Defining Colleges' Liability for Fraud Claims

Trump administration will ask negotiators of borrower-defense rule to reconsider institutions’ liability for claims of misrepresentation -- a request that has some worried DeVos plans to let bad programs off the hook.

November 6, 2017
 
Education Secretary Betsy DeVos

The U.S. Department of Education will ask the appointed panel charged with overhauling an Obama-era rule to protect student borrowers to reconsider the extent to which colleges and universities should be liable for loan discharge claims based on fraud or misrepresentation.

That question is one of many that the panelists will be asked to grapple with in a process called negotiated rule making, according to a source with knowledge of the discussions. Education Secretary Betsy DeVos announced in June that she would block the student protection regulation, known as borrower defense, from going into effect and would launch a rule-making process to craft a new rule.

DeVos has said the Obama administration’s rule did not sufficiently address the concerns of colleges. For-profit colleges have been among the most vocal critics of the regulation, but higher education groups representing public and nonprofit institutions have also been critical.

Some observers of past rule-making processes said reconsidering the liability of institutions for covering borrower-defense claims would make for a more fair regulation. Student and consumer advocates said it confirmed what many suspected after the initial suspension of the Obama rule and numerous public comments from DeVos -- that the department intends to craft a rule that lets abusive colleges off the hook for the cost of discharging student loans.

“The Trump administration wants to help schools shed those borrower-defense liabilities,” said Clare McCann, the deputy director of higher education policy at New America.

McCann, a former Obama Education Department official, said lowering the liability of institutions would create a pretext for the department, as a steward of taxpayer dollars, to clamp down on relief to defrauded borrowers.

Borrower defense to repayment was a little-used provision of the Higher Education Act that allowed student borrowers to apply for discharge of their federal loans when they were misled by their institution or it engaged in violation of certain state laws. The collapse of for-profit chains Corinthian Colleges and ITT Tech prompted a flood of claims to the department starting in 2015. Nearly 90,000 borrower-defense claims are pending review at the department, which is considering how to grant relief under existing 1995 regulations.

Department officials have said for months that they are working to establish a fair process for reviewing those pending claims. But DeVos said in a speech to Michigan Republicans in September that under the Obama borrower-defense rule, which provided a new, expanded federal standard for claims, borrowers simply had to raise their hands “to receive so-called free money” -- one of a number of statements that has colored perceptions of her approach to borrower relief.

The potential cost to taxpayers of the Obama rule was a major complaint from critics as it was finalized last year. The department’s estimates found the rule could lead to the discharge of $42 billion in loans over a decade -- providing a rationale, advocates say, for restricting relief if institutions come out of the rule-making process with lower liability.

The department declined to comment on whether it will ask the borrower-defense negotiators to consider the extent of institutional liability for claims or whether it would seek a rule that limits liability for colleges. A spokesman said in an email, “That's speculation and you know we aren't going to comment on speculation.”

The names of 17 negotiators were released last month, representing a range of interests, from consumer advocates and veterans' groups to college business officers, various university representatives, and accreditors. An initial three-day negotiating session will take place in Washington Nov. 13-15.

Negotiated rule making is a unique process used to produce regulations by the Education Department and other federal agencies, where an appointed committee seeks to reach a consensus on the details of a proposed rule. However, the agency can draft its own rule if and when a committee fails to reach consensus. Even so, past participants of negotiated rule-making sessions say the final rule will reflect the discussions.

Chris Lindstrom, the higher education program director at U.S. Public Interest Research Groups, said DeVos has been clear that the department views the Obama rule as unfair to colleges and universities because of the large liabilities it would create from debt-relief claims.

“To me, it’s trying to achieve a middle ground that doesn’t exist,” she said. “Ultimately, they’re going to ask the question because they have a particular goal in mind, and I think that goal is wrong.”

Lindstrom said she disagreed with that agenda but couldn’t accuse the department of negotiating the rule in bad faith -- a charge frequently lobbed in past rounds of rule making. Even though the Education Department may have a clear goal in mind for a provision of a rule, she said, it will take note of the political will of negotiators in the room.

In the negotiation of the Obama rule, the department did not ask panelists to consider the extent to which colleges should be liable for borrower-defense claims.

The department ultimately separated debate of how the federal government seeks restitution from deciding the process a borrower would follow to submit a claim, said Karen McCarthy, director of policy at the National Association of Student Financial Aid Administrators. The department plans to ask negotiators in the upcoming rule-making process to separately consider the process for filing a claim, according to a person with knowledge of those discussions. McCarthy said that would reflect the conclusion of the previous rule-making process.

Dennis Cariello, a negotiator in the previous round of borrower-defense rule making and a lawyer who advises institutions, including for-profit colleges, cautioned against reading too much into the questions for negotiators as a signal of where the department leans on the rule. He said there are legitimate issues of authority to be discussed involving what the department can recoup from colleges whose students have filed borrower-defense claims.

Cariello said the department should consider some kind of intent standard that would reflect different levels of culpability -- for example, recognizing negligence or recklessness versus intentional misrepresentation. He said the Obama administration was unwilling to consider whether a mistake on the part of a college should lead to an existential threat to its finances.

“Putting aside the reputational loss that’s not insignificant in having one of these claims, I think the monetary harm is something that needs to be understood,” he said.

Critics of the Obama rule say the department should account, for example, for whether a student who attends an elite private university and makes less than an advertised salary in their field suffered substantial harm. The Obama borrower-defense rule was heavily opposed by the for-profit sector in particular, but historically black college and nonprofit university groups also have criticized provisions of the rule as being onerous for their members.

Mike Goldstein, a lawyer with Cooley LLP, said the federal statute is clear that the secretary of education has the authority to recoup costs of borrower-defense claims from institutions. But he said there’s no description in the statute of exactly how the department should do that. Raising that question in the course of negotiations was perfectly fair, Goldstein said.

“Everybody agrees the student who suffered harm should have redress,” he said. “It’s a matter of how do you make it fair and how do you make it fair to both sides.”

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