Attorney Escrow Accounts Are Now Insured
The President approved legislation that enables federally insured credit unions to offer insured IOLTA accounts. These are escrow accounts held by an attorney which contain clients’ funds. Since the money held in escrow by the attorney were the funds of the clients, the previous rule would only extend share insurance to those funds held by the clients who were members of the credit union. That requirement was impractical to implement and most attorneys, including me, held our escrow accounts at banks.
The new rule approved by this legislation which was backed by NCUA would extend share insurance coverage to attorney escrow accounts if the attorney is a member of the credit union. This ruling opens the way for credit unions to obtain an additional source of deposits and to further cement the relationship with attorney members. The most relevant portion of the new legislation is set forth below. NCUA expects to issue regulations to implement the change.
Coverage for Interest On Lawyers Trust Accounts (IOLTA) and other similar escrow accounts
(A) Pass-through insurance
The Administration shall provide pass-through share insurance for the deposits or shares of any interest on lawyers trust account (IOLTA) or other similar escrow accounts.
(B) Treatment of IOLTAs
(i) Treatment as escrow accounts. For share insurance purposes, IOLTAs are treated as escrow accounts.
(ii) Treatment as member accounts
IOLTAs and other similar escrow accounts are considered member accounts for purposes of paragraph (1), 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.
For purposes of this paragraph:
(i) Interest on lawyers trust account
The terms 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.
(ii) Pass-through share insurance
The term 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, in accordance with regulations issued by the Administration.
(D) Rule of construction
No provision of this paragraph shall be construed as authorizing an insured credit union to accept the deposits of an IOLTA or similar escrow account in an amount greater than such credit union is authorized to accept under any other provision of Federal or State law.
Originally posted December 19, 2014