Monday, December 27, 2010

Congress Amends Dodd-Frank to Provide Fix for Full FDIC Protection for Lawyer Trust Accounts

Congress has passed legislation, HR 6398, amending Section 343 of the Dodd Frank Act to assure continued full FDIC protection for lawyer trust accounts. The current Term Asset Guarantee program under which the FDIC guarantees the total amount of client funds maintained in lawyer trust accounts expires December 31, 2010. The Dodd-Frank Act creates an equivalent program, running for 2 years beginning January 1, 2011, but makes several changes, including a more narrow definition of a covered account. In what appears to have been a drafting error, lawyer trust accounts were not covered under the new program established by the Dodd-Frank Act. The legislation corrects that inadvertent omission so that the accounts are fully insured. The President is expected to sign the legislation.

A Senate amendment to HR 6398 that would have clarified that derivatives trades by commercial end-users are not subject to margin requirements did not make it into the final legislation. The amendment was sponsored by Senator Saxby Chambliss (R-GA), Ranking Member on the Agriculture Committee, and Senator Bob Corker R-TN), a leading member of the Banking Committee, and supported by, among others, the Business Roundtable, the National Association of Manufacturers, and the U.S. Chamber of Commerce.

The Senate passed the legislation by unanimous consent on December 22, 2010. Senator Jeff Merkley (D-Ore) explained that in all fifty states lawyers have to put clients’ funds into trust accounts. Under the law, they are not allowed to earn interest on these accounts. Over time, however, an arrangement has been worked out whereby the banks pay interest, but it does not go to the clients; it goes to fund civil legal services for those who cannot afford those services. The Dodd-Frank Act as passed put this arrangement in great jeopardy and the legislation is designed to fix the problem.

Without the legislation, explained Sen. Merkley, lawyers applying their fiduciary duty would have had to withdraw their funds from these interest bearing accounts and put them in non-interest bearing accounts. Similarly, Senator Johnny Isakson (R-GA) noted that an unintended consequence of the Dodd-Frank legislation with regard to interest on lawyer trust accounts is that, without the HR 6398 fix, we would have had thousands of escrow accounts held by law firms and attorneys, real estate transactions, dispute resolution transactions, and beneficial programs that would have had to be spread among many more banks because the insurance level drops. It would have forced the transfer of escrow account money out of a number of banks. At a time when capital is critical in small community banks, the unintended consequence might have been to take them below tier one capital requirements and put them in a stress situation. (Cong. Record, Dec. 22, 2010, pS10964).

Rep. Lloyd Doggett, (D-TX), the House sponsor of HR 6398, noted that at a time when interest rates are at an all-time low, it is particularly important that there be a complete government-backed guarantee against any loss on these trust accounts. He also said that such protection also ensures that small, independent banks are on a level playing field with their larger competitors in securing these trust fund deposits. (Cong. Record, The legislation is supported by a broad range of groups, including the Independent Community Bankers of America and the American Bar Association.

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