October 2007

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Biola University has sued Bank of America (BA) for up to $25 million, alleging the bank overcharged it on financial transactions in 2002 and 2004.

The transactions, two sales of variable interest-rate bonds, funded new student dorms, a parking lot, and a gym, and also refinanced old debt. But the IRS discovered bank overcharges during a 2004 audit and fined the 5,700-student university, saying that BA's actions did not qualify for tax exemption.

The complicated transactions, known as interest-rate swaps, are typical among organizations with debt, said Kenneth Behr, president of the Evangelical Council for Financial Accountability. He estimates that a third of nonprofit bond offerings use such swaps. "It's typically done to minimize risk," he said, "and it's not unusual that Bank of America would be the counterparty."

The transactions work by allowing an institution to repay variable-interest rate bonds at a steady fixed rate, while the bank takes on the risk of the variable rate.

The problem, according to the IRS, was that Biola paid too high of a fixed rate. And both BA and BNP Paribas, a large French bank that BA brought into the deals, knew they were overcharging the school, said Biola attorney Sylvia Scott.

Biola had banked with BA for 20 years before the sales, so the university did little shopping around. On July 31, Biola filed suit against BA to recover excessive interest and underwriting fees, any penalty from the IRS, and attorney's fees, Scott said.

BA spokesperson Shirley Norton said the bank has no comment on the lawsuit. However, the Justice Department launched a probe in November 2006 of several financial institutions, including BA, for anti-competitive practices in the selling of investments and unregulated derivatives to tax-exempt borrowers. BA agreed in January to cooperate with the investigation in exchange for amnesty.

Nonprofit organizations should take note of Biola's lawsuit and be cautious, Behr said. While Christian colleges are generally well-managed and have professional finance committees, other organizations, especially churches, are vulnerable. "Churches make the mistake of picking someone locally" to run their finances, he said. "It's not unusual for them to be multimillion-dollar organizations, and typically they need to be more [financially] sophisticated than they are."

Also, he said, any nonprofit initiating a complicated financial transaction needs to "get good advice on what [the transaction] does, and then shop for the best rate."

BA is expected to file a reply with the U.S. district court in Los Angeles by late September.

Copyright © 2007 Christianity Today. Click for reprint information.

Bloomberg reported on the lawsuit.

Investopedia (by Forbes) and Wikipedia have longer explanations of interest rate swaps.

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