Interest on lawyers’ trust accounts (IOLTA) is an innovative way to increase access to justice for individuals living in poverty. The legal community, in partnership with financial institutions, can help increase this significant source of funding for civil legal services programs. Nationally, more than 90% of grants awarded by IOLTA programs support legal aid offices and pro bono programs.1 Without IOLTA funding, many low-income families would have nowhere to turn for help with civil legal needs.
The Michigan State Bar Foundation (MSBF) was established in 1947 and for the first 40 years, it supported many worthwhile projects including judicial conferences, state law revision committees, jury instructions, and teacher training.2 Civil legal aid for low-income individuals became a focus for the foundation when longtime access to justice leader and trustee John Cummiskey suggested a way to increase funding for the network of legal aid organizations throughout Michigan.3 In 1990, the Michigan Supreme Court adopted mandatory IOLTA and designated the Michigan State Bar Foundation to administer the program.4
Annual IOLTA grants from the foundation strengthened the legal aid delivery system through more stable annual funding which served to attract other local or philanthropic funds to the mix. In 1994, the Michigan Legislature recognized the foundation’s central role in supporting civil legal aid in the state and assigned to it administration of filing fee funds to be distributed annually to legal aid programs.5 In 2020, as part of the statewide eviction diversion program established by the Michigan State Housing Development Authority, the foundation began administering legal aid grants for representing tenants.6 The foundation also administers the Access to Justice Campaign.7
HISTORY OF IOLTA
The idea for IOLTA accounts was developed in Scotland after a legal challenge to the practice of solicitors keeping money they were holding on behalf of clients in a separate account from which the solicitor kept the interest.8 The House of Lords determined that the interest did not belong to the lawyer,9 and common law jurisdictions started exploring alternatives. In 1965, Canadian lawyer George Reilly wrote an article suggesting that a foundation be formed and that IOLTA funds be used to support legal aid.10 In 1967, Australian lawyers created the Law Foundation of New South Wales to receive IOLTA interest and use it for legal aid, education, and research.11 In 1969, the Law Foundation of British Columbia became North America’s first IOLTA program.12 By 1986, foundations had formed in all other Canadian jurisdictions, all by statute and supported by the legal profession.13
In 1978, Florida became the first state to adopt IOLTA as a result of the leadership of state Supreme Court Chief Justice Arthur England.14 England learned of the British Columbia IOLTA program from a former colleague in Vancouver. After researching that program, England proposed to the Florida Bar adopting a program funded by interest on lawyers’ trust accounts. England wrote the opinion approving creation of a program to generate interest on lawyers’ trust accounts and designated the Florida Bar Foundation as program administrator.15 The program started operations in 1981.16
The American Bar Association established its Commission on IOLTA in 1986.17 Commission members, including England, led the effort, meeting with state supreme court justices, legislators, bar association presidents, and bar foundation staff to explain the concept and help implement IOLTA programs.18 That same year, the National Association of IOLTA Programs (NAIP) was created to enhance legal services and access to justice for low-income and vulnerable individuals through the growth and development of IOLTA programs as effective grant-making organizations.19 NAIP and the commission have worked closely since their inception, serving as the central source of critical information and expertise essential to the effective management of IOLTA programs.
By the early 1990s, most states, the District of Columbia, and the U.S. Virgin Islands had developed IOLTA programs.20 Since 2013, 19 programs have converted to mandatory IOLTA in an effort to increase revenue.21 All but six of the 53 IOLTA statutes in the U.S. require lawyers holding client funds to participate in IOLTA.22
ONGOING REVENUE ENHANCEMENT STRATEGIES
Because revenue is subject to fluctuation due to interest rate changes and because there is a significant unmet need for civil legal aid, it is imperative that IOLTA programs seek innovative ways to enhance revenue. Virtually every IOLTA program, including Michigan’s, has negotiated with participating financial institutions to reduce or waive service fees or charges on IOLTA accounts,23 and many require that financial institutions pay the highest interest rate or dividend generally available to its customers when IOLTA accounts meet the same minimum balance or other qualifications.24
PARTNERSHIP WITH FINANCIAL INSTITUTIONS
Many states have implemented programs to recognize financial institutions that go above and beyond comparability requirements and pay higher interest rates. Financial institutions may choose to participate in these programs and pay higher rates for a variety of reasons including attracting new customers from the legal community and earning credit through the Community Reinvestment Act, which encourages financial institutions to serve low- to moderate-income individuals.25 Since IOLTA revenue primarily funds civil legal aid programs and supports projects that improve administration of justice, there is a direct correlation between the purpose of the Community Reinvestment Act and the services legal aid organizations provide.
Based on successful models from other states, the Michigan State Bar Foundation in 2018 launched its Leadership Bank program.26 Each state sets a threshold for participation in its program based on the market value in their specific region. Initially, program eligibility was set at two levels — a net yield of 75% and a net yield of 60% of the effective federal funds target rate.27 The Bank of Ann Arbor and CIBC joined the Leadership Bank program, and a large bank significantly increased interest paid on IOLTA accounts but chose not to be recognized.28 The increase in interest paid by these financial institutions resulted in a 61% increase in IOLTA revenue for the 2019 fiscal year.29
In March 2020, the Federal Reserve cut its target for the federal funds rate by 1.5%, bringing it down to a range of 0% to 0.25%.30 Based on this drastic cut, the MSBF modified its program and now recognizes financial institutions that agree to waive all fees on IOLTA accounts and pay a flat-rate net yield of either 0.5% or 0.75% of the effective federal funds target rate.30 The foundation tracks net weighted interest rate paid by all financial institutions participating and all three banks that committed to paying higher rates have continued to do so. It has been a difficult year to approach new financial institutions to participate in the program, but the foundation plans to continue with outreach.
BANKING ON JUSTICE
The foundation recently launched its Banking on Justice campaign to encourage the legal community to hold IOLTA accounts with financial institutions that are part of the Leadership Bank Program or pay higher interest on IOLTA accounts.31 Interest rates on IOLTA accounts vary between 0.01% and 1% and most financial institutions waive fees.32 Attorneys may not notice when rates are low because earned interest is paid directly to the foundation.
Based on experiences from other states that have implemented similar efforts, changing the culture in Michigan and further developing a stronger partnership between the legal community and financial institutions regarding increased interest rates on IOLTA accounts will take time. One Michigan bank told the MSBF that when a lawyer initially called to open an IOLTA account, they indicated that they didn’t care what the rate was because they did not receive the interest but called back a few days later and said after doing more research, the rate mattered because it supports access to justice.
Many in the legal community actively support local and statewide access to justice efforts through contributions to the ATJ Campaign, pro bono work, participation on committees related to access to justice, and other ways. As financial institutions understand the commitment of the legal community and the impact of legal aid services and as the legal community encourages financial institutions to pay higher rates on IOLTA accounts, these partnerships will result in a significant increase in funding for access to justice in Michigan. If every Michigan lawyer with an IOLTA account chose a Leadership Bank, even based on current rates, it would mean an annual increase of approximately $1.8 million for free civil legal aid to people in need.
Visit msbf.org for more information about the Michigan State Bar Foundation.