The Last Month in the Land of NextGen and Student Loan Servicing

There have been several developments in the Department of Education’s (ED or Department) NextGen saga in recent weeks. Here’s what’s happened:

I last wrote about this in mid-January, when ED released a “re-do” of its solicitation for business process services under its ambitious NextGen project.

[Editor’s Note: If you need to catch up on how we got to the point of the re-do, this article has a great recap.]

Reaction to the new solicitation was mixed. Some were impressed with the obvious thought behind the multi-part RFPs. Some suggested the Department must have been assisted by the bidder most likely to receive the massive contract. As for those in the private debt collection community, the new version raised serious questions.

Federal Student Aid (FSA) wants the full life cycle of servicing to occur under its own brand. The Debt Collection Improvement Act of 1996, however, requires Federal agencies to “REFER” debts to private collection agencies and the costs to be paid from the proceeds of collection. This makes it budget neutral. FSA must necessarily change appropriation process in a highly volatile 116^th Congress with little bi-partisan support for certain key issues such as education.

Other questions include:

• How will FSA address the “bundling” issue, where PCA work is being bundled with servicing? Office of Management and Budget (OMB) Circular A-129 describes two separate regimes for loan servicing and debt collection, and FSA senior officials have already stated multiple times in the last two years via affidavits in Court that Servicing and Collections are separate and distinct.
• Bundling loan servicing and default collection services creates an internal conflict of interest for any awardee because there is a perverse incentive to shift work to that service which provides the highest compensation structure. Evidently this did not work in the old Guaranty Agency days under the FFEL program.

Meanwhile, as a result of its issuing a new solicitation, ED motioned the Court of Federal Claims to dismiss the case of Navient Solutions, LLC et al. v. The United States. On February 7, Continental Service Group, Inc. (ConServe) filed a brief opposing the motion, and shortly thereafter FMS Investment Corp. (FMS) filed a motion for leave to file a supplemental complaint. Both are private debt collectors (you’ll recognize them from the recap), and claim that the revised solicitation improperly bundles servicing and default collection services. 

Nonetheless, ED’s motion was granted on February 12, 2019; the consolidated cases (Nos. 18-1679 C, 18-1758 C, 18-1786 C, 18-1813 C, 18-1824 C, 18-1852 C and 18-1853 C) were dismissed without prejudice.

[Editor's note: Dismissal without prejudice means that the plaintiff is free to re-file a case against the defendant based on the same claim.] 

Judge Wheeler told the parties that if they wish to protest the new solicitation, the Court would open a fresh docket to address the complaints.

If you read the recap of how we got here, you’ll note that I’ve dubbed the dismissed Navient case "Chapter 5" in this story that began five years ago. I typically end chapters upon dismissal of a case, and begin new chapters upon the filing of new litigation and assignment of a new docket. At the moment we’re lingering, waiting for a new chapter to begin. Meanwhile, the Court held a status conference last Friday afternoon, just before the holiday weekend. Sources tell insideARM that Judge Wheeler expressed continued frustration with the situation; he said he wished ED would mediate the matter with the contractors, but unfortunately they have not expressed a willingness to do so. Sources also tell insideARM that new lawsuits will likely be filed this week.

Against this backdrop, last week the U.S. Department of Education Office of Inspector General (OIG) released its latest audit report evaluating the performance of FSA’s oversight of servicers. The OIG report highlighted two major Findings:

First - FSA did not track all identified instances of noncompliance and rarely held servicers accountable for noncompliance with requirements.

Further, FSA did not track all information necessary to identify trends in servicer noncompliance with federal requirements. OIG found that about 61 percent of the documents analyzed disclosed instances of noncompliance related to forbearances, deferments, income-driven repayment, interest rates, due diligence, and consumer protection. Primarily, servicer representatives didn’t always inform borrowers of the available repayment options, and incorrectly calculated income-driven payment amounts. OIG also found that noncompliance rates, and FSA’s documentation of these instances, differed significantly among servicers (see tables 1 and 2 below).

While the tables above represents FSA’s failure to document servicing errors, OIG’s report notes that the rate of servicing errors themselves were actually much higher, including 9.2% for Navient and 24.2% for PHEAA. PHEAA had been chosen to proceed from Phase 1 to Phase 2 of the now cancelled first round of the NextGen solicitation for business processing services.

Second - FSA did not always collect information necessary to evaluate servicer interaction with borrowers.

OIG’s audit found that in 8.2% of instances audited, FSA employees didn’t follow procedure by completing a scoresheet for monitored calls. In other instances, FSA’s system wasn’t sufficient to identify call sheets that were not completed properly. OIG also found that, from June 2016 through March 2017, FSA didn’t communicate the results of its call monitoring activity to servicers. FSA said this was because they were revising the report format.

FSA neither agreed nor disagreed with the findings but agreed with OIG’s recommendations for improvement and says it has already implemented new quality control measures – including a QA process for the QA process.

insideARM Perspective

ED has signaled that it would prefer not to contract directly with private debt collection companies. It prefers to use a smaller number of large servicers to handle the whole cycle of student loan servicing and collection. The OIG’s report, and lawsuits filed by state and federal regulators, would suggest that not all of these servicers are perfect at the job either.

Turns out, it’s an incredibly complex job with a seemingly endless number of processes requiring lots of manual handling by thousands of human beings. In this New York Times article Navient CEO John F. Remondi said “[California’s suit] is another attempt to blame a single servicer for the failures of the higher education system and the federal student loan program to deliver desired outcomes.”

It's not my place to let anyone off the hook for servicing failures. I will, however, imagine for just a moment what might transpire during a phone call between a borrower and a call center employee at a servicer or debt collector, and how it could be possible that all options may not be presented. First, let's assume it's a tense call. The borrower is not happy to be having the conversation at all. And, they've likely had to jump through some hoops to prove they are the person they claim to be before the conversation could begin at all.

Now, the servicer/collector asks a bunch of seemingly intrusive questions about the borrower's finances. They get into a discussion of pretty complex topics that aren't black & white, and aren't terribly simple to explain/understand. Is it possible that conversations like this get derailed by frustration, lack of understanding, interruptions by children or employer, a quick decision to pursue the first option and get off the phone, or any number of other circumstances? Would this set of events cause an auditor to have to check the box "no," all options weren't explained? 

I get that some servicers had more failures than others, so clearly there is more going on than what I've imagined. But let's acknowledge for a moment that maybe the process is so incredibly complicated that some amount of failure is inevitable. I'd focus at least as much on root cause as I would on QA-ing the QA people.