Compliance Blog

NCUA recently issued two pieces of guidance regarding IOLTA accounts.  IOLTA stands for Interest on Lawyer's Trust Accounts.  Lawyers use IOLTA accounts to manage client money. 

Last week, NCUA issued Legal Opinion Letter 08-0840.  It addressed insurance coverage for IOLTA accounts.

The clients, not their lawyers or law firms, own the funds in an IOLTA account. The lawyers or law firms are merely the agents holding the funds in trust for their clients. While NCUSIF insurance coverage might cover clients as the beneficial owners of the funds, 12 C.F.R. §745.3(a)(2); see, e.g., OGC Op. 96-0841 (Sept. 17, 1996), OGC Op. 94-0119 (Feb. 9, 1994) (available on NCUA’s website at www.ncua.gov), the NCUSIF insures only member accounts. Therefore, client funds in an IOLTA account are insured by the NCUSIF only for those clients who are members of the credit union. 12 C.F.R. §§ 745.0, 745.1(b). In the event of a credit union’s liquidation, the amount of each client’s insured funds in IOLTA accounts is added together with any other individual account of the client. 12 C.F.R. § 745.3. Insurance coverage is the same whether the credit union is a federal or state-chartered credit union. 12 C.F.R. Part 745.

You have also asked about NCUSIF insurance coverage for IOLTA accounts at federal and state-chartered credit unions designated as low-income. Both federal credit unions and state-chartered credit unions designated as low-income can accept nonmember funds. 12 U.S.C. §1757(6); 12 C.F.R. §701.34; see, e.g., OGC Op. 96-0841. A state-chartered credit union can also be designated as low-income. 12 C.F.R. §741.204(b). Nonmembers at low-income credit unions are considered members for purposes of NCUSIF coverage. 12 C.F.R. §745.1(b). Therefore, a nonmember client’s funds in an IOLTA account at a low-income credit union are entitled to NCUSIF coverage. 12 C.F.R. §745.1(b).

The letter, however, doesn't clarify the main issue that many credit unions wrestle with.  How can credit unions offer IOLTA accounts?  Do all the clients need to be members?  Within the field of membership? Recently, NCUA issued a final rule on incidental powers.  Buried in that final rule was this guidance on IOLTA accounts that sheds light on this question.

Second, the commenter suggested NCUA permit FCUs to establish Interest on Lawyers Trust Accounts (IOLTAs). In brief, an IOLTA is an interest bearing account set up by attorneys to hold client funds. The interest, which lawyers cannot keep for themselves because the funds belong to their clients, can be donated to charities. The issue for credit unions regarding IOLTAs is that the Nation Credit Union Share Insurance Fund generally only provides insurance to the beneficial owners of an account, and they must be members. Under NCUA’s insurance rules, all the clients whose funds are in the IOLTA would have to be members of the credit union where the account is established for the client funds in the IOLTA to be fully insured. NCUA’s position on insurance coverage of IOLTAs currently remains as set out in an opinion from the OGC, OGC Op. 96-0841 (September 17, 1996), and is available on the agency website at www.ncua.gov.”  Emphasis added.

So, this guidance then points us to Legal Opinion Letter 96-0841.  That letter states the following:

With an agent account, the membership status of the client (owner of the funds) and not that of the agent (attorney, law firm or IOLTA Board) is determinative as to whether an IOLTA account can be properly maintained. Consequently, in order for an attorney or law firm to maintain an IOLTA account at an FCU, either all of the clients whose funds would be deposited must be members of that FCU or the FCU must be designated as a low income which would allow it to accept nonmember funds.  Emphasis added.

So there you have it.  There continues to be a ton of confusion on this issue within the FCU community.  Hopefully, this clears things up a bit.