Debt Collector Suit Fails

Judge dismisses lawsuit stemming from U.S. Department of Education's firing of several debt collectors over allegations they misled struggling borrowers.

April 15, 2015

A federal judge on Tuesday dismissed a lawsuit against the U.S. Department of Education by four student loan debt collection companies that claim the department arbitrarily cut ties with them earlier this year.

The decision by U.S. Court of Federal Claims Judge Francis Allegra is a victory for the Education Department, which effectively fired five debt collection companies in February after accusing them of misleading struggling borrowers.

Four of those five companies -- Coast Professional, National Recoveries, Enterprise Recovery Systems and Pioneer Credit Recovery, which is owned by Navient -- were part of the consolidated lawsuit that was dismissed Tuesday.  

Judge Allegra’s decision in the case was sealed. But it comes after he heard arguments only about whether the companies had made the type of complaint he was empowered to decide in the first place.

The debt collectors argued that the department’s decision to cut ties with them amounted to the government purchasing new services (from their competitors) without a giving them a fair shot in the bidding process. The Education Department, however, appears to have argued successfully that it was not making a new procurement decision but rather merely exercising its discretion under an existing contract when it decided to stop doing business with the companies.

After hearing from both sides about that preliminary matter last week, the judge canceled a second hearing to discuss the merits of the companies’ complaints.

Collecting the more than $42 billion in defaulted federal direct student loan debt is big business, and the contracts are often worth tens of millions of dollars.

Brian Davis, the chief executive officer of Coast Professional, said in a statement that the company was disappointed in the decision. “We believe these were new contracts that the Department of Education awarded in an unfair and arbitrary process that did not allow all bidders to compete on a level playing field,” he said.

A spokesperson for Enterprise Recovery Systems said in an email that the company planned to appeal the court’s decision.

“We remain hopeful that we can find a path forward working through the legal process to help reaffirm our position that the Department of Education erred in its review process, resulting in an unfair decision,” he said.

A spokesperson for Pioneer Credit Recovery declined to comment on the court decision, saying only that the company was focused on helping student loan borrowers. Pioneer, she said, continually makes changes to its processes based on its own reviews and ongoing conversations with its regulators.

The department’s decision in February to wind down the contracts of the five debt collection companies won praise from consumer advocates and some Senate Democrats. They had previously criticized the department for having lax oversight over the companies.  

Two of the companies -- Coast Professional and National Recoveries -- could potentially continue to collect defaulted loans on the department’s behalf under a different contract. The department has said it won’t make a decision on that newer contract until this summer.


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