What's Going On Behind the Scenes Since Court Ruled Against ED?

Last week insideARM reported that Judge Thomas Wheeler in the Court of Federal Claims ruled against the Department of Education (ED), enjoining ED from cancelling its solicitation for large debt collection contractors. It is still unclear what will happen next, although in our “insideARM Perspective” on September 17 we took a stab at identifying some of the possibilities.

Meanwhile, ED is proceeding with business among its remaining (mostly small) contractors. Sources tell insideARM that ED will start measuring agencies against each other starting on October 1, 2018.

First, a little background on ED’s measurement of private debt collection contractors

Years ago, ED reported quarterly performance results and rankings, until the reporting process hit a year-long snag in 2012. Results were published in January 2013, and then pretty much petered out after that. Other than gross collections, no performance data or rankings have been announced for several years.

When last reported, rankings were determined by a weighted average of contractors’ performance in total dollars collected, total accounts serviced, and total administrative resolutions. ED awarded 70 points to the top performer in the dollars collected category. Twenty points were awarded to the top performer in the total accounts serviced category, while the top performer in administrative resolutions received 10 points. Agencies were scored against the top performers in each category. The scores determined the bonuses each company would receive for a quarter and for the fiscal year.

For the fiscal fourth quarter 2012, Pioneer Credit Recovery was the top scoring collection agency in the unrestricted (large) category with a score of 97.25. FMS Investment Corp. was next, with 94.63, then ConServe (93.77) and NCO Group (92.34). In the three months ended June 30, 2012, all contractors together brought in a total of $669.4 million.

Back to today

For reference, FMS Investment Corp. (FMS) was the lead plaintiff in the latest round of litigation that ended in a ruling against ED. ConServe had taken the lead in the two prior rounds. Like FMS and ConServe, Pioneer did not receive a new contract award. However, unlike FMS and ConServe, Pioneer is operating under a 2017 Award Term Extension (ATE), so they are one of only two large debt collection agencies to still be working for ED (the other company is Alltran Education, which used to be Enterprise Recovery Systems, which also received an ATE in 2017).

Sources tell insideARM that the new measurement system (CPME, or contractor performance monitoring & evaluation) will incorporate things like number of complaints and time on hold, as well as accounts resolved and cash collected. The measurement will begin on October 1st for accounts placed as of that date (so nothing that’s happened in the recent past will count). Sources said their understanding is that those in the top 70% would continue to receive placements, while others will be in danger of being dropped.

One major difference in this round is that ED has told the contractors that no competitive data will be shared. So, the department will measure performance, but nobody but ED will know who stands where.

Supposedly, all contractors will receive the same number of accounts, in theory, to put everyone on a level playing field. However, at least one small contractor tells insideARM that ED is now asking questions about capacity -- which they thought was odd. On a related note, one of the claims made by FMS and its co-plaintiffs in the most recent round of litigation was that ED said the small contractors had plenty of capacity to deal with the current and expected volume, yet the Administrative Record in the case reflected no data or projections about future capacity.

Also, 1.7 million accounts that have been housed at the small contractors without a payment for at least 12 months have just been recalled, and will be re-placed. One source wondered whether this wasn’t a strategy to improve the denominator for measurement purposes, which would bolster ED’s claim that the small contractors are doing well and have plenty of capacity to properly handle all of the accounts.

Meanwhile, sources also tell insideARM that the small contractors have been opening new offices and/or buying offices from the previous large contractors, and/or subcontracting to the large companies (however, the contract limits subcontracting to a maximum of 20% of the business). So it seems there are efforts being made to ramp up to handle additional volume.

The latest performance data

Federal Student Aid (FSA) just released its gross recovery data by private collection agency for the third quarter of Fiscal Year 2018 (again, these are gross numbers, with no weighting for other factors). The data shows – among other things - a decrease in overall collections over the past year.

insideARM Perspective

On the surface, the above data reveals the following:

• On average, a fully ramped up large PCA appears to collect around 3-3.3% of its portfolio per quarter.
• On average, a fully ramped up small PCA appears to collect around 2-2.5% of its portfolio per quarter.
• For the last year, there has been a wide range of capacity, or at least inventory, among the smalls. The small with the least inventory has about 10% of the small with the most; while the large with the least inventory has about 65% of the large with the most. It's unclear whether this says anything about actual capacity, vis a vis claims about the smalls' capacity to handle the volume.
• The total inventory held by PCAs has increased by 34% over the last 4 quarters, however total recoveries have declined by 29%.
• A year ago, the ratio of total recoveries by large:small was 63:37. In the latest reported quarter, it was 50:50.

As it relates to recovery rates, it is quite difficult to nail down accurate apples-to-apples comparisons. 

One reason is because there is effectively a 9-month lag time from the time a company receives a placement to the time it can show real recoveries, primarily because rehabs -- the largest share of recoveries -- take that much time to show up on the reports. 

Another reason is timing and number of placements, and the age of default. For the period highlighted above, small PCAs have been receiving new accounts, while the large PCAs have not. Aside from Pioneer and ERS, the last new placements to large PCAs were in December 2016 (and even then, they only received 8,000 accounts, which is about 1/4 or 1/5 of what they would typically receive), with latest default dates of March 2016. The new accounts have default dates as late as June 2018; their resolution rates will be much higher.

Note: I did not count Pioneer and ERS in the above calculations, as they were primarily in the ramp up period. 

I suspect the large PCAs that have been excluded from a contract will continue to offer arguments in support of their claims that the significant and complex process of collecting defaulted federal student debt requires both large and small companies to do the job effectively.

However, a lot of the damage has been done. My sources tell me that the large PCAs who just won the court decision have already shed over 1,500 jobs in the last year, are preparing to lose another 1,000 in the coming month, and by April 2019 will have lost a total of 3,000 fully-trained staff working on FSA contracts.

There are too many devils in the details here to cover everything in one article. The story will continue.