IOLTA Revenue Enhancement
The Time Is Now!

How Legal Aid Leaders Can Help

The Resource has been involved in IOLTA "revenue enhancement" efforts since 1992. We have never seen a time when IOLTA revenue enhancement has been more needed - or more promising.

The current economic climate has created a severe challenge for IOLTA programs and the civil justice organizations that rely on them for funding. The revenue streams of IOLTA programs - as well as foundations, pension funds, and other asset-dependent, interest rate-sensitive organizations - have dropped steadily for the past several years as the interest rates banks pay on deposit accounts have fallen to the lowest levels in half a century.

Yet this is only a temporary situation. Interest rates will eventually turn upward. The time for IOLTA programs to be ramping up their "revenue enhancement" efforts is now. The action, or lack of it, that IOLTA leaders take over the next 12 months will have a dramatic impact on the size of IOLTA grants for years to come. This article lays out the opportunities ahead and provides suggestions for grasping them.

IOLTA is a mainstay of legal aid funding; IOLTA boards and staffs hold the key to providing hope for millions of people facing critical legal problems with nowhere to go for help. And the current environment, with publicity about rising bank profits, high bank fees and historically low yields on deposit accounts, makes this an ideal time for approaching authorities with a powerful rationale for making some perfectly reasonable changes in IOLTA that could dramatically increase revenues when the interest rate environment returns to a more "normal" state.

Since all of IOLTA's income depends upon the pooled interest paid on lawyers' trust accounts, every quarter-percent drop in the Federal Funds Rate compresses IOLTA's revenue dramatically, leaving the program with a reduced ability to fund everything from bread-and-butter general legal aid programs to special projects and technology grants. And with the Fed Funds Rate currently at its lowest level since the 1950s (one percent), IOLTA programs continue to watch their revenues shrivel.

The "special treatment" that many banks give IOLTA accounts has made a bad situation worse. IOLTA accounts often suffer from various forms of discriminatory treatment from banks, including:

  • Lower rates and/or less-competitive tiered-rate schedules (by which rates improve as balances in the accounts increase) compared to non-IOLTA accounts

  • Special "IOLTA handling fees," in some cases as high as $45/month and lacking the fee waivers that comparable business accounts get when their principal balances rise above certain thresholds

  • "Negative netting" - that is, the practice of using the net IOLTA revenue from larger accounts to cover the fees from unprofitable ones.

Even worse is the legacy of the "interest checking" product that forms the backbone of most IOLTA account portfolios. In the 1980s, when IOLTA was new, interest checking was the only vehicle available, and millions of IOLTA accounts were set up as interest checking accounts. Two decades later, these are at the bottom of the food chain, replaced by sophisticated bank products like investment sweep accounts offering much higher yields. Efforts to switch IOLTA accounts to these new structures face resistance from banks and inertia from law firms.

Not all IOLTA programs have taken this situation sitting down. IOLTA boards and staffs in Alabama, Florida, Ohio, Virginia, Massachusetts and several other leading states have for several years carried out "revenue enhancement" initiatives aimed at minimizing bank fees and maximizing interest rates. They persuade banks to offer better terms on IOLTA accounts through a combination of negotiation, public relations, IOLTA rule changes and mobilization of the "market power" of the legal community, a lucrative market segment for banks.

These efforts have paid off. Although IOLTA revenues in these states have suffered along with the rest, their hemorrhage has been dramatically less than states where no such efforts have been made. In Florida, for example, where heavy investments were made in revenue enhancement, IOTA revenues dropped by only six percent between 1998 and 2002 while revenues in some states dropped by 20 percent or more.

For the past several years, the legal challenges to IOLTA and resulting uncertainty about IOLTA's future have had a chilling effect on revenue enhancement efforts, but this year's favorable Supreme Court decision has restored many people's confidence that IOLTA is here to stay. With interest rates in a deep trough and banks enjoying record profits, now is the time for building the vehicles that will launch IOLTA upward when the Fed begins raising interest rates.

The Resource has for the past decade been a leader in IOLTA revenue enhancement, working with leading programs across the country to explore proactive options for maximizing IOLTA income. In partnership with leading IOLTA programs - particularly the Florida Bar Foundation - the Resource has provided analytical and strategic support for the development of a number of avenues that IOLTA programs have used successfully to attack the issue, including:

  • The Florida Rule: The Florida Supreme Court - at the request of IOTA (IOTA stands for "Interest on Trust Accounts," the name for the program in Florida) - modified its IOTA rule to require banks to offer IOTA accounts rates comparable to those available to non-IOTA customers (preventing discriminatory pricing). The Florida Bar Foundation followed up to implement the rule on a bank-by-bank basis as each bank submitted proposals to conform to the new requirement. We estimate that the first five major banks to be implemented alone increased IOLTA's net revenues by an average of 40 basis points above the level they otherwise would be, generating additional income of $1.3 million per year. More importantly, the rule ties IOTA rates more directly to market rates than previously. When the Fed raises rates in the future, this figure will increase dramatically. For example, our financial models indicate that a one percentage point of increase over June 2002 rates translates into an additional $6 million per year in additional IOTA revenue.

  • 'Sweep' the biggest accounts: IOLTA can maximize revenues on consistently high-balance accounts by shifting them into "sweep accounts" - products designed for businesses seeking more aggressive returns on their depository accounts - rather than leaving these funds in generic, low-rate "interest checking" products. Today's market interest rates are so low that few IOLTA accounts could justify the high fees that banks charge on sweep accounts, but as rates rise, these products can provide significant dramatic increases in IOLTA revenue.

  • Exempt consistently unproductive accounts: In many states, a large percentage of IOLTA accounts (one-third to more than half) are consistently "unproductive" - in other words, the monthly fees exceed the interest they earn -- resulting in negative income, month after month, year after year. These accounts are a massive drain on IOLTA revenues. For example, in Florida, we estimated that unproductive accounts cause losses of $1.1 million annually - nine percent of total IOTA revenue. Existing policies allow these accounts to be eliminated, but that can be tricky; for example, one does not want to eliminate an account that is unproductive only temporarily. With analytical support from The Resource, the Florida program has used its powerful remittance data base to identify unproductive accounts, analyze their behavior over time, and develop action plans to minimize future losses. Steps that may be taken include exempting the firms that hold the accounts from IOLTA participation (permanently or temporarily) and/or asking the firms to consolidate multiple, unprofitable IOLTA accounts to reduce fees.

  • No Negative Netting: Though potentially the most challenging from a political standpoint, the ultimate answer for unproductive accounts is a marvel of simplicity from a practical point of view: namely, the implementation of a "no negative netting policy." This renders the practice of charging fees on IOLTA accounts in excess of interest earned impermissible, thus in one stroke eliminating the financial bleeding caused by unproductive accounts. A few states have done this successfully through changes in their IOLTA administrative policies, preceded by astute negotiation with the banking community. In other states, IOLTA rules or statutes may have to be changed in order to carry out this kind of initiative.

  • The Community Investment Appeal: IOLTA campaign leaders can ask banks in the community to extend goodwill reductions in fees to IOLTA as relief from the interest rate crisis. Potential incentives include favorable publicity in the legal community and having "good stories" about being a good corporate citizen that banks can include in their Community Reinvestment Act (CRA) reports.

We offer the following suggestions for developing an IOLTA Revenue Enhancement campaign:

  • Do a feasibility study. This should include statistical analysis of bank remittance data and financial modeling of potential strategies and their implications over time. Detailed figures, a thorough understanding of the underlying financial dynamics, and sophisticated, in-depth analytical models are necessary before you enter into negotiations with bankers or pursue policy initiatives such as changes in your IOLTA rule or statute.

  • Analyze banking products and the rate schedules and fees they offer. These vary widely from bank to bank. There is no "one size fits all" approach that will work with every bank in your region. A flexible, strategic approach is necessary, and a thorough understanding of each bank's particular rate and fee structure and its implications for IOLTA is key.

  • Deploy the "market power" of your legal community. IOLTA is a critical charitable program of, and well connected in, the legal community in your state, a market segment that has a lot of clout with banks. One large law firm can mean millions of dollars in business for banks in the form of investments, loans, deposits and referrals. Banks will go a long way to please such a customer. This market power is a powerful asset that many IOLTA programs overlook or underutilize. In large states such as Massachusetts, it has proven key to success. Smaller states can band together to present a united front to large banks, backed up with the market power of hundreds of law firms.

  • Be prepared for tough negotiation. Banks are in business to make money, and will need strong business incentives for making changes in the status quo. Historically, IOLTA has been very profitable for them, with little of the competitive pressure on rates and fees that characterize personal and business deposit products. Banks will throw up obstacles to changing this situation. However, armed with a strong case, solid data, and strong backing from community leaders and the bar, IOLTA programs that are aggressive and stay the course have had surprising successes, to the great benefit of their grantees and the low-income communities they serve.

Above all, the best answer is an aggressive, well-designed strategy driven by calculated assessment of risks, costs, and benefits. We at The Resource would be glad to answer your questions about how IOLTA revenue enhancement can help in your state.

The time to act is now!

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