As ordered by Judge Thomas Wheeler of the Court of Federal Claims (COFC), the U.S. Government produced its Administrative Record (AR) last week in support of the cancellation of the Department of Education’s (ED or FSA) Solicitation No. ED-FSA-16-R-0009 for Large Business Debt Collection Services. The conclusion of the 12-page record -- plus 26 exhibits, which were not made public as of the time of this writing -- is that the existing small business Private Collection Agency (PCA) contractors have sufficient capacity to do the job; ED doesn’t need the large contractors that would be selected through the Solicitation in question.
The history of this saga had pit the “smalls” against the “bigs,” but that ended a few months ago when ED announced it likely wouldn’t need PCAs at all once it fully implements its Next Generation (NextGen) student loan servicing process. The reason, says ED, is because it planned to employ “enhanced servicing” techniques that would prevent the majority of defaults in the first place. Suddenly, all PCAs were on the same page.
It’s a very long story
The saga has unfolded over the course of years and dozens of articles. We are currently in Chapter 6. If you need to catch up on the details, read this story, and then this story. The most important background for this article is that after several years of litigation, on May 13, 2018 ED cancelled the solicitiation in question, 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.”
ED said the 11 small business PCAs have sufficient capacity to handle the volume of defaulted loans while we ramp up this "Enhanced Servicing" program. Complaints were filed by many large PCAs, and everyone went to the COFC. The process pitted the “smalls” against the “bigs,” with smalls insisting they have the capacity and the bigs pointing to data they felt illustrated it wasn’t possible. This chapter (which was #4) ended on September 14, 2018, with the Judge permanently enjoining ED from cancelling the solicitation for large PCA services. ED was on the hook to come up with a better explanation, or come up with some new corrective action.
In the meantime, FSA moved ahead with its NextGen servicing platform project (which anticipates merging pre-and-post default collection activities to a large degree). Over time, these two solicitations -- for PCAs and for NextGen servicers -- converged. Then two things happened on March 6, just a few weeks ago. One: ED cancelled (again) that same procurement that the COFC permanently enjoined them from cancelleing. Two, multiple PCAs filed pre-award complaints related to NextGen, claiming in part that 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.
In a March 7, 2019 status conference, the Court ordered ED to produce the Administrative Record (AR) supporting the May 2018 cancellation of the Solicitation for large PCAs… and here we are.
The AR basically returns us to a contest between the “bigs” and the “smalls”
“[the] decision to re-cancel Solicitation ED-FSA-16-R-0009 is based on maturation of the NextGen vision, the development and implementation of specific procurement activities to realize the vision... and a determination that existing PCAs under contract through 2024 have sufficient capacity to provide effective debt collection services during the transition period from now until full implementation of NextGen, which under current timelines is expected to be completed by the end of 2020.”
“Existing PCAs under contract through 2024” refers to the eleven small business contractors that received awards on September 30, 2014. These initial 5-year contracts end in September of this year, with an optional ordering period of five years, through September 30, 2024.
The AR highlights the following conclusions from its initial review process:
- Reaching and maintaining contact with delinquent and defaulted borrowers poses a particular challenge for FSA’s vendors.
- A 2015 pilot program to compare the performance of ED contractors and Department of Treasury collectors (Treasury) revealed that more phone calls to borrowers, and earlier use of tools such as administrative wage garnishment (AWG) and Treasury’s offset program (withholding tax refunds, for instance, in order to repay federal debt), produce better collection results.
- The Treasury effort, which employed the use of minimal phone calls -- with the expectation that a lighter touch would be more effective -- achieved less than a 2% call return rate, and resolved approximately 30% fewer accounts vs. the PCAs working for ED.
The “High-Touch Servicing Plan” will reduce defaults
In response to these findings, between March and May 2018 a team from FSA’s Business Operations group developed this “High-Touch Servicing Plan” (they say this occurred separately from the NextGen work):
- Upon reaching 90 days delinquent, student loan accounts would be moved to a vendor specializing in delinquency remediation and default prevention and collection efforts.
- Collection tools with proven success, such as Treasury offset and AWG, would be moved earlier in the loan lifecycle.
During summer 2018, FSA determined these activities were within the high-level scope of work established during the NextGen Phase 1 Solicitation, so the program was incorporated into Phase II. Then…”To ensure all parties had a full understanding of the scope included in these procurements, the Department decided in January 2019 to take corrective action by cancelling the initial solicitations and issuing new solicitations.” [Editor’s note: What also coincided with the period between summer 2018 and January 2019 were multiple lawsuits crying foul at the change in scope.]
Additional FSA research led to these conclusions:
- Under current ED practices, servicers are engaging delinquent borrowers at a low intensity compared to commercial best practices (an exhibit provides detail, however the exhibits are all under seal as of this point).
- Standard commercial collections’ practice dictates placing up to three calls per day per customer. Current call volume per FSA guidelines is well below this rate, with some averaging only 1.5 calls per borrower per month.
- Calls per account currently peak during the 91-150 days past due time period, then decline significantly. FSA research found that this is contrary to commercial best practices. The AR mentions that some of the experts consulted on such processes include the Consumer Financial Protection Bureau (CFPB) and McKinsey and Company.
- Delinquencies will be reduced by deployment of state-of-the-art technology and market-tested outreach strategies, behind consistent FSA branding, to communicate continuously with students throughout the full lifecycle of the loan.
FSA expects to select one EPS vendor to quickly begin migrating existing loans, including those in default, to a new “life of the loan” servicing program. This vendor will provide transitional business process operations (BPO) until multiple BPO vendors can be awarded contracts and ramp up under the separate BPO solicitation.
The BPO vendors will:
- Deploy multi-channel customer engagement methods (phone, email, chat, SMS text, etc.) to stress the importance of avoiding default by finding a solution that best fits each customer’s unique situation.
- Use improved analytics to better understand customer needs, to increase tracking of customer interactions, and to improve skip tracing.
- Initiate administrative actions at 270 days vs. the current practice of waiting until 400 days.
- Work under a compensation program that provides incentives based on default reduction.
Implementation is underway
The first NextGen deliverables included the “successful and on-time launch in October 2018 of the redesigned fafsa.gov website and a new mobile app, myStudentAid.” No doubt this is intended to lay the groundwork of evidence to counter future claims that FSA will be unable to deliver on time. Also, the contract for the comprehensive technology platform was awarded in February 2019 to Accenture Federal Services. This platform will consolidate all of FSA’s customer-facing websites and will streamline its systems and infrastructure. Major deliverables are due by August of this year, with full implementation expected by August 2020.
FSA anticipates selecting awardees for EPS (the interim servicing solution) and BPO (the permanent servicing solution) no later than September 30, 2019. All accounts are required to be migrated to the new process no later than 22 months after award (approx. December of 2020).
The “smalls” can handle the interim volume
- Based on historical data, 80 percent of defaulted borrower accounts are assigned to PCAs; the remaining 20% are not assigned for a variety of reasons.
- As of February 1, 2019 the total number of defaulted accounts assigned to any PCA is 7.6 million, with 4.8 million of them assigned to the 11 small PCAs (on average, 436,000 accounts per PCA). 1.1 million are assigned to the two large PCAs whose contracts expire in 2021. The five large PCAs with ATEs expiring next month have fewer than 15,000 accounts; these will be resolved or transferred to other PCAs.
- Small Business PCAs are now receiving 100% of all new assigned accounts. Later this year these PCAs will begin to receive the inactive accounts held by the two large PCAs whose contracts are not expiring until 2021.
- ED estimates that the number of borrowers in default will grow to 11.5 million by the end of 2024 (with 9.2 million - or 80% - being assigned out), but notes that this does not take into account the projected impact of the planned enhanced servicing strategy.
- In September 2018 ED requested that all PCAs provide month by month forecasts of the number of accounts they can accept. A summary of this data is included in the AR as an exhibit but it is currently not available to the public. ED reports that the Small Business PCAs have said they are able to quickly ramp up either through hiring or through subcontracting arrangements.
- As of October 2018, FSA staff meets monthly with each PCA to review and discuss a range of performance and quality data, as well as call monitoring reports produced by FSA. Minutes of several of these meetings are provided as one of those sealed exhibits to the AR.
- FSA estimates that the “smalls,” if necessary, could manage up to 17 million accounts by August 2019, which exceeds the actual estimate of what they will receive by over 10 million.
- Once the transition to the NextGen permanent BPO solution is complete, FSA expects to terminate the Small Business PCA contracts for convenience.
The “smalls” performance is as good as -- or better than -- the “bigs”
The AR includes the following table, which FSA says illustrates that the net collection rate (dollars collected through borrower payments, wage garnishments and treasury offsets minus fees paid to PCAs) has increased from 2.2 percent in 2016, when most accounts were assigned to Large Business PCAs (the bigs), to 2.3 percent in 2018, when most accounts were assigned to Small Business PCAs (the smalls).
Finally, FSA includes performance data based on overall recovery rate -- which includes both cash collected and collections through loan rehabilitation and consolidation -- and highlights that the rate has declined from 15 percent in FY 2014 to 10 percent in FY 2018. They note that the decline began while accounts were still being placed with Large PCAs.
Based on the factors above, FSA concludes, cancellation of Solicitation No. ED-FSA-16-R-0009 is justified.
This article is long enough already. Suffice it to say, the plaintiffs in the current case at the COFC see the facts in this AR differently. For now, I will just raise these questions:
- ED says they don't need the bigs because they can renew the contracts of the smalls for five years. But, I understand that six of the eleven smalls are now actually big. So, are they still eligible for the five-year renewal on a small business contract?
- Evidently one of the 11 smalls hasn't received any accounts yet in 2019 due to poor performance -- and this firm's estimated capacity was higher than the others. Does this change the math on how many accounts can be handled in the coming months?
- Is there any caselaw that supports the COFC taking action other than cajoling and encouraging?
Also, evidently President Trump issued an Executive Order on Friday (I'll write about that separately) regarding -- I kid you not -- free speech on college campuses. But, most of the Order is about paying for college. The President addresses the need to help borrowers avoid defaulting on their student loans "by educating them about risks, repayment obligations, and repayment options," and gets into the weeds to list deliverables from the Department of Education, even specifically requesting recommendations for reforming the collections process for Federal student loans in default (emphasis added).
Okay, but....huh? Last Friday? While he was in Florida awaiting the Mueller report? The timing is interesting.