State IOLTA programs: Regulatory changes, funding pose challenges

For four decades, money from state programs related to Interest on Lawyers’ Trust Accounts, or IOLTA, has been an important tool in directing sometimes tens of millions of dollars annually to legal aid groups to help fund civil legal services for the traditionally underserved.

But these days, IOLTA is facing some big challenges, coming from changes in how the legal profession delivers its services, historically low bank interest rates and, most recently, the bite of inflation.

Running concurrently with the American Bar Association 2022 Virtual Midyear Meeting, the ABA Commission on IOLTA and the National Association of IOLTA Programs organized five different programs for IOLTA officials nationally February 10-11 to explore emerging IOLTA issues, examine best practices and hear from national leaders working with civil legal aid.

IOLTA funds complement other avenues of revenue of civil legal aid, such as federal money from the Legal Services Corporation.

On Friday, February 11, LSC President Ronald Flagg outlined an upbeat assessment for federal funding, saying Congress and the Biden administration seem to understand the growing urgent need, particularly in light of the impact of COVID-19 on low-income Americans.

Stopgap budget legislation now making its way through Congress maintains LSC funding at $465 million, he said. But he is optimistic that more funds will be made available in long-term funding although not as much as the $1.264 billion the agency says it needs to effectively shrink the “justice gap.”

Flagg said the problem is particularly acute in rural areas, many of which are classified as legal deserts for their lack of lawyers. “Civil legal aid is not something that people are very well aware of,” he said. “And, particularly in rural areas, that lack of knowledge is pronounced.”

Flagg also said that a spring update of a 2017 LSC study that showed that 86% of low-income Americans receive “inadequate or no assistance” in civil legal matters will suggest that percentage is much higher today.

In response to a question, he also said LSC and state IOLTA officials could do more together. “I think there is a broad array of collaboration where we have not scratched the surface,” he said, pointing to oversight and technical assistance with grantees. “This is work we should be doing in conjunction with you or sharing with you.”

IOLTA represents a big piece of civil legal aid to the needy. These accounts emerged following changes to federal banking laws passed by Congress in 1980, which allowed some checking accounts to bear interest. IOLTA programs operate in 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands, and directs lawyers on how best to handle money that belongs to clients, such as settlement checks, fees advanced for services not yet performed, or money to pay various court fees.

Sometimes the amount of money that an attorney handles for a single client is quite large. In such cases, lawyers deposit the funds into trust accounts, where the funds can earn interest for the client. In many other cases, the money from a single client is quite small or held for only a short period of time and cannot earn interest for the client in excess of the costs incurred to collect that interest. Traditionally, lawyers have placed these deposits into combined, or pooled, trusts, and banks have in turn forwarded the interest earned to a state IOLTA program, which uses the money to fund a variety of charitable causes.

With regulatory changes emerging in the legal profession allowing nonlawyers to provide some legal services, this could challenge state IOLTA officials. At a program, “The Times They are a Changing: Regulatory Innovation and its Potential for IOLTA Programs,” panelists from Arizona and Utah warned that IOLTA issues need to be addressed upfront during the discussions related to change. Both states are in the national forefront of loosening restrictions on who can provide legal services.

In Arizona, Lynda Shely, a lawyer from that state and chair of the ABA Standing Committee on Ethics and Professional Responsibility, said IOLTA issues were considered early in regulatory changes approved in 2019. Arizona now allows nonlawyers to have an equity stake in delivery of legal services, a situation called alternative business structures. The new rules also allow a nonlawyer position known as legal paraprofessionals (LPP), who are permitted to provide services without the supervision of an attorney. Few issues have arisen related to IOLTA accounts.

But in Utah, some unforeseen issues arose. Kim Paulding, executive director of the Utah Bar Foundation, recalled that when the Utah Supreme Court approved an LPP program, there was “a little bit of blowback.”

In Utah, these professionals can become certified in family law, debt law or landlord-tenant law and sought to operate IOLTA accounts similar to lawyers. But the banks declined to participate, citing a lack of a law license. She explained the lawyers subsequently worked with the Utah Bankers Association “to make sure the banks are educated about this program.”

Across the country, about a dozen other states have begun processes to implement some regulatory changes and the full impact on IOLTA programs won’t be known for a while. But so far, change has come slowly. “I think the other states are waiting to see if Utah and Arizona are going to stub their toes,” Shely said.