Quest for Unrestricted Dept. of ED Collection Contract Enters Round 4

In the last few weeks, several new lawsuits have been filed against the Department of Education (ED) by private collection agencies (PCA). This marks round 4 in the on-going quest for the unrestricted (large) debt collection contract.

Backing up slightly, last month insideARM reported that four firms had notified the Court of Federal Claims of their intention to protest ED's request to dismiss the case of FMS v. USA as moot. On May 25, 2018, Judge Thomas C. Wheeler granted the motion for dismissal and lifted the February 26, 2018 preliminary injunction that prevented ED from recalling in-repayment accounts. -- and so ended round 3 of the quest. 

Since that dismissal, ED did in fact send notice to the firms operating under 2015 Award Term Extentions (ATEs) notifying them that the government will be recalling their accounts on July 3. Those firms are FMS Investment Corp. (FMS), Account Control Technology, Inc. (ACT), GC Services Ltd. Partnership (GC), Continental Service Group, Inc. (ConServe), and Windham Professionals (Windham).

Last Friday, June 22, the fourth of those same firms -- FMS, ACT, GC, and ConServe -- filed a new complaint, which was consolidated with the others under FMS Investment Corp. v. The United States, No. 18-862. Most of the court documents are sealed. What we do know is that there will be a scheduling conference tomorrow morning to address a Temporary Restraining Order that has been filed to prevent the recall of accounts. 

A source close to the matter tells insideARM that many assume the accounts will be recalled from the five ATE holders and transferred to Pioneer Credit Recovery and Alltran, the two firms that won their appeal of ED's sudden termination of their contract on February 27, 2015. As a result of that win, these two firms received an ATE on April 28, 2017, but have yet to see meaningful account volume. This recall and transfer would cure that issue.

Now, back to the curent complaint.

As justification for cancelling the Solicitation for unrestricted PCA services, ED said it would be changing its strategy, and instead of using 3rd party debt collectors for defaulted accounts, it would be implementing an "enhanced servicing" strategy, using its pre-default servicers. ED says this is a part of its NextGen solution. This is the source of the round 4 dispute.

Basically, here is the argument, in bullet points to make it easier to follow:

• As currently posted, NextGen is a two-part procurement: proof of concept, and then system delivery (at least a year from now; some say this timing would be very optimistic).
• The latest diagram describing NetGen clearly shows a separate default servicing component, which has not been included in the bidding detail.
• The requirements for post-default servicing are completely different from pre-default, and cannot be handled on the same system as it is currently designed. 
• The loan servicers ED expects to perform "enhanced servicing" receive their accounts prior to default. This means that, under federal rules, they are not subject to the Fair Debt Collection Practices Act (FDCPA).
• ED is already fighting with states over who is the rightful regulator of federal student loan servicing. It seems pretty clear that if ED makes a change that removes default servicing from the protection of the FDCPA, then states will step in and ensure their individual laws require equivalent protections.
• PCAs are experts at complying with both federal and state collection laws, and their systems are built specifically for this. As a result, they can do it for far less cost. The pre-default servicers would have to invest in building this capability from scratch.
• So. ED's arguments simply make no sense.

insideARM Perspective

Although the complaints are sealed it seems the argument has moved from "ED, your criteria for selecting unrestricted contractors was flawed" to "ED, your justification for not needing large PCAs is crazy, and your proposed strategy of using 'enhanced servicing' is a) non-sensical and b) at best, years away from being practical."

What's also worth following is that we now have the interests of collection agencies (the veritable Davids, even though they are considered "large") in this case colliding with the interests of student loan servicers like Nelnet and Navient (the Goliaths). Meanwhile, whatever folks want to say about collection agencies, these large servicers have their own issues with regulators.

This will continue. Forever.

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Editor's note: An earlier version of this article incorrectly identified SalleMae as a Department of Education student loan servicer. insideARM regrets the error.