A "Key" Battle Against Students

On Super Bowl Sunday in 2008, Silver State Helicopters, an unlicensed and unaccredited Nevada-based flight school chain, shut down without warning, leaving its 2,500 students in the lurch – heavily indebted with tens of thousands of dollars of expensive private student loans and little practical training. The students, however, fought back and most have succeeded in getting their debt discharged or at least reduced. Under threat of legal action, lenders such as Citibank and Student Loan Xpress have backed down and agreed to forgive much of the debt these students took out to attend this fly-by-night school.

But one lender has refused to budge. KeyBank continues to fight tooth and nail to force Silver State students to pay back every single penny they borrowed from the company. The battle is expected come to a head later this month when a federal district court in Northern California is scheduled to hear KeyBank’s motion to get the court to throw out a class action lawsuit brought against the lender by former Silver State students who are seeking to have their high-cost private loans canceled.

The students accuse the Ohio-based lender of colluding with the school to defraud them. From 2002 to 2005, the bank was Silver State’s exclusive private student loan provider -- a time when the flight school chain grew by “an astounding 2,786 percent,” according to the lawsuit. During this time, the school directed prospective students to apply for private loans from KeyBank to cover the full cost of attendance – between $50,000 to $70,000 per student – that they were required top pay upfront before the classes started. The willingness of KeyBank to waive its credit requirements to provide these high-cost loans to financially needy students served “as a fundamental catalyst” for the school chain’s “exponential growth.”

Soon after enrolling, the students discovered that the school was ill-equipped to deliver the training that was promised. “SSH was unable to provide the equipment, instructors, or maintenance necessary to enable the students to gain their pilot ratings,” the lawsuit says. KeyBank was made aware of these problems, the students’ lawyers say, but continued to help market the school for several years. [In 2005, KeyBank severed its ties to Silver State, forcing the school to find other lending partners to make and service the loans]

KeyBank officials deny any wrongdoing, saying that they had little involvement with the school except to provide financing to their students. Therefore, they say, they can’t be held responsible for mismanagement at the schools with which they work.

In weighing these arguments, the court can not look at this case in isolation. It needs to understand that the bank’s actions are part of a much larger pattern of predatory lending.

A History of Abuse

As we have previously reported, there has been in recent years a proliferation of unlicensed and unaccredited trade schools that do not participate in the federal student aid programs and therefore go largely unregulated. Their growth has been fueled by lenders that have “partnered” with these institutions to provide expensive private loans to the low-income and working-class students these schools tend to attract. The lenders have then turned around and, like sub-prime mortgage providers, securitized the loans, shifting these high-risk loans onto unsuspecting investors.

The most aggressive player in this arena has been KeyBank. Over the last decade, KeyBank has formed exclusive relationships with dozens of unlicensed trade schools – particularly ones focused on computer training and flight training. These unregulated schools typically have required their students to pay the full cost of their training up front, with tens of thousands of dollars of private loans from KeyBank. Unfortunately many of these schools have gone belly up, without providing students with the training promised.

In case after case, KeyBank has fought aggressively (and often successfully) to force students to pay back these high-cost loans. The corporation has been able to get away with this by engaging in a coordinated legal strategy that is designed to knock out existing federal regulations and consumer protections for borrowers.

Disregarding the Law

As we have detailed in the past, a key part of KeyBank’s strategy to avoid discharging borrowers’ debt has been to intentionally disregard the U.S. Federal Trade Commission’s Preservation of Claims and Defense Rule. Otherwise known as the FTC Holder Rule, this regulation requires schools and lender that have “a referring relationship” to notify students that they have the right to discharge their private loans if the schools close unexpectedly.

Congress enacted this consumer protection law in the late 1970s to discourage lenders from entering into business arrangements with disreputable schools and companies that are out to scam consumers. In the preamble to the regulations carrying out the law, the FTC said that by holding loan providers accountable for the actions of their business partners, consumers would be safeguarded against “predatory practices and schemes.”

“We can imagine no reasonable measure of value which could justify requiring consumers to assume all risk of seller misconduct, particularly where creditors who profit from consumer sales have access to superior information combined with the means and capacity to deal with sell misconduct expeditiously and economically,” the FTC stated.

So how does KeyBank get around this seemingly straightforward law? By ignoring it altogether. The bank has refused to include the required notice in the private loan promissory notes it provides students.

Lawyers for KeyBank argue that the lender is not subject to the FTC Holder Rule because it is not regulated by the FTC, but by the U.S. Treasury Department’s Office of Comptroller of the Currency (OCC), which oversees national banks and does not have a similar requirement in place. Contrary to the spirit of the FTC rule, KeyBank officials maintain that it is entirely the student’s responsibility to ensure that the schools they enroll in, with financing from the bank, are legitimate operations.

Despite pleas from consumer advocates, FTC and OCC officials have so far failed to challenge the bank’s interpretation of the law. The Silver State students’ class action lawsuit seeks to hold KeyBank accountable for its willful defiance of this key federal consumer protection law. A victory by students in this case could open the floodgates to new challenges from others who have been victimized by the sham schools with which the lender has “partnered.” No wonder KeyBank is fighting so hard to get the court to throw this lawsuit out.

We'll have more coverage on this case as it moves forward. Stay tuned.