Rethinking IOLTA

Abstract

IOLTA (Interest on Lawyers’ Trust Accounts) is a popular mechanism for funding legal services for the poor, and such programs now operate in every state. IOLTA programs suffer from badly depleted resources due to the current financial environment, causing painful cutbacks at the nonprofit legal aid entities that depend on IOLTA for their operating expenses. This shortfall casts doubt on the wisdom of widespread dependence on IOLTA.

The previous academic literature about IOLTA focused on input-side is-sues: the original owners’ property rights in the interest taken to fund the programs, the compliance of lawyers with the program’s requirements, and the role of banks as intermediaries. Instead, this Article focuses on the output side, analyzing some unconsidered consequences of IOLTA programs.

This Article analyzes five previously ignored policy concerns about IOLTA: crowding out effects, monopoly and monopsony effects, agency prob-lems, and moral hazard problems. Finally, the Article offers some modest policy reforms in response to these issues.

Keywords: IOLTA, Interest On Lawyers Trust Accounts, Crowding, Legal Aid, Poverty Law, Civil Gideon, Pro Bono

JEL Classification: K19, K39, K10, I38, I30