Boosting civil legal aid: How Florida’s IOTA program leads the way
Retired banker says controversial rule is good for citizens — and his longtime profession.
| 5:00 a.m. February 1, 2024
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Since its inception in 1981, The Florida Supreme Court’s Interest on Trust Accounts (IOTA) program has pioneered a groundbreaking approach to funding civil legal aid for the underprivileged. By harnessing the previously dormant interest potential of short-term client funds held by lawyers, IOTA has become a national model, generating millions for those in need of civil legal representation.
Within the framework of the IOTA program, the Supreme Court, leveraging its exclusive jurisdiction to regulate the legal profession as stipulated in the Florida Constitution, mandates lawyers pool all nominal or short-term funds of clients or third persons into an interest-bearing checking account for the benefit of IOTA. Prior to the establishment of the Court’s IOTA program, these pooled funds, that couldn’t be invested in other ways, were relegated to non-interest-bearing accounts.
The financial crisis of 2008 and its aftermath underscored the need for a more secure funding source for legal aid, prompting The Florida Bar to propose a new Bar rule in October 2022. This rule requires lawyers to keep their trust accounts in institutions that tie interest rates for IOTA accounts to specific indexed rate points, offering a free-market approach to securing better funding for necessary legal services for low-income Floridians. The Supreme Court adopted this proposal and its amendments to Bar rules, which went into effect on May 15, 2023.
Importantly, the rule changes do not regulate banks or give the Court the power to sanction banks. Instead, the changes are designed to regulate lawyers opening and maintaining IOTA trust accounts. With the new rule, The Supreme Court aims to obtain the highest interest rates available in the free market. The decision to tie the rate to the Wall Street Journal Prime Rate is seen as a reasonable approach within the fair market price range.
While the rule does not compel any bank to offer this interest rate, it sets a standard that every lawyer can aspire to, providing FFLA (formerly known as The Florida Bar Foundation) with a larger and more consistent funding source to provide legal services grants to organizations serving indigent Florida citizens who are 125% of the poverty line or below.
It is the Bar’s position that this minimum rate is well within the price range that will create an adequate supply of willing bankers to offer trust accounts sufficient to cover the amounts held in those accounts by Florida’s lawyers. And, the structure of the rule still allows banks to profit on these accounts.
Since the Court’s rule went into effect in May, the attorney trust accounts have earned more than $60 million for civil legal aid, a significant increase compared to the $9.5 million to $16.2 million per year earned from 2018 to 2022. The overwhelming participation of banks is noteworthy, with only a minimal percentage (2.5%) of the 161 banks providing IOTA accounts discontinuing the service since the changes.
I would point out there is a guardrail built into the current approach in that banks still make financial gains on IOTA accounts because the interest rates they pay out will always be lower than the interest rates they earn by at least 3%.
For instance, under the Court’s rule, when the prime rate is between 3.25% and 5%, then the trust account rate banks pay out is between .25% and 2%, a 3% gain. After that, the gains get even better for banks. At a 7% interest rate, for example, banks will pay out 2.8%, a 4.2% gain.
The success of the Florida Supreme Court’s new IOTA rule offers a sustainable model for boosting legal aid funding. Florida’s innovative approach has the potential to inspire similar initiatives across the nation, ensuring greater access to justice for all Americans.
Jody Hudgins, the architect of the IOTA rule, was a banker in Florida for 40 years before retiring in early 2023. He was chief credit officer of First Florida Integrity Bank in Naples; executive vice president and top Florida executive for the First National Bank of Pennsylvania, based in Sarasota; and a senior vice president for Fifth Third Bank in Naples, among other positions. A Sarasota resident, he also taught at the Florida Bankers Association’s school of banking for 30 years and was previously a public member of The Florida Bar Board of Governors.