid agencies across Texas. The amended rule makes the benchmark rate the higher of 65 percent of the federal transfer rate, or 65-hundreds of 1 percent (0.65), for banks that choose the safe-harbor option.
"The rule as amended also affords the Foundation flexibility to determine the appropriate index periodically, based on overall comparable rates in Texas," Justice O'Neill said. "This will minimize the need for further rule amendments as market conditions change."
Revenue from the lawyer-trust accounts has fallen from $20 million in 2007, to slightly more than $12 million last year, to projected revenue this year of $1.5 million without the amendment. Justice O'Neill predicted the amended benchmark calculation will raise this year's projected yield to $3 million, still far below what is necessary to meet the increasing needs.
"Without the change," she said, "the money we distribute to help the poor with their legal problems would cover no more than overhead. And in this economy, when more and more clients face foreclosures, fallout from the hurricanes, and other hardships that may demand legal help, this rule change is a slight but needed boost."