Pandemic upends solicitation by the Federal Housing Administration

Sometimes things change after an agency issues a request for quotations. Like the possible deliverable quantities or other conditions. If the solicitation doesn’t change along with it, the agency might be forced to start over. The pandemic upended a solicitation by the Federal Housing Administration, part of HUD. Procurement attorney Joseph Petrillo discussed the details with Tom Temin.

Interview transcript:

Tom Temin: Joe, walk us through this case, because this is one of the, I think, signature cases of where something like a pandemic really makes an agency need to rethink its contracting strategy.

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Joe Petrillo: Yes, that’s quite right. Just as matter of background, I think most of us are familiar with the Federal Housing Administration, which federally ensures certain mortgages. That means when a mortgage that’s insured by FHA defaults, the lender can foreclose on the property and transfer the property to FHA and the lender gets paid. And now it’s FHA’s problem to deal with a foreclosed property. And you know, HUD, which is the parent agency of FHA awards contracts so that the contractors can handle that portfolio of foreclosed houses — these are single family dwellings — and can sell them to cover the losses on the mortgage.

Tom Temin: So the would-be bidders are like brokerage firms or real estate firms?

Joe Petrillo: I guess so. I believe there’s an actual industry that does this kind of service for HUD and probably private lenders as well. So we’ve got a situation where there was a large procurement that HUD was conducting, and it was going to award a single indefinite quantity contract for each of 11 regions that it runs, that has this program. The evaluation criteria were technical acceptability, so that was pass/fail, past performance which was going to be evaluated comparatively, and price. There’s a total small business set aside. The FHA issued a solicitation and amended it several times. And in the middle of this process, the COVID-19 pandemic gets started. The COVID-19 pandemic, of course, had an impact on the housing situation. Specifically, we had some legislative and policy changes to address the economic pressure that homeowners were under. The CARES Act had a moratorium on foreclosures. The initial term was, I think, six months, that could be extended for another six months. So there’s a year possible, no foreclosures under these properties. In addition, HUD changed its certain policies, and added mortgage payment relief programs to reduce the number of foreclosures. In spite of these changes, the FHA didn’t change the RFP, didn’t change its statement of requirements, didn’t revise its estimated quantities. And these estimated quantities were based on historical volumes of foreclosures that were pre-COVID.

Tom Temin: Sure, and quantities can affect the price that a bidder is willing to offer. If you have to sell one house, there’s a certain commission, but if you’re going to sell 1000 houses, maybe you take a lower commission, for example.

Joe Petrillo: Sure. And of course, it reflects the infrastructure you have to build and maintain to perform the contract. And that’s a very important factor as well. So when FHA refused to make any changes to the solicitation, three offerors protested. They were able to make a pretty compelling case that the changes in law established changes in requirements. And the effect of that would be to drastically reduce the number of foreclosures, maybe even eliminate it for a period of time. And then the protesters made a reasonably good case that after the moratorium gets lifted, there’s possibly going to be a flood of foreclosures, because of people in economically weakened circumstances who can’t get back on their feet in time to fix their mortgages.

Tom Temin: We are speaking with procurement attorney Joseph Petrillo of Petrillo and Powell. And by the way this these protests occured after they had submitted bids initially?

Joe Petrillo: I believe there were no bids yet at this point in the procurement and so we’ve got a situation where the solicitation still getting amended.

Tom Temin: And so the protest went to the court or to the GAO.

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Joe Petrillo: This is a GAO protest. I’m glad you mentioned that. It’s important and the name of the protest is Chronos; that was the first protester, Chronos Solutions LLC. The issue here now is what is GAO going to do about this? And it basically upheld the protest. I mean, the FHA said that the changes in the estimates were speculative, and the contemplated contracts were indefinite quantity, so they had built-in flexibility, but that didn’t wash it with GAO. GAO felt that it was necessary for the solicitation to reflect the actual requirements of FHA, which included the changes in the law. And they also thought it would be probably necessary to revisit those estimates in light of these developments. So GAO upheld the protest, FHA has to go back to the drawing board, take a look at these things and amend the solicitation as necessary.

Tom Temin: And for all we know, now, if the election ever does get settled, and the new Congress comes in, the new administration comes in, there could very well be further legislation that might even change the conditions once again.

Joe Petrillo: Yeah, this isn’t over yet. And we could see, I think, a possible extension of the moratorium or other policy changes that are going to affect this contract and how it works.

Tom Temin: So what should an agency do in general, then I guess, pay attention to the weather. And if you have already issued the request for quotes, not information, but actual for quotes, request for bids, for offers. Suppose the offers had come in? Is it possible for the agency to say I’m sending these offers back? Everything has changed? Here’s the new conditions, the new solicitation, the new requirements?

Joe Petrillo: Well, absolutely. And depending on the type of contract, you might actually, if you don’t do that, be leaving yourself open to a potential claim of some kind, where you may have a contractor who even if he doesn’t have an opportunity to bring a claim is so weakened, they’re going to default. It’s not a good situation, in a lot of ways.

Tom Temin: And it also sounds like there was a little bit of a lack of communication intra-HUD, since HUD policy on one standpoint was reacting to the COVID-19 pandemic, the Federal Housing Administration, which is part of HUD, as you pointed out, you’d think there would have been some kind of channel there to say, ‘Hey, guys, on this foreclosure deal you’re trying to award things have changed?’

Joe Petrillo: Yeah, I’m kind of mystified about that part as well, because, of course, these are changes that directly affect the Federal Housing Administration, which is the requiring agency for this procurement. So there should have been some realization that this needed to get redone.

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Tom Temin: So right now it is back at the drawing board.

Joe Petrillo: Yep, it sure is. It’s back to the drawing board and we’ll see what FHA does with the procurement.

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