New Haven Independent

At stake is up to $10 million a year, and free legal help for up to 270,000 Connecticut families who can’t afford a lawyer.

The issue at hand involves a program known as IOLTA. That stands for “Interest on Lawyers’ Trust Accounts.” It’s the main way Connecticut pays for legal aid for the poor. Under the program, banks turn over to the Connecticut Bar Foundation all interest earned on short-term accounts lawyers set up for, say, holding money in escrow for a real estate closing. The Bar Foundation distributes the money to legal services for the poor and for law school scholarships.

Here’s the rub: Banks get to choose what interest rate to offer on those accounts. And according to the =Bar Foundation, Connecticut banks try to get off cheap — take credit for participating in the program, but paying hardly any interest. They pay far less interest than they pay on other accounts at their banks, and far less than banks pay in other states with similar programs.

Typically banks in Connecticut are paying less than one-half of 1 percent interest on IOLTA accounts, according to Klebanoff, who serves as executive director of the Connecticut Bar Foundation. A lot of money is at stake: there are about $1 billion in IOLTA accounts in Connecticut, she said.

As a result, IOLTA sends about $10.5 million a year to legal aid services in the state, she said, when it could be far, far more. IOLTA accounts for 70 percent of the cash-strapped legal-aid agencies’ budgets. Those agencies help 15,000 families a year — a fraction of the 270,000 cases in which families can’t afford a lawyer, according to Marvin Farbman, executive director of Connecticut Legal Services.

So on Monday Klebanoff, Farbman and other advocates went to the Supreme Court chambers in Hartford to seek a new rule requiring banks to pay more interest.

Even though the program is voluntary, rules do exist for how much interest must be paid. That’s because lawyers make the decisions on where to open short-term accounts covered under IOLTA. And lawyers must follow guidelines set by Rules Committee of the Superior Court.

That committee is now considering a change requiring that IOLTA accounts pay interest rates equal to the rates paid on “comparable” accounts at the same bank. In other words, if a lawyer has, say, a $100,000 short-term trust account covered by IOLTA, that account should pay the same interest as other $100,000 accounts at the bank.

“Right now some IOLTA accounts have $6 million” on an average day and pay only 0.35 percent interest, said Klebanoff. “Any other account put into a bank with $6 million sitting there every day — do you thank any other account holder would accept 0.35 percent?” A typical non-IOLTA account of that size pays more like 4 percent, Klebanoff said.

The proposed rule change would also empower the Bar Foundation to review banks’ IOLA rates to make sure they’re complying.

Michigan, Florida, Alabama, Ohio and New Jersey have made similar rule changes in recent years. As a result, according to Klebanoff, money paid to legal aid agencies has doubled. For Connecticut, that could mean another $10 million a year.

The Rules Committee, chaired by Justice Peter T. Zarella, heard Monday from three witnesses supporting the proposed change in Connecticut. No one spoke against; the state’s bankers association didn’t send anyone. The justices on the panel asked no questions.

Among the evidence introduced: As federal interest rates have risen, interest paid on IOLTA accounts by Connecticut banks has not risen. The federal funds rate shot up from 1 percent to 5 percent from 2002 to 2006. The average Connecticut IOLTA yield remained well under 1 percent.

This issue gained traction after the April 11 annual shareholders meeting of NewAlliance Bank. An 81 year-old judge, Anthony DeMayo (pictured), stood up at that meeting to excoriate bank officials for their IOLTA record.

The Bar Foundation had already been planning to seek this rule change. DeMayo’s stand reverberated through the state. An article in the Independent was followed by an editorial in the New Haven Register, then by a hearing at the state legislature at which lawmakers expressed outrage at banks’ greed. The Rules Committee agreed to consider the proposal and possibly vote on it at its June meeting. Member Patty Jenkins Pittman, a New Haven Superior Court judge, said Monday that the panel seemed well disposed toward it.