State Bar of Georgia Lawyers Serving the Public and the Justice System

Unlimited FDIC Insurance Debate May Be A Factor in Managing Client Funds

By J. Joseph Brannen, President and CEO, Georgia Bankers Association

A debate is going on in the United States Congress about whether to extend the unlimited FDIC insurance on certain transaction bank accounts. IOLTA and non-IOLTA trust accounts are affected by this.

Existing FDIC insurance covers 100 percent of all client funds in your IOLTA account, no matter how large the sum of money. But the law providing unlimited FDIC insurance coverage for these types of accounts expires January 1, 2013. If an extension is not granted, the $250,000 FDIC insurance limit will go back into effect.  

Keep in mind that such unlimited coverage was only instituted as part of many extraordinary steps taken during the most severe period of the financial downturn and extended by the Dodd-Frank Act, so the need to manage the minimal account risk that does exist is not something completely new. And, the permanent increase in basic account coverage to $250,000 per individual account, which applies to client funds in IOLTA accounts with pass-through coverage provisions, is more than double the amount of coverage available before the financial downturn and emergency actions. The need for deposit insurance payouts has been rare. During this cycle of 84 bank closures in Georgia, there have been only four for which no buyers were found and only one instance in which a buyer did not acquire all deposits.

If the unlimited insurance is not extended, then lawyers will need to decide how best to protect their clients’ funds. Here are some actions we suggest lawyers consider taking regarding client funds in IOLTA accounts:

1. Disclose to their IOLTA clients the name of the bank where the IOLTA is held.
2. Perform due diligence on the health of their depository: http://www2.fdic.gov/idasp/main.asp
3. If due diligence shows the risk of failure is minimal, the lawyer may simply decide to leave the account with that bank.
4. If FDIC insurance is a concern, the lawyer may also ask the bank about a reciprocal deposit insurance program like CDARS that gives up to $50 million in FDIC coverage (http://www.promnetwork.com), or choose to open an additional IOLTA(s) with another institution(s).
   

You may want to monitor the debate and any votes on this topic.  When the result is known, it will be published on the State Bar website.