Low interest rates leave less money for legal aid groups

August 21, 2011

A year after a judge began requiring members of the District of Columbia bar to put certain client funds in pooled interest-bearing accounts aimed at generating money for legal aid groups, revenue from the funds remains near historic lows.

The lack of growth has less to do with the new requirement, and more to do with the fact that interest rates hover near zero percent, making it difficult to generate gains from the deposits.

Until last year, members of the D.C. bar could opt out of the Interest on Lawyers Trust Accounts program, which pools the interest generated from the accounts to be distributed to civil legal services providers in the District. But a D.C. Court of Appeals judge approved a rule change making participation mandatory as of Aug. 1, 2010. Since then, the number of IOLTA accounts has grown more than 9 percent (from 2,070 in June 2010 to 2,269 in June 2011). And the revenue in interest generated from those accounts crept up from $541,917 in June 2010 to $550,637 in June 2011 — a 1.6 percent increase, according to the most recent figures collected by the D.C. Bar Foundation, the charitable arm of the D.C. Bar that distributes IOLTA funds to legal aid providers.

Still, 2011 revenue is down dramatically from the $2.4 million in IOLTA funds generated in 2008. That’s largely because participating banks, which until mid-2008 had been paying interest rates of up to 4 percent, are now — with a few exceptions — paying no more than 0.25 percent, in accordance with the federal funds target rate.

“The interest rates are the big factor now,” said Katherine Garrett, executive director of the D.C. Bar Foundation.

The Federal Reserve has indicated it expects to keep interest rates low until at least mid-2013, leaving D.C. legal aid groups scrambling to find funding sources that don’t depend on interest rates. This year marked the beginning of the Raising the Bar program in the District, spearheaded by the D.C. Access to Justice Commission, that asks law firms to set aside a portion of revenue from their District office for legal service providers. Eighteen law firms have agreed to donate between 0.075 percent and 0.11 percent, and the commission is recruiting more.

All 50 states, D.C. and the U.S. Virgin Islands run their own IOLTA programs independently. The District, where the IOLTA program has been running since 1985, is among 44 jurisdictions that mandate attorney participation in the program.

Lawyers often keep client funds in trust accounts, such as when they hold a retainer fee, complete a deal or hold a class action settlement to be paid out over time. If the amount is large or held for a long enough period, it generates interest for the client. But when the amounts are “nominal” or held for too short a time to generate interest, lawyers can place the funds in IOLTA accounts. D.C. IOLTA funds go to 501(c)(3) nonprofits in the District that serve D.C. residents with direct legal services including help gaining access to shelter, food and safety.

Catherine Ho covers law and lobbying for Capital Business, which she joined in 2011. She was previously a reporter at the Daily Journal in Los Angeles, covering LA civil courts and labor and employment law.
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