B of A Resolves Suit Over Bad Student Loans : * Litigation: Compromise settlement is reached with nine other financial institutions on footing the bill for a default-plagued program.

Bank of America confirmed Thursday that it has settled a major lawsuit with nine other financial institutions over its role as trustee in a default-plagued student-loan program that both embarrassed the bank and caused it major losses several years ago.

The agreement was reached after more than two months of arduous negotiations mediated by Stanford Law School Prof. Robert Mnookin. The case had been set to go to trial April 28.

Though the terms were not revealed, one lawyer close to the case called the agreement a compromise. “A mediator is going to make sure that no one can claim victory,” the lawyer said. Mnookin declined to comment on the terms of the agreement.

In confirming that an accord had been reached, B of A spokesman Peter Magnani said that the settlement “involves payments by all parties.” He declined to elaborate. The nine banks include Citicorp, seven financial institutions from Japan and one from the Netherlands.

Magnani also said the settlement “won’t have a material effect on the condition of the bank.” San Franciso-based B of A had already set aside more than $130 million in a litigation reserve in late 1988 and early ’89 to handle this and other legal problems.

The litigation concerned who would foot the huge losses on a loan-servicing operation run by United Education & Software in Encino that was plagued by foul-ups and mismanagement. The loan losses are expected to run between $450 million and $650 million.

B of A was a trustee for the loans, but the nine banks had issued letters of credit to cover any losses. The loans were packaged as bonds and sold to investors through the California Student Loan Finance Corp. in Los Angeles.

At the heart of the problem was United Education’s failure to follow government guidelines for collecting the loans, which totaled $1.4 billion and went mostly to vocational school students. A major flaw was that most borrowers who defaulted were not located and made to repay.

The federal government was supposed to back the loans in case of default, but that backing was canceled after authorities discovered the loan-collection problems.

B of A ultimately took over the loan servicing and tried--but failed--to get the U.S. Department of Education to honor the federal guarantee. The cancellation of that guarantee put the burden on the other banks, whose letters of credit also backed the bonds, and they in turn sued B of A as trustee for the bonds.

Another loser in the debacle was California Student Loan Finance, a private, nonprofit concern that used the banks to help provide liquidity to the student-loan market. Since the scandal broke, that business has dried up, said Sid Karsh, the firm’s chief executive.

“It has been a pretty bad blood bath for everyone concerned,” Karsh said.