Quick Answer: The National Consumer Law Center found that private debt collectors working with the Department of Education routinely violated borrowers’ rights to affordable loan rehabilitation payments before July 2012. The violations occurred because collectors only received full commissions when they arranged higher balance-based payments rather than income-based affordable options.
To say the National Consumer Law Center (NCLC) just took issue with the relationship between the U.S. Department of Education and private debt collectors would be like saying a pedophile Santa at the Mall was no problem.
While I believe the U.S. Department of Education wants student debtors to be treated fairly and have access to all of the available solutions to help them deal with their debt, that’s not what happens. Far from it.
The NCLC report says, “Recent changes in the compensation system demonstrate the relationship between the incentives and borrower outcomes. The law clearly states that the monthly payment for loan rehabilitation (an important right for borrowers seeking to get out of default) should be based upon the borrower’s circumstances. However, prior to July 2012, it was nearly impossible for borrowers to negotiate a rehabilitation payment amount that was less than a percentage of the loan balance (called balance sensitive rehabilitation). This rampant violation of consumer rights occurred in an era when the government’s collection contract only paid the full commission rate if the collector-induced rehabilitation payment amounts were at least the balance sensitive amount. In July 2012, the Department amended the contracts to allow contractors to earn the full commission for arranging either a balance sensitive rehabilitation or one that calculated payments based on the borrower’s actual income.”
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NCLC says the data the reviewed shows affordable rehabilitations skyrocketed after the change in commission incentives changed. Quick, reach for your shocked face. “Bottom line: money, not the law, drives collection agency behavior,” says NCLC.
It’s nice to see NCLC nailed the inherent problem with the goals of the Department of Education. While they would like to serve the students as their top priority, they kind of really don’t.
“The performance based organization (PBO) structure is to blame for some of the ongoing conflicts of interest within the Department. For example, FSA is supposed to act on behalf of its customers but there is no single priority group of customers. The category includes not only students, but also financial institutions and schools. The FSA by its very nature has multiple constituencies, often with conflicting needs and goals.”
Just to show you how totally bizarre the current system is the NCLC found, “[t]he Department rewards the agencies based on the total amount of money collected from student loan borrowers, regardless of the harm caused to student loan borrowers and regardless of legal compliance. Ironically, this same system, which lets collection agencies break the law without consequence, imposes severe consequences on borrowers when they get into trouble and fall behind on their payments.”
A claim made in the report is the Department of Education awarded additional compensation and perks to debt collection companies they contracted with if they returned big bucks, regardless of the level of consumer complaints against those companies.
NCLC found the following problems with the Department’s evaluation system:
- There is no relationship between the Department’s scores and the volume of complaints;
- The Department has never deducted points from a collection agency for complaints;
- The Department failed to use the performance category that incorporates borrowers’ experiences; and
- The Department has given collection agency NCO Group, Inc. the highest rank among the PCAs collection agencies several times in recent years, despite NCO’s legal troubles with federal and state regulators.
If you don’t believe the situation with federal student loan debt collectors isn’t a totally fucked up mess, you will after reading this report.
The good news is the NCLC has a list of well reasoned recommendations that we can only hope will be followed by some in Congress.
Recommendations for Reform
- Eliminate the use of private collection agencies and move toward a comprehensive and individualized counseling model. In deciding how to work with borrowers in default, the Department should study alternatives and create pilot projects with empirical research to test these options. The goal of this model should be to match the borrower with the right program based upon circumstances, not just to collect the most money for the Department.
- Reform the debt collection agency evaluation system so that performance is about more than dollars collected.
- Eliminate conflicts of interest by using neutral entities to administer extra-judicial collection, such as administrative wage garnishment.
- Improve transparency and provide public information about the private debt collectors’ performance, including complaints and any investigations or disciplinary actions taken against private debt collectors and the cost of outsourcing to them.
- Congress and the President should improve the Department of Education’s oversight of collection agencies and require the Department to make public information about how performance is tracked and the results.
- Hold collection agencies accountable through rigorous public and private enforcement.
- Improve the complaint system so that student loan borrowers can easily file complaints about collection agencies.
- End the Performance Based Organization experiment and set up a system that clearly puts borrowers first.
- Expand online options so that borrowers can more easily access programs, such as rehabilitation, without needing to go through a third-party collection agency.
- The Department of Education should improve its data collection system and make the information public to ensure integrity of data collected and the programs it administers.
You’ve got to completely agree when the NCLC says, “The government funnels enormous profits to private companies to hound borrowers. This is short-sighted policy that fails to provide a way out for borrowers struggling to recover financially.”
NCLC obtained a list of private debt collection companies and tabulated a list of complaints on file for each with the BBB and FTC.
The companies with the largest number of complaints was: CBE Group, Allied Interstate, Diversified Collection Services, Collecto, GC Services, NCO Group, Pioneer Credit Recovery, Progressive Financial Services, and West Asset Management.
The National Consumer Law Center deserves a big hat tip for their work on this issue.
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Pioneer is owned by Sallie Mae.
NCO Group… owned 100% by Chase Bank.