Chapter 5 Officially Begins in Department of ED Private Debt Collection Saga

This week FMS Investment Corp. (FMS) filed a protest with the U.S. Government Accountability Office (GAO) regarding the terms of the Federal Student Aid (FSA) NextGen procurement (Solicitation 91003118R0024). In a saga that began in 2014, and has seen multiple rounds of protests and litigation come and go, I dub this the beginning of Chapter 5.

Briefly, here is how we moved through the first four chapters

1. Chapter 1 began in 2014 when the five-year 2009 ED contract for debt collectors ended. New small business contracts were awarded on schedule, but the large-firm contracts were delayed. More than 40 large collection agencies entered the two-phase process. After ED made its initial cut, formal protests were launched by some of the companies not making it to phase two. Generally, the protests challenged the selection criteria. Finally, in December 2016 contracts were awarded to seven large companies (down from 17 on the previous contract). This led to dozens of protests by firms that believed the process was flawed and unfair.
2. So began Chapter 2 of the matter, with a VERY LENGTHY "re-do" of the solicitation, which resulted in awards to just two large companies, in January 2018.
3. This led to Chapter 3, with more protests, more litigation, and finally... nothing. No large company awards at all. On May 3, 2018 ED cancelled the whole solicitation, rescinded the contract awards from the two companies, and re-called the accounts still being worked by the firms that had an Award Term Extention (ATE) from the previous contract. There were more protests, and a temporary injunction of the recall, but ultimately, the protests were dismissed, and the accounts were returned to ED, thus ending Chapter 3. 
4. …Which gave rise to Chapter 4 in June 2018, with eight companies protesting the cancellation of the solicitation, arguing that it was irrational. This chapter ended on Friday afternoon, September 14, 2018. Judge Wheeler ruled in favor of the PCAs, and permanently enjoined ED from cancelling the solicitation – at least based on the current Administrative Record.
5. Chapter 5 began this week, by jumping to a new protest over a different, initially unrelated but now apparently very related contract – the one for NextGen servicing. The same company that led the last round of litigation, FMS, has filed the first protest regarding Phase II of NextGen, claiming that ED has unfairly changed the nature of the Solicitation, and excluded PCAs from the ability to compete.

What’s NextGen?

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In August 2017 ED announced a “Next Generation Processing and Servicing” plan (NextGen) that would put all federal student loan servicers on a common technology platform with a single database in order to drastically improve customer support.

By February 2018, ED issued a Solicitation for Phase I of the project, including a diagram (you can see it in this story) showing that default servicing and recovery (including PCAs) are in the overall vision, but not part of the current Solicitation.

At the end of September 2018, ED announced it had completed Phase I, and had chosen a set of vendors who are eligible to participate in Phase II – which now clearly encompasses post-default servicing and collection activity.

What’s the protest about?

The 28-page protest goes into a lot of detail about the history of the PCA program and solicitation process summarized above. I won’t cover that again. What’s new are the following claims:

Fairness

• During the Chapter Four litigation, ED went out of its way to insist that Phase I of the NextGen procurement was about development of the online system for servicing, and that there was no target date yet for moving to the next phase; this decision would be made upon completion of Phase I.
• ED informed the Court of Federal Claims that loan servicing and default loan collection are two separate services, and Phase I of NextGen was only intended to cover loan servicing (as a result, PCAs did not submit bids in response to the Phase I Solicitation).
• ED’s own regulations for a two-phase procurement like NextGen require it to give reasonable and adequate notice of a procurement’s scope so potential offerors can decide whether to participate in the opportunity. While specific requirements may be refined during the second phase, those revisions cannot be outside the scope of the initial notice.
• On September 24, 2018 – ten days after the court ruled against ED in Chapter Four – ED issued an RFP for Phase II of NextGen, now appearing to include services for loans in default.
• However, it was too late for PCAs to respond because ED has limited Phase II bids only to those firms selected in Phase I.
• ED has not, and cannot articulate any reasonable justification for limiting the Phase II competition with these new default collection services requirements only to offerors who submitted proposals under a Phase I RFP that did not contemplate or include these requirements.

Also, improper bundling

• Notwithstanding the arguments above about the fairness of bundling two services (loan servicing and defaulted loan collections) that have never before been bundled, and without contemplating the bundling in Phase I – it is unclear that the bundling is even legal.
• Office of Management and Budget (OMB) Circular A-129 describes two separate regimes for loan servicing and debt collection.
• Federal law requires PCAs to be compensated through contingency fees. Loan servicing is paid for through Congressional appropriation.
• Bundling loan servicing and default collection services creates an internal conflict of interest for any awardee because there is a natural incentive to shift work to that service which provides the highest compensation structure.
• ED has not explained how these structural differences will be resolved.

What’s next?

FMS is requesting:

• A complete copy of the Phase I and Phase II RFPs, including all amendments and attachments (some of which were only available to participating offerors).
• All documents comprising the source selection plan and evaluation plan established for this procurement.
• All communications or documents relating to ED’s inclusion of default collection services within the NextGen procurement.
• A hearing pending further development of the record.
• A request for protective order to cover the proprietary and sensitive documents that will be produced as part of the protest.
• A GAO decision sustaining the protest and recommending that ED take corrective action to modify the RFP to remove default collection service, or if it does want to include default collection services, that ED cancel the RFP and issue a new solicitation for business operations process solutions and allow PCAs to submit proposals.

Continental Service Group (ConServe), which was the lead plaintiff in the early chapters of this saga, also filed a bid protest related to this Solicitation, on the same day as FMS.

insideARM Perspective

I suspect we will see more protests. Unlike the other chapters, which related only to procurement of unrestricted (large) PCA contractors, this affects all PCAs, including the small business contractors who are currently working to collect defaulted student loans for ED. Under the current circumstances, none of those firms would be allowed to bid on the NextGen work either.