Chapter 6 Begins in ED Default Collection Saga; PCAs Files Pre-Award Complaint

We’ve entered Chapter 6 in the story of the Private Debt Collectors’ (PCAs) quest for a Department of Education contract to collect defaulted student loans. On Monday, Continental Service Group (ConServe) filed suit in the U.S. Court of Federal Claims (COFC or the Court) against the United States (in this case, ED or The Department). The action is a pre-award protest challenging ED’s decision to procure default recovery services through three solicitations under its NextGen Procurement. This case was consolidated by the Court under the one filed on February 27th by FMS Investment Corp. (FMS).

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.

In February 2018, ED issued a Solicitation for Phase I of the NextGen 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. As a result, most PCAs did not bid on the contract (unless they were in a position to offer the pre-default services).

As we learned with ED’s cancellation of the unrestricted PCA solicitation, those who win a NextGen contract will be the ones to implement the “enhanced servicing” strategies that are meant to drastically reduce defaults by preventing them in the first place. (Note the timing -- February 2018 was just three months prior to ED’s cancellation of the Solicitation for unrestricted PCAs, claiming their services would be unnecessary.)

This story provides a recap of Chapters 1-5. Chapter 5 ended on September 14, 2018 with Judge Wheeler permanently enjoining ED from canceling the Solicitation for unrestricted PCA services.

Chapter 6 begins with ConServe making these primary claims:

• ED ignored the September 2018 COFC decision that invalidated ED’s May 2018 cancellation of the separate Default Collection Procurement, and the Court’s order to figure out how to revisit that Procurement in a way that is fair and reasonable.
• Instead of revising the Default Collection Procurement, ED “attempted to shoehorn in default recovery services under NextGen Procurement Phase II.”
• The Procurement represents illegal consolidation – or bundling -- of distinct services; and the only way for ConServe and its peers to compete for a contract is if it can find a suitable teaming partner that can provide all of the other required services (one is only eligible to bid on the contract if one can provide all listed services).
• Historically, loan servicing and default recovery services have been procured separately and compensated under separate regimes with different funding sources. The improper consolidation of services will create a conflict of interest for any winning team, because it would allow the awardee to focus its time and resources where the financial incentive is greatest.
• Current federal law provides that “in order to promote accountability and high-quality service to borrowers, the Secretary shall not award funding for any…solicitation for the FSA NextGen environment…unless such an environment provides for the participation of multiple student loan servicers.” Nonetheless, ED is seeking to award a contract to a single servicer under the New Enhanced Processing Solution.
• Rather than address the concerns previously identified by the Court in its decision to invalidate ED’s cancellation of the Default Collection Procurement, “ED appears to have ignored this Court’s order finding that ‘ED either did not have, or did not sufficiently document, a rational basis for its decision to cancel’ the…Procurement and continued to go on with business as usual as if this Court did not specifically enjoin ED from cancelling that procurement.”
• During a hearing on February 15, 2019, the Court suggested that ED avoid protracted litigation and consider mediation to resolve the dispute. The company says it expressed an eagerness to do so, as did other PCAs, but ED declined. As a result, the company had no choice but to file this protest.
• The actions taken by ED will have the effect of shutting ConServe out from any competition for default recovery services for the next 5 to 15 years.

ConServe is seeking the following:

• That the Court order ED to produce the full and complete administrative record (AR) showing what actions it has taken in response to the Court’s September 14, 2018 order.
• That the Court find ED’s decision to procure default recovery services under the New NextGen Solicitations is arbitrary, capricious, and in violation of CICA and other applicable procurement laws and regulations.
• That the Court issue a declaratory judgment that ED’s issuance of the New NextGen Solicitations has resulted in an improper de facto cancellation of the Default Collection Procurement.
• That the Court permanently enjoin ED from procuring default recovery services under the New NextGen Solicitations unless they are canceled and amended to unbundle default recovery services, and those services are procured separately.
• That the Court require ED to extend ConServe’s existing contract or award the company a new Award Term Extension (ATE).
• That the Court require ED to diligently proceed with the Default Collecton Procurement evaluation and require that ED complete its evaluation and make new award decisions by a set date in the near future, or articulate the reasons for not proceeding in a manner that addresses the requirements in the Court’s September 14, 2018 Order.

What's next? A status conference has been set for tomorrow afternoon, March 7. The conference call is not public.

insideARM Perspective

Another interesting point I noted in the ConServe complaint is that, during a hearing on December 21, 2018, the company suggested to the Court that ED give the protesters the opportunity to review and comment on a draft solicitation before it was released. The concern was that “ED would attempt to consolidate or bundle a multitude of services and again sideline ConServe from participating in its own right to provide such work…In response, the Court suggested that protesters meet with ED and try to work this all out, which ConServe expressed a willingness to do, but ED, through counsel, made no similar gesture.”

For the record, the insideARM Perspective in this article on September 17, 2018 suggested mediation as a possible course of action that could help to avoid an endless trail of litigation in this case. It is quite difficult to imagine how these parties could move forward in a productive way after years of such acrimony without this type of intervention. Well, it didn’t happen then either.

For what it’s worth (which is nothing at this point), it seems to me – and many other insiders I’ve spoken with over the years – that if ED had simply amended its original December 2016 award to add a small number of PCAs (including ConServe) that had received historically high scores, its first “do-over” likely would have ended this entire saga. If the Department wanted to narrow its field of PCAs, it could have accomplished that through competitive scoring.

Meanwhile, ED announced yesterday that Mark A. Brown has been appointed chief operating officer of Federal Student Aid (FSA). FSA is the department that has been in charge of the PCA contract for decades, and is overseeing the implementation of NextGen. Brown replaces acting COO James Manning, who is retiring for the second time. Dr. A Wayne Johnson, the NextGen brain child, who was hired by Secretary Betsy DeVos in 2017, remains in his role as chief strategy and transformation officer.