It's Even Worse Than You Think

by David Cay Johnston

  DeVos named as one of her special assistants a lawyer, Robert S. Eitel, with a solid résumé in commercial education.

  Eitel took a leave of absence from his job as vice president in charge of regulatory matters for Bridgepoint Education, Inc., a California company operating for-profit colleges with 45,000 students. Student loans provided Bridgeport with more than 80 percent of its revenue and, the company disclosed in a footnote to a regulatory filing, perhaps more than 90 percent.

  The company warned shareholders that it faced significant difficulties because of federal regulations adopted by the Obama administration. These regulations were designed to protect students and taxpayers from unscrupulous and worthless schools. The regulations required such schools to show that a substantial number of their students found work in the fields in which they paid to learn. Getting rid of that rule and another one limiting student loans to less than 90 percent of school revenues were top priorities for Bridgepoint and its for-profit peers.

  Bridgepoint was not thriving as a business. From 2013 through 2016 its annual revenue steadily shrank with a net loss over those years of $44 million.

  Potentially much more serious problems than losing money, and filling nine pages near the end of its annual disclosure report to shareholders, were some footnotes on “commitments and contingencies.” These footnotes told of audits and subpoenas in actions brought by the Justice Department, the Education Department’s inspector general, the attorneys general of California, Massachusetts, New York, and North Carolina, as well as several lawsuits. The litigation had been brought by investors claiming Bridgepoint executives were lining their own pockets at the expense of shareholders and other alleged dishonest behavior.

  Despite the financial losses and unsettling allegations, Bridgepoint stock shot up after Election Day, from $6.35 just before voting to $15.19 in June 2017, a phenomenal 139 percent gain. This remarkable growth came despite only a sliver of increased revenue in the first half of 2017. The stock price rise suggested that speculators were betting not on a boom in profitable business, but on the Trump administration improving the business climate for the company.

  DeVos assigned Eitel, during his leave of absence from Bridgepoint, to guide the rollback of federal regulations. This posed obvious conflict-of-interest issues. The top lawyer for an anticorruption nonprofit organization, Scott Amey of the Project on Government Oversight, said Eitel’s position “raises considerable red flags, especially due to the fact that this company was under investigation.”

  Senator Elizabeth Warren, the Massachusetts Democrat who made a name for herself exposing abusive financial practices and designing the Consumer Financial Protection Bureau, asked DeVos about this. In a letter, she noted that Consumer Financial Protection Bureau had reached a $23.5 million settlement with Bridgepoint over its practices in advising students about loan repayment.

  Bridgepoint had agreed to a consent order stating that Bridgepoint sales agents, called financial advisers, “made oral statements to Students about the potential costs of the loans, including that Students normally paid off Institutional Loans . . . with $25 monthly payments.” Monthly payments would, of course, have had to be much larger than $25 just to cover interest.

  Numerous studies have shown that most Americans woefully underestimate interest costs on loans. Many cannot calculate simple interest and even fewer understand compound interest. The for-profit colleges aimed their marketing at poor and ill-educated young people, many of whom would not be proficient at math.

  Lending to students is “a largely unregulated financial market and opaque industry [that] cries out for transparency and consumer-focused regulation,” Bruce H. Adams, the Connecticut Department of Banking general counsel, wrote in urging federal and state banking regulators to cooperate in ensuring that “robust enforcement authority” is exercised on behalf of students.

  “Our vulnerable student borrowers . . . will do anything to chase the American Dream,” Adams wrote, making them easy prey for predatory student loan firms.

  Senator Warren’s letter to DeVos also questioned the legality of employing Eitel and a second man, Taylor Hansen, as her special assistants. Warren, a former Harvard Law School professor, raised the specter of criminal violations of federal integrity laws. Congress prohibits government officials from any involvement on issues in which they have a financial interest. Warren noted that rather than sever his ties to Bridgepoint, Eitel was only on unpaid leave.

  Eitel immediately resigned from Bridgepoint. For weeks he had worked on undoing a host of Education Department regulations under an executive order Trump issued in March. As regulatory reform officer he issued a fifty-three-page report in late May outlining a plan for sweeping reforms. The task force operated in what a variety of education interest groups, education journalists, and congressional staffers all described as extreme secrecy.

  The other special assistant DeVos hired, Taylor Hansen, had been on the payroll of the largest association of for-profit schools, Career Education Colleges and Universities. As its lobbyist, Hansen sought to roll back rules, especially a “gainful employment” rule that vexed for-profit schools. This Obama regulation was intended to weed out schools that were outright scams or trained students for careers in areas where there were no jobs. Getting rid of it was a top priority for the lobbying arm of the commercial schools.

  * * *

  News reports documenting in vivid detail the mistreatment of student loan borrowers by the lenders and their collection agents had been widely reported in print and broadcast for several years before the 2016 presidential campaign. These articles included images of canceled checks and other documentation showing that student borrowers had made their monthly payments on time, or obtained forbearances, and in some cases entirely paid off the debts. Yet they were being hounded because the lenders insisted that money was still owed.

  To rein in these abuses, the Obama administration instituted a formal rulemaking. In most regulatory proceedings only the affected industry and executives from individual companies, along with state-level regulators, file comments. But in this case more than ten thousand Americans wrote to express their anger and frustration. These comments overwhelmingly favored regulating the lenders, especially giving relief to borrowers when the lenders either refused to acknowledge payments that had been made or to abide by the terms of loan modification agreements.

  Obtaining forbearance from bankers had been a Trump specialty for a quarter century. No one knew better than he that banks will rework the terms of the loan to help borrowers burdened with more debt than they can handle or who are the unfortunate victims of events beyond their control like the Great Recession that cost nearly nine million Americans their jobs.

  At campaign rallies, Trump said a big problem he would address as president was that after taking out loans and earning their degrees many students discovered “there are no good jobs.” Six weeks after becoming president, though, the Trump administration delayed implementing the Obama era rule requiring for-profit schools to show that a significant number of their students found “gainful employment.”

  The Education Department granted the for-profit colleges and loan servicers this favor the day that Senator Warren’s letter arrived. The favor was especially valuable to the biggest student loan servicer, which in its financial statements disclosed that it stood to gain perhaps $15 million per year if the Obama era rule was reversed. That servicer just happened to have been run until the start of 2017 by Bill Hansen, father of DeVos special assistant Taylor Hansen.

  DeVos, two months into the Trump administration, issued a letter saying, in effect, that the federal Education Department would not protect student loan borrowers when lenders refused to honor their signed agreements modifying loan payments. The Education Department simply “will not require compliance with the interpretations” of the Obama administration that such agreements be honored, the letter said.

  Under laws passed by Congress, regulations are not casual wo
rds, like tweets, that can be ignored. Regulations are indeed interpretations of how laws will be enforced, and they carry the force of law if they have been properly, in legal parlance, promulgated. The Obama era rule had been promulgated; the Trump era policy had not.

  Senator Warren, the former Harvard law professor, in a stinging letter told DeVos that she had no legal authority to ignore any regulation. If the Trump administration wanted to change the regulation, it had to follow the Administrative Procedure Act procedures. That law required formal notice, time for public comment, and an opportunity for all interested parties to be heard. These requirements are rooted in the First Amendment’s guarantee of the right to petition the government for a redress of grievances.

  DeVos’s letter also drew a sharp rebuke from 130 members of Congress, all Democrats. They pointed out that her letter benefits lenders who had abused veterans, whom Trump said he would always look out for and help. It also noted that at her confirmation hearing, DeVos said the Education Department “should to do everything possible to ensure that our students are getting excellent servicing of their student loans.” They said her letter contradicted her testimony and “signals an unwillingness to support and safeguard the best interests of borrowers.”

  “Your decision to rescind these memos—including the guidance making servicers’ past performance and record of compliance with the law the most important non-cost factor in the evaluation—will put millions of borrowers and taxpayers at risk. Without accounting for past performance, federal contracts will be open to bidders that have previously violated state or federal consumer protection laws, mistreated members of our military, and consistently ignored the needs of their borrowers,” the senators and representatives wrote.

  DeVos never acknowledged the letter, a practice widespread in the Trump administration.

  Maura Healey, the Massachusetts attorney general, interpreted the nonresponsiveness of DeVos as both high-handed and a sign that the Trump administration has little to no regard for the law. Healey filed a lawsuit to block what she called the “unlawful rescission” of the rule protecting diligent borrowers from financial abuse. Healy persuaded the attorneys general from seventeen other states and the District of Columbia to join her.

  Federal law “does not permit the [Education] Department to delay” implementing a properly adopted “regulation in order to work on a replacement,” the attorneys general argued. They said the rationale DeVos put forth for delaying the rule was “mere pretext,” an excuse to evade following the existing rule until the department went through the legally mandated steps to adopt a new regulation.

  They also argued that DeVos was delivering a hugely lucrative favor to loan servicers and the related commercial schools that charged a lot and delivered little. The attorneys general, all Democrats, said the “borrower rule” was “designed to hold abusive post-secondary institutions accountable for their misconduct and to relieve their students from federal loan indebtedness incurred as a result of that misconduct.”

  Their lawsuit noted that for-profit schools are very expensive. For each dollar community colleges charged, the lawsuit said, for-profit schools typically charged $4.50.

  “For-profit schools have directed their marketing toward low-income and minority students, particularly low-income women of color,” the attorneys general said. They noted that just a tenth of college students attend commercial schools, but they take out a quarter of all student loans.

  The DeVos letter was suspect for another reason. DeVos was an investor in companies that seek to profit from education. Among them was LMF WF Portfolio. It finances a firm that collects student loans. The bigger the debts owed, a figure that would increase significantly if the Obama era regulation was ignored, the greater the value of her investment. DeVos had more than $1 million invested with that firm, although that was only a small part of her overall portfolio.

  DeVos had to divest, but people close to her did not. And she had to divest only her financial holding, not any allegiance to people like herself who had enjoyed profits from practices that exploited poor people trying to better their lives.

  DeVos’s haughty dismissal of a properly adopted regulation, and the complete turnabout from what candidate Trump promised to what President Trump did would have surprised no one who had read Trump’s campaign book.

  In Great Again: How to Fix Our Crippled America, Trump wrote that “we can’t forgive these [student] loans.” It was a clear signal that he had no interest in allowing overburdened students to repudiate their debts as he had done when he got his bankers to permit him an allowance of $450,000 a month of personal spending money in 1990 when he accumulated massive debts.

  Trump’s book did say, “We should take steps to help students.” The way to do that, the book said, was to make sure the federal government did not profit from these loans. As for abuses by loan servicers and mendacious sales pitches to get students to take out loans, there was not a word in the book.

  By favoring bankers over borrowers, the Trump administration is punishing not only current students but also the working adults who have been struggling to settle their student loan debts and build their lives after getting their education. Behind them is a generation of workers-to-be who may never be able to sit in a college classroom if funding is cut to every program that might allow them to attend. The long-term cost to the American economy could be devastating if many thousands of our brightest minds are shunted into low-wage, low-skilled jobs.

  PART VII

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  LAW AND ORDER, VETERANS, RACE AND GUNS, IMMIGRATION

  Above the Law

  In late August of 2017, Donald Trump flew to Phoenix to hold a rally for the 2020 election. To those who heard his entire speech and understood the context, his remarks raised troubling, even frightening new concerns about the future of America as a democracy under law.

  Phoenix signaled an important change in Trumpian rhetoric that revealed just how far his contempt for the rule of law could go. He replaced his many wink-wink and dog-whistle comments—subtext intended to be understood by his fellow racists, but not most people—with a rhetorical bullhorn. He aimed the message at two audiences. One consisted of his die-hard supporters, some of whom told television journalists that any effort to remove Trump via impeachment would be met with violence, perhaps even a civil war.

  The other audience consisted of Republicans in Congress who might be thinking that Trump was a danger to the nation or the Republican Party—and needed to go. Journalists and anyone who might challenge Trump also came in for a not at all subtle threat that he could pursue them using the powers of the presidency, if only to harass them.

  Given the rapidly advancing Russia investigation by special prosecutor Robert Mueller, Trump’s need to signal Capitol Hill Republicans that they had better stay quiet or face the wrath of Trump voters in 2018 was pressing. That Trump’s popular support was down to about a third of all voters mattered far less than the vast majority of Republicans who still stood firmly with him. They represented plenty of votes to sway Republican primary elections to those who vowed fealty to Trump and away from anyone who challenged his fitness to hold office.

  While not using these words in Phoenix, Trump articulated clearly that his administration stood for two standards of justice, separate and unequal. One standard was for those in positions of power who shared his views and took actions he liked, even if they were unlawful. The other standard was for everyone else. Those who were with him would be protected, if necessary with pardons or clemency. They would not be held accountable for lawless behavior, no matter how egregious, provided it was in Trump’s personal or political interests to shield them. His support for former sheriff Joe Arpaio, whose pardon Trump had hinted at for days, exemplified Trump’s protection of those he liked or whose allegiance he needed to shield himself from the Mueller probe.

  The other standard of justice was for those who opposed Trump and found themselves in trouble in any way. That group
was sent a simple message: expect no quarter from the Trump administration, which intended to use every tool at its disposal to vanquish those he perceived as unworthy or, worse, as enemies.

  In Phoenix, Trump quickly riled up the crowd on behalf of Arpaio by attacking the legitimacy of the law enforcement people who had brought him to justice through years of diligent work, culminating in a three-week trial for criminal contempt of court for brazenly violating a federal judge’s order again and again. Criminal convictions for contempt of court are rare both because such conduct is extraordinary and because there are so many ways to create the appearance of lawful compliance without actually doing so. Trump, though, made it seem as if Arpaio was railroaded.

  “So, was Sheriff Joe convicted for doing his job?” Trump asked. The crowd responded with shouts of “yes!”

  The responses grew louder when Trump went on to declare his intent to pardon Arpaio. Playing coy with the audience, Trump said, “I won’t do it tonight because I don’t want to cause any controversy.” He waited for the applause to die down before adding, “I’ll make a prediction: I think he’s going to be just fine.”

  By pardoning Arpaio, Trump signaled those who might turn against him to avoid long prison terms for their own crimes that so long as they are with Trump, so long as he trusts in their loyalty to him, he wants them to think they are safe.

  The president then launched into an angry and unscripted denunciation of journalists. Less than a month after taking office, he had declared that journalists are “the enemy of the people. SICK!” As a candidate, he said that no one should be allowed to publish stories about him that he did not agree with, a position at complete odds with the First Amendment to the Constitution, with its prohibition against government blocking the press.

  “It’s time to expose the crooked media deceptions. They’re very dishonest people,” Trump continued. “The only people giving a platform to these hate groups is the media itself and the fake news.”