KeyBank’s “One-Two Punch”

Last week, we described how KeyBank has partnered with dozens of unlicensed and unaccredited trade schools to help thousands of students take on high-cost private student loans, and then refused to cancel them when the institutions shut down. KeyBank has apparently been able to avoid forgiving borrower debt at these defunct schools by engaging in a coordinated strategy that legally knocks out existing federal regulations and consumer protections for borrowers.

As we noted last week, a large 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 lenders that have “a referring relationship” to notify students that they have the right to discharge their private loans if the schools close unexpectedly.

KeyBank has refused to include the required notice in the private loan master promissory notes it provides students. The lender argues that it is not subject to the rule because it is not regulated by the FTC but by the Treasury Department’s Office of the Comptroller of the Currency (OCC), which oversees national banks and does not have a similar requirement in place. Despite pleas from consumer advocates, FTC and other federal officials have so far failed to challenge the bank’s interpretation of the law.

But KeyBank’s defiance of the FTC Holder Rule is just half of its strategy. The other part is aimed at preventing students whose schools have shut down from challenging their loan agreements in court. The bank has tried to achieve this by including a clause in students’ promissory notes that requires them to settle any disputes with the lender through binding arbitration. By signing their loan documents then, students, often unwittingly, sign away their right to sue the lender in court.

According to a recent report from the National Consumer Law Center’s Student Loan Borrower Assistance Project, mandatory arbitration agreements — which have become increasingly common in all sorts of consumer contracts, including those for credit cards — put borrowers with legitimate grievances at an extreme disadvantage. “This constraint puts the lender in a stronger position because little discovery is available, the lender can pick the arbitration service provider (and repeat players bring more business, leading to an incentive for the arbiter to rule for the lenders), and decisions cannot be appealed,” the project’s report states. “In addition, after it became clear that these clauses did not fully terminate the ability to bring class actions, lenders are also requiring class action prohibitions within arbitration.”

The increasing use of binding arbitration agreements has raised concerns on Capitol Hill. “The right to a jury trial is guaranteed by the Federal Constitution, yet this right is lost as more and more businesses impose arbitration agreements on their customers,” Rep. Hank Johnson (D-GA) said at a House of Representatives hearing on the subject last year. He added that these “so-called agreements” have become “a tool for business to divert disputes into a private legal system.” Johnson has sponsored legislation that would limit the use of mandatory arbitration agreements in most consumer contracts. The bill is currently pending before the House Judiciary Committee. Sen. Russ Feingold (D-WI) has introduced a similar bill in the Senate.

But just because KeyBank includes these arbitration agreements in students’ promissory notes doesn’t necessarily make them iron-clad. Some state courts have allowed students who have been scammed by unscrupulous schools to still move ahead with legal challenges against the lender.

KeyBank, however, has another card up its sleeve. In its private loan promissory notes, it includes a clause stating that any legal actions initiated by the bank or the borrower must be filed in KeyBank’s home state of Ohio. These “venue restrictions” appear to be yet another attempt to prevent borrowers from having their day in court. Cash-strapped students, who suffered significant financial harm when their schools closed, generally don’t have the resources to wage a lengthy legal battle in another state.

In addition, Ohio’s consumer protection laws, by almost all accounts, are among the weakest in the country. And KeyBank has successfully argued in a few cases that it is exempt from these state laws because it is a national bank.

While some courts have been willing to ignore mandatory arbitration clauses, almost all of those that have tried these cases have honored the venue clause. We know of only one case — filed by more than 50 former students from TAB Express International, a now-defunct flight school in Florida — in which a court declined to enforce it. Lawyers for the former students argued that their cases against the school and the lender were too intertwined to separate them. Now the case is scheduled to go to trial in a state circuit court in March.

In their lawsuit, lawyers for the TAB students argue that the mandatory arbitration and venue clauses that the lender includes in its promissory notes represent “a one-two punch to deter any legitimate claims against KeyBank.”

“In fact,” they continue, “KeyBank’s ability to continue blindly trusting in its venue clause, when pursuing similar vocational school schemes outside of Ohio, effectively immunizes it from legal challenges by students everywhere.”

These are very serious allegations that demand federal attention. Hopefully, a new administration will provide a knockout blow to put an end to these types of predatory private student loan practices.