Dept. of ED: Why Proceed With a Procurement for Services that are Going the Way of the Dodo?

Oral arguments took place on August 30, 2018 in the consolidated case of FMS Investment Corp. (FMS) vs. United States of America (ED) vs. Alltran Education, Inc. (Alltran), Intervenor Defendant.

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This was the final argument on cross-motions for judgment on the administrative record. The issue currently at hand in this years-long protest is whether the Administrative Record (AR) reflects evidence that ED was rational in its decision to cancel the procurement for unrestricted (large) private debt collectors (PCAs). The 77-page transcript of the proceedings is sealed, but insideARM obtained a copy.

For readers who may need a refresher on the ED litigation -- we are now in round four (my own classification) -- this insideARM article describes how we got here.

Now, back to the August 30 hearing…the following arguments were made by the plaintiffs:

• The government can’t make up facts; ED must have a record that supports its May 3, 2018 decision to cancel the procurement for large PCAs.
• The decision must have been a rational one.
• A rational decision by ED would have reflected a clear understanding of its needs, a survey of options to achieve its requirements, and an evaluation of viable alternatives.
• One viable option has been the services of large PCAs, which are on the record as having been effective.
• The only other option the AR reflects is simply a recently-developed “vision” (or “idea”) to have its pre-default servicers use enhanced techniques – a vision which as yet has not been tested, has no allocated budget, and has no timeline for implementation.
• The NextGen procurement RFP (which ED says is the precursor to its enhanced servicing program) makes no mention of enhanced servicing, and in fact references PCAs.
• The number quoted in the NextGen RFP as potential debt collection volume (350,000 accounts per month) is different than the numbers relied upon in the May 3, 2018 RFP Cancellation Notice (120,000 accounts per month).
• ED’s claim that only small businesses are necessary to handle the accounts is false, as they are in fact using two large companies to do it now (Alltran and Pioneer, which have 2-year Award Term Extensions that expire in 2019).
• ED’s claim that it can simply award more small business contracts when it has a capacity problem is erroneous, because history (and a statement in court made by ED in June 2018) shows that it takes years to get new contractors up and running.
• ED’s claim that the small companies will perform well because if they perform poorly, “it would negatively affect [their] abilities to secure additional contracts” is erroneous because ED has said that, with enhanced servicers, there will be no new PCA contracts… so “there is no carrot here that’s …cajoling the smalls to perform well.”
• While such a direct statement has not been made by ED, the “evidence shows that they cancelled [the procurement] because there was a protest (not because there was a strategy change). The proof of this is that in January, Windham Professionals had a contract award. Nowhere in the record does it say if there hadn’t been a protest, they would have issued this May 3^rd cancellation decision cancelling that contract.”
• These are IDIQ (indefinite delivery/indefinite quantity). The government is not locked in – they only have to use the contractors if they have a need. Why cancel them when the new solution isn’t yet clearly in place?
• The overall student loan portfolio is growing at about 5.8 percent per year, according to ED’s records, but the default portfolio is growing at 5 percent per quarter. So they cannot claim that they’re keeping up adequately with the demand.
• ED is talking about wholly reinventing the way they service loans – defaulted and performing loans – and there’s no consideration. It sounds like they think they can just flip the switch and the whole system would be up and running.
• Many cases have ARs in the hundreds or thousands of pages. This AR is 33 pages. It doesn’t even include the solicitation being cancelled. The 2018 round capacity numbers included for the 11 small businesses and the 2 ATEs are not explained or supported at all. There isn’t a single chart or anything that analyzes capacity beyond December 2018. The record does not support the decision that has been made. ED has not done its job. They shouldn’t be let off the hook.
• Since 2009 ED has acknowledged that it needs both large and small businesses to effectively collect defaulted student loan debt. The agency has never used only small businesses to handle defaulted debt, because those entities historically have demonstrated much lower collection rates than large PCAs.

“Why do we need two contracts on January 11^th, but by May 3^rd we don’t need them anymore? So much do we not need them, that even if there weren’t any protests, we would cancel the contracts.”

• The timeline of ED’s cancellation decision (and their supporting reasons for the cancellation) is suspect:
  • In January 2018 ED awarded unrestricted contracts to two PCAs.
  • In January 2018 ED published a forecast on its website that it would solicit more PCA services; this forecast was removed from the website the day after FMS filed its complaint in this case.
  • The NextGen RFP was issued in February 2018 but did not mention “enhanced servicing,” yet ED claims that the higher number of 350,000 accounts per month was used to represent the potential volume – contemplating enhanced servicing – because they would be assigned much sooner to enhanced servicers than to PCAs.
  • On March 6, 2018 the court became convinced that plaintiffs had demonstrated a likelihood of success on the merits.
  • According to the AR, the enhanced servicing concept was hatched in April 2018, and the cancellation decision was implemented on May 3, 2018.
  • There is no timeline for the newly envisioned enhanced servicing program to be active.

Judge Wheeler asked whether, if hypothetically, the real reason for the cancellation was the desire to not litigate anymore, would that be a rational reason for cancelling the solicitation? The attorney for FMS said no, not under federal procurement law. He, along with other plaintiffs’ attorneys, offered multiple prior court and/or GAO cases they believe support their position (Mori Associates, Starry Associates, WHR Group, California Marine Cleaning, SMF Systems Technology, Phil Howry Company, and Superlative Technologies).

The attorney for lead Plaintiff FMS offers analogies to ED’s irrational decision to cancel the procurement:

• With winter coming, would it be rational to cancel your heating oil supplier for a difference source to heat your home, when you don’t know whether that source will be available?
• In the midst of a war, would it be rational for the Army to cancel a contract for ammunition because a team of diplomats has an idea to negotiate for a ceasefire?
• Finally, would it be rational to cancel the lease on your car because Metro had an idea that they were going to put a stop near your home?

He suggested none of these actions would be rational, but they are all good analogies for ED’s actions in this case.

Judge Wheeler asked what the legal standard would be for awarding bid and proposal costs for the efforts put into this solicitation. Plaintiffs responded that this is not the remedy they seek; what they want is to roll back to the situation prior to the May 3 cancellation, and to be able to compete for the contract in accordance with the law. Plaintiffs reassure the Court that this does not constitute micromanagement of the solicitation. Following the roll back, ED is free to do what it wants, but it must provide a rational basis for its actions (i.e. If the decision is to cancel, then the Metro stop must actually be built or far enough under construction that it’s rational to cancel the lease of the car).

The following arguments were made by the Government, on behalf of ED:

• Plaintiffs have ignored the numbers of accounts that have actually been assigned, and the role that has played in the cancellation decision. The historical record of accounts that have been assigned over the last 3.5 years has trended down.
• There have been consistent assignments to the small businesses over the preceding 12-18 months, they’ve been handling the work adequately, and they’ve been receiving more and more accounts. The two large PCA ATEs have received accounts, but they have not been getting regular assignments. The small businesses have been the focus.
• The 120,000 account per month number (which is the actual number that’s being assigned) is drastically below the estimated capacity of the small businesses. So all this focus has been on the future and what’s going to happen, but has ignored what has actually been happening.
• ED is trying to innovate and do something completely different. There are obviously entrenched interests here, so there is a lot of upset. But that’s the key change, and it’s been going alongside this procurement, which has been on the street since 2015.
• The NextGen proposal went onto the street on February 20, 2018. The proposals were due in April. They are currently being evaluated for phase 1, which is about implementing and developing this seamless online system. Right now, every PCA has their own website, and there are a lot of different mechanisms for borrowers to deal with whoever is handling their account, and the goal is to get on one platform that services the life of a loan.
• The one decision that needs to be made for ED (which won’t happen until they finish the phase 1 evaluation) is whether or not they are going to do the enhanced servicing strategy via phase 2 of the NextGen procurement, or if they’re going to separately procure it. They anticipate phase 1 evaluation to be completed in the early fall.
• One key element that plaintiffs skipped over is, once enhanced servicing starts, there’s no more assignments of accounts to PCAs. It stops. Because it goes to the new program. Every new default, every new – anyone falls behind in their payments, it goes to the new system. And then once the system is up and running, accounts will be brought from the small businesses.
• How it all plays out in the future, whether there’s subcontracting or other elements, that’s something that will be played out as it goes forward.
• For now, they have what they think is appropriate to deal with their needs. And that is the basis for a rational decision.

“So once that decision had been made in the spring of this year, why proceed with a procurement for services that are going the way of the dodo, according to how ED wants to do work going forward?”

As rebuttal, plaintiffs made the following comments:

• When ED said we’re litigating something that doesn’t matter anymore, that’s about as cavalier as we can get about this procurement. These folks have been through proposal after proposal chasing something that really does matter, that they’re required to collect as a matter of law.
• Assignment of accounts is not the test of capacity. The fact that you’ve got a bucket that will take all these accounts doesn’t mean you’ve got capacity to collect the defaulted debt.
• The parade of speculation is this enhanced servicer concept. It’s a neat idea, but there is not one piece of evidence in the record that existed before April that relates to enhanced servicers.
• The cancellation memo is based on the 11 small businesses doing the work, not the large business ATEs. So the record already shows that the rationale is flawed. You don’t need to second-guess what’s the right capacity decision; they’ve already crossed over into using large businesses to do this work.

And with all of that, the matter was left in the hands of Judge Thomas Wheeler, who took over the flailing case in December 2017, when it was in a previous incarnation (Continental Service Group Inc. et al. v. United States of America). He promised a ruling "in fairly short order," which he typically delivers on.

insideARM Perspective

This article is long enough already, but I will add one point that was not mentioned during the hearing. Third party debt collectors are subject to the Fair Debt Collection Practices Act (FDCPA), but because of an exception, servicers who receive accounts prior to default are not subject to the same rules. Establishing the knowledge and systems to comply with the FDCPA is not a trivial undertaking. If ED decides to hold its pre-default servicers accountable to the same rules, it seems that this would certainly delay full implementation of NextGen post-default servicing.