9 Big Banks Sue B of A Over Losses on Student Loans

Times Staff Writer

Nine of the world’s largest banks filed lawsuits Monday demanding that Bank of America be found responsible for hundreds of millions in losses arising from the most expensive foul-up in the history of the U.S. student loan program.

In identical suits filed in U.S. District Court in Los Angeles, the banks said they have already lost more than $350 million and that losses are expected to reach between $450 million and $650 million. One of the nine, Bank of Tokyo, said it alone has lost $177 million.

The lawsuits, which had been anticipated, are the latest round in a high-stakes battle involving Bank of America, the other nine big banks and the U.S. Department of Education.


Huge losses in the complicated case stem from the failure of an Encino firm to follow federal guidelines for collection of $1.4 billion in student loans. The failure to follow the guidelines voided the federal guarantees for the loans, leaving the nine banks to cover the losses.

Acted as Loan Trustee

The lawsuits ask a federal judge to shift that responsibility to Bank of America, which was trustee for the loans. The suits said that B of A failed to perform its duties to ensure that proper procedures were followed to maintain the guarantees.

In addition, the suits said that B of A continued to process hundreds of millions of dollars in student loans through the Encino firm, United Education & Software, even after an examination by California authorities uncovered problems in July, 1986.

Bank of America acknowledged in February that the lawsuits were a possibility and said it felt there were legal defenses for its position. A spokesman said Monday that the bank had no comment because it had not seen the suits.

The banks that filed suits are Citibank, the nation’s largest bank; Raiffeisen-Boerenleenbank of the Netherlands, and seven of Japan’s largest banks: Dai-Ichi Kangyo, Sumitomo, Fuji, Industrial Bank of Japan, Mitsubishi, Bank of Tokyo and Mitsubishi Trust.

The loans were made by a variety of financial institutions and bought by the nonprofit California Student Loan Finance Corp. in Los Angeles with money raised by selling bonds.

The nine banks that filed the suits had extended letters of credit to back the $1.4 billion in loans, mostly to students at vocational schools, who have what the lawsuits called a “notoriously high default rate.”

The letters of credit made the banks responsible for any defaults. But because the loans were guaranteed by the federal government, the banks believed they were protected. However, the federal guarantees required that strict rules be followed in attempts to collect on bad loans from students.

Examinations by state and federal authorities discovered that the required collection procedures were not followed on at least 250,000 of the loans, said the suits. Investigators have said they found boxes of unmailed collection letters at UES headquarters and that regulations had not been followed on 92% of the loans examined in one batch of accounts.

Hired New Firm

After the problems became public last summer, Bank of America bought out UES and hired another company to process the loans. The bank then began a strong lobbying effort in Washington to convince the federal government to honor the guarantees despite the collection problems.

But the U.S. Department of Education said in March that it would not honor the guarantees on the loans.

“As a result, the (letter of credit) banks will be forced to pay out hundreds of millions of dollars . . . which will not be reimbursed,” said the lawsuits.

Gerald W. Palmer, a Los Angeles lawyer representing Fuji Bank, said there is no way yet to estimate the total losses connected with the loans. He said the banks are using the range of $450 million to $650 million estimated in February by Bank of America.

The suit by Bank of Tokyo, which apparently has had the biggest losses so far, also named as a defendant Peat Marwick Main. The suit said the big accounting firm had issued regular reports to Bank of America saying that the loan servicing procedures were followed. Attempts to reach a spokesman at the firm’s Los Angeles office late Monday were unsuccessful.

The assertion that Bank of America was aware of some problems as early as July, 1986, was a new allegation in the case. The lawsuits said that an examination by the California Student Aid Commission discovered loan servicing failures at UES that should have alerted the bank that the company was not equipped to handle the loans.

But the suits said that Bank of America dramatically increased the volume of loans delivered to UES in 1987.

UES and Bank of America have blamed the processing failures on a botched computer conversion at UES in the fall of 1987, which was required to handle the increasing volume of loans.

The suits contend that substantial problems were occurring well before the computer conversion.