ED Commences Recall, Senators Weigh in, Collectors File Restraining Order, Recall Put on Hold

The end of last week was busy at the United States Court of Federal Claims. In chapter four of private collection agencies (in this iteration, FMS Investment Corp. is the lead) v. The United States (specifically, the Department of Education, or "ED"), ED notified the court that it would commence the recall of accounts from five collection agencies that have been operating under award term extensions (ATEs). This recall had been announced previously, then put on hold without explanation -- although the hold closely followed a letter from a Senate committee directing ED not to go through with the recall. 

[For those who need a little more background before proceeding, read Quest for Unrestricted Dept. of ED Collection Contract Enters Round 4.]

On Thursday, June 28, the Senate Committee on HHS, Labor, and Education approved the 2019 Appropriation, including the following:

The Committee is concerned with the Department’s recent management of the defaulted Federal student loan process and with the capacity of current private collection agencies receiving new accounts to be able to properly serve borrowers who have defaulted on their loans. Accordingly, the Committee encourages the Department to extend current contracts with private collection agencies whose award term extensions are set to expire in April 2019, and that are affirmatively meeting all contract requirements, serving the fiscal interest of the United States, and complying with applicable consumer protection laws until the Department is able to transition to a new collections process as part of the Department’s Next Generation Financial Services Environment. Furthermore, the Committee directs the Department not to recall accounts that are not in repayment from such private collection agencies and allow them to continue servicing their current portfolio to avoid disruptions for borrowers, and to comply with the performance reporting requirements of the explanatory statement accompanying the Consolidated Appropriations Act, 2018. (emphasis added)

In response to the notification that the recall would commence immediately (at 4 p.m. eastern on Friday July 13), FMS and friends (GC Services, Windham, ConServe, and ACT) filed an emergency temporary restraining order (TRO), and the court held a hearing by telephone that same day. They requested that ED not be able to move forward with the recall until at least July 27 (or the end of the present case).

The plaintiffs said there have been material developments in the case which support this new TRO. One development was the Senate committee's language in the 2019 Appropriation. A second was that the House Appropriations Committee passed a version of the FY2019 funding bill for ED, including an ammendment requiring ED to establish debt collection performance targets. The language includes:

"the optimal use of qualified large and small business contractors to help [ED] achieve, at minimum, the average portfolio resolution percentage achieved by [ED] for the period of fiscal years 2015 through 2018." (emphasis added)

The plaintiffs argue that (1) Congress clearly intends for large collection agencies to be a part of ED's solution, (2) that the concept of "enhanced servicing" is merely a concept at this point, with no specific timetable or implementation in sight, and (3) that stripping the ATE PCAs of their non in-repayment accounts now will "mortally wound each and every PCA." (emphasis added)

Two things happened following the emergency telephone hearing. First, ED notified that court that it has agreed to stay its recall of accounts through Thursday July 19. Second, an in person hearing has been scheduled for the same day, at the Court of Federal Claims, to hear oral arguments addressing the legal effect of the Senate Committee's language directing ED not to recall the accounts.

insideARM Perspective

What can I add at this point? Everyone is wondering what legal authority a Senate committee has to compel action by a government agency. One thing remains true... Judge Wheeler is moving this thing along. I hope he wasn't planning to take a summer vacation.