Department of ED vs. Collection Agencies Saga Will Come to a Head on April 16

In a status conference on March 21, 2019, the Court of Federal Claims (COFC) set a hearing date of April 16th to address a preliminary injunction that would prevent the Department of Education (ED, FSA or The Department) from recalling all remaining accounts from four large private collection agencies (PCAs) that still hold Award Term Extensions (ATEs). The recall of these accounts would, for practical purposes, be a nail in the coffin for these firms because it would mean the loss of their Authority to Operate (ATO), which can take up to a year to get -- even if they ultimately win their case.

The companies in question are FMS, ConServe, GC Services, and Account Control Technology.

If you're just now trying to jump on this moving train of a story, you can get the condensed background here, and then here.

On March 25th, I described the Administrative Record (AR) that ED had produced (as ordered by the Court) to justify its re-cancellation of Solicitation No. ED-FSA-16-R-0009 for Large Business Debt Collection Services. The purpose of the status conference on March 21 -- two days after the AR was produced -- was to discuss its implications and how to move forward.

FSA’s conclusion was that the existing small business Private Collection Agency (PCA) contractors have sufficient capacity to do the job; the large contractors that would be selected through the Solicitation in question were not needed.

Just about everyone disagreed with this conclusion, but it took a few weeks for the parties to get access to the 26 exhibits attached to the AR (those were not made public; just the 12-page narrative was) which provided the detailed data ED used. ED claimed they contained private borrower information and needed to be redacted, which was taking a lot of time.

So, the PCAs told the Court that they intend to file a motion for preliminary injunction to stop ED from recalling their remaining accounts when their contracts expire on April 21. Their argument is that the AR is 11 ½ pages, 7 ½ of which chronicle the history of the case. Only four pages provide any of the required insight into their decision to cancel, with all associated data in the non-accessible exhibits. What is accessible now describes a “high-touch” strategy (described in this article), which -- among other things -- is illegal.

Mr. Johnson, representing lead plaintiff FMS, laid out the argument (headers and parenthetical comments have been added for organization and clarity):

High-touch plan violates state law

“...Now, imagine getting three calls a day about the same loan or debt, and the first issue with all of this in the decision...is that apparently unknown to them, there are state laws that prohibit calls with such regularity. Massachusetts, for example, has a very clear statute that says… a debt collector can only make two calls per a seven-day period to a customer’s residence or cellular phone. There are other states that have similar limitations. So this premise of what they’re doing at least in the debt collection portion of these is illegal.”

Bundling servicing and default is illegal

“...There are a number of other problems. They have got the bundling, which we’ve talked about before. There’s no justification that we can find where they should be bundling servicing and default. They have now, by the way, Your Honor, taken what I would call a limited corrective action in that they’ve eliminated from the first (NextGen) RFP everything but IP requirements, but their other RFPs have still got the bundling problem.”

Calling under an inaccurate name is illegal

“...They have got this “one brand concept” that they are trying to put forward, and remember… the one brand concept is a concept that basically says anybody who’s making contact with a borrower make it in the name of one brand, probably FSA or ED or whatever the brand is that they pick. The problem with that is… that you can’t contact a debtor and say you are somebody else. You must say who you are, and that’s in the Fair Debt Collection Practices Act.

…The entire premise of that plan is inconsistent with the 8 million defaulted loans (anticipated by this summer) that must be provided to somebody to collect. Their own record says, ‘The Fair Debt Collection Practices Act requires debt collectors to identify themselves by corporate affiliation. Therefore, any deviation from this requirement would require an exception before implementation.’ So in the record, behind the memo, they’ve explained that they can’t do what they’re saying... They would have to change statutes to do it.”

Calculation of small business PCA capacity lacks rigor

“...They try to claim that even if they can’t get these procurements off the ground in the next four or five years, they have adequate coverage for defaulted student loans debt collection through their small business contractors (more detail is provided in this article)... In May 2018 when they tried to cancel (this Solicitation) the first time,...they put forth data that the small businesses had capacity. There was a spreadsheet that we put on the screen in front of the Court where the small businesses had identified a number of accounts that they could take on, and the agency just accepted that. They’ve done actually the same thing here in this matter.”

Calculation showing collection rate by “smalls” is as good as or better than “larges” is grossly misleading

“...They created a chart to display a metric which they say is very important, and that’s the net collection rate. The chart shows that in 2018, when the smalls were running the work, they had a net collection rate of 2.3 percent, which the chart shows also is better than the net collection rate two years earlier when the majority of the work was being done by the larges. ...The problem is the paragraph right before that chart…[which] reveals that they are including Treasury Offset Program dollars in the collections… the reason this is important is because the AR confirms that the PCAs play no role whatsoever in Treasury offset collections…[and] those numbers are huge. Compared to the collections of the PCAs in recent years, Treasury offset is dwarfing what the PCAs are collecting.

...If you remove the Treasury offset numbers from the chart...the net collection rate reverses, and it shows that...there is a 40 percent difference in favor of the larges.”

Finally, Johnson argues that if his client’s ATE contract terminates and accounts are recalled, it will be “forever irreparably damaged because it will no longer be able to compete at the same level that it was able to compete when we filed this matter.”

Mr. Canni, representing ConServe, added a these points:

• The most efficient approach for ED would be to issue a fourth RFP under NextGen where they procure default recovery services independently and then later, once they’ve stood up the full platform, integrate the default recovery services into NextGen.
• The cancellation memo makes clear that defaults are expected to continue at a staggering rate, and a recent report by the Brookings Institute even states that nearly 40 percent of all borrowers may be in default by 2023.
• Even the smalls themselves qualify their capabilities and say they can’t handle the volume without subcontracts. In fact, five of the eleven intend or are using at least 15 subcontractors, including large businesses.
• So if the smalls need to subcontract to larges to handle the volume, doesn’t it seem unreasonable that the Department wouldn’t want to continue working with the larges now?
• By taking the total inventory, which affects the net collection rate, they were able to reduce the problematic inventories by doing a recall of 1.7 million accounts from the smalls in September 2018. By doing that, they would have inflated the recovery rate.
• The Hill published an article on March 20, 2019 that pointed out the ED is leaving billions of dollars in lost recoveries by not working with the larges. (The article was written by James Bergeron, president of the National Council of Higher Education Resources (NCHER), a higher education finance trade association whose members include lenders, servicers, guaranty agencies, collection agencies, financial literacy providers and schools.)

In response, the Court asked ED to explain its plan. Mr. Pehlke said ED would not be granting a voluntary stay and that the ATE contracts would indeed be ending on April 21. He also argued that The Department has resolved the bundling issue by removing servicing from the current NextGen RFP. (The PCAs argued vehemently that they’ve delayed -- but have not resolved -- the issue.)

The Court, anticipating the filing of a motion for preliminary injunction, set the following briefing schedule:

• Motions filed by March 29
• Government response by April 10
• Plaintiff response by April 15
• Preliminary injunction hearing on April 16

And here’s how that teleconference concluded:

THE COURT: I have to say… just listening to the discourse today, Mr. Canni’s (attorney for ConServe) proposal seems eminently reasonable to me, and I really would like the Government (ED) to go back and think about it some more and see if that could work. This, once again, seems like a monumental mess to the Court, and I’m just not -- I have to tell you, I’m not impressed with the procurement capability of the Department of Education, and it seems to me we’re going to end up a lot like we have in the past. So if you see a way to straighten this out and to make it more reasonable for everyone, I’m all ears, but as for today, we’ll get the order out setting the schedule. That’s all I can do today.

MR PEHLKE (for ED): I would only ask, Your Honor, that the Department of Education has been moving forward with NextGen and making awards without protests on other aspects. It’s only this aspect and these Plaintiffs where the difficulties are arising.

THE COURT: I know, but I just -- I just -- and I -- you can’t see me today, but I’m shaking my head.