On Monday I wrote about the Administrative Record (AR) submitted by the U.S. Government on behalf of the Department of Education (ED) in the case currently being debated at the Court of Federal Claims (COFC). Among other things, that AR reveals what ED has developed as its “enhanced servicing strategy” which will eliminate the need to separately procure the services of private debt collectors.

In this video I’ve highlighted the irony in some of these “enhanced strategies,” which include making more calls to borrowers and starting wage garnishments a lot sooner — because, they noticed — people call when their wages have been garnished. Wonder how this will sync with new rules from the CFPB?

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On Monday, a divided panel of the Ninth Circuit rejected what is perhaps the most common allegation asserted by plaintiffs as a way of achieving standing under FCRA: that, as a result of some alleged misconduct, their credit report contained misleading information.

This decision arose in five related cases. Green v. Experian Information Solutions, Inc., No. 17-15987 (9th Cir. 2019); Rydolph v. Experian Information Solutions, Inc., No. 17-15990 (9th Cir. 2019); Contreras v. Experian Information Solutions, Inc., No. 17-15991 (9th Cir. 2019); Hunter v. Experian Information Solutions, Inc., No. 17-15992 (9th Cir. 2019); Jaras v. Equifax Inc., No. 17-15201 (9th Cir. 2019). In these companion cases, the plaintiffs alleged that the notations on their credit reports mischaracterized the legal status of debts which were subject to a Chapter 13 bankruptcy plan. The trial court dismissed the cases based on findings that the notations on the credit reports were accurate and not misleading.

The Ninth Circuit panel, however, did not reach the merits. Instead, the majority held that, pursuant to the United States Supreme Court’s precedent in Spokeo v. Robins, plaintiffs lacked standing to bring suit.

The majority’s analysis focused on the lack of concrete allegations from the plaintiffs. They noted that “Plaintiffs here do not make any allegations about how the alleged misstatements in their credit reports would affect any transaction they tried to enter or plan to try to enter—and it is not obvious that they would” given that other explanations might exist for the lower credit scores alleged by the plaintiffs. Thus, the majority argued, the plaintiffs failed to allege any actual or imminent concrete harm, and that their claims were too amorphous to litigate. They concluded that the plaintiffs’ claims should be dismissed without prejudice.

Judge Berzon dissented. In her dissent, Judge Berzon noted that several of the plaintiffs alleged that the conduct at issue lowered their credit scores, and that it is difficult for individuals to predict when and how their credit reports may be used or accessed. Judge Berzon therefore argued that “adverse information on a credit report, often resulting in a lower credit rating, constitutes a reputational injury creating a material risk of harm, whether or not an individual contemplates a specific, imminent transaction.”

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Editor’s note: This article is provided through a partnership between insideARM and Womble Bond Dickinson. WBD provides a steady stream of their timely, insightful and entertaining take on this ever-evolving, never-a-dull-moment topic. WBD – and all insideARM articles – are protected by copyright. All rights are reserved.

CARROLLTON, Texas — Southwest Credit Systems raised over $900 throughout November and December 2018 to donate to the Ronald McDonald House of Dallas. Employees from SWC undertook friendly competition to raise funds between teams throughout their Carrollton, TX headquarters. The team that amassed the highest amount of donations was awarded the privilege of purchasing ingredients with company funds, and cooking lunch for the families and staff members of the Ronald McDonald house and neighboring hospitals.

“We selected the Ronald McDonald House of Dallas because of their willingness to feed, house, and assist families who are doing their best to care for their loved ones. Our core company values align with the mission of the Ronald McDonald House of Dallas, and we look forward to continuous support in the future” says Jeff Hurt, CEO.

“The response from our employees is heart-warming,” says Hurt. “Their enthusiasm and willingness to continue to support our local charities throughout the year makes us proud.”

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About Southwest Credit Systems

Southwest Credit Systems is one of the nation’s leading provider of accounts receivable management and consumer service solutions.  They bring over 40 years of proven experience in the government, tolling, utility, telecommunications, cable, property management, and education industries. Southwest Credit Systems annually manages billions of dollars in receivable accounts, proudly serving organizations of all sizes from Fortune 500 private firms to small public agencies.

TCPAWorld has more than its fair share of raging debates: the definition of ATDS, whether contractual consent can be revoked, etc.

Among the most frustrating – from my perspective – is the question of whether creditors might be automatically liable for TCPA violations by third-party collectors servicing debts even though sellers are not subject to such per se liability when telemarketers make calls on their behalf.

Huh, you say?  Let me break it down.

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Back in 2008, the FCC ruled that calls made by debt collectors would be treated as if they were made by the creditors for purposes of TCPA liability. See In re Rules & Regulations Implementing the Tel. Consumer Prot. Act of 1991, 23 F.C.C. Rcd. 559, 565 (2008) (“[c]alls placed by a third party collector on behalf of that creditor are treated as if the creditor itself placed the call.”) The language of the order is vague, and it was always unclear whether the Commission was just using loose language to describe the general vicarious liability paradigm applicable to federal statutes or actually intended to create some sort of substantive rule that creditors must always answer for the sins of their collectors.

In 2013, however, the FCC issued a very clear ruling finding that vicarious liability principles apply to the TCPA in the context of telemarketing calls. See In re Joint Petition Filed by Dish Network, LLC, 28 F.C.C. Rcd. 6574, 6574 (2013). This means that a seller cannot be held liable for a TCPA violation by a telemarketer in the absence of agency, apparent authority or ratification.

Since 2013, district courts have split as to the impact of the 2013 vicarious liability ruling on the oddball language from 2008 regarding creditor liability for calls by servicers. Some courts continued to find that creditors remained per se liable. But many others disagreed holding that the 2013 ruling applied in all contexts, not just to telemarketing. No court of appeal had considered the issue, however.

Until now.

On Friday, the Ninth Circuit Court of Appeal weighed in and answered the question directly – creditors are not per se liable for TCPA violations by debt collectors but can be held liable under basic vicarious liability principles. See Shyriaa Henderson v. United Student Aid Funds, Inc., No. 17-55373 (9th Cir. March 22, 2019). That’s nice to hear.

In Henderson, Plaintiff sought to hold the Defendant, USA Funds – the owner of billions in federally backed debt – liable for calls made by down-stream debt collectors that had contracted with USA Funds’ servicer to collect on delinquent student loan debt. These collectors were (allegedly) naughty miscreants who were using autodialers to call skip traced phone numbers. Not a good idea in TCPAWorld.

USA Funds earned summary judgment below, however, with the district court finding that a passive creditor relying on a servicer to hire collectors could not possibly be liable for TCPA violations by those collectors on a vicarious liability theory. The Plaintiff appealed, arguing: (i) sure they can be; and (ii) Defendant is automatically liable for those calls under the old 2008 FCC ruling anyway.

The Ninth Circuit agreed that the Defendant might be held vicariously liable – more on that in a second – but disagreed that creditors are always liable for calls by collectors pursuant to the FCC’s 2008 Order. To the contrary, the Ninth Circuit held that the 2013 ruling had abrogated the language from 2008 and that the Supreme Court’s subsequent holding in Gomez v. Campbell-Ewald Co. foreclosed any such reliance on the 2008 FCC Order (which is a little odd since Gomez was a telemarketing case.) So under Henderson a creditor can only be held liable for TCPA violations by a collector under vicarious liability principles after all.

While that’s great news, it wasn’t great enough to save USA Funds from a reversal of fortune. The Court goes on to analyze the evidence presented at the summary judgment stage and concludes that a jury could have found USA Funds liable on a ratification theory.

And here’s the second critical piece of the Henderson ruling – the Ninth Circuit disagrees with case law holding that an agency relationship must exist in order for liability via ratification to attach. Rather, in the Ninth Circuit’s view, where a party ratifies the act of another an agency relationship is thereby created for vicarious liability purposes. Thus, where a Defendant knows that an agency’s calls are illegal but accepts the benefit of those calls anyway, it might be vicariously liable for those calls as if they were authorized by the creditor in the first instance.

In Henderson the Ninth Circuit panel found sufficient facts existed to uphold a jury finding on such a theory against USA Funds: “Here, a reasonable jury could conclude that USA Funds accepted the benefits – loan payments – of the collectors’ calls while knowing some of the calls may have violated the TCPA. If a jury concluded that USA Funds also had ‘knowledge of material facts,’ USA Funds’ acceptance of the benefits of the collector’s unlawful practices would constitute ratification.”

What was that evidence? Well, apparently, USA Funds had audited the performance of the debt collectors and found the collectors were violating the TCPA. Although it, apparently, asked its servicer to make sure corrective measures were taken, it did not instruct the servicer to fire the collectors. And that, apparently, is all it takes to ratify illegal conduct these days.

Hmmm.

So what was USA Funds to do here? The Ninth Circuit seems to punish the Defendant for conducting an audit. Sure the Defendant could have adopted a zero tolerance policy for TCPA violations and fired (or instructed its servicer to fire) every collector that ever made a booboo, but that seems a bit harsh and inappropriate from a policy perspective.  Mistakes happen and folks shouldn’t be ever fearful of losing their seat with a creditor merely because of an oversight here or there. Then again, the TCPA itself is a strict liability statute, so perhaps it is appropriate that TCPA compliance requirements by collectors be likewise unyieldingly unjust.

The Defendant also, presumably, could have avoided liability by returning the benefit of the illegal conduct – and thus not “ratifying” it – but how does that work in this context? The money the collectors collected was actually owed. So was the Defendant supposed to return the debtor’s account to a delinquent status and send him/her a check and ask for the money all over again? That’s just bizarre. The problem is that the debtors conduct of going delinquent was illegal–that is to say, contrary to law– in the first place. So the Court’s order finding that the creditor had benefited from an illegal act is not quite right– the illegal act of the creditor had cured the debtor’s illegal act, it hadn’t inured to the benefit of the creditor in any true sense. Now obviously “two wrongs don’t make a right” but correcting one wrong without correcting the other doesn’t make a right either, especially in this context.   So now I have a headache.

Rather than focus on all the new questions Henderson raises, however, it is likely best to focus on the one question it actually answers quite clearly – creditors are not per se liable for calls by debt collectors, and that’s a very important ruling for a TCPAworld looking for clarity.

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Editor’s note: This article is provided through a partnership between insideARM and Squire Patton Boggs LLP, which provides a steady stream of timely, insightful and entertaining takes on TCPAWorld.com of the ever-evolving, never-a-dull-moment Telephone Consumer Protection Act. Squire Patton Boggs LLP — and all insideARM articles – are protected by copyright. All rights are reserved.

Editor’s Note: insideARM published an article last week about U.S. Supreme Court’s Obduskey opinion, but thought our readers would benefit from the additional context provided in this article authored by Joann Needleman and Jane C. Luxton, which originally appeared as an alert on Clark Hill and is republished here with permission from the authors.

The Fair Debt Collections Practices Act (FDCPA or Act) is an archaic consumer protection statute. Well-intentioned when enacted in 1977, unlike fine wine the FDCPA has not aged gracefully. Lower and appellate courts have pulled and twisted the Act in ways those regulated by it never expected. [Last week’s] 9-0 U. S. Supreme Court decision in Obduskey v. McCarthy & Holthus, LLP marked the third ruling in the last several years based on a well-reasoned, narrow analysis, rather than allowing expansive, nuisance theories that have been the prior theme of FDCPA interpretation. Even among the most liberal of justices, judicial restraint and strict statutory construction seem to have won the day.

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Background of the Case

Wells Fargo hired the law firm of McCarthy & Holthus, LLP as its agent in carrying out a nonjudicial foreclosure on a residential mortgage. The real property was located in Colorado, which permits notice to the parties and sale of the property outside the supervision of the court. Another 25 states also permit nonjudicial foreclosure. The Colorado state court-approved procedure requires that the creditor first send a notice with preliminary information including the telephone number for the Colorado foreclosure hotline. Thirty days thereafter, the creditor is permitted to file a notice with a state official or “public trustee.” The public trustee then records the notice and mails copies to the borrower, along with other materials, such as information on the balance of the loan, the right to cure, and the time and place of the foreclosure sale. If the borrower does not cure the default or file bankruptcy, the creditor can seek an order from the court authorizing the sale of the property.

Prior to proceeding with the nonjudicial foreclosure process, the law firm mailed Obduskey the statutorily required disclosures under the FDCPA. The disclosures notified Obduskey of the law firm’s representation of Wells Fargo, the balance due on the loan, and the right and opportunity to dispute and seek validation of the debt. Obduskey invoked his dispute rights under § 1692g(b) of the FDCPA. Once a consumer invokes his dispute rights, the FDCPA requires a debt collector to cease all collection activity until verification of the debt is provided. The law firm did neither, and proceeded with nonjudicial foreclosure proceedings. Obduskey sued the law firm, alleging violations of the FDCPA for, among other things, pursing non-judicial foreclosure without first verifying the debt. The federal district court dismissed the case on the ground that the law firm was not a debt collector because it was seeking solely to enforce a security interest which does not fall within the purview of the Act. The 10th Circuit affirmed the dismissal. Because of a split among federal appellate courts about the application of the FDCPA to nonjudicial foreclosures, the Supreme Court granted certiorari.

The U.S. Supreme Court Holding

Justice Breyer, writing for the majority, began his analysis by looking at the plain language of the statute. §1692a(6) of the FDCPA defines a debt collector first as:

… any person… in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

The statute then qualifies this definition, which the Court refers to as the “limited-purpose definition”:

For the purpose of section 1692f(6) of this title, such term also includes any person … in any business the principal purpose of which is the enforcement of security interests.

§ 1692f(6) prohibits a debt collector from:

Taking or threatening to take any nonjudicial action to effect dispossession or disablement of property if—

(A) there is no present right to possession of the property claimed as collateral through an enforceable security interest;

(B) there is no present intention to take possession of the property; or

(C) the property is exempt by law from such dispossession or disablement.

Working within this statutory framework, the Court unanimously held that the law firm was not a debt collector and not subject to the Act for three reasons. First, because §1692a(6) qualifies the general definition of a debt collector by also including the limited purpose definition, the use of the word “also” suggests that one who “does no more than enforce a security interest does not fall within the general definition.”  The Court noted that if Congress wanted enforcers who solely handle security interests to be included in the general definition, then the limited purpose definition would be superfluous.

Second, by treating the enforcement of security interest differently, the Court felt Congress wanted to avoid conflicts with state nonjudicial foreclosure laws. As an example, the Court noted that advertising the sale of a property would be in direct violation of the FDCPA because the FDCPA prohibits debt collectors from communicating with third parties about a debt. By limiting the scope of a debt collector in this context, the Court noted is was quite possible Congress wanted to avoid the risk of such conflicts altogether.

Finally, the Court reviewed the legislative history of the Act. The original, proposed version of the FDCPA presumed that anyone who enforced a security interest was a debt collector. Another proposed version excluded that activity completely from the Act. The Court reasoned that the current language, which has been in existence for 42 years, clearly showed a compromise by Congress on the definition.  

Future FDCPA Interpretation

The FDCPA is a litigious statute. Over the past two decades, many federal district and appellate courts have taken great liberties in twisting and stretching the interpretation of the Act to surprising lengths. As an example, several years ago, the use of a QR code or bar code, visible through a window envelope that did not reveal any information about the consumer or the debt, became the source of considerable liability for the industry. Many courts, including the Third Circuit, found the use of such symbols an invasion of privacy because they could potentially reveal information about the consumer and the debt. Countless other examples exist of federal courts going beyond not only the plain meaning of the FDCPA, but well beyond what most believe Congress considered to be abusive and harassing debt collection activity.

Remarkably, the U.S. Supreme Court seems to be the only court that truly understands the FDCPA. Like Obduskey, the last two FDCPA Supreme Court decisions were also unanimous. In Sheriff v. Gillie, a law firm was hired by a State’s Attorney General to collect debts owed to the state. The law firm was permitted to use the Attorney’s General letterhead when communicating with consumers. The majority opinion was written by Justice Ginsburg, who found that use of the letterhead was not false or misleading because it could not create a false impression of the law firm’s task. Further, Justice Ginsburg noted, “the [FDCPA] bars debt collectors from deceiving and misleading consumers; it does not protect consumers from fearing the actual consequences of their debts.” In the recent case of Henson v. Santander, Justice Gorsuch, writing his first opinion for the unanimous majority, held that individuals and entities who regularly purchase debts originated by someone else and then seek to collect those debts for their own account, are not “debt collectors” subject to the FDCPA. The Court narrowly applied the definition of a debt collector to the particular facts in the Henson case.

The Supreme Court’s continuing interpretations of the FDCPA should be a wakeup call for those lower courts that view the FDCPA as an opportunity for judicial advocacy. The Supreme Court makes clear in this decision that if Congress intended the FDCPA to predict certain outcomes, it would have stated so in the plain language of the statute. As Justice Sotomayor’s concurrence in Obduskey suggested, if the Court’s interpretation of the FDCPA is viewed as wrong based upon the plain meaning of the Act, the solution is to change the Act. In the interim, the lower courts should review the declaration of purpose of the FDCPA, specifically §1692(e): “It is the purpose of this subchapter to eliminate abusive debt collection practices by debt collectors [and] to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged” (emphasis added). The past two decades of FDCPA jurisprudence suggest this lesson has not been learned.         

ROCKVILLE, Md. — insideARM and the iA Institute announced today that Katie Keich has joined its leadership team as Vice President of Commercial Services.

Katie is an experienced credit & collections leader with an extensive background in the logistics and supply chain industry. She worked her way up from being an accounts receivable specialist to Director of Credit & Collections as the organization grew from a franchise with under $5M in revenue to a global logistics organization with nearly $2B in revenue. It was Katie’s responsibility to establish credit policy, build a collections department, and train sales and credit associates across the country.

She is a five time winner of her firm’s Special Recognition for Outstanding Performance.

“As the architect of her firm’s credit and collection policy, Katie achieved credit losses of .3% on revenues of $650M, a record unheard of in the commercial space,” said Stephanie Eidelman, CEO of insideARM. “We are excited to bring the strategies she developed to the thousands of organizations that could reap a meaningful return by implementing her proven processes.”

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Through its new Commercial Division led by Katie, insideARM will deliver workshops, training, conferences and more. First up will be a one day workshop for commercial credit & collections leaders in Nashville on June 17 including topics like credit policy, collections process and how to effectively use first and third party partners. More information will be coming soon.  

“I’ve spent most of my career learning and developing a system that works. Now I can’t wait to share what I’ve learned and to make a broader impact,” said Keich. “I couldn’t be more excited for this new challenge, and to join this smart and creative team of men and women at the iA Institute and insideARM.”

You can contact Katie here.

About The iA Institute

The iA Institute is a media company that provides context, insight, and practical information to the complex debt industry. Professionals turn to us with the day-to-day challenges not covered in training. iA initiatives bring a range of stakeholders to the table in candid and intimate environments to inform, to build a culture of compliance, to address industry challenges, and to make profitable connections. The iA Institute publishes insideARM.com – including the flagship Daily Insider newsletter, and iA Research Service — hosts conferences including the First Party Summit and Women in Consumer Finance, and manages the Consumer Relations Consortium & Innovation Council. More at www.theiAinstitute.com.

The Cybersecurity Requirements for Financial Services, issued by the New York State Department of Financial Services (NYDFS), are now in full effect. The rules were first introduced in September 2016 and revised in January 2017, becoming effective on March 1, 2017. Section 500.22 of the rules (text can be found here) laid out a two-year long transition period, which ended on March 1, 2019.

The transition period contained three main checkpoints with certain requirements:

1. By March 1, 2018 (one year after effective date): Have systems in place for annual penetration testing, bi-annual vulnerability assessments, periodic risk assessments, and annual written reports by Chief Information Security Officer to the governing body of the covered entity (e.g., board of directors).
2. By September 1, 2018 (eighteen months after the effective date): Establish audit trails, in-house application development policies and procedures, limitations on data retention, and encryption of nonpublic information.
3. By March 1, 2019 (two years after the effective date): Establish third party service provider security policies that include risk assessments and setting minimum cybersecurity standards for third party vendors.

insideARM Perspective

Consumer data in financial services has been a hot button issue for several years now, with the focus centered on external threats to and internal use of the data.

Several years ago when the NYDFS cybersecurity rules came out, the focus was on protecting data from external threats, such as cybersecurity attacks and data breaches, to electronically-stored consumer data. The Equifax data breach of 2017 doubled-down on the importance of cybersecurity.

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Over the past year or so, an added area of focus has been data privacy. While cybersecurity focuses on protection from external threats, privacy focuses on internal policies and procedures related to sharing or selling consumer data. Laws such as the California Consumer Protection Act and Washington Consumer Protection Act give consumers power to control how companies use and share their data.

Cybersecurity and privacy in financial services are two distinct issues that require different approaches, but both share the common thread of consumer data. And, if the recent legislative and regulatory trends are any indication, consumer data is king in the modern world.

On Thursday, March 21, 2019, the Consumer Financial Protection Bureau (CFPB) announced that it is seeking applications for its advisory committees, including the Consumer Advisory Board (CAB). According to the announcement, the CFPB is looking for experts from both sides of the aisle, including consumer advocates, experts in consumer financial products or services (such as debt collection and credit reporting), as well as academics with economic and public policy backgrounds.

Applications, which can be found here, are due by May 5, 2019.

Earlier this month, Director Kathy Kraninger received backlash from Congress regarding her predecessor’s decision to disband all of the CFPB’s advisory boards. This occurred during both the House Financial Services Committee and the Senate Banking Committee hearings where Director Kraninger testified as part of the CFPB’s annual report to Congress. Former Acting Director Mick Mulvaney disbanded the advisory boards in June 2018, citing that they were too large and too costly. However, Mulvaney re-established the advisory boards, including the CAB, in September 2018, which was not mentioned at all during the congressional hearings.

insideARM Perspective

To date, only two ARM industry representatives have been selected to the CAB: Joann Needleman, former NARCA (now known as National Creditors Bar Association, or NCBA) president and currently a partner with Clark Hill, served a three-year term which ended in August 2017; Ohad Samet, the CEO of debt collection firm True Accord, began a three-year term in September 2017 that was cut short by Mulvaney’s decision to disband the advisory boards. The CAB re-established in September 2018 as a much smaller group did not contain any ARM industry representatives.

With the current application’s specific reference to seeking industry experts in debt collection, the industry may see representation on the CAB yet again.

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”

ED says,

“[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.

insideARM Perspective

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.

On March 20, 2019, the Consumer Financial Protection Bureau (CFPB or Bureau) released its Fair Debt Collection Practices Act Annual Report. The report discusses trends in consumer complaints and in various debt collection markets. However, of greatest importance information to creditors and debt collectors alike is that the Bureau highlightscertain verification of debt practices where the creditor — rather than the debt collector — directly responds to a consumer’s debt validation request.

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Verification of Debt Practices

In the Supervisory Activities section of the report, the Bureau notes that one or more debt collectors continued collection activity despite not properly obtaining and mailing debt verification after a consumer exercised his or her 1692g rights. Specifically, the Bureau calls out the practice where “debt collectors forwarded consumer debt validation requests to the relevant clients, who mailed responses directly to the consumers.” In the immediately-preceding sentence, the report summarizes the FDCPA, which states that the debt collector is to cease collection activity until it obtains and mails verification of debt to the consumer. The report also notes that “one or more debt collectors accepted client determinations, as reflected by a code that the client entered into a shared system of record that the debt was owed by the relevant consumer for the amount claimed without taking any steps to verify the debt and without mailing the required verification to consumers.”

In response to the Bureau’s findings, the debt collectors in question revised their debt validation policies, procedures and practices to comply with the FDCPA.

Editors’ Note: It might be time to change policies and procedures, and also to inform creditor clients of this report, if the creditor client currently sends verficiation of debt directly to the consumer.

Debt Collection Market Trends

Consumer debt surpassed its 2008 peak in 2017 and was at a new high in Q4 2018, with a balance of $13.54 trillion. The Bureau notes that this number is not adjusted for population growth. 28% of consumers with a credit file have a debt collection tradeline.

Editor’s Note: This might not account for all accounts in debt collection. There was a drop in reported collections accounts after the implementation of the National Consumer Assistance Plan. Additionally, some debt collectors stopped reporting accounts to credit bureaus due to credit repair organizations’ scheme of mass-mailing largely identical dispute letters in hopes of strong-arming FCRA settlements from collectiohn agencies.

The growth in the outstanding consumer debt balance is largely attributed to the growth in debt related to credit cards, student loans, and auto loans.

The Bureau’s market research shows that banking or financial services debt is the largest source of revenue for the industry, accounting for 40% of debt collection revenue in 2018. It is followed by telecommunications debt, the “other” category, and healthcare.

The Bureau’s report notes that 90+ day delinquencies in auto loans have been steadily increasing since 2012 “after years of increased lending to subprime borrowers.”

Consumer Complaints

In 2018, the Bureau received 81,500 consumer complaints related to first and third party debt collection.

The report further breaks down each of the above-listed complaint types by specific allegation. The top three break down as follows:

For complaints regarding attempts to collect a debt not owed:

• 53% are related to debt that does not belong to the consumer.
• 23% are related to debt that was previously paid.
• 20% are related to debt that resulted from identity theft.
• 4% are related to debt that was discharged in bankruptcy.

For complaints regarding written notification about a debt:

• 72% are related to the consumer not receiving enough information to verify the debt.
• 25% are related to the consumer not receiving notification of dispute rights as required by section 1692g.
• 3% are related to not notifying the consumer that the communication is an attempt to collect a debt.

For complaints regarding communication tactics:

• 55% are related to repeated calls, either receiving several calls a day or receiving calls consistently over several months.
• 31% are related to continued contact despite requesting no more communication.
• 11% are related to the use of obscene, profane, or abusive language.
• 4% are related to calling outside of the FDCPA’s statutorily-mandated calling hours.

Debt Collection Rulemaking

The Bureau reaffirms that it expects to issue a Notice of Proposed Rulemaking in spring 2019, which will address communication practices and consumer disclosures.

insideARM Perspective

This report is chock-full of information for debt collectors and it is worth a read in its entirety. The Bureau calling out the verification of debt issue is most notable to debt collectors and creditors alike because it provides specific guidance on how to comply with the FDCPA. If an agency currently sends verification requests to the creditor and the creditor sends the debt validation directly to the consumer, it is time to revisit your policies and procedures. Since validation procedures are largely dictated by creditor clients, it would be a good idea for debt collectors to send this report to their creditor clients if they find themselves in this position.