Yesterday the Department of Education (ED) released its re-do of the solicitation for business process services under the ambitious new NextGen student loan servicing environment. As I read this new solicitation, I’m still not sure how Private Collection Agencies (PCAs) can compete.
The original version of the solicitation incorporated a two-phase procurement, where only those chosen during phase one would be able to bid on phase two. But ED changed the scope of work between phase one and phase two, which sparked protests from ...just about everyone, claiming they had been unfairly excluded from bidding on a contract they would have been qualified for. Suits were filed in the Court of Federal Claims (COFC). Judge Thomas Wheeler sided with the plaintiffs, and ordered the re-do from ED.
To put the PCA role in full context here, let’s back up a moment. Here is the VERY brief history of how we got where we are:
What began in 2009 as a 5-year contract for 17 large (unrestricted) and five small debt collection companies became a contract in 2014 for 11 small companies and a delay for the large firm awards. Eventually, in December 2016 seven large companies received awards, which launched dozens of protests from those who were left out, followed by a re-do, a whittling down to just two large companies, then more protests, and then... nothing. No large company awards at all. On May 13, 2018 ED cancelled the whole thing, offering this justification:
"The solicitation will be cancelled due to a substantial change in the requirements to perform collection and administrative resolution activities on defaulted Federal student loan debts. In the future, ED plans to significantly enhance its engagement at the 90-day delinquency mark in an effort to help borrowers more effectively manage their Federal student loan debt. ED expects these enhanced outreach efforts to reduce the volume of borrowers that default, improve customer service to delinquent borrowers, and lower overall delinquency levels.”
As you may have guessed, complaints were filed, and everyone went to the COFC. This chapter ended on September 14, 2018, with the Judge permanently enjoining ED from cancelling the solicitation.
(A more detailed recap of the above, which I call the first four chapters of this saga, is here.)
This is where NextGen comes in.
Backing up slightly...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 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.)
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 spells out requirements for post-default servicing and collection activities. In short, ED changed the scope mid-stream.
PCAs cried foul (as did some of the phase one winners), and so began what I call chapter five of the PCA quest for a Department of Education student loan contract.
Again, lots of stakeholders went to the COFC, and met with our friend, Judge Thomas Wheeler. The claims are explained in this story. In the end, Judge Wheeler sided with the plaintiffs and urged ED to pursue corrective action that would avoid a repeat of the previous chapters of this saga. He gave the Department until December 14th.
And, on December 14, 2018, ED cancelled the procurement, revoking the Phase I awards and saying it would issue a new solicitation by January 15, 2019, allowing for a “full and open competition.”
Now we’re back to today.
As promised, yesterday ED issued three new RFPs and canceled previous ones. The three include:
RFP R00005 - Enhanced Servicing Solution - This is the immediate term solution used by ED to justify its cancellation of the unrestricted PCA Solicitation. Proposals are due by February 25, 2019 [Editor's note: this is corrected. A previous version of the story listed the due date as March 25, 2019]
RFP R00008 - Business Process Operations Solution - After the Enhanced Servicing Solution has been awarded, a timeline will be set for this Solicitation - there is currently no due date, except that bidders must complete a Past Performance Reference Questionnaire by March 1, 2019.
RFP R00007 - Optimal Processing Solution - This is the long-term system solution that carries a two-year implementation period. The due date is March 25, 2019.
For purposes of this article, I've chosen to focus on RFP R00008 - Business Process Operations (BPO) solutions (which also references the Enhanced Servicing Solution). The following are some high level details:
- The award will be an indefinite-delivery indefinite-quantity contract.
- The base ordering period will be five years, with one five-year optional extension.
- There will be multiple awards under this Solicitation.
- The scope of services spans the entire lifecycle of student financing -- from application for financing, to origination and disbursement, to processing and servicing and pay-off or default.
- All activities will be performed under the Federal Student Aid (FSA) brand.
ED articulates four goals for NextGen servicing:
- Provide a world-class customer experience. Among other things, this experience includes the ability to receive support through the channel most appropriate to their needs, and should be continuously improved through activities like data analysis and iterative user testing.
- Create an environment that can efficiently and effectively integrate new and existing capabilities, and also stay in compliance with changing Federal rules, regulations and law.
- Drive greater operational efficiency by reducing complexity, improving the stability and security of systems, and ensuring effective use of taxpayer dollars.
- Measure success in part on how well it improves customer outcomes and facilitates compliance with Federal consumer protection standards and Title IV legal requirements. Examples include: decreased percentage of borrowers in delinquency or default, reduction of borrowers in deferment and forbearance, increased repayment rate, and increased digital self-service and correspondence.
The Solicitation sets an ambitious goal:
“In the near term, FSA anticipates the need for multiple loan processing solutions. Long-term, however, FSA’s goal is to move towards the future-state of a single platform operating environment. Most immediately and on a rapid schedule, FSA anticipates migrating, through conversion, nearly 200 million loan accounts from existing servicers to the Enhanced Processing Solution, while minimizing disruptions for customers.” (emphasis added)
Under the title of Solution Objectives, the Solicitation states:
Business Process Operations will support efficient and effective operations across the entire lifecycle of student financing...under FSA’s single brand, by providing the personnel necessary to respond to inbound customer (e.g. student applicants, borrowers, etc.) and partner (e.g. schools) inquiries, execute separately-developed outbound outreach campaigns, and perform back-office processing activities that cannot be automated. These personnel will provide an enhanced level of service, across the full life cycle of student financing, beyond today’s environment and one that is consistent with leading financial services providers…”
Based on broader NextGen goals, ED wants the selected BPO contractors to begin scaling operations in parallel with the start of existing customer accounts migration once the Enhanced Processing Solution is fully operational and ready to start migration (no later than six months after award). (emphasis added)
In no particular order, I’ll raise these questions/observations:
Based on my reading of the Solicitation, it sounds like potential solution providers can only bid on this contract if they are able to service the entire lifecycle of student aid. I’m not sure there is any one organization immediately equipped to do that. How will this affect PCAs? Must they scramble to attach themselves to companies that are equipped to service the front half? Would they bid on the contract anyway, making the case that if they've done a good job managing defaults, they could do a good job preventing defaults?
There is a lot that is still undefined. The schedule starting on page 11 of the Solicitation refers to requirements that have yet to be established...yet services must begin a mere six months after award.
I gather ED is requiring the aggressive timeline because the Title IV Additional Servicing (TIVAS) contracts end in April 2019 and they have just one 6-month extension available. Sources tell insideARM that FSA will not be negotiating further extentions on the small PCA contracts, so those will likely end this fall as ED expects to quickly transfer 200 million accounts to the new Enhanced Processing solution.
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. PCA then send letters, make calls, etc. These are just a few of the questions that will need to be addressed if collections are performed on the FSA system under the FSA brand:
- Will the PCA debt collection notices state “FSA has placed your account for collections with FSA?”
- Will FSA pay itself a contingency fee? Federal law requires PCAs to be compensated through contingency fees (collections must be budget neutral). Loan servicing is paid for through Congressional appropriation.
- 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.
- 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.
Meanwhile, remember that last September Judge Wheeler permanently enjoined ED from cancelling the Solicitation for unrestricted (large) PCAs. Will this solicitation appear to satisfy the spirit of that Order?
Another read is that this Solicitation is seeking responders to develop the system/platform and remains silent on the actual collection agencies; At some later point the winners will pick the PCAs and thus move the procurement and oversight away from ED. This would be an interesting way to address ED’s selection and oversight challenge.
We are coming up to Groundhog Day. What happens if the PCA procurement sees it shadow? Six more years?