ARCHIVED INFORMATION -- Annual Accountability Report Fiscal Year 1996
Federal Family Education Loan Program
Education Needs to Complete Steps Underway to Improve Oversight of Lenders in the FFEL Program. (material weakness)
Under the FFEL Program, lending institutions (lenders) are another key component of the guaranteed loan system. These institutions provide loans to students. Guaranteed student loans are originated by approximately 8,000 lenders. From a financial point of view, the interaction between Education and lenders is critical with respect to fees and billings that pass between them. Lenders remit a loan origination fee of 3% of the loan balance to Education. In turn, lenders bill Education for interest subsidies to which certain students are entitled and for special allowances, which represent the differential between the maximum interest rate charged to students and the market interest rate at the time the loans were originated. Given the magnitude of the financial transactions between Education and lenders, an important control objective is to assure that fees and billings are properly calculated, are properly supported and are for the purposes authorized by Education. During fiscal year 1995, lenders submitted billings on ED Form 799 and remitted loan origination fees to Education as summarized in Exhibit 4.
Exhibit 4: Lender Billings
FY 1995 Lender Billings and Remittances to Education
|Interest Subsidy Billings
|Special Allowance Billings
|Origination Fee Remittances
Having so many parties involved with the guaranty process adds complexities to the internal control structure. Automated information must be shared by disparate systems not designed for this purpose; thousands of individual audits must be conducted and their results carefully assessed; and financial transactions between the organizations must remain in sync and reconcilable. Oversight in this kind of environment is inherently convoluted and resource intensive. The internal control issues we identified are at least partly attributable to the difficulties of the environment.
Improving Control Over Lender Billings Is Still Needed
Education can review lender billings and fee remittances for obvious errors or significant fluctuations, but its automated systems are incapable of independently checking against detailed supporting information. Education's principal control for monitoring the integrity of lender billings is its requirement that lenders undergo audits by external auditors. However, the GAO and OIG in conjunction with their fiscal years 1992 - 1994 audits of the FFEL Program reported (GAO/AIMD-94-131) that:
".... the external audits were broad in scope and auditors were not required to, and therefore did not conduct, in-depth examinations of the accuracy and validity of ... lenders' claims for defaulted loans, interest subsidies, and special allowances."
While Education has implemented certain corrective actions to address this issue, as discussed below, Education's actions have not been fully implemented. Therefore, the need for improved lender oversight still exists as of the end of our audit.
Education Is in the Process of Implementing New Controls
In March of 1995, Education's OIG issued a new audit guide, entitled Compliance Audits of the FFEL Program at Participating Lenders. This new guide requires that the lender auditors specifically audit and report on the integrity of the billings to Education. While this new guide should significantly improve Education's assurance as to the propriety of lender billings, a number of open issues still existed in its implementation.
- A tracking system for lender audits is not yet in place. Education does not have a system in place to track the timely and complete submission of lender audit reports. Tracking and following-up on missing lender audit reports is important to assure all potential errors and issues are identified, and to maintain discipline over the lender audit process. Education also does not have a system in place to review lender audit reports that are submitted and to ensure appropriate follow-up of questionable charges and control issues identified by the auditors. This follow-up is important to ensure that Education is reimbursed for amounts improperly billed by lenders and to ensure lenders stop inappropriate billing practices. We understand that Education is in the process of developing an automated system to perform these critical functions; however, implementation is not scheduled until later this summer.
- Not-for-profit and government entities are not specifically required to follow the new audit guidance. Information provided by professional bodies might encourage auditors to follow agency guidance that would appear applicable, if not specifically required. However, since Education "recommends" rather then requires following its new guidance, it is possible that this could be misinterpreted. Not-for-profit and Government entities service approximately 50% of the total loan portfolio. Some Government and not-for-profit entities are already voluntarily applying the new audit guide; however, the extent of voluntary compliance is unknown.
- GAs are not required to follow the new audit guidance for the lender program reviews they conduct. GAs are required to perform reviews of the ten largest lenders for which they guarantee loans. However, Education's guide for the GAs for performing these reviews is outdated (issued 1989) and provides very limited guidance about how and to what degree GAs should test lender billings to Education. The outdated GA guide does not include the more comprehensive review steps found in the updated lender audit guide.
In addition to improving its audit guidance for oversight of lenders, Education is in the process of implementing its NSLDS and populating this system with data. NSLDS will track loan activity and balances at a detail level, including identification of loans held by each lender. Once implemented and populated, Education plans to use this system to determine the reasonableness of billings from lenders by comparing the loan detail contained in the system to lender billings. While portions of this system have already been implemented, Education does not anticipate being able to use this system to determine the reasonableness of lender billings until fiscal year 1997.
We recommend that Education:
- Identify missing/delinquent lender audit reports and follow-up with lenders to obtain the reports. One option for identifying missing reports is to compare the lender payments database to the lender audit reporting database.
- Summarize lender audit reports that identify questioned costs or improper billing practices. Assess the reasons errors occurred and their financial effect; systematically pursue reimbursement where questioned costs are identified.
- Based on the summarized results of the lender audits, modify audit guidance to concentrate on areas identified as vulnerable.
- Determine which government and not-for-profit entities are not following audit guidance recommended by Education, and place more emphasis on these entities as part of Education's program reviews.
- Consider updating the GAs audit guidance to be more specific and compliment the work already being performed by IPAs under the new lender audit guide.
- Complete and implement the system being developed to track receipt of lender audit reports.
[FFEL Program - Guaranty Agency Oversight]
[Cash - Timely Reconciliations]