CFPB Sides with ED in RFP Litigation and the Court’s Preliminary Injunction Prohibiting New Placements

On Monday, August 21, 2017, the Consumer Financial Protection Bureau (CFPB) filed an Amicus Curiae Brief in support of the Department of Education (ED) in the multiple consolidated appeals in the United States Court of Appeals for the Federal Circuit in the litigation surrounding the ED RFP awards and protests.

The CFPB brief focuses on the preliminary injunction issued by Chief Judge Susan G Braden on May 31, 2017 and the harm it is causing to consumers. Since it was issued, that injunction has effectively paralyzed ED’s ability to place new accounts with ANY Private Collection Agency (PCA).

A copy of the CFPB Amicus Brief can be found here.

Editor’s Note: “Amicus Curiae” literally means “friend of the court.”  A person or entity with a strong interest in the subject matter of any litigation may petition the court for permission to file a brief, ostensibly on behalf of one of the parties to the case, but also to suggest things to the court consistent with their own views and opinions.  

This is the key passage from the May 31, 2017 preliminary injunction:

“The preliminary injunction will remain in place to preserve the status quo until the viability of the debt collection contracts at issue is resolved. See Litton Sys., Inc. v. Sundstrand Corp., 750 F.2d 952, 961 (Fed. Cir. 1984) (“The function of preliminary injunctive relief is to preserve the status quo pending a determination of the action on the merits.)”

Unfortunately, nobody other than Judge Braden has any clue what she means by “until the viability of the debt collection contracts at issue is resolved.”

On June 1, 2017 insideARM wrote about the issuance of the preliminary injunction. In that article, we noted that Judge Braden had referenced “three recent news articles” as part of the rationale for her order. We also two mentioned how unusual the order was; one, because it was issued sua sponte, which means the court took the action on its own motion, rather than at the request of one of the parties. Second, because Judge Braden was effectively taking judicial notice of news items, including an Op/Ed article. Finally, we noted that the order effectively precluded ED from placing any new accounts to PCA’s.

In the “Background” section of the brief, the CFPB brief begins with a short history of the Bureau, its consumer education mission, and its experience with student loan borrowers. To highlight, the Bureau hits two key points:

1. To the extent the trial court’s preliminary injunction precludes the Department of Education from assigning or reassigning a debt collector to a borrower’s student-loan account, that injunction implicates the Bureau’s consumer-education mission.
2. To the extent the trial court’s preliminary injunction in this case prevents the Department of Education from assigning debt collectors to federal student loans in default, the Bureau is concerned that borrowers will face greater obstacles when seeking to exercise their right under federal law to cure their default and enroll in an income-driven repayment plan.

The brief sites the 2016 Annual Report of the CFPB Student Loan Ombudsman (Oct.2016). The Bureau then notes:

“To be sure, as the trial court observed, the 2016 Ombudsman Report recommended reforms to the process for collecting and restructuring federal student loan debt. But as that process is currently structured, debt collectors are the primary contact for borrowers seeking information about how to rehabilitate, consolidate, or otherwise manage their federal student-loan debt. Debt collectors are also the primary contact for borrowers seeking to make any payment toward defaulted federal student loan debt — debt which continues to accrue interest daily when in default. By preventing Education from assigning debt collectors to loans in default, and thus impeding or preventing borrowers from managing their federal student loan debt, the preliminary injunction leaves some borrowers worse off — potentially interfering with access to important consumer protections and preventing some borrowers from making payments toward accruing interest charges — while doing nothing to advance the reforms proposed by the Ombudsman.”

The CFPB brief then took the time to explain the difference between loan servicing and collection of a defaulted loan. This was a distinction that had previously baffled Judge Braden. (See our August 8, 2017 article regarding ED’s filing of a status report for Judge Braden.) So, it appears the Bureau was being proactive in explaining the distinction to the Court of Appeals. 

The CFPB brief then discusses the various options available to a borrower in default and the key role PCAs fill in educating borrowers on those options, and often facilitating the execution of documentation to take advantage of them. Finally, the CFPB discusses how a PCA may assist a borrower in default to terminate an administrative wage garnishment.

In the “Argument” section of the brief the CFPB quickly notes:

“To the extent the preliminary injunction precludes Education from assigning debt collectors to federal student loans in default, the trial court was mistaken in suggesting that the 2016 Ombudsman Report supported that outcome. Consistent with his statutory responsibilities, the Ombudsman has evaluated and made various recommendations for improving the process for collecting federal student loan debt. Principally, the Ombudsman recommended that lawmakers “consider ways to improve repayment success for previously defaulted borrowers that include immediate access to a stable and long-term [income-driven repayment] plan.” As an interim step, the Ombudsman recommended strengthened communications with borrowers to facilitate their ability to bring their loans current. But the preliminary injunction does exactly the opposite: it eliminates a point of contact for borrowers in default seeking information for bringing their student loans out of default. Contrary to the conclusion of the trial court, the harm to borrowers is real and does not support the preliminary injunction in this case.

Preventing Education from assigning debt collectors to borrowers in default can lead to real world harm for some borrowers — potentially interfering with access to important consumer protections and preventing some borrowers from making payments toward accruing interest charges. “A borrower in default on a federal student loan has a right under federal law to work with a collector to rehabilitate their debt,” and a “debt collector facilitates this process by collecting information from the borrower necessary to set up a monthly rehabilitation payment amount.”

The Bureau also discusses the potentially negative alternatives for consumers:

“Indeed, the Bureau is concerned that many borrowers seeking to navigate their options under the current system may be enticed by private “debt relief” scams that promise to assist borrowers with managing their debts but in fact offer little benefit. These scams “prey on distressed borrowers who run into trouble and struggle to figure out what comes next” because “[i]n some cases, [they] do not think their student loan servicers can help them.” Borrowers in default who do not, in fact, receive basic information about key consumer protections and the opportunity to arrange repayment are more likely to turn to one of these outfits for assistance, and may potentially end up paying “hundreds of dollars or more” in unnecessary fees.”

The CFPB concludes with:

“In sum, the Bureau respectfully submits that borrowers in default will be better off if they have access to Education’s debt-collection contractors during the pendency of this litigation than if they do not. To the extent the trial court’s preliminary injunction forecloses Education from assigning such borrowers to debt collectors, the preliminary injunction is contrary to the public interest and, therefore, cannot be supported on that basis.

For the foregoing reasons, the Bureau urges this Court, in reviewing the trial court’s preliminary injunction, to conclude that precluding Education from assigning debt collectors to loans in default is inconsistent with the public interest.”

insideARM Perspective

Kudos to the CFPB for jumping into the fray in this matter. As we have written in past, the ED PCA RFP process was, and is, a mess. However, Judge Braden exacerbated the mess to the detriment of consumer borrowers by issuing a preliminary injunction that forbade ED from placing business to any PCA contractor – including the 11 small businesses that have valid contracts and the contractors that have valid Award Term Extensions (ATE).

The numbers are staggering. In a Declaration of James Manning, Acting Under Secretary for the Department of Education, (filed in connection with the litigation) Mr. Manning discussed the accounts that are sitting and not being placed. He stated, in part:

“This means that by the end of May, 2017, a total of 234,000 borrowers holding accounts collectively valued at $4.6 billion have been denied PCA service due to the Court’s orders. Based on fiscal year 2016 figures, a conservative estimate of newly defaulted accounts added to the Department’s inventory every month would be 118,000 borrowers with the value of those loans totaling $2.285 billion.”

Extrapolating those figures, it would appear that by the end of August there would be approximately 588,000 accounts, with the value of those loans totaling $11.455 billion, sitting in some holding queue at ED.

insideARM also believes that figure is low. The number might increase if accounts being currently held at PCAs with expired ATE’s are added into the mix.

These accounts must be placed with PCAs. The continuing harm to consumers is real. The preliminary injunction must be lifted or modified to allow placement of these accounts to PCAs.

BUT, there will still be a problem. Immediate placement of that many accounts to the 11 small business contractors and the 2 PCAs with current ATEs is not a great solution either. insideARM believes that is too many accounts to be handled efficiently by those firms in the short term and so, for those consumers who can’t be reached in a timely manner, the consumer harm the CFPB seeks to address will only continue.  

The fact of the matter is the RFP selection process must be brought to a conclusion and the protests and litigation must be brought under control.  Additional agencies need to be brought into the placement strategy. Preferably, those agencies will have significant ED experience and can be up speed quickly.

In the RFP “Do Over” ED is currently scheduled to provide Notice of Awards on Friday, August 25, 2017. Even if that deadline is met, history tells us that there will be more protests and more litigation. If that happens, will the “preliminary injunction” be extended indefinitely?

The madness needs to end sometime.

Editor’s Note: insideARM has written extensively about the ED RFP and the litigation surrounding the RFP. We have often been asked for a summary of all our articles on the subject. See here for a link to an insideARM.com page that provides a history of our ED related articles. The page is automatically updated as new stories are written.