Karen Sloan / Staff reporter
November 14, 2008

Several bar associations and legal groups are scrambling to close a loophole in new Federal Deposit Insurance Corporation regulations that they fear will create headaches for attorneys and threaten funding for legal aid programs across the country.

Attorneys have been lobbying FDIC leaders and have written letters urging the agency to modify the rules of its new Temporary Liquidity Guarantee Program (TLGP) to ensure Interest on Lawyer Trust Accounts (IOLTAs) are fully insured by the government. The critics say the current FDIC rules turn IOLTAs into a liability, and make them less-attractive options for attorneys.

That's bad news for legal aid programs, which rely heavily on interest from IOLTAs to pay the bills.

In 2007, IOLTA programs generated more than $371 million nationwide. Much of that funding went to programs that offer legal assistance to low-income people.

The interim TLGP rules were established in October, and the FDIC is in the process of finalizing them.

"We've made this our top priority over the past several weeks," said Julia Wilson, the executive director of the Public Interest Clearinghouse and the Legal Aid Association of California. "It has been a scramble on our end, but all [97 legal service programs the PIC works with] would be adversely affected if the interim rules take effect." In an effort to bolster confidence in banks amid the financial crisis, the FDIC recently increased the amount of insurance on interest-bearing bank accounts to $250,000.

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