Archives for September 2018

On Friday afternoon, the judge in the case of FMS Investment Corp. (FMS) et al., vs. United States of America (ED) ruled in favor of the plaintiffs, granting their motion to permanently enjoin ED from cancelling its solicitation for unrestricted debt collection services.

Last week, insideARM published a lengthy article detailing the August 30th final oral arguments. In a nutshell, the plaintiffs argued that – based on the information in the Administrative Record (AR) – ED’s decision to cancel the contract was irrational. ED’s argument, in a nutshell, was that they’ve changed their strategy (they are planning to use pre-default servicers manage defaulted accounts), they will no longer need the services of large debt collectors, the 11 small contractors they do have are sufficient to get them from here to there, and so, they cancelled the solicitation for large agencies. In a ruling based solely on the contents of the AR, Judge Thomas Wheeler sided with the plaintiffs.

A quick recap

Every few articles on this saga it seems that a review of the case would be helpful for those who may have lost track.

Chapter One of this (so far) four chapter book began in 2014 when the five-year 2009 ED contract for debt collectors ended. New small business contracts were awarded on schedule, but the large-firm contracts were delayed. More than 40 large collection agencies entered the two-phase process. After ED made its initial cut, formal protests were launched by some of the companies not making it to phase two. Generally, the protests challenged the selection criteria.

Finally, in December 2016 contracts were awarded to seven large companies (down from 17 on the previous contract). This led to dozens of protests by firms that believed the process was flawed and unfair.

So began Chapter Two of the matter, with a VERY LENGTHY “re-do” of the solicitation, which resulted in awards to just two large companies, in January 2018.

This led to Chapter Three, with more protests, more litigation, and finally… nothing. No large company awards at all. On May 3, 2018 ED cancelled the whole solicitation, rescinded the contract awards from the two companies, and re-called the accounts still being worked by the firms that had an Award Term Extention from the previous contract. There were more protests, and a temporary injunction of the recall, but ultimately, the protests were dismissed, and the accounts were returned to ED, thus ending Chapter Three. 

Which gave rise to Chapter Four, with eight companies now protesting the cancellation of the solicitation, arguing that it was irrational. 

Now, back to Friday’s ruling

Judge Wheeler cited several cases in his discussion of whether ED’s decision to cancel its solicitation was a rational one.

• From Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co. (“MVMA” – 1983), he noted that “an agency must articulate a ‘rational connection between the facts found and the [policy] choice made.”
• From Gulf Gr. Inc. v. United States (2004) and AshBritt v. United States (2009), he noted, “Where an agency fails to undertake a review of relevant data, or fails to document that review, and articulate a satisfactory explanation for its conclusions, the Court must conclude that the agency has acted irrationally.’
• From Bannum, Inc. v. United States (2009), he noted that the “Court’s review is ‘highly deferential’ to the agency as long as the agency has rationally explained its decision…[and from MVMA], But the Court will ‘not supply a reasoned basis for the agency’s action that the agency itself has not given.”

The following sums up the Court’s opinion about ED’s defense:

“If ED anticipates loan volume growth, it failed to account for it in the AR. If ED anticipates loan volumes levelling off or falling, it failed to explain the basis for this conclusion. If ED assumes that current capacity will be sufficient until the enhanced servicer program is implemented — a goal for which ED apparently has no plan and no timeline — the AR provides no support for this assumption. ED ‘entirely failed to consider,’ (MVMA, 463 U.S. at 43) the interactions between future loan volumes, future small business capacity, and future enhanced servicer capacity over any timeline for implementing the enhanced servicer program.

The cancellation notice and the AR purport to outline a significant policy change. ED had clearly planned for PCAs to continue to administer defaulted student loans as recently as January 2018 because the agency awarded two PCA contracts that month. Yet not four months later, in a procurement cancellation notice, ED declared a new direction and an end to contracting for PCA services. ED needs to provide a ‘reasoned analyisis’ for the policy change. For all the reasons above, it has failed to do so. The AR before the court is not enough to show that ED’s decision to cancel the solicitation was rational.”

And, as to the reasoning for granting an injunction…

For the reasons stated above, the Court determined that the plaintiffs indeed succeeded on the merits, that they would suffer irreparable harm without an injunction, that the balance of the hardships favors an injunction, and that an injunction is in the public interest.

There was discussion during the August 30th oral arguments of the potential remedy of awarding attorneys’ fees and proposal costs to the plaintiffs, however the PCAs said this would be inadequate; what they want is to be able to fairly compete for the contract.

Judge Wheeler noted that resurrecting the solicitation and returning the procurement to the May 2, 2018 status quo will not prevent ED from continuing to develop its enhanced servicer program; on the other hand, plaintiffs depend on ED debt collection contracts to survive.

Finally, from a case cited by the plaintiffs (Starry Assoc.’s v. United States), he stated that “the public interest always favors inegrity in the federal government procurement process.”

So. We are back at May 2, 2018. No costs have been awarded to either side. The Court has not told ED what to do, except that it has permanently enjoined the agency from canceling Solicitation No. ED-FSA-16-R-0009.

insideARM Perspective

What’s next? Well, there will most certainly be a Chapter Five here. What can happen? A few thoughts:

• ED could re-offer the contracts to Windham and Performant — the two companies that had the contracts as of May 2, 2018.
• ED could re-award to the original 7 who got the contract in December 2016, plus maybe a few more.
• ED could take a 3rd shot at a revised RFP based on new criteria that the PCAs might possibly find reasonable.
• As these are IDIQ (indefinite delivery/indefinite quantity) contracts, ED could make awards, but then just delay giving the awardees any work.
• ED could make awards, but delay certification of the contractors’ readiness to receive accounts.
• ED could make awards, and determine that they DO need the services of large contractors, and send them accounts.
• ED could make awards, send accounts, proceed with their enhanced servicing program, and eventually pull back the accounts (as they’ve said would happen with the small PCAs).
• ED could make awards, send accounts, proceed with their enhanced servicing program, find that it will not be effective, and in the end, make full utilization of both large and small PCAs throughout the life of the contract.
• No doubt there are other possibilities. 

The bottom line at this point is that there are human beings involved. Things can’t possibly move forward in the best interests of borrowers, taxpayers, industry, or ED unless people can talk to each other. But how do you re-build a relationship that has become so acrimonious over the last few years?

Sources tell insideARM that, since December 2014 when Patty Queen Harper took over as administrator of the debt collection contracts (she has since left that position), nobody has spoken with a contracting officer, but all communication has been through email and memo. Contractors were told, “please don’t send responses to our audit findings. When we want it, we’ll ask for it.” There has never been a discussion about best practices, and it has been management by threat since early 2015 when the five contractors were suddenly fired.

In my humble opinion, perhaps a mediated meeting among the parties would be a place to start. Now that there is no pending litigation, why not take the opportunity to bring in the experts, bring in the contractors, and create a public-private partnership to figure out the best way to manage the millions of loans currently in default, plus the inevitable future defaults that will occur. 

Meanwhile, the whiplash and uncertainty has got to be killing the employees of the PCAs, both large and small. 

DEFINACE, Ohio — Credit Adjustments, Inc. (CAI), a values-led, family-owned call center and receivables management company, has announced the hiring of Scott Daniels as Chief Operating Officer. In his new role, he will oversee day-to-day operations to support the growth and add to the bottom line of the organization. Previously with Collection Technology, Inc. (CTI) in Rancho Cucamonga, CA, his focus at CAI is on operational needs including strategic planning, process improvements, and collaborative advances throughout the company. 

“Scott brings a wealth of experience to the organization at a crucial time in our company history,” said Lisa Bloomfield, President of CAI. “We are experiencing unprecedented growth and Scott’s commitment to delivering the ‘best in class’ highest standard in all operational aspects of a project from start to finish exemplifies what this company is all about.”

Scott’s experience encompasses twenty-one years at CTI, climbing from entry level IT help desk to CTI’s Vice President. Scott and his wife Suzy have two kids, Ethan and Emily, and have moved to Defiance, OH, from Fontana, CA. 

About Credit Adjustments, Inc.

Credit Adjustments, Inc. (CAI) is a world-class leader in receivables management. Founded in 1977 and headquartered in Defiance, OH, CAI has additional call centers in Toledo, OH, and Manchester, NH. CAI employs actionable analytics with experienced personnel to provide a fully secure suite of contact management solutions in first and third-party engagements. As a faith-based corporation, CAI believes it is part of the company’s mission to invest in our communities by partnering with other organizations to help address social issues. CAI follows the motto: Delivering Respect. Collecting Results. To learn more, visit: www.credit-adjustments.com/

A group of 15 Democratic senators sent a letter to the Bureau of Consumer Financial Protection’s (BCFP or Bureau) Acting Director Mick Mulvaney on September 13, 2018, inquiring about the resignation of Seth Frotman, the Bureau’s now-former Student Loan Ombudsman. As previously published by insideARM, Mr. Frotman sent a resignation letter to Acting Director Mulvaney on August 27, 2018, blasing the Bureau’s current direction and accusing the Bureau of failing the consumers it was created to protect. Democratic senators now want answers to the accusations made in the Frotman letter.

The senators’ letter expresses shock at the contents of the Frotman letter and accuses Acting Director Mulvaney of failing consumers in two main ways. First, the letter accuses the Bureau of abandoning consumers by failing to uphold its supervisory responsibilities over student loan servicers, and over violations of the Military Lending Act. Second, the letter accuses Mulvaney of politicizing the BCFP, expressing concerns that a political hire may “overrule the independent judgment of the Ombudsman’s office.”

The senators requested answers to certain questions stemming from the Frotman letter. Specifically, the questions revolve around:

• The BCFP’s relationship with the Department of Education;
• The BCFP’s oversight and supervision of the student loan servicing market;
• The BCFP’s actions stemming from complaints about student loan servicers;
• Acting Director Mulvaney’s political appointments to positions in the Bureau; and
• The staff report referenced in the Frotman letter regarding large banks “ripping off” students by “saddling them with illegally dubious account fees” that, according to Frotman, the Bureau leadership suppressed.

The senators who signed the letter were Sherrod Brown (D-OH), Patty Murray (D-WA), Jack Reed (D-RI), Brian Schatz (D-HI), Catherine Cortez Masto (D-NV), Doug Jones (D-AL), Margaret Wood Hassan (D-NH), Chris Van Hollen (D-MD), Robert Menendez (D-NJ), Tammy Baldwin (D-WI), Tina Smith (D-MN), Bernard Sanders (D-VT), Elizabeth Warren (D-MA), Richard Blumenthal (D-CT), Richard J. Durbin (D-IL).

insideARM Perspective

Considering the contents of the Frotman letter, the Democratic senators’ letter does not come as a surprise. What is a bit interesting is the senators’ accusations of Mulvaney politicizing the Bureau when, under former director Richard Cordray, the Bureau was also considered politicized but for the opposite political party. For example, roughly two years ago, former BCFP enforcement attorney Ronald Rubin wrote an article about, among other things, the Bureau’s hiring practices that heavily favored Democratic candidates. While the Bureau is meant to be an independent agency, its history thus far indicates that it will likely be caught in a political tug-of-war for many years to come.

ACA International made two announcements today, including the publication of a three-year strategic plan, and the hiring of industry veteran Issa Moe as General Counsel.

The goals of the strategic plan include:

1. Consistently maintain financial health by offering fairly-priced, high-quality and member-centric services and events, as well as being good stewards of ACA resources.

2. Ensure all educational offerings are relevant and use modern and effective delivery methods. Consistently innovate new educational offerings to meet members’ changing needs.

3. Build respect among consumers, media, lawmakers and regulators by regularly publishing all different facets of member-community impact, including impact on economic society (clients and consumers), philanthropy and employee opportunity.

4. Contribute to ACA members’ success by accurately understanding members’ needs with effective and consistent member engagement, unit engagement, and managing the organization well to meet those needs.

5. For the benefit of members and society, reduce or eliminate unreasonable federal and state regulatory or legislative rules through advocacy, member involvement, and even legal challenge as necessary, to ensure a healthy and vibrant economy with broad access to reasonably-priced credit.

6. For the benefit of members, decrease their financial exposure to unmerited legal cases.

Jack Brown, President, ACA International Board of Directors said, “Developing the strategic plan was a thoughtful process spearheaded by the Board of Directors, and particularly its treasurer, Scott Purcell. The Board sought staff input to carefully craft a strategic plan that is based on the overarching goal of helping members succeed.”

You can see the full plan here.

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Also today, ACA International CEO announced that the association has hired Issa Moe as Vice President & General Counsel. Prior to joining ACA, Moe was General Counsel and Chief Compliance Officer for First National Collection Bureau Inc..  He was previously an attorney with the law firm of Moss & Barnett. He has extensive experience defending claims under the Fair Debt Collection Practices Act, Fair Credit Reporting Act, Telephone Consumer Protection Act and similar statutes at the state level.

Read more about Moe’s appointment here.

 

On September 12, 2018, the Bureau of Consumer Financial Protection (BCFP or Bureau) issued its interim final rule addressing recent legislative changes to the Fair Credit Reporting Act (FCRA). The interim rule is in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act (Act) passed by Congress in May 2013.

The Act creates several new requirements for consumer reporting agencies (CRA). CRAs must now provide national security freezes free of charge and send a notice of security freeze rights when sending the Summary of Consumer Rights or Summary of Consumer Identity Theft disclosures to the consumer. The Act also requires CRAs to extend initial fraud alerts to a minimum of one year, wan increase from the previously-required 90 day minimum.

The Bureau’s new interim rule provides two new model disclosures for the Summary of Consumer Rights and Summary of Consumer Identity Theft in order to comply with the new requirements. The new disclosures will amend Appendicies I and K of Regulation V. 

In a footnote to the interim rule, the Bureau mentions that the additional costs, if any, to implementing this new rule should be minimal since the new disclosures and currently-required disclosures are similar in length.

The interim rule becomes effective on September 21, 2018. The Bureau invites comments on the interim rule, but the comments must be received on or before the effective date.

insideARM Perspective

One issue that stands out with the model disclosures is the complexity of the language used. While the “least sophisticated consumer” standard applies to the Fair Debt Collection Practices Act (FDCPA) and not the FCRA, identity theft and fraud impact consumers of all reading abilities. When run through a reading index, the results show that these disclosures are at a relatively high reading level. For example, the Flesch-Kincaid and the Coleman-Liau Index rate the disclosure at a twelfth grade reading level. The Linear Write Formula rates the disclosure at a college reading level. It is interesting that the Bureau would issue disclosures at such a high reading level while at the same time, and when communicating with the same consumers, debt collectors must ensure that their letters can be understood at a sixth grade reading level.

With debt collection rules perpetually around the corner, could these model disclosures be a sign of what is to come? A two page double-sided FCRA-required disclosure may not add additional cost, especially with the ability to send such disclosures electronically. Hopefully, while contemplating debt collection rules, the Bureau keeps in mind that the FDCPA world is very different.

In the debt collection context, such a long disclosure would add fairly significant operational costs. Sending initial validation letters, which contain the bulk of the required disclosures, via electronic formats is still a new pursuit for the industry. Recently, the BCFP complicated this effort when it filed an amicus brief in the Lavallee v. Med 1 case arguing that the E-SIGN Act applies to FDCPA-required disclosures. Currently, most initial validation notices are sent as one double-sided page. Printing and mailing costs would practically double if debt collectors were required to send a two page double-sided letter to consumers. It is comforting to know that the Bureau conducted a cost analysis on the new FCRA disclosure, and this may be indicative that it will do the same for the debt collection rules.

WOODLAND HILLS, Calif. — Account Control Technology Holdings, Inc. (ACT Holdings), a national leader in delivering debt recovery and business process outsourcing solutions, welcomes Chad Benson as the Chief Operating Officer (COO). Benson joins the executive leadership at ACT Holdings to drive results as the company continues to build and invest in its future growth. Benson officially joined ACT Holdings effective, September 4, 2018.

“I’m thrilled to have someone with Chad’s background and experience join the ACT Holdings team,” says Mike Meyer, CEO of ACT Holdings. “I have great respect for him, his leadership capabilities and operational experience and I look forward to leveraging his skill set across all the ACT Holdings clients and verticals we service. Chad is an incredible addition to our senior leadership team and will help us continue to provide outstanding service to our clients and grow our business.”

As the COO, Benson will be responsible for operations and data analytics for all ACT Holdings companies: Convergent Outsourcing, Inc., Convergent Revenue Cycle Management, Inc., Convergent Healthcare Recoveries, Inc. and Account Control Technology, Inc. He will oversee day-to-day operations, including strategy creation and building employee alignment with client and company goals. Benson has more than 20 years of leadership experience in financial services and technology, specializing in growth management, capital planning, operational and customer lifecycle management.

Most recently, Benson served as the Chief Executive Officer at CBE Companies, a global provider of outsourced call center solutions with more than 1300 employees and five locations. Prior to joining CBE Companies, Benson directed and managed a multimillion division at Capital One where he consistently sought to drive profit and process optimization, ensured all operational goals and metrics were achieved while cultivating credible and trusted partnerships with employees and clients.

“I am excited to join such a passionate group at ACT Holdings who are dedicated to delivering innovative BPO and accounts receivable management solutions,” states Benson. “I look forward to working with Mike and the ACT Holdings management team to help facilitate our next phase of growth.”

About Account Control Technology Holdings, Inc. (ACT Holdings)

Account Control Technology Holdings, Inc. provides comprehensive business process outsourcing and financial services to diverse industries. Our companies partner with clients to help them run the “business” behind their operations so they can focus on what they do best – whether it’s serving customers, educating students, caring for patients, or keeping communities moving forward. ACT Holdings companies include Convergent Outsourcing, Inc., Convergent Revenue Cycle Management, Inc., Convergent Healthcare Recoveries, Inc. and Account Control Technology, Inc. with locations across the US and offshore. For more information, visit www.accountcontrolholdings.com.

Oral arguments took place on August 30, 2018 in the consolidated case of FMS Investment Corp. (FMS) vs. United States of America (ED) vs. Alltran Education, Inc. (Alltran), Intervenor Defendant.

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This was the final argument on cross-motions for judgment on the administrative record. The issue currently at hand in this years-long protest is whether the Administrative Record (AR) reflects evidence that ED was rational in its decision to cancel the procurement for unrestricted (large) private debt collectors (PCAs). The 77-page transcript of the proceedings is sealed, but insideARM obtained a copy.

For readers who may need a refresher on the ED litigation — we are now in round four (my own classification) — this insideARM article describes how we got here.

Now, back to the August 30 hearing…the following arguments were made by the plaintiffs:

• The government can’t make up facts; ED must have a record that supports its May 3, 2018 decision to cancel the procurement for large PCAs.
• The decision must have been a rational one.
• A rational decision by ED would have reflected a clear understanding of its needs, a survey of options to achieve its requirements, and an evaluation of viable alternatives.
• One viable option has been the services of large PCAs, which are on the record as having been effective.
• The only other option the AR reflects is simply a recently-developed “vision” (or “idea”) to have its pre-default servicers use enhanced techniques – a vision which as yet has not been tested, has no allocated budget, and has no timeline for implementation.
• The NextGen procurement RFP (which ED says is the precursor to its enhanced servicing program) makes no mention of enhanced servicing, and in fact references PCAs.
• The number quoted in the NextGen RFP as potential debt collection volume (350,000 accounts per month) is different than the numbers relied upon in the May 3, 2018 RFP Cancellation Notice (120,000 accounts per month).
• ED’s claim that only small businesses are necessary to handle the accounts is false, as they are in fact using two large companies to do it now (Alltran and Pioneer, which have 2-year Award Term Extensions that expire in 2019).
• ED’s claim that it can simply award more small business contracts when it has a capacity problem is erroneous, because history (and a statement in court made by ED in June 2018) shows that it takes years to get new contractors up and running.
• ED’s claim that the small companies will perform well because if they perform poorly, “it would negatively affect [their] abilities to secure additional contracts” is erroneous because ED has said that, with enhanced servicers, there will be no new PCA contracts… so “there is no carrot here that’s …cajoling the smalls to perform well.”
• While such a direct statement has not been made by ED, the “evidence shows that they cancelled [the procurement] because there was a protest (not because there was a strategy change). The proof of this is that in January, Windham Professionals had a contract award. Nowhere in the record does it say if there hadn’t been a protest, they would have issued this May 3^rd cancellation decision cancelling that contract.”
• These are IDIQ (indefinite delivery/indefinite quantity). The government is not locked in – they only have to use the contractors if they have a need. Why cancel them when the new solution isn’t yet clearly in place?
• The overall student loan portfolio is growing at about 5.8 percent per year, according to ED’s records, but the default portfolio is growing at 5 percent per quarter. So they cannot claim that they’re keeping up adequately with the demand.
• ED is talking about wholly reinventing the way they service loans – defaulted and performing loans – and there’s no consideration. It sounds like they think they can just flip the switch and the whole system would be up and running.
• Many cases have ARs in the hundreds or thousands of pages. This AR is 33 pages. It doesn’t even include the solicitation being cancelled. The 2018 round capacity numbers included for the 11 small businesses and the 2 ATEs are not explained or supported at all. There isn’t a single chart or anything that analyzes capacity beyond December 2018. The record does not support the decision that has been made. ED has not done its job. They shouldn’t be let off the hook.
• Since 2009 ED has acknowledged that it needs both large and small businesses to effectively collect defaulted student loan debt. The agency has never used only small businesses to handle defaulted debt, because those entities historically have demonstrated much lower collection rates than large PCAs.

“Why do we need two contracts on January 11^th, but by May 3^rd we don’t need them anymore? So much do we not need them, that even if there weren’t any protests, we would cancel the contracts.”

• The timeline of ED’s cancellation decision (and their supporting reasons for the cancellation) is suspect:
  • In January 2018 ED awarded unrestricted contracts to two PCAs.
  • In January 2018 ED published a forecast on its website that it would solicit more PCA services; this forecast was removed from the website the day after FMS filed its complaint in this case.
  • The NextGen RFP was issued in February 2018 but did not mention “enhanced servicing,” yet ED claims that the higher number of 350,000 accounts per month was used to represent the potential volume – contemplating enhanced servicing – because they would be assigned much sooner to enhanced servicers than to PCAs.
  • On March 6, 2018 the court became convinced that plaintiffs had demonstrated a likelihood of success on the merits.
  • According to the AR, the enhanced servicing concept was hatched in April 2018, and the cancellation decision was implemented on May 3, 2018.
  • There is no timeline for the newly envisioned enhanced servicing program to be active.

Judge Wheeler asked whether, if hypothetically, the real reason for the cancellation was the desire to not litigate anymore, would that be a rational reason for cancelling the solicitation? The attorney for FMS said no, not under federal procurement law. He, along with other plaintiffs’ attorneys, offered multiple prior court and/or GAO cases they believe support their position (Mori Associates, Starry Associates, WHR Group, California Marine Cleaning, SMF Systems Technology, Phil Howry Company, and Superlative Technologies).

The attorney for lead Plaintiff FMS offers analogies to ED’s irrational decision to cancel the procurement:

• With winter coming, would it be rational to cancel your heating oil supplier for a difference source to heat your home, when you don’t know whether that source will be available?
• In the midst of a war, would it be rational for the Army to cancel a contract for ammunition because a team of diplomats has an idea to negotiate for a ceasefire?
• Finally, would it be rational to cancel the lease on your car because Metro had an idea that they were going to put a stop near your home?

He suggested none of these actions would be rational, but they are all good analogies for ED’s actions in this case.

Judge Wheeler asked what the legal standard would be for awarding bid and proposal costs for the efforts put into this solicitation. Plaintiffs responded that this is not the remedy they seek; what they want is to roll back to the situation prior to the May 3 cancellation, and to be able to compete for the contract in accordance with the law. Plaintiffs reassure the Court that this does not constitute micromanagement of the solicitation. Following the roll back, ED is free to do what it wants, but it must provide a rational basis for its actions (i.e. If the decision is to cancel, then the Metro stop must actually be built or far enough under construction that it’s rational to cancel the lease of the car).

The following arguments were made by the Government, on behalf of ED:

• Plaintiffs have ignored the numbers of accounts that have actually been assigned, and the role that has played in the cancellation decision. The historical record of accounts that have been assigned over the last 3.5 years has trended down.
• There have been consistent assignments to the small businesses over the preceding 12-18 months, they’ve been handling the work adequately, and they’ve been receiving more and more accounts. The two large PCA ATEs have received accounts, but they have not been getting regular assignments. The small businesses have been the focus.
• The 120,000 account per month number (which is the actual number that’s being assigned) is drastically below the estimated capacity of the small businesses. So all this focus has been on the future and what’s going to happen, but has ignored what has actually been happening.
• ED is trying to innovate and do something completely different. There are obviously entrenched interests here, so there is a lot of upset. But that’s the key change, and it’s been going alongside this procurement, which has been on the street since 2015.
• The NextGen proposal went onto the street on February 20, 2018. The proposals were due in April. They are currently being evaluated for phase 1, which is about implementing and developing this seamless online system. Right now, every PCA has their own website, and there are a lot of different mechanisms for borrowers to deal with whoever is handling their account, and the goal is to get on one platform that services the life of a loan.
• The one decision that needs to be made for ED (which won’t happen until they finish the phase 1 evaluation) is whether or not they are going to do the enhanced servicing strategy via phase 2 of the NextGen procurement, or if they’re going to separately procure it. They anticipate phase 1 evaluation to be completed in the early fall.
• One key element that plaintiffs skipped over is, once enhanced servicing starts, there’s no more assignments of accounts to PCAs. It stops. Because it goes to the new program. Every new default, every new – anyone falls behind in their payments, it goes to the new system. And then once the system is up and running, accounts will be brought from the small businesses.
• How it all plays out in the future, whether there’s subcontracting or other elements, that’s something that will be played out as it goes forward.
• For now, they have what they think is appropriate to deal with their needs. And that is the basis for a rational decision.

“So once that decision had been made in the spring of this year, why proceed with a procurement for services that are going the way of the dodo, according to how ED wants to do work going forward?”

As rebuttal, plaintiffs made the following comments:

• When ED said we’re litigating something that doesn’t matter anymore, that’s about as cavalier as we can get about this procurement. These folks have been through proposal after proposal chasing something that really does matter, that they’re required to collect as a matter of law.
• Assignment of accounts is not the test of capacity. The fact that you’ve got a bucket that will take all these accounts doesn’t mean you’ve got capacity to collect the defaulted debt.
• The parade of speculation is this enhanced servicer concept. It’s a neat idea, but there is not one piece of evidence in the record that existed before April that relates to enhanced servicers.
• The cancellation memo is based on the 11 small businesses doing the work, not the large business ATEs. So the record already shows that the rationale is flawed. You don’t need to second-guess what’s the right capacity decision; they’ve already crossed over into using large businesses to do this work.

And with all of that, the matter was left in the hands of Judge Thomas Wheeler, who took over the flailing case in December 2017, when it was in a previous incarnation (Continental Service Group Inc. et al. v. United States of America). He promised a ruling “in fairly short order,” which he typically delivers on.

insideARM Perspective

This article is long enough already, but I will add one point that was not mentioned during the hearing. Third party debt collectors are subject to the Fair Debt Collection Practices Act (FDCPA), but because of an exception, servicers who receive accounts prior to default are not subject to the same rules. Establishing the knowledge and systems to comply with the FDCPA is not a trivial undertaking. If ED decides to hold its pre-default servicers accountable to the same rules, it seems that this would certainly delay full implementation of NextGen post-default servicing.

Yesterday, five agencies that oversee financial institutions issued a joint statement regarding the role of supervisory guidance. The Federal Reserve Board, the Bureau of Consumer Financial Protection, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency confirmed that supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance. 

The statement — which follows — explains that supervisory guidance can outline the agencies’ supervisory expectations or priorities and articulate the agencies’ general views regarding appropriate practices for a given subject area.

Difference between supervisory guidance and laws or regulations

The agencies issue various types of supervisory guidance, including interagency statements, advisories, bulletins, policy statements, questions and answers, and frequently asked questions, to their respective supervised institutions. A law or regulation has the force and effect of law. Unlike a law or regulation, supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance.  

Rather, supervisory guidance outlines the agencies’ supervisory expectations or priorities and articulates the agencies’ general views regarding appropriate practices for a given subject area. Supervisory guidance often provides examples of practices that the agencies generally consider consistent with safety-and-soundness standards or other applicable laws and regulations, including those designed to protect consumers. Supervised institutions at times request supervisory guidance, and such guidance is important to provide insight to industry, as well as supervisory staff, in a transparent way that helps to ensure consistency in the supervisory approach. 

Ongoing agency efforts to clarify the role of supervisory guidance

The agencies are clarifying the following policies and practices related to supervisory guidance:

• The agencies intend to limit the use of numerical thresholds or other “bright-lines” in describing expectations in supervisory guidance. Where numerical thresholds are used, the agencies intend to clarify that the thresholds are exemplary only and not suggestive of requirements.  The agencies will continue to use numerical thresholds to tailor, and otherwise make clear, the applicability of supervisory guidance or programs to supervised institutions, and as required by statute.

• Examiners will not criticize a supervised financial institution for a “violation” of supervisory guidance. Rather, any citations will be for violations of law, regulation, or non-compliance with enforcement orders or other enforceable conditions. During examinations and other supervisory activities, examiners may identify unsafe or unsound practices or other deficiencies in risk management, including compliance risk management, or other areas that do not constitute violations of law or regulation. In some situations, examiners may reference (including in writing) supervisory guidance to provide examples of safe and sound conduct, appropriate consumer protection and risk management practices, and other actions for addressing compliance with laws or regulations. 

• The agencies also have at times sought, and may continue to seek, public comment on supervisory guidance. Seeking public comment on supervisory guidance does not mean that the guidance is intended to be a regulation or have the force and effect of law. The comment process helps the agencies to improve their understanding of an issue, to gather information on institutions’ risk management practices, or to seek ways to achieve a supervisory objective most effectively and with the least burden on institutions.

• The agencies will aim to reduce the issuance of multiple supervisory guidance documents on the same topic and will generally limit such multiple issuances going forward.    

• The agencies will continue efforts to make the role of supervisory guidance clear in their communications to examiners and to supervised financial institutions, and encourage supervised institutions with questions about this statement or any applicable supervisory guidance to discuss the questions with their appropriate agency contact.

insideARM Perspective

This is certainly a change from the position taken by former CFPB Director Richard Cordray, who famously warned a group of bankers in March 2016,

“Without undermining the confidentiality of the supervision process, we are providing this de-identified information so that everyone can see and respond immediately to violations and remedial actions being taken elsewhere.”

(emphasis added) and

“[I]t would be ‘compliance malpractice’ for executives not to take careful bearings from the contents of these orders about how to comply with the law and treat consumers fairly.”

Indeed, nearly all supervised industries under the CFPB complained that rules were effectively being written – and retroactively imposed – without proper administrative process, and based on actions against specific companies for specific fact patterns, or based on vague supervisory documents.

Also worth noting is industry’s support for guidance, when properly issued and used. In response to the Bureau’s call for evidence regarding its Guidance Bulletins, the Consumer Relations Consortium (CRC) urged the agency to continue – or even increase — the practice of offering guidance to provide clarity where needed. The group highlighted multiple examples of important guidance provided in the past by the Federal Trade Commission, and noted that guidance can be helpful in addressing elements of laws that have become outdated or “gray” due to market advancements. For example, technology has evolved so greatly during the last several years that some of the positions addressed in the November 2013 Advanced Notice of Proposed Rulemaking (ANPR) for debt collection have become moot, or at least outdated to the point where they ought to be reconsidered from scratch. 

The process of rule (or law) making is, by definition, a slow one. But markets are changing at an ever-increasing pace. The joint statement issued yesterday addresses the need to provide interim guidance, while maintaining the integrity of the rulemaking process that carefully considers many perspectives.

LIVONIA, Mich. and ST. PAUL, Minn. — RevSpring and Apex Revenue Technologies announced that they have entered into a definitive agreement to combine in a strategic transaction. The combined company, which will continue to conduct business as RevSpring, will be the leading provider of intelligent multi-channel consumer and patient engagement solutions, electronic and printed communications, and billing and payments solutions. On behalf of their customers, the combined companies generate over one billion consumer financial communications and $4 billion in consumer payment volume annually. The transaction is being led by GTCR, a leading private equity firm based in Chicago which is currently the majority shareholder of RevSpring. Closing is expected to be in the fourth quarter of 2018 after the receipt of regulatory approvals. Following closing, GTCR will be the majority shareholder with substantial ownership held by management of the combined companies. 

RevSpring and Apex are pioneers in intelligent, analytics-driven consumer engagement and multi-modal communications platforms designed to drive the right message to the right consumer at the right time to drive the best outcome for both the patient and the healthcare provider. The companies’ solutions are differentiated by proficiencies in consumer behavior analysis, propensity-to-pay scoring, intelligent design, and user experience best practices. These solutions allow healthcare providers and others to improve their revenue cycle management, increase customer and patient engagement, better leverage data and increase overall efficiency.

“Every day, over 700 team members at RevSpring and Apex strive to drive the best outcomes for their customers by leveraging technology to intelligently engage with each consumer. We all care deeply about the patients we serve and believe that every communication matters,” said Rahul Gupta, RevSpring CEO. “I am thrilled that we can bring these two great companies together, creating enhanced scale and deeper capabilities. This combination will augment our capability to further evolve our powerful healthcare solutions and to continue our innovation on behalf of all our customers. I look forward to working with the Apex team to leverage our combined strengths.”

“I am a strong believer in the merits of this combination,” said Brian Kueppers, Apex Founder and CEO. “I am so extremely proud of the entire Apex team and all that we have accomplished together. This combination represents the next chapter in our mission to deliver world-class technology and data-driven solutions to this marketplace.”

“We are gratified that RevSpring is joining forces with Brian Kueppers and the Apex team,” continued Collin Roche, Managing Director at GTCR. “We have long respected Apex’s position in the market and their service orientation. We believe that RevSpring and Apex have a shared perspective and commitment to their customers in healthcare, financial services and other industries. Our plans going forward are to continue to invest heavily in technology and further expand product offerings and solutions for current and future clients.”

“We could not be prouder of Brian Kueppers and the Apex team. Their focus on serving their customers’ needs and developing unique solutions has been the hallmark of Apex’s growth,” said John Turner, Partner of WestView Capital, a member of Apex’s board of directors. “Together, we have accomplished great things, and while we won’t be part of the next step in their journey, could not be more excited about the future of the combined Apex and RevSpring.”

About RevSpring

RevSpring is a leader in patient communication and payment systems that tailor engagement touch points to maximize revenue opportunities in acute and ambulatory settings. Since 1981, RevSpring has built the industry’s most comprehensive and impactful suite of patient engagement, communications and payment pathways backed by behavior analysis, propensity-to-pay scoring, intelligent design and user experience best practices. RevSpring leverages “Best in KLAS” software and services to deliver over 1 billion smart medical communications each year that drive increased patient engagement and payment rates. To learn more visit https://revspringinc.com/healthcare/.

About Apex Revenue Technologies

Founded in 1995, Apex Revenue Technologies is a leader in healthcare technology solutions that provide insight into how patients pay to improve financial outcomes for providers and their patients. Apex’s cloud-based software promotes patient financial engagement, streamlines patient billing processes, increases revenues and reduces the cost to collect from patients. The company’s award-winning Apex Connect™ platform dynamically tailors financial communications and payment options to match healthcare provider goals with the needs of the patient for better results. To learn more, visit www.apexrevtech.com.

About GTCR

Founded in 1980, GTCR is a leading private equity firm focused on investing in growth companies in the Financial Services & Technology, Healthcare, Technology, Media & Telecommunications and Growth Business Services industries. The Chicago-based firm pioneered The Leaders Strategy™ – finding and partnering with management leaders in core domains to identify, acquire and build market-leading companies through transformational acquisitions and organic growth. Since its inception, GTCR has invested more than $15 billion in over 200 companies. For more information, please visit www.gtcr.com.

About WestView Capital Partners

WestView Capital Partners, a Boston-based private equity firm focused exclusively on middle market growth companies, manages approximately $1.7 billion in capital across four funds. WestView partners with existing management teams to sponsor minority and majority recapitalizations, growth, and consolidation transactions in industries such as healthcare technology and outsourcing business services, software and IT services, consumer, and growth industrial. WestView invests in companies with operating profits between $3 million and $20 million with investment sizes ranging from $10 million to $60 million. For more information, please visit www.wvcapital.com.

The Treasury Inspector General for Tax Administration (TIGTA) issued a report on September 5, 2018, regarding the Internal Revenue Service’s (IRS) most recent attempt at its private debt collection (PDC) program. The report did a thorough review of the current PDC program, finding that the Private Collection Agencies (PCA) performed well despite setbacks caused by the IRS’s management and oversight of the program.

On two prior occasions, the IRS attempted to implement PDC programs. Both times, the programs resulted in a financial net loss to the government according to the report. The 1996 pilot program resulted in a $17 million net loss and was cancelled after 12 months. The 2006 initiative resulted in a $20.9 million net loss.

In the most recent PDC program, the IRS awarded contracts to CBE Group, ConServe, Performant, and Pioneer (collectively, the PCAs). Of note, the report states that PCAs performed well in both quality and customer satisfaction. Combined initial quality scores of all PCAs were:

• Customer Accuracy: 99.7 percent,
• Professionalism: 99.9 percent,
• Timeliness: 99.8 percent,
• Regulatory Accuracy: 98.5 percent, and
• Procedural Accuracy: 97.2 percent.

Customer satisfaction scores, taken through a survey at the end of telephone calls with PCAs, show the following anonymized scores:

• PCA 1: 95 percent,
• PCA 2: 90 percent,
• PCA 3: 95 percent, and
• PCA 4: 91 percent.

The report discusses that the PDC program’s collection rate (1%) is lower than the national debt collection average (9.9%). However, the report lists many reasons that explain this, the most influential of which is the average age of accounts placed with PCAs. The average age of assigned accounts is 3.97 years, which, according to the report, are thought to be nearly uncollectible accounts.

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The report also points to other obstacles faced by PCAs due to the IRS’s procedures for the program and the current climate. For example, the report notes that the IRS does not provide PCAs with the taxpayer’s telephone number upon placement. PCAs also face difficulty placing telephone calls to taxpayers because they must verify the taxpayer’s sensitive information in an environment where telephone scams involving IRS impersonators are widespread.

The report also calls out several IRS procedures for the PDC program that may be harmful to consumers. As one example, the report highlights the potential harm caused by the required verification process. In the current process, the letters received by the taxpayer from both the IRS and the PCA contain a Taxpayer Authentication Number (TAN), which is unique to each taxpayer. PCAs are to use the TAN along with other personal information to ensure they are speaking to the correct person. However, if the taxpayer does not have his TAN available, he may verify the account using his social security number (SSN). To do this, the taxpayer would provide the first five digits of his SSN and the PCA would then provide the last four digits of the SSN. The report notes that this procedure could allow scammers to get access to the taxpayer’s sensitive information.

Another example is the IRS’s lack of standardization of a complaint process. This issue is twofold. First, the report notes that the IRS should have a complaint panel or have a complaint process that alows taxpayers to lodge compalints directly to the IRS rather than relying on PCAs to self-report complaints. Second, the IRS needs to clarify the definition of complaint so that the PCAs can self-report complaints consistently. The report found that the disparity in self-reported complaints (44% by one PCA, 6% by another) is indicative that the IRS has not provided clear guidance to the PCAs on what qualifies as a self-reportable complaint. The report notes that a complaint panel consisting of a cross-functional group would ensure that “the person in charge of reviewing complaints agast the PCAs are not the same people who are responsbile for the success or failure of the PDC initiative.”

The report states that with the current inventory of delinquent taxpayer accounts, the IRS could do a better job at placing more promising accounts with PCAs. For example, inventory management and placement could be more profitable if assignment was based on dollar value of the account, age of the case, the taxpayer’s financial position, or the availability of taxpayer contact information. The IRS responded to this recommendation by stating it currently places accounts based on type and balance due, but any further analysis would result in a significant technology investment.

The report also notes that the IRS made it difficult to forecast the future financial success of the program. Specifically, the report states that the IRS failed to identify which expenses for the program were one-time start-up costs versus recurring operational costs. Without this information, it is difficult to accurately extrapolate the program’s future financials.

Despite all of this, the current PDC program appears to be a success financially, as previously reported by insideARM. As of May 31, 2018, the program’s revenue ($56.65 million) was higher than the costs associated with the program ($55.33 million).

insideARM Perspective

This report provides a positive review of the PCAs, showing that they are doing very well despite the inventory, information, and oversight provided by the IRS. Even would-be criticisms of PCAs, like the inconsistency of self-reporting complaints, are directed at the IRS, finding that PCAs did not receive clear guidance from the IRS. A review of the report as a whole gives the impression that the IRS is trying to balance oversight of the PDC program with the need to keep costs low and manageable so the program does not result in a net loss like its predecessors. Considering that the program is currently running in the black, it appears that the IRS’s efforts are working in that area, which may mean the current program avoids the fate of the two prior attempts.