oversight

Federal Student Aid's Award and Administration of the Title IV Additional Servicers Contracts

Published by the Department of Education, Office of Inspector General on 2013-08-20.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Federal Student Aid’s Award and Administration of the
        Title IV Additional Servicers Contracts

                           FINAL AUDIT REPORT




                                 ED-OIG/A02L0006
                                   August 2013


Our mission is to promote the                      U.S. Department of Education
efficiency, effectiveness, and                     Office of Inspector General
integrity of the Department’s                      New York, NY
programs and operations.
                                   NOTICE

    Statements that managerial practices need improvements, as well as other
  conclusions and recommendations in this report, represent the opinions of the
 Office of Inspector General. Determinations of corrective action to be taken will
          be made by the appropriate Department of Education officials.

   In accordance with the Freedom of Information Act (5 U.S.C. § 552), reports
issued by the Office of Inspector General are available to members of the press and
     general public to the extent information contained therein is not subject to
                               exemptions in the Act.
                                 UNITED STATES DEPARTMENT OF EDUCATION
                                        OFFICE OF INSPECTOR GENERAL

                                                                                                                   AUDIT SERVICES

                                                          August 20, 2013
Memorandum
TO:                  James W. Runcie
                     Chief Operating Officer
                     Federal Student Aid

FROM:                Patrick J. Howard /s/
                     Assistant Inspector General for Audit

SUBJECT:             Final Audit Report
                     Federal Student Aid’s Award and Administration of the Title IV Additional
                     Servicers Contracts
                     Control Number ED-OIG/A02L0006

Attached is the subject final audit report that covers the results of our review of the Federal
Student Aid’s Award and Administration of the Title IV Additional Servicers Contracts during
the period from January 1, 2009, through September 30, 2011. An electronic copy has been
provided to your audit liaison officer. We received your comments on the findings and
recommendations in our draft report.

Corrective actions proposed (resolution phase) and implemented (closure phase) by your office
will be monitored and tracked through the Department’s Audit Accountability and Resolution
Tracking System. Department policy requires that you develop a final corrective action plan
(CAP) for our review in the automated system within 30 days of the issuance of this report. The
CAP should set forth the specific action items, and targeted completion dates, necessary to
implement final corrective actions on the findings and recommendations contained in this final
audit report.

In accordance with the Inspector General Act of 1978, as amended, the Office of Inspector
General is required to report to Congress twice a year on the audits that remain unresolved after
6 months from the date of issuance.

In accordance with the Freedom of Information Act (5 U.S.C. §552), reports issued by the Office
of Inspector General are available to members of the press and general public to the extent
information contained therein is not subject to exemptions in the Act.

We appreciate the cooperation given us during this review. If you have any questions, please
call Daniel P. Schultz at (646) 428-3888.

Enclosure
 The Department of Education's mission is to promote student achievement and preparation for global competitiveness by fostering educational
                                                   excellence and ensuring equal access.
                                                TABLE OF CONTENTS


                                                                                                                                          Page

EXECUTIVE SUMMARY .......................................................................................................... 1
BACKGROUND ........................................................................................................................... 3
AUDIT RESULTS ........................................................................................................................ 6
   FINDING NO. 1 – FSA Inadequately Monitored TIVAS Invoices and Deliverables ..................... 6
   FINDING NO. 2 – FSA Omitted a Requirement in the Contracts That Resulted in a Separate
                   Cost ....................................................................................................................... 10
   FINDING NO. 3 - FSA Did Not Properly Execute Changes to the TIVAS Contracts and
                   Insufficiently Documented Decisions ................................................................. 12
   FINDING NO. 4 - FSA Used Improper Criteria in Its Monitoring of the TIVAS ........................ 16
OBJECTIVE, SCOPE, AND METHODOLOGY ................................................................... 18
Enclosure 1: Changes to TIVAS Contracts that Resulted in Additional Cost to FSA, as of
September 30, 2011 ..................................................................................................................... 22
Enclosure 2: FSA Comments ..................................................................................................... 23
Enclosure 3: FSA Updated Comments to Recommendation 3.1 .............................................32
             Abbreviations, Acronyms, Short Forms Used in This Report

34 C.F.R.               Title 34 of the Code of Federal Regulations
ACS                     ACS Education Solutions, LLC
CDR                     Cohort Default Rate
CO                      Contracting Officer
COR                     Contracting Officer’s Representative
Department              U.S. Department of Education
Contract Monitoring     U.S. Department of Education Directive OCFO [Office of the Chief
Directive               Financial Officer]:2-108, Contract Monitoring for Program Officials
Direct Loan             William D. Ford Federal Direct Loan
DMCS                    Debt Management Collection System
FAR                     Federal Acquisition Regulation
FFEL                    Federal Family Education Loan
FSA                     Federal Student Aid
Great Lakes             Great Lakes Educational Loan Services, Inc.
Nelnet                  Nelnet Servicing, LLC
NSLDS                   National Student Loan Data System
OIG                     Office of Inspector General
PHEAA                   Pennsylvania Higher Education Assistance Agency
Sallie Mae              SLM Corporation
SF 30                   Standard Form 30, “Amendment of Solicitation/Modification of
                        Contract”
Title IV                Title IV of the Higher Education Act of 1965, as amended
TIVAS                   Title IV Additional Servicers
Final Audit Report
ED-OIG/A02L0006                                                                     Page 1 of 33



                               EXECUTIVE SUMMARY


The objectives of our audit were to determine whether (1) Federal Student Aid (FSA) selected
Title IV Additional Servicers (TIVAS) servicing prices that are the most efficient and
cost-effective for the Government and (2) FSA adequately monitored the TIVAS to determine
their compliance with the contract requirements. Our audit period covered January 1, 2009,
through September 30, 2011. However, we reviewed contract deliverables due to FSA
January 1, 2012, through March 15, 2012 and expenditures for cohort default rate challenge
activities from June 17, 2009, through December 31, 2012.

The TIVAS contracts are significant because the TIVAS serviced about 15 million student loan
borrowers on behalf of the U.S. Department of Education (Department) as of September 2011.
To accomplish the objectives of this audit, we reviewed FSA’s contracts with the TIVAS and its
related contract modifications, contract pricing documentation, and FSA’s monitoring plans and
procedures. We judgmentally selected 9 invoices totaling $29,524,349 out of 112 invoices
totaling $337,363,472 and 5 of 993 contract deliverables. We also reviewed all 21 changes to
the contracts that resulted in a cost to FSA, totaling $2,968,143. As described below, we
determined that (1) FSA appears to have negotiated the most efficient and cost-effective
servicing rates, but we could not determine whether FSA selected the most efficient and cost-
effective prices for changes to the contracts; and (2) FSA did not adequately monitor TIVAS
compliance with the contract requirements.

Based on the evidence we reviewed, we determined FSA appears to have negotiated the most
efficient and cost-effective servicing rates with the TIVAS because the final awarded contracts
included negotiated rates that were generally lower than the lowest proposed bid. However, we
could not determine whether FSA selected the most efficient and cost-effective prices for
changes made to the contracts for several reasons. First, FSA modified the TIVAS contracts to
include a requirement for cohort default rate challenges that should have been included in the
base contracts. This modification resulted in a separate cost of $600,866 from June 17, 2009, the
start of the contracts, through December 31, 2012, that was possibly more than it would have
been if the requirement was included initially. Second, FSA officials did not properly document
their decisions for 18 of 21 changes to the prices or terms of the TIVAS contracts that totaled
$1,271,949 out of $2,968,143. FSA officials also did not properly execute the 18 changes by
obtaining the signatures of TIVAS officials.

We determined that FSA did not adequately monitor TIVAS compliance with the contract
requirements because the contracting officer’s representatives did not sufficiently validate
TIVAS invoices and confirm the timeliness and adequacy of deliverables. Additionally, we
found that FSA used inadequate criteria in its monitoring of the TIVAS contracts.
Final Audit Report
ED-OIG/A02L0006                                                                        Page 2 of 33

We recommend that the Chief Operating Officer for FSA—

   •   develop and implement comprehensive and detailed guidance and procedures on how to
       adequately validate borrower volumes and related costs in invoices, and apply those steps
       to the invoices during our audit period to ensure accurate billing and payment occurred;
   •   ensure that FSA officials who receive and review deliverables required by the TIVAS
       contracts communicate with the TIVAS contracting officer’s representatives about the
       timeliness and quality of the work products;
   •   in future base contracts for Title IV servicing, include the requirement that servicers
       research and resolve postsecondary institutions’ challenges to their draft cohort default
       rates so that this activity is performed within the scope of the initial contract;
   •   require the director of Acquisitions Group to complete Standard Form 30, “Amendment
       of Solicitation/Modification of Contract,” signed by the contracting officer and TIVAS
       officials for future changes to the TIVAS contracts, and to document the rationale of the
       determinations made by FSA officials regarding changes to the contract terms and prices;
       and
   •   ensure the use of proper monitoring criteria when reviewing TIVAS performance and
       compliance with the contracts.

We provided a draft of this report to FSA. In FSA’s comments to the draft report, FSA agreed
with all findings except for the potential impact regarding the inclusion of the cohort default rate
challenges in the TIVAS contracts, and the proper execution of changes to the TIVAS
contracts. FSA agreed that the cohort default rate challenges should have been included in the
base contracts, but disagreed that the inclusion of cohort default rate challenges would have
resulted in a decreased cost to the Government. FSA acknowledged it did not document all
changes made to the TIVAS contracts in strict compliance with the documentation requirements
concerning contract modifications, but stated that the changes were nevertheless properly
executed and fully enforceable by law. FSA agreed with all recommendations except for
partially agreeing with the recommendation pertaining to the proper execution of changes to the
TIVAS contracts. Based on FSA’s comments, we made clarifying changes to the finding and the
recommendation. FSA agreed, as an alternative approach, to establish a procedure for issuing a
summary Standard Form 30 that links the changes to the Standard Form 30 that provides funding
for the changes.

We have summarized FSA’s comments and our response after each finding. A copy of FSA’s
comments, dated June 20, 2013, is included as Enclosure 2, and a copy of FSA’s updated
comments, dated July 3, 2013, is included as Enclosure 3.
Final Audit Report
ED-OIG/A02L0006                                                                                      Page 3 of 33



                                             BACKGROUND


The Federal Family Education Loan (FFEL) Program provided federally insured loans to
students and their families from commercial and nonprofit lenders. The SAFRA Act (Public
Law 111-152, March 30, 2010) ended the origination of new FFEL Program loans after
June 30, 2010. Beginning July 1, 2010, all Stafford subsidized and unsubsidized loans, PLUS,
and consolidation loans originate through the William D. Ford Federal Direct Loan (Direct Loan)
Program. In addition, starting in September 2008, the Department began purchasing FFEL
Program loans, as authorized under the Ensuring Continued Access to Student Loans Act
of 2008 (Public Law 110-227, May 7, 2008).

On June 17, 2009, to service the anticipated increase in Direct Loans, as well as the FFEL
Program loans purchased by the Department, FSA contracted with four servicers in indefinite-
delivery, indefinite-quantity performance-based contracts: 1 Great Lakes Educational Loan
Services, Inc. (Great Lakes); Nelnet Servicing, LLC (Nelnet); Pennsylvania Higher Education
Assistance Agency (PHEAA); and SLM Corporation (Sallie Mae). These four servicers are
commonly referred to as Title IV Additional Servicers (TIVAS). The contracts expire on
June 16, 2014, but can be extended by FSA for 5 years to June 16, 2019. Before June 2009, one
servicer, ACS Education Solutions, LLC (ACS) serviced the entire Direct Loan portfolio. ACS
still services some of these loans; however, FSA is not assigning any newly originated loans to
ACS and is planning to transfer the bulk of loans held by ACS to other servicers. The ACS
contract is scheduled to expire on December 31, 2013.

FSA pays the TIVAS for servicing Direct Loans and FFEL Program loans, implementing various
changes to the contracts (for example, enhancing a system), and other activities. Other activities
that FSA paid the TIVAS for during our audit period included a one-time transfer of loans past
360 days delinquent to the Department’s Debt Management Collection System (DMCS), 2
discharging loans for borrowers who become disabled, and responding to a school’s challenges
of its draft cohort default rate (CDR). For the servicing of Direct Loans and FFEL Program
loans, FSA negotiated a common pricing schedule with the TIVAS before awarding the contracts
based on borrower volume and borrower status (see Table 1 for common pricing schedule).




1
  With an indefinite-delivery, indefinite-quantity contract, FSA orders services as needed from the TIVAS
throughout the life of the contract rather than specifying exact amounts at the time of contract award (for example,
the servicing of a certain number of borrowers). With a performance-based contract, the TIVAS compete against
each other for a share of FSA’s allocation of new borrowers to service. Greater performance by a TIVAS results in
a larger allocation of new borrowers.
2
  On October 6, 2011, ACS and FSA implemented a new system referred to as DMCS2. On December 13, 2012, the
Office of Inspector General issued an alert memorandum, “Debt Management Collection System 2”
(ED-OIG/L02M0008), regarding issues with DMCS2.
Final Audit Report
ED-OIG/A02L0006                                                                        Page 4 of 33

                                   Table 1: Common Pricing Schedule
Borrower Status                                                                 Monthly Unit Price
Borrowers in School                                                                   $1.05
Borrowers in Grace or Current Repayment (0 to 3 million borrowers)                    $2.11
Borrowers in Grace or Current Repayment (more than 3 million borrowers)               $1.90
Borrowers in Deferment or Forbearance (0 to 1.6 million borrowers)                    $2.07
Borrowers in Deferment or Forbearance (more than 1.6 million borrowers)               $1.73
Borrowers 31–90 Days Delinquent                                                       $1.62
Borrowers 91–150 Days Delinquent                                                      $1.50
Borrowers 151–270 Days Delinquent                                                     $1.37
Borrowers 270+ Days Delinquent                                                        $0.50

In addition, FSA negotiated prices with each TIVAS individually, as changes were initiated to
the contracts. These changes did not alter the common pricing schedule. Table 2 illustrates the
amount FSA paid to each TIVAS for servicing and changes to the contracts, from the start of the
contracts to the end of our audit period, from June 17, 2009, through September 30, 2011.

                         Table 2: TIVAS Payments as of September 30, 2011
TIVAS                                 Servicing          Contract Changes              Total
Great Lakes                                $86,444,706               $418,324           $86,863,030
Nelnet                                     $66,989,379             $1,655,242           $68,644,621
PHEAA                                      $81,837,282               $366,333           $82,203,615
Sallie Mae                                 $99,123,962               $528,244           $99,652,206
                    Total                 $334,395,329             $2,968,143          $337,363,472
Note: Funds rounded to the nearest dollar.

Various people in FSA oversee the TIVAS contracts. Contract administration staff includes the
contracting officer (CO) and contract specialist within the Acquisitions Group, and the
contracting officer’s representative (COR) within the Program Management Services Group.
The CO has overall responsibility for contract administration. However, contract monitoring is a
team effort between the CO, contract specialist, COR, and staff in other FSA offices, including
the Operations Services Group, Finance Group, Internal Control Division, and Financial
Institution Oversight Service Group. Contract monitoring is based on the terms and conditions
in the TIVAS contracts, the Federal Acquisition Regulation (FAR), and policies and procedures
established by FSA and the Department.

The TIVAS submit monthly invoices that list the number of borrowers serviced as of the last day
of that month, categorized by borrower status. They invoice FSA based on the contracts’
common pricing schedule, which stipulates the price for each borrower status. Each borrower is
counted only once for the purpose of billing. For a borrower with multiple loans that are in
different statuses (for example, one loan in repayment and another in delinquency), the contracts
require the TIVAS to bill FSA at the least expensive status.

FSA also manages new contract requirements and changes to existing requirements through its
change management process. All changes must begin with a change request, which is a formal
submission of a new or modified requirement. According to the CO, in the change management
process, a cross-functional team composed of individuals from various FSA offices determines
whether a proposed change to the TIVAS contracts is within the scope of the contracts or
Final Audit Report
ED-OIG/A02L0006                                                                     Page 5 of 33

whether to recommend the change be performed at additional cost to the Government. The CO
makes the final determination in the change management process.

In December 2011, the Office of Inspector General (OIG) released an Ernst & Young consulting
report, “Title IV Additional Servicers Capacity Assessment,” (ED-OIG/S15L0001) on the
TIVAS contracts. The report had several findings, of which two were relevant to our audit.
First, finding number four indicated that contract requirements were documented at a very high
level and FSA did not define detailed requirements until after the contract award in June 2009.
Second, finding number five stated that FSA neither tracked contract modifications in one central
location nor tracked delivery of each contract requirement.
Final Audit Report
ED-OIG/A02L0006                                                                                   Page 6 of 33



                                          AUDIT RESULTS


We determined from the evidence reviewed that FSA appears to have negotiated the most
efficient and cost-effective servicing rates with the TIVAS because the final awarded contracts
included negotiated rates that were generally lower than the lowest proposed bid. However, we
could not determine whether FSA selected the most efficient and cost-effective prices for
changes made to the contracts because FSA made changes to contract pricing and terms that may
have resulted in additional cost to FSA, and FSA did not properly document its decisions of
changes to the prices and terms of the TIVAS contracts. FSA modified the TIVAS contracts to
include a requirement that should have been included in the base contracts, which resulted in a
separate cost of $600,866 from June 17, 2009, the start of the contract, through
December 31, 2012. FSA officials did not properly execute and document its decisions for
18 of 21 changes to prices and terms of the TIVAS contracts that totaled $1,271,949. We also
determined that FSA did not adequately monitor TIVAS compliance with the contract
requirements because the COR did not sufficiently validate TIVAS invoices and confirm the
timeliness and adequacy of deliverables. Additionally, we found that FSA used inadequate
criteria in its monitoring of the TIVAS contracts.

FINDING NO. 1 – FSA Inadequately Monitored TIVAS Invoices and Deliverables

FSA did not adequately monitor TIVAS compliance with the contract requirements because the
CORs did not sufficiently validate TIVAS invoices and confirm the timeliness and adequacy of
deliverables, as required by the FSA TIVAS Contract Monitoring Plan, Version 4.3; the
Department’s Contract Monitoring Directive; 3 and the COR appointment memorandum. We
judgmentally sampled 9 invoices totaling $29,524,349 from a universe of 112 invoices totaling
$337,363,472 and found that the CORs did not perform sufficient procedures to ensure invoices
were accurate. The CORs did not ensure borrower volumes and the associated costs were
correct, all required invoice elements were included, and that math verifications of subtotals and
totals were documented. Also, the CORs did not adequately monitor whether deliverables of
sufficient quality were timely provided before recommending payment.

Invoices Insufficiently Validated

For all nine sampled invoices, the CORs did not reconcile the invoiced borrower volumes to
source data in the TIVAS systems to ensure the accuracy of the invoices. Instead, the CORs
compared invoiced borrower volumes to those listed in three unreliable sources. For three of the
nine invoices, the CORs used borrower volumes in the previous month’s invoice to determine
whether the borrower volumes in the current invoice seemed reasonable. Because neither the
CORs nor the CO had ever confirmed the accuracy of the borrower volume in an invoice to its
source data, prior month invoices were not a reliable source. If borrower volume had been
periodically confirmed, prior invoices could have served as a benchmark for measuring trends

3
  U.S. Department of Education Directive OCFO [Office of the Chief Financial Officer]:2-108, Contract Monitoring
for Program Officials, August 6, 2009 (Contract Monitoring Directive).
Final Audit Report
ED-OIG/A02L0006                                                                        Page 7 of 33

and determining the reasonableness of volumes in future invoices. For four sampled invoices,
FSA compared invoiced borrower volumes to National Student Loan Data System (NSLDS)
information. None of the volumes in the invoices reconciled to the NSLDS information because
the NSLDS records did not cover the same time period that the invoices covered. In addition,
the CORs compared the borrower volumes in the nine invoices to projections of borrower
volumes that the Department prepared for budget purposes. Projections were unreliable for
determining the actual borrower volumes because they were only estimates based on trends in
borrower volumes and economic data. These procedures used unreliable sources that did not
allow the CORs to adequately validate the accuracy of borrower volumes and related costs.

The CORs did not perform validation procedures to ensure the TIVAS complied with the
contract requirement that borrowers in multiple statuses were billed under the least expensive
status. Three examples are provided below:

       1. From September 1, 2009, through October 31, 2010, Great Lakes used incorrect
          billing rates for borrowers with loans in multiple statuses that resulted in a $459,078
          overpayment by FSA. In November 2010, Great Lakes identified the error and
          provided FSA with a credit in the amount overpaid. As of July 2012, FSA had not
          accessed Great Lakes’ servicing system to verify that the credited amount was
          accurate or that Great Lakes had begun to bill at the correct rate after October 2010.
          We tested Great Lakes’ new calculations for 2 of the 14 months and confirmed that
          the procedures were adequate and the correct billing rates were used for those
          2 months.
       2. One of the sampled invoices, submitted by Nelnet, listed borrower volumes that did
          not match those on the supporting documentation. The invoice contained a mistake
          of 37,368 borrowers that resulted in an overall underpayment of $8,310 by FSA.
          Nelnet later corrected the mistake and billed FSA for the underpaid amount.
       3. Another sampled invoice submitted by Nelnet contained an incorrect rate for
          127 borrowers that resulted in an underpayment of $53.70 by FSA.

FSA was unaware of both of Nelnet’s underpayment errors and Great Lakes’ overpayment error
because the CORs did not sufficiently validate invoices.

For all nine sampled invoices, the CORs did not perform validation procedures to ensure that the
required invoice elements were included in order for them to be considered proper for payment,
as required by the contracts. For example, the invoices either partially or fully lacked supporting
documentation that provided detail for the borrower volumes listed in the invoices. In those
invoices with partial support, the TIVAS restated only subtotals and did not provide borrower
details that made up the subtotals. It is necessary for FSA to have sufficient supporting detail to
verify invoices, especially when all other available sources are unreliable for validating invoices.

For six of the nine sampled invoices, we found no evidence that the CORs verified the math for
amounts in the invoices (for example, borrower counts multiplied by common pricing rates). We
requested documentation for the nine invoices to ensure that the CORs verified that subtotals
listed on invoices were accurate and equaled the totals. The CORs could not provide
documentation of this validation step for six of the invoices, but they stated that they used a
calculator to verify the math in the invoices.
Final Audit Report
ED-OIG/A02L0006                                                                        Page 8 of 33

Deliverables Inadequately Confirmed

We found the CORs did not confirm the timeliness and adequacy of contract deliverables that
were in addition to routine loan servicing. In addition to providing loan servicing, each TIVAS
must provide other deliverables, such as accounting reports, collection activity reports, improper
payment reports, and monthly reconciliations. These deliverables are, in effect, evidence that the
TIVAS are servicing the loans and meeting the other contract requirements. The CORs did not
determine whether the contract deliverables were submitted timely and with sufficient quality
before recommending an invoice for payment to the CO. FSA management assigned the
responsibility of receiving and validating these deliverables to various offices within FSA based
on each office’s use of the deliverable and relevant technical knowledge. However, these offices
and the CORs did not communicate with each other as to whether the TIVAS provided timely
and adequate deliverables. Ernst & Young also identified this problem in its December 2011
consulting report. To follow up on Ernst & Young’s recommendation for FSA to track delivery
of each contract deliverable, we judgmentally sampled 5 of 993 contract deliverables required of
the TIVAS from the start of our audit period through November 18, 2011. The work products of
the 5 deliverables were due to FSA for the period from January 1, 2012, through
March 15, 2012. We found that the FSA offices received and validated four of the five
deliverables but did not communicate to the CORs whether deliverables were received timely
and with sufficient quality. FSA did not validate the fifth deliverable because it was assigned to
two offices within FSA and no official in either of these offices claimed responsibility for the
deliverable. In an effort to centralize monitoring activities under one component, FSA
established the Servicer Monitoring Group in October 2012. According to FSA, the purpose of
the Servicer Monitoring Group is to achieve a comprehensive view of FSA’s servicer monitoring
activities and analyze servicer performance.

The CORs did not sufficiently validate invoices and monitor the timeliness and adequacy of
deliverables because they did not fully follow the existing guidance. The Contract Monitoring
Directive, Section VII.H, states that the COR must ensure that invoices reflect the agreed-on
price for completed and accepted work. To accomplish this, the CORs verify that the invoice
subtotals are accurate and equal the total. In addition, the Contract Monitoring Directive,
Section VII.L, states that detailed record-keeping is necessary to keep an up-to-date history of
the life of a project despite changes in staff. Detailed record-keeping of activities, such as math
verifying invoices and accepting deliverables, provides a mechanism for analysis by future
reviewers and auditors. In addition, the COR appointment memorandum lists the COR’s
responsibilities and is signed by the COR, CO, and TIVAS. It states that the COR is required to
monitor and ensure that the contractor meets the technical requirements of the contract by
inspecting and testing deliverables and evaluating reports.

The TIVAS Contract Monitoring Plan, the Contract Monitoring Directive, and the COR
appointment memorandum stated that invoices must be reviewed. However, the three guidance
documents did not include instructions on validating the accuracy of borrower volumes; ensuring
invoices contain all the required elements, and documenting math verifications. In
December 2011, the supervisor for Budget and Services Management developed a written
procedure that instructed the CORs to document math verification. To improve its invoice
review process, the supervisor for Budget and Services Management stated in February 2013 that
FSA uses a new report that shows the borrower volumes serviced by each TIVAS to verify
invoiced borrower volumes. According to the director of the Contract Oversight Division, FSA
Final Audit Report
ED-OIG/A02L0006                                                                       Page 9 of 33

is in the process of contracting a third party to review the system used by the TIVAS to generate
invoices.

In addition to needing to improve existing guidance and the CORs’ compliance with it, FSA
management did not provide the CORs with comprehensive and detailed procedures on
validating invoices and reviewing deliverables. An effective control environment is affected by
management’s philosophy and attitude toward monitoring and evaluation, according to the
Government Accountability Office’s “Standards for Internal Control in the Federal
Government,” November 1999. The director of the Contract Oversight Division, who is
responsible for overseeing the CORs, was not aware of the contents of the COR appointment
memorandum. This document is signed by each COR and outlines the duties and authority
delegated by the CO to the COR. In addition, management emphasized prompt invoice payment
over adequate monitoring, according to the director of the Acquisitions Group. FSA policy
states that CORs review invoices within 5 business days. The director said that CORs learn in
training and from their managers that meeting this deadline is a priority. Therefore, FSA’s
management contributed to a weak control environment, which can increase the risk of FSA not
identifying errors in TIVAS invoices.

Because the CORs did not sufficiently validate the accuracy of invoices that we sampled, there is
a heightened risk of improper payments for the $337,363,472 paid to the TIVAS during our audit
period. As detailed earlier, four of the nine sampled invoices contained errors that resulted in
improper payments by FSA. In these invoices, either the TIVAS self-identified the errors or we
found them. Therefore, FSA has no assurance that invoices from and payments to the TIVAS
were accurate. In addition, because the CORs did not confirm the timeliness and adequacy of
deliverables, the CORs could not ensure that the TIVAS complied with the contract terms.

RECOMMENDATIONS

We recommend that the Chief Operating Officer for FSA—

1.1    Develop and implement comprehensive and detailed guidance and procedures on how to
       properly validate TIVAS invoices.

1.2    Properly validate the invoices totaling $337,363,472 already paid to the TIVAS during
       our audit period to ensure accurate billing and payment.

1.3    Develop and implement a process to ensure that the FSA officials who receive and
       review deliverables communicate with the TIVAS CORs about their timeliness and
       quality.

FSA Comments
FSA agreed with Finding No. 1 and its recommendations. FSA noted that all invoices were
reviewed for reasonability prior to payment using the data that was available at that time. FSA
stated it diligently monitors the deliverables but agreed that the COR needs to be notified of the
communications regarding the deliverables and deficiencies need to be reported to the CO.
As part of its corrective actions, FSA stated that it developed and implemented the recommended
actions, as well as improved its overall approach to invoice validation. FSA stated that it revised
its procedures to include additional validation steps. FSA also planned to procure the services of
Final Audit Report
ED-OIG/A02L0006                                                                                   Page 10 of 33

an objective third party vendor to perform a review of each of the TIVAS’s billing processes.
According to FSA, this review would include an accuracy review of a statistically significant
sample of invoices submitted during the audit period. FSA also developed policy and delivered
mandatory training for CORs and COs on the proper review and processing of invoice payments.

Additionally, FSA stated it is updating its procedures regarding work product reviews. 4 FSA
stated it would identify the users of the work products and instruct them on how and when to
notify the CORs when receipt is not timely, the products are inaccurate, or when there may be
performance issues.

OIG Response
We considered FSA’s comments to be responsive to our recommendations. FSA’s planned or
taken corrective actions, if properly implemented, are responsive to our finding and
recommendations.

FINDING NO. 2 – FSA Omitted a Requirement in the Contracts That Resulted in a
                Separate Cost

FSA modified the TIVAS contracts to include a requirement that should have been included in
the base contracts. Specifically, FSA initially omitted any contract requirement for the TIVAS to
research and resolve postsecondary institutions’ challenges to their draft CDR. The CDR is the
percentage of a school’s student loan borrowers who enter repayment within a cohort fiscal year
and default within the 2- or 3-year cohort default period. The Department’s Operations
Performance Division publishes the CDRs annually. FSA modified the contracts nearly
10 months after they were finalized to include this requirement, which resulted in a separate and
additional cost of $600,866 through December 2012. FSA may have paid the TIVAS more to
perform CDR challenge activities than it would have paid if it had included the requirement in
the base contracts. Based on FAR Section 7.102(b), we conclude that FSA should have planned
the acquisition of Title IV servicing including the performance of CDR challenge activities to
meet its needs in the most efficient and cost-effective manner. Historically, FSA did not
separately pay ACS (the original Direct Loan servicer) to respond to CDR challenges pertaining
to Direct Loans, nor did it separately pay guaranty agencies to respond to CDR challenges
pertaining to FFEL Program loans. With the TIVAS, FSA negotiated a rate with them related to
the number of institutions challenging their draft CDR and a rate related to the number of
borrowers in each challenge. The TIVAS billed FSA on a monthly basis. From June 17, 2009,
through September 30, 2011, FSA paid the TIVAS $206,077 to perform these activities. By
December 31, 2012, FSA had paid the TIVAS a cumulative total of $600,866.

In planning the TIVAS contracts, FSA did not consider all the potential activities it would expect
a servicer of Direct Loans and federally held FFEL Program loans to perform and then include
them in the contract requirements. FSA’s November 20, 2003, base contract with ACS
Education Solutions, LLC, ED-04-CO-0004, for Direct Loan servicing requires the servicer to
support the Default Management Division by receiving, processing, and responding to CDR
challenges and appeals by Direct Loan institutions. The requirements of the ACS contract
should have been considered by FSA when developing the TIVAS contracts, with the CDR

4
 The “work products” referred by FSA in its comments relate to the “deliverables” discussed in the finding and
Recommendation 1.3.
Final Audit Report
ED-OIG/A02L0006                                                                        Page 11 of 33

challenge activities explicitly described in the scope of the TIVAS contracts. The Department’s
Directive OCFO [Office of the Chief Financial Officer]:2-107, Acquisition Planning,
February 11, 2008, requires the development of a written acquisition in accordance with FAR
Section 7.105. FAR Section 7.105(a)(4) states that all required performance capabilities be
specified as part of the planning process.

A previous CO for the TIVAS contracts stated that it was an oversight by FSA that the CDR
challenges were not included in the TIVAS contracts’ statement of objectives. Similarly, the
Ernst & Young TIVAS report had a finding that the TIVAS base contracts did not include
detailed requirements, which provided the TIVAS with a short timeframe to understand and
implement the initial set of requirements and develop appropriate system design. Ernst & Young
recommended that, for future onboarding of servicers, FSA should timely communicate the
details of system and functionality requirements.

We could not determine whether FSA selected the most efficient and cost-effective prices for
changes made to the contracts, in part, because FSA made changes to contract pricing and terms
that have resulted in a separate and possibly additional cost to FSA. In particular, there was no
means for us to determine how the base TIVAS contract cost would have changed had CDR
challenge costs been included in the negotiated contract cost. While CDR challenge costs were
included in the base ACS contract costs, it was part of the overall negotiated cost for “Common
Services for Borrowers” without a breakout for the CDR challenge portion of work.
Additionally, CDR challenge costs are based on volume. Because volume is variable, we cannot
estimate CDR challenge costs. From June 17, 2009, through December 31, 2012, FSA incurred
a separate cost of $600,866 for activities related to CDR challenges. These costs will grow as
the volume of CDR challenges increases over the lives of the contracts, which could extend to
June 2019.

RECOMMENDATION

We recommend that the Chief Operating Officer for FSA—

2.1    In future base contracts for Title IV servicing, include the requirement that servicers
       research and resolve postsecondary institutions’ challenges to their draft CDRs so that
       this activity is performed within the scope of the initial contract.

FSA Comments
FSA agreed with Finding No. 2 and agreed with its recommendation. FSA disagreed with the
potential impact, but agreed that it is not clear how the inclusion of the CDR challenges in the
base requirements of the TIVAS contracts would have affected the base contract price. As part
of its corrective actions, FSA stated that it will include the requirement in future base contracts
for Title IV servicing as appropriate, contingent on timing, contract vehicle, and budget.

OIG Response
While FSA may have disagreed with the potential impact the CDR challenges could have on the
cost of the contract, FSA agreed with the finding and agreed to take corrective actions to address
the recommendation. Therefore, FSA’s planned corrective actions, if properly implemented,
should address our finding and recommendation.
Final Audit Report
ED-OIG/A02L0006                                                                    Page 12 of 33

FINDING NO. 3 – FSA Did Not Properly Execute Changes to the TIVAS Contracts
                and Insufficiently Documented Decisions

Out of the 21 changes made to the contracts during our audit period that resulted in $2,968,143
in additional costs to the Government, FSA did not properly execute and document 18 as
required by the FAR. The 18 changes totaled $1,271,949. (See Enclosure 1 for details.)
Specifically, we found that:

   •   FSA did not properly execute (that is, obtain signatures from the CO and TIVAS
       officials) 18 changes to the prices and terms of the contracts that were agreed-on in
       advance of implementing the changes by the TIVAS and the CO.
   •   FSA officials did not document their decisions on whether the prices and activities
       proposed by the TIVAS for the 18 changes were within or outside the scope of the
       contracts and did not document why there was an additional cost to the Government.

FSA negotiated a price for each change with each TIVAS individually. However, for 10 of the
18 changes reviewed, some of the TIVAS proposed to implement the change at no cost to the
Government. In addition, for 8 of the 18 changes, some of the TIVAS were already meeting the
expectation set forth in the contract change and FSA did not require them to take any action.
This variance in dealing with the changes by FSA is because of differences in TIVAS’ servicing
systems. Although some changes were made at no cost to the Government, FSA did not properly
execute and document all 18 changes to the TIVAS contracts as required by the FAR.

Improper Execution of Changes

For the 18 changes made to the contracts’ prices and terms, FSA did not complete a Standard
Form 30, “Amendment of Solicitation/Modification of Contract” (SF 30), which requires the
signatures of the TIVAS and CO. For the 18 changes, the CO received proposals from the
TIVAS describing the work to be performed and the proposed price. The prices proposed by the
TIVAS were based on their estimate of the number of hours to perform the work and the
technical expertise of the employees required to complete the work. After receiving the
proposal, the CO determined whether the proposed prices were fair and reasonable and
documented it in an internal document called a price negotiation memorandum. The COR, on
behalf of the CO, then emailed the TIVAS with the order to begin work. The CO did not use the
SF 30 to document these changes, as required by the FAR. For example, the CO approved a
proposal by Nelnet to implement a technical solution for the transfer of loans in an estimated
1,020 hours for a fixed price of $127,500. Nelnet later billed only $100,000 after it performed
the work. We found that it actually took Nelnet more than 1,800 hours to perform this activity.
If Nelnet had not honored the informally documented agreement, FSA could have been subjected
to an equitable adjustment request to be paid for all of the hours actually worked, more than
$225,000. In this example and others, because FSA did not follow FAR requirements and use
the SF 30 to document contract changes, FSA is at risk of disputes for additional costs that the
TIVAS incurred.

According to FAR Sections 43.103(a)(1), 43.204(a), and 43.301(a)(1)(ii) and (v), the CO should
use an SF 30 for change orders that are bilateral agreements, which are equitable adjustments to
the contract price or terms that are negotiated in advance between the contractor and the CO. In
Final Audit Report
ED-OIG/A02L0006                                                                      Page 13 of 33

addition, the FAR Sections 43.201(a) and 43.204(a) state that the CO should also use the SF 30
for change orders that are unilateral agreements, which are changes to the contract that are not
agreed to in advance by both parties. The CO did not consider the 18 changes to be change
orders, as defined by the FAR, because FSA and the TIVAS bilaterally negotiated the terms in
advance. However, the CO incorrectly defined change orders as only unilateral changes in
which no input or negotiations occur before the contractor commences work. Multiple sections
of the FAR state that change orders can be unilateral or bilateral agreements, and if a change
order results in the change of a contract’s price or terms, it should be documented with the SF 30.
The CO and acting director of the Mission Procurement Division stated that the 18 changes were
“change requests” and the director of the Acquisitions Group stated that FSA was in compliance
with the FAR since the FAR does not address the use of “change requests.” The term “change
request” is not defined or used in the FAR.

Insufficient Documentation of Changes

We could not determine whether the CO’s decisions to process the 18 contract changes were
appropriate because the CO insufficiently documented his determinations in the contract files.
The CO did not document whether the prices and activities proposed by the TIVAS were already
covered within the existing contractual requirements. In addition, the CO did not document why
changes that resulted in adjustments to the contract price were funded outside the common
pricing of the TIVAS contracts. The price negotiation memorandum did not contain the CO’s
determinations on these two decisions, nor were they documented anywhere else in the contract
files. If the CO had completed the SF 30, it would have included an explanation of the reason
for and the impact of the modification on the overall contract price.

The 18 changes were not sufficiently documented because FSA did not fully follow the FAR
requirements and the Department’s policies and procedures. FAR Section 16.505(b)(5) states
that the CO should document the rationale for placement and price of each order in the contract
file. This includes the CO’s basis for awarding the order and the rationale for any tradeoffs
among cost and noncost considerations in making the award decision. The Contract Monitoring
Directive, Section VII.L(1), states that detailed record-keeping is necessary to keep an up-to-date
history of the life of a project despite changes in staff. It also provides a mechanism for analysis
by future reviewers and auditors. In addition to the CO, the decisions made by the
cross-functional team in the Change Management Division were communicated orally and not
properly documented. FSA officials began documenting the cross-functional team meetings with
meeting minutes in January 2012. However, the meeting minutes provided to us by FSA for
January and February 2013 did not contain enough detail explaining the rationale behind the
team’s decisions. In addition, one of the internal control standards contained in the Government
Accountability Office’s “Standards for Internal Control in the Federal Government,” November
1999, is control activities. Control activities help ensure that staff execute management’s
directives. Such activities include properly executing and documenting transactions of
significant events, such as those that determine use of funds. The CO relied on the decisions
made by the cross-functional team to make these determinations for the 18 changes. FSA’s
change management plan states that a business analyst in the Change Management Division is
responsible for recording the team’s meetings in writing. This cross-functional team is a
component of FSA’s process for handling contract changes; however, the FAR authorizes the
CO as the person acting on behalf of the Government and responsible for the decisions and
actions for all contract changes and for maintaining contract documentation.
Final Audit Report
ED-OIG/A02L0006                                                                    Page 14 of 33

Because of the improper execution of changes to the TIVAS contracts, FSA is not complying
with the FAR and is vulnerable to contract challenges. Although FSA has a record of the TIVAS
price proposal for each change and acceptance by the CO, the failure to follow through with a
completed SF 30 creates a risk of future disputes or requests for equitable adjustment. The lack
of sufficient documentation can lead to future problems as key FSA contracting personnel and
TIVAS personnel involved in the change negotiations change or leave their positions.

Because of the lack of sufficient documentation, we could not determine the reasonableness of
the CO’s and the cross-functional team’s decisions. Specifically, we could not determine the
reasonableness of decisions on whether prices and activities proposed by the TIVAS were within
or outside the scope of the contracts and whether the changes should have been an additional cost
to the Government. As a result, we could not determine whether FSA selected the most efficient
and cost-effective prices for the 18 changes to the contracts.

RECOMMENDATIONS

We recommend that the Chief Operating Officer for FSA require the director of the Acquisitions
Group to—

3.1    Complete an SF 30, including signatures from both parties, for any future changes to the
       TIVAS contracts that result in additional cost to the Government or increased time to
       perform the work under the contract and adequately document all previous changes.

3.2    Ensure all staff comply with requirements in FAR, Part 43, “Contract Modifications,” for
       execution of changes to all contracts administered by FSA.

3.3    Document the rationale of its determinations on whether the prices and activities
       proposed by the TIVAS for previous and future changes to the contracts are within or
       outside the scope of the contracts and should be additional costs to the Government.

3.4    Ensure that all decisions made by the cross-functional team regarding future changes to
       the terms or conditions of the TIVAS contracts are adequately documented in writing.

FSA Comments
FSA did not take the same position as OIG regarding Finding No. 3, but agreed with all of its
recommendations. FSA acknowledged it did not document all changes that were made by
mutual agreement of the parties during the change management process in strict compliance with
the documentation requirements of the FAR concerning contract modifications. However, FSA
believes that these changes were properly executed and are fully enforceable by law. FSA views
the absence of individually signed and executed SF 30 forms to address each change to be a
ministerial error and believes that all necessary documentation was obtained to effectuate the 18
changes and bind both parties. FSA noted that each change was tied back to an SF 30 that
provided funding for the contract.

FSA believes all changes performed by the TIVAS contractors were within the general scope of
the TIVAS contracts. In addition, FSA believes that its explanation for these changes and their
effect on the TIVAS contracts’ overall contract price were sufficiently documented through
Final Audit Report
ED-OIG/A02L0006                                                                               Page 15 of 33

FSA’s change management process. FSA does not believe that additional SF 30s were required
in each instance to document this rationale.

For Recommendation 3.1, FSA provided an updated response, dated July 3, 2013. (See
Enclosure 3 for details.) FSA stated that for previous changes to the TIVAS contracts, it will
consolidate all change requests and locatable supporting documentation with the SF 30 that
provided funding for the changes. For future changes to the TIVAS contracts, FSA will issue an
SF 30 when the CO determines one is required, consistent with FAR requirements. FSA will
also establish a procedure for issuing a summary SF 30 that links the changes to the SF 30 that
provides funding for the changes.

As part of its corrective actions for Recommendations 3.2 through 3.4, FSA stated that the head
of the contracting activity 5 will issue a memorandum reminding COs of responsibilities
associated with the requirements of the FAR and other regulation, policy, and guidance. FSA
also agreed to adequately document required decisions during contract award and administration
and the cross-functional team’s decisions concerning future TIVAS contract changes.

OIG Response
We made changes to the finding and Recommendation 3.1 based on FSA’s comments. For the
finding, we clarified that the CO did not document whether the prices and activities proposed by
the TIVAS were already covered within the existing contractual requirements. For
Recommendation 3.1, we clarified that FSA will complete an SF 30 for any future changes to the
TIVAS contracts and adequately document all previous changes.

The FAR Part 43 requires the CO to execute an SF 30 for changes to a contract. We disagree
with FSA that its change management process negates the need for the CO to execute a SF 30 for
a change. In addition, we disagree that the execution of an SF 30 to increase the funding of a
TIVAS contract has the effect of incorporating such changes. The SF 30s which add funding to
the TIVAS contracts specify the amount of funding added to the contract and the “not-to-exceed
limit” of the contract. These SF 30s also state, “All other terms and conditions remain
unchanged.” However, FSA often did not incorporate into these SF 30s documentation created
by its change management process. Furthermore, FSA’s comments state that the Department’s
Office of the General Counsel agreed that the TIVAS change request process was not in strict
compliance with FAR Part 43.

We disagree with FSA that it had adequate documentation to support the 18 changes. As stated
in the finding, because of the lack of sufficient documentation of the CO’s and the
cross-functional team’s decisions, we could not determine the reasonableness of decisions on
whether prices and activities proposed by the TIVAS were already covered by existing
contractual requirements and pricing and whether the changes should have been an additional
cost to the Government.

While FSA believes that the 18 changes were enforceable, our finding is that FSA’s use of
alternative and informal documentation increased the risk to the Department. FSA’s
documentation for all 18 changes was provided to OIG in electronic format but was not a part of
the official contract file for any of the TIVAS. The CO stated that the documentation is

5
    The head of the contracting activity for FSA is the director of the Acquisitions Group.
Final Audit Report
ED-OIG/A02L0006                                                                                     Page 16 of 33

maintained through a combination of hardcopy and electronic files; however, such
documentation could be separated from the files based on the activity occurring related to the
changes. Upon review of the electronic documentation, we noted several instances of missing
documents. In one instance, the documentation was not readily available to the CO, who instead
had to ask one of the TIVAS for copies of relevant information. Also, during our audit period,
the CO and the CORs for the TIVAS contracts have changed since the award of the contracts in
June 2009. Therefore, the information and documentation available to one CO or COR might
not be available to the subsequent CO or COR, especially if the documentation is not stored in a
central location accessible to subsequent CO or CORs, for example a shared network drive for
electronic files or the official contract file for hardcopy documents.

Although FSA did not fully agree with OIG’s position regarding the finding, FSA agreed to
make improvements to its documentation of changes for the TIVAS contracts.

FINDING NO. 4 – FSA Used Improper Criteria in Its Monitoring of the TIVAS

The FSA Business Operations group reviewed each TIVAS using its 2010 Operations Services
monitoring procedures plan. The plan referenced improper criteria to measure the performance
and adequacy of TIVAS collection activities; loan conversions; and servicing procedures, scripts,
and training materials. The improper criteria included the Direct Loan Business Rules (which
were outdated, inappropriate for monitoring the TIVAS, and not readily accessible), an
unspecified OIG audit guide (which is not designed for such use), 6 and the Common Manual
(which was created by a nongovernmental entity and had no authority).

The Direct Loan Business Rules are improper criteria for monitoring the TIVAS because
(1) FSA developed the rules as a guide in 1997 for ACS, (2) the rules do not incorporate the
differences between the TIVAS contracts and ACS contract, and (3) the rules were not accessible
to the FSA staff performing the monitoring. The purpose of the Direct Loan Business Rules was
to serve as the baseline business rules for the ACS Direct Loan Servicing System and ensure
equitable treatment and consistent processes for all borrowers that ACS serviced. The ACS
contract with FSA was not a performance-based contract, as are the TIVAS contracts. An FSA
official responsible for compiling a new set of business rules stated that the TIVAS contracts are
less prescriptive in their servicing requirements than the ACS contract. The official also told us
that only some of the Direct Loan Business Rules are applicable to the TIVAS servicing
activities. In addition, FSA has not updated the Direct Loan Business Rules to reflect changes to
Direct Loan requirements that were implemented after the Direct Loan Business Rules were
created. This criteria does not assist FSA in monitoring the TIVAS contracts to ensure that the
TIVAS are performing the work as delegated in the contracts.

The FSA officials responsible for using the monitoring procedures plan were not able to locate
the Direct Loan Business Rules. The Government Accountability Office’s “Standards for
Internal Control in the Federal Government,” November 1999, states that documentation of
internal control activities should be properly managed and maintained. In addition, the Contract

6
 For example, the OIG audit guide, “Compliance Audits (Attestation Engagements) for Lenders and Lender
Servicers Participating in the Federal Family Education Loan Program,” is designed for use by all lenders or
servicers that participate in or administer any aspect of the FFEL Program and are required to have an annual
compliance audit performed by a non-Federal auditor.
Final Audit Report
ED-OIG/A02L0006                                                                        Page 17 of 33

Monitoring Directive, Section VII.F.4, states that the Government must clearly define its
expectations in a performance-based environment. FSA indicated that it is incorporating
relevant sections of the Direct Loan Business Rules into a database that will serve as a new set of
business rules applicable to the TIVAS. However, in March 2013, an FSA official stated that the
database project is on hold due to competing priorities.

The 2010 FSA Operations Services monitoring procedures plan lists an unspecified OIG audit
guide as criteria, although these are not designed for monitoring Direct Loan servicers. The plan
also lists the following as criteria, without referring to any specific sections: the entirety of the
Higher Education Act of 1965, as amended; 34 C.F.R. Parts 682 (FFEL Program loans) and 685
(Direct Loans); U.S. Department of the Treasury guidelines; and the FSA Financial Institution
Oversight Service’s program review guide.

FSA’s 2010 and 2011 monitoring procedures plans also referred to the Common Manual as
supplemental criteria for monitoring the TIVAS. The Common Manual was developed by
representatives from the nation’s guarantors that participate in the FFEL program. The Common
Manual was not issued or approved by the Department, and thus is not an authoritative source for
program requirements. It was developed by non-Federal entities and is directed at lenders and/or
guarantors administering FFEL Program loans, and not the TIVAS.

Because referenced criteria in the FSA Operations Services monitoring procedures plan were
improper, not effectively communicated within FSA, and not accessible to FSA monitoring staff,
there is heightened risk that FSA’s monitoring may not uncover TIVAS performance and
compliance issues.

RECOMMENDATIONS

We recommend that the Chief Operating Officer for FSA—

4.1    Ensure that FSA applies proper monitoring criteria (for example, contract terms,
       regulations, and applicable sections of its revised Direct Loan Business Rules) when
       reviewing TIVAS performance and compliance with the contracts.

4.2    Communicate the revised Direct Loan Business Rules to the TIVAS when they are
       completed.

FSA Comments
FSA agreed with Finding No. 4 and Recommendation 4.1. In regards to Recommendation 4.2,
FSA agreed that servicing requirements need to be clearly conveyed to the TIVAS. FSA stated
that this is accomplished through the TIVAS requirement documents. Further, FSA stated that
the Direct Loan Business Rules, which were retired in 2011, has never applied to the TIVAS. As
part of its corrective actions, FSA stated that it will revise the Operating Services monitoring
procedures plan by removing references to the Common Manual and Direct Loan Business Rules
and making other revisions as appropriate.

OIG Response
FSA’s planned corrective actions, if properly implemented, should address our finding and
recommendations.
Final Audit Report
ED-OIG/A02L0006                                                                   Page 18 of 33



                 OBJECTIVE, SCOPE, AND METHODOLOGY


Our objectives were to determine whether (1) FSA selected TIVAS servicing prices that are the
most efficient and cost-effective for the Government and (2) FSA adequately monitored the
TIVAS to determine their compliance with the contract requirements. Our audit period covered
January 1, 2009, through September 30, 2011. However, we reviewed contract deliverables due
to FSA January 1, 2012, through March 15, 2012, and expenditures for CDR challenge activities
from the start of the contracts to December 31, 2012.

To obtain applicable information about the TIVAS contracts, we performed the following
procedures:

   •   obtained and reviewed the TIVAS contracts, contract modifications, and COR
       appointment memorandum for Great Lakes, Nelnet, PHEAA, and Sallie Mae;
   •   reviewed select provisions of the FAR, C.F.R., Contract Monitoring Directive, FSA
       policies and procedures, Government Accountability Office “Standards for Internal
       Control in the Federal Government,” and FSA contract monitoring plan for the TIVAS
       contracts;
   •   obtained an understanding of the roles and responsibilities of key personnel involved in
       the TIVAS contracts through interviews with officials from FSA’s Acquisitions Group,
       Operations Services Group, Program Management Services Group, Financial Institution
       Oversight Service Group, Change Management Division, and Finance Office;
   •   identified the amount of Federal funding awarded, allocated, and expended for the
       TIVAS contracts during the audit period; and
   •   reviewed relevant reports by the Government Accountability Office, OIG, and
       Ernst & Young:
           o Government Accountability Office report on Federal student loan programs,
               “Opportunities Exist to Improve Audit Requirements and Oversight Procedures,”
               July 2010 (GAO-10-668);
           o OIG report, “Controls Over Contract Monitoring for Federal Student Aid
               Contracts,” August 2007 (ED-OIG/A19G0006);
           o OIG report, “Audit of the Department’s Oversight of the Direct Loan Program,”
               November 2009 (ED-OIG/X19I0006);
           o OIG report, “Federal Student Aid’s Efforts to Ensure the Effective Processing of
               Student Loans Under the Direct Loan Program,” September 2010
               (ED-OIG/X19K0008);
           o Ernst & Young consulting report, “Title IV Additional Servicers Capacity
               Assessment,” December 2011 (ED-OIG/S15L0001); and
   •   reviewed program reviews of the TIVAS by FSA’s Financial Institution Oversight
       Service Group.
Final Audit Report
ED-OIG/A02L0006                                                                    Page 19 of 33

Federal Student Aid
We addressed both audit objectives through (1) interviews of relevant FSA officials; (2) reviews
of documents related to contract pricing and other contract costs; (3) FSA’s monitoring plans and
procedures; and (4) analysis of FSA documentation related to invoices, changes to the contracts,
and contract deliverables.

To achieve our audit objectives, we performed the following:

   •   obtained an understanding of the selection and award of the TIVAS contracts through
       review of solicitation documentation;
   •   obtained an understanding of the contracts’ pricing schedule through the examination of
       the TIVAS Phase II Source Selection Statement and Price Negotiation Memorandum;
   •   reviewed the ACS bid protest to the Government Accountability Office of the award of
       the contracts to Great Lakes, Nelnet, PHEAA, and Sallie Mae;
   •   obtained an understanding of the methodology and controls over allocation of loans to the
       TIVAS for servicing;
   •   reviewed FSA’s 2010 and 2011 Operations Services monitoring procedures plans;
   •   reviewed FSA’s 2010, 2011, and 2012 Financial Institution Oversight Service
       methodology and processes for the annual program reviews of the TIVAS;
   •   obtained an understanding of FSA’s Finance officials’ oversight of the TIVAS contracts
       in respect to their reporting of financial data and their Office of Management and Budget
       Circular A-123 Appendix A reviews of the TIVAS;
   •   obtained an understanding of FSA’s Internal Control Division oversight of the TIVAS
       contracts in regards to data reconciliations prepared by the TIVAS and the resolution of
       FSA’s Financial Institution Oversight Service program reviews of the TIVAS;
   •   obtained an understanding of FSA’s processes and procedures related to payment of the
       TIVAS invoices;
   •   reviewed FSA’s change management plan and obtained an understanding of the
       processes for changes to the TIVAS contracts;
   •   reviewed all 21 changes to the TIVAS contracts that resulted in additional cost to the
       Government totaling $2,968,143 (see Enclosure 1 for details);
           o reviewed supporting documentation for all 21 changes, including contract
               modifications and price negotiation memorandums for 3 of the 21 changes, and
               change management business forms, impact analyses, cost proposals, and email
               communication between FSA and TIVAS officials for 18 of the 21 changes; and
           o obtained an understanding of the changes to the TIVAS contracts by interviewing
               FSA officials directly associated with each change;
   •   reviewed 9 judgmentally sampled invoices and related supporting documentation for each
       invoice from the universe of 112 TIVAS invoices; and
   •   reviewed 5 judgmentally sampled contract deliverables and related supporting
       documentation for each deliverable from the universe of 993 contract deliverables and
       interviewed officials responsible for obtaining and reviewing each deliverable.

We relied on computer-processed data to obtain the universe of changes made to the TIVAS
contracts that resulted in additional cost to the Government and the universe of contract
deliverables. FSA provided both in the form of spreadsheets. In addition to providing the
universe of changes and deliverables, the spreadsheets supplied us with TIVAS invoice costs,
Final Audit Report
ED-OIG/A02L0006                                                                      Page 20 of 33

costs for changes to the contracts, and contract deliverable details. We compared the
spreadsheets to additional sources of information to determine whether they were complete and
accurate. For the changes to the contracts, we determined the completeness and accuracy of the
expenditure spreadsheet that FSA provided by comparing it to the changes listed in the invoices
in our sample, contract modifications, price negotiation memorandums, and related change
management documentation. For the contract deliverables, we received a spreadsheet from FSA
listing the contract deliverables required of the TIVAS. We compared the computer-processed
list to the contract deliverables included as an attachment to the TIVAS contracts. Additionally,
we interviewed FSA officials to determine the completeness and accuracy of the contract
deliverables spreadsheet. We also compared the expenditure data for the sampled invoices to
FSA’s Financial Management Support System documentation. Based on all the above
comparisons, we determined that the data contained in these files were sufficiently reliable for
the purpose of answering our audit objectives.

Sampling Methodology
We judgmentally sampled 9 invoices, with charges to FSA totaling $29,524,349, from a universe
of 112 TIVAS invoices totaling $337,363,472. From September 1, 2009, through
September 30, 2011, there were 25 months, or billing periods, in which each TIVAS submitted
one invoice. However, from October 1, 2010, through September 30, 2011, Nelnet submitted
two invoices for each month: one invoice for loan servicing and the other for discharging loans
for borrowers eligible for Total and Permanent Disability status. Therefore, there were
12 additional invoices for Nelnet. As a result, our universe of the TIVAS invoices consisted of
112 invoices. We judgmentally selected a sample consisting of the invoices for 2 of the
25 monthly billing periods for each TIVAS based on various risk factors. Risk factors included
invoice errors previously identified by FSA or OIG during our preliminary work and billing
periods when there were personnel changes in the COR position. This totaled nine invoices
because Nelnet submitted two invoices in one of the selected billing periods.

To follow up on the Ernst & Young consulting report recommendation that FSA track delivery
of each contract deliverable, we judgmentally sampled 5 of 993 contract deliverables required of
the TIVAS from the start of our audit period through November 18, 2011. We selected the
deliverables that specifically indicated a report, a trial balance, or any type of work product that
should have been provided to FSA and, where possible, deliverables with due dates. The final
Ernst & Young consulting report was issued December 2011. Therefore, to avoid duplicating the
efforts of Ernst & Young, the work products of those five deliverables we reviewed were for the
period from January 1, 2012, through March 15, 2012.

Because there is no assurance that the two judgmental samples of invoices and deliverables were
representative of the entire universe, the results should not be projected over the invoices or
deliverables that were not selected for testing.

Title IV Additional Servicers
We judgmentally selected, for site visits, two of the four TIVAS with the greatest variability
among the TIVAS based on two criteria: TIVAS loan volume and organizational business model.
We selected Great Lakes because this TIVAS had the largest volume of loans and is a nonprofit
organization, and Nelnet because it had the smallest volume of loans and is a for-profit
organization.
Final Audit Report
ED-OIG/A02L0006                                                                     Page 21 of 33

To achieve our audit objectives, we performed the following:

   •   gained an understanding of Great Lakes’ and Nelnet’s internal controls, policies,
       procedures, and practices related to their performance under the TIVAS contracts;
   •   interviewed key Great Lakes and Nelnet officials and personnel involved in servicing
       loans, changes to the TIVAS contracts, invoicing process and procedures, and reporting
       loan information to NSLDS; and
   •   reviewed supporting documentation for the selected invoices and changes to the TIVAS
       contracts that resulted in additional cost, such as:
           o costs billed in the invoices, the borrower volumes in each billing category, and the
               invoice correction spreadsheet for the 14 months of overbilling by Great Lakes;
               and
           o support for the actual number of hours worked to perform the changes compared
               to the agreed-on estimates between FSA and the TIVAS.

For the TIVAS component of our audit, our use of computer-processed data was generally
limited to the monthly invoice data maintained in the Great Lakes and Nelnet servicing systems.
We used this data to assist us in our review of sampled invoices. We performed a limited
assessment of the reliability of the computer-processed data that assessed both Great Lakes’ and
Nelnet’s processes to validate the monthly invoice data. This included verifying the logic and
methods used when Great Lakes and Nelnet prepared the invoices before submitting them to
FSA for payment. As a result, we considered the monthly invoice data maintained in the TIVAS
servicing systems to be the best available data for the purpose of our audit. To determine
whether the data files were complete and accurate, we used data analysis software to combine
and summarize the data for the invoices sampled for Great Lakes and for Nelnet, and we
compared the totals and subtotals for each borrower category to the totals and subtotals listed on
the invoices. For the two Great Lakes’ sampled invoices, they were originally incorrect due to
overbilling by the servicer, as described in Finding No. 1. However, in our analysis, we used the
data for the corrected invoices. We determined that the totals and subtotals listed on Nelnet’s
invoices and Great Lakes’ corrected invoices agreed with the numbers reported in the files from
the monthly invoice data maintained in the TIVAS servicing systems provided by the two
servicers. Based on the results mentioned above, we determined that the computer-processed
data used were sufficiently reliable for the purposes of our audit objectives.

We conducted fieldwork at FSA in Washington, DC, from September 27, 2011, through
June 27, 2012. We also conducted fieldwork at Great Lakes in Madison, Wisconsin, and at
Nelnet in Lincoln, Nebraska, from June 4, 2012, through June 8, 2012. We held an exit
conference to discuss the results of the audit with FSA officials on September 6, 2012.

We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
based on our audit objectives. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objectives.
Final Audit Report
ED-OIG/A02L0006                                                                                      Page 22 of 33

Enclosure 1: Changes to TIVAS Contracts that Resulted in Additional Cost to FSA,
                           as of September 30, 2011 7

During our audit period, FSA made 21 changes to the contracts that had costs associated with
them for at least one of the TIVAS. For example, one change to the contract was implemented at
no cost by three TIVAS, but was implemented at an additional cost by only one of the TIVAS.
As discussed in Finding No. 3, FSA improperly executed 18 of these changes.

                                                                                                       Amount
                                              Change Name
                                                                                                        Spent 8

Improperly Executed Changes

    1    Stop Transfer of Defaulted Loans from TIVAS to DMCS                                               $1,500

    2    Financial Management System File Status Dashboard                                                 $5,400

    3    Financial Management System Refunds to Include Deposit Ticket Number                            $18,330

    4    U.S. Department of the Treasury Electronic Check Processing Roster Payment Return File            $5,780
         Substitute Statement on Standards for Attestation Engagements No. 16 Audits for Statement       $11,469
    5
         on Auditing Standards No. 70 Audits
    6    Clean-up Project for Ineligible Loans Sold to the Department                                    $11,700

    7    Interface with DMCS2                                                                           $295,764

    8    FFEL Repurchase Process                                                                        $178,840

    9    NSLDS Reporting Update                                                                         $202,438

    10 Compliance with Higgins Decision Pertaining to Nondiscretionary Benefits for Borrowers            $50,890

    11 Change to Audit Downloads                                                                         $36,990

    12 Acceptance of Civil Legal Assistance Attorney Student Loan Repayment Program Payments             $35,620

    13 Common Servicing Schema Changes to Common Origination and Disbursement System                    $257,902
         Move Conditional Disability Discharge Tracking System Inactive Accounts to                      $20,938
    14
         Total and Permanent Disability System
    15 Consolidation Reversals Requirements                                                              $92,439

    16 Direct Loan Servicing System Decommission with Total and Permanent Disability System              $16,500

    17 Additional Federal Servicer Codes                                                                 $18,650

    18 NSLDS Reporting Frequency for Department Servicers                                                $10,800

                                                                                           TOTAL      $1,271,950 9
Properly Executed Changes
    1    Cohort Default Rate Challenge Support                                                          $600,866
    2    Total and Permanent Disability Services                                                       $1,475,398
    3    Processing of Borrowers Greater Than 360 Days Delinquent                                        $14,719
                                                                                           TOTAL       $2,090,983
7
  The Cohort Default Rate Challenge Support total is as of December 31, 2012.
8
  Funds rounded to the nearest dollar.
9
  This total differs from the total presented throughout the report ($1,271,949) due to rounding.
Final Audit Report
ED-OIG/A02L0006                                                                                      Page 23 of 33

                                    Enclosure 2: FSA Comments




                              UNITED STATES PEPARTM&NT OF EDUCATION
                                                  Federal Sludent Aid


                                                Jure 20, 2013


        TO:           Daniel P, Schultz
                      Regional lns~lor General for Audit
                      Office of Inspector General


        FROM:         James W. Runcie
                      Chief Operating Officer     ~~x?
        SUBJECT:     Draft Audit Report- "Federal Student Aid's Award and Administration of
                     the Title IV Additional SeMcers Contracts.· Control Number ED-
                     O!GIA02L0006

        Thank you for providing Federal Student AJd (FSA) with an opportunity to respcnd to the
        Office of ln~pector General's (OIG) findings and rooomrrrend~tions in the draft audit
        report, "Federal Student Aid's Award and Administration of the Titte IV A::lditional
        Servlcers Contracts."

        Since ihis audit began in September 2011, FSA's management has addressed many of
        OtG's recommendations. FSA assessed observations made by the auditors during the
        review and instituted several immediate changes to include the development of a new
        approach to invoice validaf-on that otrongthans the integrity of the validation process,
        and implementation of a new forum in which the Trtle IV Additional Service~s Contracts
        (TIVAS) perfoonance Issues are analyzed as part of conrract oversight and, when
        necessary. escalated to the Contracting Officer and executive leadership. In assessing
        OIG s iindings and recommendations, FSA also consuned legal counsel (the Office of
        the General Counsel (OGC)) regarding ~s rights and obligations rl'llated to performance
        and administration of the TIVAS contracts as a matter of federal procuwnent law FSA
        appreciates this opportunity to respond to OIG's ooncerns.

        FSA's response to each of the recommendations Follows:

        Finding 1: FSA Inadequately Monitored TIVAS Invoices and Oeliverables

        Response to Finding 1:

        FSA agrees the TIVAS invoices validation process needed improvement However, ~is
        1mportant to note that all invoices were reviewed for reasonability prior to payment using
        the data that was available at that time.
Final Audit Report
ED-OIG/A02L0006                                                                                       Page 24 of 33




        FSA diligently monitors the deliverables. For example, when the TIVAS contractors
        submit a financial reconciliation report that the Chief Financial Ofrlcer group determines
        to be insufficient, the TIVAS contial.iors are, in fact, informed and the insufficiency is
        generally addressed. However, FS!\ agrees that the Contracting Ofticer's
        Representative (COR) needs to be notified of these communications, and deficiencies
        reported to the Contracting Offocer. Upon proper notification, the Contracting Offic;Ar
        could then determine whether the withholding of further invoice payments or other
        actions authorized by the contract were proper in order to ensure all contract terms
        were met.

        Recommendation 1.1: Develop and implement comprehensive and detailed guidance
        and procedures on how to prope~y validate the TIVAS invoices.

        Response to Recommendation 1.1;

        FSA developed and implemented the recommended actions, a> well as improved ""
        overall approach to invoice validation. Procedures have been re\•ised to include
        add~ional validation steps (See steps 2 and 3 below). In summary, the steps are as
        follows:

           1) Review invoice supporting documentation (reports) . Calculate the total counts of
              borrowers within specific borrower repayment categories from the supporting
              documentation reports and compare the total with the counts provided for the
              same category on the invo ce.
           2) Perfonm a frequency of distributio1 reasonabili~t check in which the percentages
              of reporting in the specific borrower categories on the invoice is compared to the
              historical percentages of borrowers in those categories.
           3) Perform a final check on the invoices by generating a report from the Aid Data
              Mart (ADM) capturing beth accounts and account statuses at the time the
              invoices were generated. During the audit period, NSLDS was the only tool
              available for this reasonability checl<. Due to the timing of servicer-to-NSLDS
              reporting, and the fact that NSLDS is a production database, FSA detennined tile
              ADM could be modified to produce a report using the same date parameters of
              the invoice and produce very similar results. The report specifications are
              continuously evaluated and FSA continues to identify opportunities to modify
              specification$ with the intent to achieve 100 percent reconciliation. Until then, the
              report is an improved reasonabilrty check. It is important to note this check is
              perfonned after the nvorce is paid. If the ADM report leads to the detection of an
              under/over payment, the contractor will be instructed to net the difference in the
              subsequent invoice. In turn. FSA will report the payment as an improper
              payment to FSA's Finance office in order to meet Improper Payments Elimination
              and Recovery Act (Pl 111 -204) and Improper Payment Information Act (PL 107•
              300) requirements. FSA coniinues to work towards refining the ADM report so
              that it can be used prior to payment.




                                                    2
Final Audit Report
ED-OIG/A02L0006                                                                                           Page 25 of 33




          In each of the three steps above, FSA is using TIVAS-reported data to validate tha
          invoices. FSA is strengthening the integrity of the invoice validation l)y procuring the
          services of an objective, third party vendor to perform an a!teslation or ~C:lt:h of the
          TIVAS's billing processes. The attestation contractor shall ensure that the TIVAS
          methods, practices, and logic used to generate the invoices are accurate, complete,
          timely submitted and contain sufficient internal controls to provide reasonable
          assurance of the accuracy of the reported data. This task order is scheduled to begin in
          June 2013; with ~ttestotions expected in Fiseol Year (FY) 2013 and FY 2014, and then
          every three years, contingent upo, the availability of funds and continued TIVAS
          participation . The attestation Performance Wor1< Statement (PWS) for this task order
          can be revtewed at the following link:

          https:/lwww.fbo.govlindex?s=ooportunity&mode=form&id=c5457177cd981df95a995P.80
          2697aadf&tab=oore& cview=O

          In add~ion, FSA developed policy and delivered training for CORs and Contracting
          Officers on the proper re11iew and processing of invoice and finance payments. This
          training is mandatory for all CORs and Contracting Officers, and specifically addresses
          the responsibility to 'Jerify invoice -nformation. to include the accuracy of the unit prices
          and all computations.

          Recommendation 1.2: Properly validate the irvoices totaling $337,363,472 already
          paid to the TIVAS during our audit period to ensure ao--..vrate billing and payment.

          Response to Recommendation 1.2:

          FSA concuis with this recommendation. The attestation task order discussed above will
          include an accuracy review of a statistically significant sample of invoices submitted
          dt.ring the audit period, and provide for the review of an additional quantity of invoioes if
          inaccuracies are found in lh~ first ~~vit"w ( S~e the attestation P\NS at Ule link provided
          above in Response to Recommendation 1.1). In addition, we are examining whether
          ADM reports can be generated with the necessary accuracy for a reasonability
          comparison to be performe:l on all invoices submitted during the aud~ period.
          Reasonability comparisons for invoioes submitted from December 201? through March
          2013 shew an average variance of less than 0 .6 percent; based on these results, FSA
          does not anticipate that the accuracy review will identify significant varia noes. Any over~
          or underpayments identified will be corrected through adjustments to futurt" invok:es.

          Recommendation 1.3: Develop and implement a process to ensure that the FSA
          officials who recer1e and review deliverables communicate with the Til/AS ard CORs
          about their timelines-s and quality.

          Response to Recommendation 1.3:

          FSA is updating its procedures regarding worl< product reviews. ~SA w111 1denllfy :he
          users of the work producis and ·nstruct them on how/when to notify the CORS when



                                                        3
Final Audit Report
ED-OIG/A02L0006                                                                                         Page 26 of 33




        receipt is not timely, the products are inaccurate, or when there may be performance
        issues. Some of OIG's concerns have already been addressed through tile
        establishment of the SeNicing Monitoring Group in July 2012, where issues are
        escalated to lhe COR and Contracting Officer in a more formal process lhan prev1ously
        performed.

        Finding 2: FSA Omitted a Requ~ement in the Contracts that Resulted in a Separate
        Cost

        Response to Finding 2:

        FSA agrees that cohort default rate (CDR} challenges should have been included in the
        base requirements of the TIVAS contracts. Wl>ile this omission did lead to the ca.t of
        these activities being broken out separately from the base unit pricing we do not agree
        that in:lusion of the CDR challenge performance in the base TIVAS requirements would
        have resulted in decreased cost to the government. It is not clear how the inclusion of
        tl1is reqvJrement would have affected the Initial base price, so tliere Is no basis to
        conclude that overall costs increased as a result of its omission.

        Recommendation 2.1: In future base contracts for Trtle IV servicing, inr.ludP. thP.
        requirement for servicers to research and resolve postsecondary institutons' challenges
        to their draft CDRs so that this activity is performed w~hin the scope of the in ~ial
        contract.

        Response to Recommendation 2.1:

        FSA agrees with this recommendation and will include this requirement as appropriate,
        contingent upon tilling, contract vehicie, budget. etc.

        Finding 3: FSA Did Not Properly Execute Coanges to the TIVAS Contracts and
        lnsufficienty Documented Decisions

        Response to Finding 3:

        While FSA does not take the same position as OIG does regarding this finding, FSA
        agrees improvements to documentaticn can be made. At the same time, FSA believes
        a process is in place that work::;, whic.;h aooomp!ishes Ule mission. is legally enforceable,
        and while not identified in the FAR, is one that can be used. As stated in part in FAR
        1.102(d), "In exercising initiative, Government members of the Acquisition Team may
        assume if a specific strategy. practice. policy or procedure is in the best interest of the
        Government and is not addressed in the FAR nor prohiMed by law (statute or r.a<P. iaw}
        Executive order or other reguJation, that the strategy, practice, policy or procedure is a
        permissible exercise of authorit'f." FSA intends to ensure that the rationale for all future
        changes is memorialized using tho1ough documentation aud executed using apprcable
        fonns \VIlen required.




                                                     4
Final Audit Report
ED-OIG/A02L0006                                                                                        Page 27 of 33




        FSA acknowledges it did not document all changes that were made by mutual
        agreement of the parties during the Change Management process in stnct complioncc
        with the documentation requirements of the FAR concerning contract modiications.
        However, FSA believes that in all cases, these changes (and resultant modifications)
        were properly executed and are fully enforceable by law. In other words, FSA does not
        believe this finding has a legal consequence as the actions of the parties are binding on
        the parties. FSA views the absence of individually signed and executed SF-30 forms to
        address each Ch:mge Request to be a ministerial error and believes that in all 18
        cases, a I necessary documentation was obtained to effectuate these changes and bind
        both parties. While OGC agrees that the TIVAS Change Request process was not
        previously In strtct compliance with FAR Part 43, OGC believes that these changes
        were fully executed and binding modifications to the TIVAS contracts, and that they are
        likely otherNise enforceable.

        With regard to the OIG's finding concerning alleged improper execution of changes,
        FSA's Change Management process for the TIVAS contracts, and how these changes
        ope1ate il relation to the requirements of the FAR, follows.

        The TIVAS contracts include contract changes language at FAR 52.212-4(c) consistent
        with the language found in 52.243- 1 (Changes - Fixed Price). This language allows the
        Contracting OffiCer to issue a unilateral written order, at any time, to make changes
        within the general scope of the ·::ontract without the prior agreement of the contractor.
        This type of modification is frequently referred to as a directive change. In the event
        that such change causes an increase in the cost of, or the time required for.
        performance of the contract, the Contractmg Officer os to make an equotable adjustment
        to the contract price. (See FAR 52.243-1 (b).) FAR Part 43 governs contract
        modifications Pursuant to FAR 43.103(b) and FAR 43.201(a). Contracting Officers are
        permitted to make unilateral changes (by way of uni'ateral modifications) within the
        general scope of the contract. However, pursuant to FAR 43.103{a), a bilate-al
        modification (i.e. , signed by both parties) is required in cases whet"e a change order
        resutts in an equitable adjustment in con:ract price or delivery terms. A bilateral
        moMicatoon os also used when the contracting parties agree to the terms of the
        modification prior to its issuance (a unilateral change order is not ~rst issued). This type
        of modification is referred to as a supplemental agreement issued by mutual agreement
        of the parties. (See FAR 43.204(a), requiring both a change order and the
        documentation reflecting tho equitable adjustment in administering the change) and
        FAR 43. \ 03(a)(3).) In both cases. the typical change order is executed via the
        Standard Form 30 (SF-30). (See FAR 43.201(a).)

        The 18 cnanges that are referenced in the OIG's draft reoort concern additional
        ·enhancements" of requirements for the TIVAS contracts that were derived from FSA's
        Change Management process. FSA utilizes this Change Management process as a
        planning tool to contemplate po~cntial future changes in system behavior. In order to
        compensate TIVAS contractors for increases in performance due to these
        enhancements (where applicable), and In reoognltlon of the fact that enhancements are
        frequently time sensitive, often requiring implementation wijhin 24 hours. FSA obligated



                                                     5
Final Audit Report
ED-OIG/A02L0006                                                                                    Page 28 of 33




        funds on the TIVAS ccntracts for future enhanceme"'t$ using an SF 30, and then
        employed external written communications that were approved by the Contracting
        om,e, and the conbactor to identify, price and initiate enhancements, enabling a timely
        accomplishment of mission-essential functionality. Each of 1he enhancements was tied
        back to the SF-30 that provided funding for the enhancement in a distinct Contract Line
        Item Number (CLIN). The orices and terms of the enhoncP.ments were agreed to in
        advance. Although the changes clause was available to the Contracting Officer to cirect
        changes, a directive change was not employed to initiate the 18 changes in the OIG's
        draft report. Although not ronn•lly included in the contract, parties to the TIVAS
        contracts have seen and adhere to 1he Change Management process that was
        employed .

        The Change Management orocess indudes negotiation of contemplated enhancements
        with individual TIVAS contractofs. Thfough these negotiations, FSA determines
        whether the proposed charges will result in an increase in costs andlcf time of
        JJerforrnance, emd, if so, would finalize written documentation with the servicer
        implementing the moMicauon and reflecting the pnce and/or delivery tems. 1 he to:al
        value of the contract was not increased in anv of the 18 cases referenced i1 1he OIG's
        draft report as the funds for these changes were already obligated on the oontracl.
        According to FAR Part43.103(a)(3), these changes , having been agreed to in advance,
        reflect other agreements of the parties modifying the terms of the contract, and require
        the agreemert of both parties. The agreement of the parties is witnessed through
        written commJnications and actions of the parties in the 18 changes.

        Since FSA previously completed an SF-30 form to add a CLIN for funds to aodress any
        impending Change Request. funds we·e irrmediately available to respond to ard
        acquire essential functionality if the Change Request bore a cost to the government.
        This CUN w<:~s available for usc ~$ long .::1$ the Contrc:tcting Officer and scrviccr
        coordinated and agreej to the terms o: the changes in writing. n:.ese agreements are
        witnessed in supplemental/suppofting documentatio1 between the ser1icers and the
        Contracting Officer which tie back the change to tile CLIN that provided 1he funding. In
        the event that the initial funding was expended. FSA established new CLINs using
        another SF-30 for additional Change Requests. Thus, FSA believes that
        notwithstanding the absence of SF-30's signed by both parties for each of the 18
        Change Requests, such contract modifications were adequ<:~tely documented and
        binding on both parties. FSA does not believe the abs-ence of individual SF-30 forms for
        each change makes these changes non-,lndlng or otherwise creates a risk of future
        disputes or requests for equitab'e adjustment.

        FSA also respectfully disagrees with OIG's finding that FSA did not adequately
        documant its decisions regarding whether the pric·ng and activities pfoposed by TIVAS
        contractors for these 18 Change Requests were within the origina' scope of tile TIVAS
        conlrac.;t.

        FSA believes all enhancements performed by the TIVAS contractors "vere within the
        general scope of the TIVAS contracts. Courts and GAO have set forth the test for



                                                   6
Final Audit Report
ED-OIG/A02L0006                                                                                          Page 29 of 33




        detennining whether a moc:Hfication to a contract is beyond the original scope of that
        contract: i.e., where there is a material difference between the modified contrad and the
        contract originally awardt<d. (S"" Engineering & ProF/ Servs., B-289331 , Jan. 28, 2001,
        2002 CPO 1]24 at 4 ; see also AT&T Commc'ns. Inc. v. Wllfel, Inc., 1 F.3d 1201, 1205
        (Fed. Cir. 1993)). Evidence of a material difference is found by examining the changes
        in type of work. costs, and performance period between the contract as awarded and as
        modified. (See Overseas Lease Group, Inc., 8-402111, Jan. 19, 2010, 2010 CPO 1]34
        at 3 .) In this case, the changes in scope of work to the TIVAS contracts are all clearly
        related to the original scope of work containetJ within ~ach contract as awarded.
        Addhionally, since there is no express FAR provision requiring a single form of
        documentalion to support a Contrac~ing Officer's decision that a contemplated change
        is w~h in the scope of the contract, FSA believes that the Change Management prooess
        itsen satisfies any scope determination.

        In addition, FSA believes that its explanation for these changes and the reason for and
        impact of tl"e modifications to TIVAS contracts on the overall contract price were also
        sufficiently documented. FSA does not believe that addrtronal S~ ·30's were required in
        each instance to document this rationale. The Change Requests were not part of the
        common pricing of the TIVAS contracts. and the enhancements were reviewed on a
        servicer-by-servioer oasis. On a similar subject. OIG's draft report's makes reference to
        the FAR's requirement for an a,gency's documentation of its decisions regarding
        placement an<! pricing of task orders under muHiple-award contracts (See FAR
        16.505(bi(5).). FSA does not consider this pertinent as the Change Requests and
        mod:f1cahons were requ1red of each serv1cer and d1d not constitute separate task
        orders.

        Recommendation 3.1: Complet~? an SF-30. including signab.Jres from both parties for
        all previous and any future cho.nges to the TIVAS contracts that resutt in :Jdditional oost
        to the Government or inc•eased time to perform the work under the contract.

        Response to Recommendation 3.1:

        FSA understands OIG•s rationale for Recommendation 3.1 and agrees that proper
        documentation for executed contract modifteations is crucial. However, as discussed
        above, FSA believes that the OIG's issues surrounding its Change Ma1agcmcnt
        process have been satisfactorily addressed and that the concern for future TIVAS
        contractor claims is unlikely at this time. Additionally, FSA believes the completion of
        retroactive SF-30s for all previous changes to (and modifications of) the TIVAS
        contracts will resutt in a significant administrative burden on the Agency and will do little,
        ~anyth ing , to protect the governmenfs interests. FSA understands the importance of
        outside parties being able to locate all documentation associated with a modification.
        FSA anticipates consolidating all written communic-ations with the SF-30s that provide
        funding for the Change Requ~sts for aU prior and future enhancements. In addition,
        FSA anticipates issuing bilateral summary SF-30s in the future that physically tie
        change requests, by number, back to the SF-30 that provides funding.




                                                      7
Final Audit Report
ED-OIG/A02L0006                                                                                      Page 30 of 33




          Recommendation 3. 2: Ensure all staff complies with the requirements in FAR Part 43,
          "Contract Modifications" for execution of changes to all contracts administered by FSA.

          Response to Recommendation 3.2:

          FSA concurs with this recommendation and will issue a memorandum from the Head of
          Contract Activity (HCA) reminding Contracting Officers of responsibilities associated
          with the requirements of the FAR and other regulation, policy, and guidance.

          Recommendation 3.3: Document the rationale of its determinations o n whether the
          prices and activities proposed by the TIVAS for previous and future changes to the
          contracts are within or outside the scope of the contracts and should be add~ional costs
          to the Government.

          Response to Recommendation 3.3:

          FSA agrees that the rationale for contract actions should be properly documented, and
          wrll cont~nue to adequately document requ11ed decisions during contract award and
          administra, on.

          Recommendation 3.4: Ensure that a I decisions made by the cross-functional team
          regord1ng future changes to the terms or conditions of the TIVAS COI'Ibacts a re
          adequately documented in writing,

          Response to Recommendation 3.4:

          FSA agrees that proper documentation surrounding the cress-functional team's
          deliberations for recommending future T IVAS contract changes is necessary. In fact, as
          the OIG's draft report points out. the cross-functional te<lm began documenting its
          meetings in January 2012.

          Finding 4: FSA Used Improper Criteria in Its Mon ~oring ot \he TIVAS

          Response   to Finding 4:

          FSA concurs with this finding in that improper reference-s to the 2009 Common Manu<ll
          were included in the Operations Ser1icers Monitoring Procedures.

          Recommendation 4.1: Ensure that FSA applies proper monitoring cnteria (tor
          example, con:ract terms, regulations. and applicable sections of its revised Direct Loan
          Business Rules) when reviewing T IVAS performance and compliance with the
          contracts.




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ED-OIG/A02L0006                                                                                    Page 31 of 33




        Response to Recommendation 4.1:

        FSA concurs with this recommendation. FSA will revise Operating Servicers Moi' itoring
        Procedures by removing references to the Common Manual and Direct Loan Business
        Rules, neither of which are used to monitor the TIVAS, and making other revisions as
        appropriate. FSA has implemented a formal forum, the Se<Vicing Monitoring Group
        (SMG) for the purpose of analyzing TIVAS performance in a complete, cohesive
        manner among all business units engaged in TIVAS oversight. This forum uses
        monitoring criteria as expressed in the revised TIVAS Contract Monitoring Plan, contract
        terms, and regulatio1.

        Recommendation 4.2: Communicate the revised Direct Loan Business Rules to the
        T IVAS when :hey are completed.

        Response to Recommendation 4.2:

        FSA agrees that servicing requirements need to be clearly conveyed to the TIVAS; this
        rs accomplished through the TIVAS requrrement documents, which are routinely
        updated as appropriate to reflect statutory, regula:ory, and busi1ess process
        changes. The Direct Loan Business Rules document was written specifically for the
        DLSS system, which was retired in 2011. This document has never applied to the
        TIVAS and is not the appropriate vehicle for conveying servicing requirements.

        Thank you again for the opportunity to comment on your draft audit report.

        Attachmenls

        cc: W. Christian Vierling. Director, Student Financial Assistance Ad•1isory Team
            Jeffrey Morhardt, Office of the General Counsel
            Brian Stanford. Office of the General Counsel




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ED-OIG/A02L0006                                                                                      Page 32 of 33

                Enclosure 3: FSA Updated Comments to Recommendation 3.1 10

For all previous TIVAS change requests:

       •   Consolidate all change requests and locatable supporting documentation (directions to the
           servicers, Contracting Officer authorization, correspondence, price reasonableness
           determinations, etc.) with the SF-30 that provided the funding for the change requests. For
           instance, if modification 100 provides funding for change requests 50-65, each change request
           and supporting documentation will be added sequentially behind the SF-30 that provided the
           funding for the change requests, such that all related documentation is grouped together in the
           contract file and available for review.

For future TIVAS change requests:

       •   Changes that are the result of technical direction by the Contracting Officer’s Representative do
           not require SF-30s. FSA will issue SF-30s when the Contracting Officer determines one is
           required, consistent with FAR requirements. Such FAR requirements include directive changes
           (unilateral), and the resulting request for equitable adjustment (bilateral); and other changes
           that result in additional cost to the government or increased time to perform work under the
           contract (bilateral) that will be issued as summary modifications.
       •   In addition, FSA will establish a contract term that memorializes a procedure for issuing a
           summary modification of change requests that links the change requests to the modification
           that provides funding for the change request.
               o This bilateral modification will include terms similar to the following:
                         1. "This contract includes a line item or multiple line items that provide funding for
                             change requests. The parties to this contract agree that, in addition to any
                             modifications that add line items to fund change requests, additional summary
                             modifications will be issued to identify all change requests that link back, by
                             change request number, to the modification that provided funds for those
                             change requests. These modifications confer no additional rights to the
                             contractor other than those identified in change request supplemental
                             documentation between the Contracting Officer and servicer."
               o As an example, if modification 0025 provided funding for change requests, and change
                    requests 16-30 used those funds, another modification will be issued, with language
                    similar to the following:

                    “The purpose of this summary modification is to make the following changes:

                                 a.   Incorporate into the contract the following Change Requests (CR) that
                                      were funded by modification 0025, as follows:

                                      CR#               Date                Brief Description     Amount


                                 b. The total value of the contract remains unchanged.
                                 c. All other terms and conditions remain unchanged.”


10
     The updated comments were provided by FSA’s director of the Strategic Initiatives Division on July 3, 2013.
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ED-OIG/A02L0006                                                                          Page 33 of 33

    •   On June 22, 2012 the Head of the Contracting Activity issued a Memorandum reminding
        Acquisition Team Members of their responsibilities associated with ordering directive changes.
        This Memorandum specifically addresses the issuance of an SF-30 to direct changes and another
        SF-30 when a firm price and terms are established. FSA plans to further update this
        Memorandum to address the information contained in the preceding bullet that deals with
        supplemental agreements, with FSA-wide applicability.

Language similar to the foregoing language addresses the following concerns:

  * The ability to rapidly respond to change requests is available
  * The administrative burden of issuing an SF-30 for each change request is minimized in a summary
SF-30
  * The contract term, issued bilaterally, identify the administrative nature of the additional SF-30s
  * The contract term provides for no additional rights as a result of the summary modification