In the IOTA comments: A battle between Florida bankers and their former teacher

In the IOTA comments: A battle between Florida bankers and their former teacher

Jody Hudgins, a recently retired banker, designed the updated IOTA rule fought by his industry

The clash over a new amended rule governing attorney trust accounts with tens of millions of dollars at stake each year for free civil legal aid to Floridians near the poverty line has led to a fissure between Florida bankers and their longtime former teacher, Jody Hudgins.

Hudgins taught at the Florida Bankers Association’s school of banking for 30 years. But now he and the association are at odds over the updated rule, of which he is the architect, that is already bringing in tens of millions of additional dollars in legal aid funding for poor Floridians.

Hudgins, a public member of The Florida Bar Board of Governors at the time, proposed in 2020 to require attorneys to keep trusts storing client money in higher-yield accounts. The changes were modified and approved this year by the Florida Supreme Court on March 16. The bankers association asked for a rehearing on March 31, and in response, the court allowed the public to weigh in on the modified rule until November 1.

Now, the court will either dismiss the concerns led by the bankers, change the rule, or open it up to oral arguments. A major question before the court is who is right — Hudgins or the banking association — about the technical aspects of the amended rule that will either make it financially feasible for banks to participate, or not.

The bankers association argues in a 16-page comment that the rule changes do not make sense. The central issue is whether IOTA accounts can earn more interest than the bankers pay out under the amended rule. Hudgins says yes. The bankers association says no.

The outcome of this debate will be consequential to poor Floridians. That’s because the interest banks pay out on these attorney trust accounts is swept and distributed across Florida as civil legal aid. Since the rule went into effect in May, the attorney trust accounts have earned more than $60 million for civil legal aid, according to an October Florida Bar report for the court on the amended rule’s status.

By contrast, the accounts earned between $9.5 million and $16.2 million per year from 2018 to 2022.

At least so far, “the rule is working exactly as designed,” the Bar report states.

And banks are participating. Only three, potentially four, out of 161 banks providing Florida attorney IOTA accounts have stopped the service since the changes, per the Bar report. That’s just 2.5% of the banks.

But the bankers association argues that even if banks are complying in the short-term, the additional money they must now pay out in higher interest rates is unsustainable.

These trust accounts will not earn enough interest for the banks to cover the increased payout because they are “short-term deposits…earning a much lower yield than the type of yield long-term loans provide,” reads part of the bankers association’s comment.

Why? Because the trust account funds must be “available when the law firm needs the nominal or short-term dollars to close a real estate transaction or to pay a plaintiff their settlement proceeds.”

Basically, the bankers association argues, these trust accounts are checking accounts, which don’t earn a lot of interest. And so, bankers could go broke complying with the rule by paying out more than they bring in.

Tucked into a footnote on page six of the bankers’ comment is a dig that Hudgins said is directed at him:

“[A]t least one former banker (not currently affiliated with the FBA) has voiced support for the IOTA Rule in its current form. That support, however, is premised on the misguided notion that banks can use short-term IOTA funds to make long-term loans and keep the spread between what they are permitted to charge on the long-term loan (Prime Rate) and what they must remit to the [Florida Bar] Foundation (40% of Prime Rate (at current rates))” reads the footnote. “Advocating for the use of short-term IOTA funds to fund long-term loans is antithetical to the purpose of IOTA funds and does not comport with the intended purpose of the IOTA program. If a bank were to hypothetically engage in such behavior, it could lead to bank failure when the IOTA depositors demand their short-term funds, only to find out they are not available for years due to being used to fund a long-term loan to increase the Bank’s yield.”

“For 30 years, they thought I was a good guy,” Hudgins said about being a bankers association teacher. “But it was awkward to come back and teach there this year after presenting this rule change.”

Hudgins, 68, was a member of the Florida Bankers Association until he retired in January. He has been  president and CEO of three Florida banks. He has taught since 2007 at the Graduate School of Banking at Louisiana State University, and previously served as president. He estimates he’s taught about 4,000 bankers in total. He was given the 2022 President’s Award by The Florida Bar Foundation for his work on updating the rule to bring in more civil legal aid.

“They are trying a scare tactic to the uninformed,” Hudgins said about the bankers’ rule comment. “They want to prey upon your financial illiteracy. They prey upon that so that they make sizable income off those accounts. Even for checking accounts, they earn interest on those, of course they do.”

About the banks: “Whether they’re paying you interest or not, they’re earning interest on your money.”

Except for required regulatory reserves, every dollar that comes into a bank is invested or loaned out shortly thereafter, often to other banks, becoming an “interest earning asset,” Hudgins said.

Banking is about matching interest rates on deposits to their corresponding loans, Hudgins said, a process called “interest rate sensitivity,” not about what account the money originally went into.

And, the way the rule is structured, banks will still make financial gains on the trust accounts. That’s because while the interest rates they earn will correspond with interest rates set by the federal reserve, the rates they pay out will always be lower than that by at least 3%, Hudgins said.

Under the amended rule, when the Wall Street Journal prime rate — commonly used by banks when setting their interest rates for loans and related to rates set by the federal reserve — 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.

“It’s a win-win for the banks but the banks don’t like it because it’s not free anymore,” Hudgins said.

These trust accounts weren’t earning much interest in prior years because the attorneys who set them up don’t benefit from them, according to the Bar report. The money they deposit into the accounts belongs to their clients. The interest earned usually gets swept.

And “until now there has been little, if any, incentive for lawyers to negotiate with banks for the best possible terms,” states the Bar report.

The bankers association, however, remains steadfast.

“The Florida Bankers Association stands firmly behind the legal arguments and facts, as presented, in our response to the Florida Supreme Court,” wrote Florida Bankers Association president and CEO Kathy Kraninger to the Bar News by email. “We look forward to the court’s ruling on this important matter.”

While the fight between Hudgins and his former employer may have gone unnoticed, the prospect of more and stable legal aid funding has not.

Since the bankers association asked the court for a rehearing on the changes, five groups or people have weighed in against the updated rule and 18 groups or people have weighed in in favor of it.

Those against include the bankers association, which attached letters signed by 29 banks and over 200 Florida lawyers expressing concerns about the rule changes to its comment; a personal injury attorney; a banking attorney; the Florida Chamber of Commerce; and, Florida Chief Financial Officer Jimmy Patronis.

The rule change will result in a “windfall for the Florida Bar Foundation,” which collects and distributes the trust account money as legal aid, “in excess of $200,000,000,” and is effectively a tax on banks, commented Patronis.

“Indeed, if the Legislature wished to adopt any tax or fee increase into law, that increase would need to be enshrined in a standalone bill, and both chambers would need to approve that bill by an extraordinary two-thirds vote,” Patronis wrote. He suggested instead that the Bar increase its aspirational legal aid contribution by each attorney of $350 annually, “which has not been revisited since 1993.”

As of October 6, the 94,940 Florida attorneys in good standing with the Bar contributed a collective $7.5 million in legal aid in the past year, and volunteered 1.5 million hours in representation, which equates to about $79 donated, and 16 hours volunteered, for every one of those attorneys.

Doubling, tripling, or quadrupling the amount donated or volunteered by individual Florida attorneys may not make much of a difference, though. That’s because the number of practicing Florida lawyers – roughly 100,000 – is dwarfed by the number of Floridians living near the poverty line – 3.6 million.

Those in favor of the trust account rule changes include Hudgins; The Florida Bar Foundation; past presidents of the Foundation; the Bar’s Public Interest Law Section; the Pro Bono Coordinators Association; the Cuban American Bar Association Pro Bono Project; The Innocence Project of Florida; The Florida Health Justice Project; Idignity; the Florida Civil Legal Aid Association; Community Legal Services of Mid-Florida; Florida Rural Legal Services; Bay Area Legal Services; Dade Legal Aid; Legal Aid Society of the Orange County Bar Association; Northwest Florida Legal Services; Southern Legal Counsel Inc; and former Bar President Michael Tanner, whose tenure over lapped with Hudgins’.

Prior to the amended rule, “civil justice access programs in Florida struggled for years for adequate funding to assist Florida’s low income citizens,” in part because federal interest rates drove revenues into the ground when they dropped related to the 2008 financial crisis, Tanner commented.

By 2014, the interest earned on these accounts was so little that the Foundation had to borrow $6 million from the Bar, Tanner wrote. The Foundation repaid the loan, but it had little to give out in terms of grants until this year, when revenues increased along with higher interest rates due to inflation.

And even though the Foundation will distribute grants this year that are roughly four times larger than last year’s to about 34 different legal aid groups, that money will mostly plug federal funding holes.

And as it stands, only about 8% of low-income Floridians’ legal aid needs are being met.

“Without question, Florida has unique challenges such as:

• skyrocketing cost of living expenses exceeding federal increases, and

• a large population of senior citizens often living on fixed incomes, and

• an ongoing housing affordability crisis,” commented the Florida Civil Legal Aid Association.

The increased funding “will enable legal aid law firms to retain talented attorneys that now have several years’ experience serving the low-income client community, while they turn their attention to the emerging legal needs of Florida’s large at-risk population,” the association continued.

Hudgins said he was motivated to update the rule to bring in more money for legal aid after he was appointed in 2019 by the court to the Board of Governors and realized how little money for civil legal aid the trust accounts were generating.

“If it weren’t me that was going to try to get the rule changed, who was going to do it?” Hudgins said. “Who could have understood the operational strategies of bankers if it wasn’t a banker?”

And he said he believed the court understood the value of having a banker’s insight too.

“Guess who replaced me in June?” Hudgins said about the Board of Governors. “Another banker.”