Eight Washington banks have sued the District of Columbia government for $2.9 million to cover unpaid student loans that the city guaranteed but has failed to pay off.
The suit, filed Monday in D.C. Supreme Court, follows a year-long effort by the banks to collect the money.
Since last July the banks have stopped making any more low-interest loans to D.C. college students even though about 1,500 students have applied for them.
"Nobody wanted a lawsuit," said Joseph H. Riley, the president of National Savings & Trust Co., "and I think we've been understanding. But we have to fulfill our responsibility to our shareholders and collect a debt that is due."
Since the program started here in 1967, the D.C. banks have made about 14,000 student loans to city residents, totaling about $14.5 million. The default rate now is about 33 per cent, about triple the average for all students borrowed nationwide.
All loan applications are screened and approved by the D.C. Department of Human Resources before the banks consider them.
Yesterday a city spokesman said Human Resources Director Albert P. Russo "regretted the (banks) action because of the intense efforts by the city government and the federal government to reach an amicable agreement . . . The action is unfortunate."
In March Russo announced that the city had paid the banks $100,000 and would stiffen its effort to collect money from delinquent student borrowers.
Two weeks ago the federal government offered the banks 50 per cent of what they are owed if the bankers agreed to resume the loan program with direct federal guarantees. But the bankers said no new loans would be made until all the old loans with city government guarantees are paid off.
Under the old program, if the city paid the money it owes the banks, it would be eligible to get 80 per cent of it back from the federal government.
But the city cannot reimbursed until after it pays out the money itself, and city officials have said the District does not have enough money to begin paying.
Under the D.S. loan program, the money for the loans was put up by nine of the District's banks through a pool arrangement.
However, one of the banks in the pool, the Bank of Columbia, refused to join the lawsuit, and is named in the court papers as a defendant along with the D.C. government, even though the other banks seek no money from it.
Yesterda James B. Brockett, president of the Bank of Columbia, said he felt "there must be a better way than to get into a protracted legal battle to work things out with the city."
"This (suit) will just drag on and on and cost a lot of money," Brockett said. "It will cause a lot of hard feelings between the banks and the city."
The banks filing the suit are Riggs, which has about 41 per cent of the money in the loan pool; American Security, 29 per cent of the loan money; Union First National, 13.6 per cent; National Savings & Trust, 11.8 per cent, and D.C. National Bank, Industrial Bank of Washington, McLachlen National and United National Bank of Washington, each with about 1 per cent apiece.
Bank of Columbia also accounted for about 1 per cent of the loan pool.