Updated with a comment from Pioneer Credit.
A pair of private collection agencies fired by the Obama administration have accepted the Education Department’s offer of new contracts to recoup past-due student loans, but the agreements are in limbo as the government wades through a messy court battle.
Enterprise Recovery Systems and Pioneer Credit Recovery were among five companies whose contracts the government cancelled in 2015 after an audit showed them giving inaccurate information to people trying to get their student loans out of default. The companies said the evaluation was arbitrary and flawed for drawing conclusions based on excerpts from a handful of calls, and four of them took legal action against the department.
To put an end to the litigation, the Trump administration in February said it would reconsider assigning accounts to the four companies and disregard the two-year old audit against them. Some of the firms balked at the deal for failing to compensate them for the loss of hundreds of thousands of accounts, and said it would be meaningless because the department was in the midst of a new contract bid, according to court documents.
This week, Enterprise Recovery and Pioneer Credit accepted the terms of the deal, but the other two companies involved — Coast Professional and National Recoveries — rejected the offer. They choose instead to continue collecting student debt under other, existing contracts with the department, according to court filings.
“Pioneer has a well-documented track record of exceptional ratings on compliance reviews from numerous entities, both before and after the special 2015 review,” said Patricia Christel, a spokeswoman for loan servicing giant Navient, which owns Pioneer Credit. “Pioneer is confident that a full review of the calls in question would confirm its high compliance and place it in the top tier of entities reviewed in 2015.”
Calls to Coast Professional, Enterprise Recovery and National Recoveries were not returned. The department declined to comment, citing pending litigation.
“The decision by the Department of Education to reinstate the contracts of the companies it previously fired is a slap in the face to student loan borrowers,” said Persis Yu, a staff attorney at the National Consumer Law Center. “Student loan borrowers deserve accurate information regarding their loans. The government should not be rewarding companies that break the law and lie to student loan borrowers with lucrative government contracts.”
Reversing the Obama-era decision may prove inconsequential for the time being. A group of companies that lost out on a 2016 debt collection contract bid are waging a fight in the courts that is preventing the government from assigning accounts. Because of a temporary restraining order issued by a federal judge in the case, education officials are not transferring accounts to Enterprise, Pioneer or any other collection agencies until the courts give the okay.
Nearly two dozen companies are affected by the decision. The disputed contract is valued at $2.8 billion over 10 years for the collection or resolution of past-due student debt. Seven companies were selected, sparking a series of protests at the Government Accountability Office, which faulted the Education Department for mismanaging some of the bids. A few firms filed complaints with the federal claims court that led authorities to put a hold on all new assignments.
The Education Department estimates that the order cost taxpayers $640,000 in collections in April alone. It has also resulted in roughly 91,000 borrowers, most of them newly defaulted, having no access to a debt rehabilitation program that could help them exit default and repair their credit. That rehabilitation program erases a default from a person’s credit report after nine consecutive payments over a 10-month period to a debt collector.
Defaults in the federal student loan portfolio have been climbing for several quarters, with millions of people at least nine months behind on $137 billion in debt at the end of 2016. The government has extraordinary power to collect federal debt by seizing tax refunds or a portion of a person’s paycheck, Social Security or disability income. But it encourages collection agencies to rehabilitate loans because defaulting can ruin a person’s credit.
Consumer advocates have been critical of collection agencies, accusing them of using aggressive tactics to pursue past-due payments and failing to provide people the necessary information to stay current on their loans over the long term. Many cheered the Education Department for cracking down on the five agencies in 2015, but were ultimately left disappointed.
Even though the Obama administration terminated their agreements, all five collection agencies continued collecting on the defaulted loans in their portfolio, and some even received new business.
Months after the heralding the contract cancellation, the Education Department handed Coast Professional and National Recoveries new accounts valued at $863.5 million and $679.8 million, respectively. At the time, education officials said the companies took “corrective action” to ensure that borrowers received accurate information about their defaulted loans, a move that made them eligible for new assignments under federal procurement law.
Both collection agencies have continued to receive new accounts, with the department adding more than $1 billion worth of student loans to the inventory of each firm in the last quarter of 2016, according to the latest federal data. The Obama administration said it was necessary to keep all of the debt collectors on the payroll to avoid disruption as borrowers tried to resolve their defaults. As a result, Pioneer had a warehouse of $131 million in defaulted loans in the last three months of the year, while Enterprise had $76 million in its inventory. But those contracts were recalled in February.
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