oversight

Federal Student Aid's Controls Over Loan Purchases Under the Ensuring Continued Access to Student Loans Act of 2008

Published by the Department of Education, Office of Inspector General on 2010-07-02.

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

   Federal Student Aid's Controls Over Loan Purchases Under the Ensuring 

                     Continued Access to Student Loans Act of 2008 





                                 FINAL AUDIT REPORT 





                                   ED-OIG A03J0005 

                                      July 2010 





Our mission is to promote the                              u.s Department of Education
efficiency, effectiveness, and                             Office of Inspector General
integrity of the Department's                              Philadelphia, PA
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 ofInspector General.
Determinations of corrective action to be taken will be made by the appropriate Department of
Education officials.

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

                                                                                                  Audit Services, Washington, DC

                                                                             July 2, 20 1 0

MEMORANDUM



TO :                 William J. Taggart
                     Chief Operating Officer, Federal Student Aid
                     Lead Action Official

                     Daniel T. Madzelan
                     Delegated the Authority to Perform the Functions of
                      Assistant Secretary for Postsecondary Education

FROM:                Keith West /sl
                     Assistant Inspector General for Audit

SUBJECT:             Final Audit Report
                     Federal Student Aid's Controls Over Loan Purchases Under the Ensuring
                     Continued Access to Student Loans Act of 2008
                     Control Number ED-OIG/A03J0005

Attached is the subj ect final audit report that covers the results of our review of Federal Student
Aid's (FSA) Controls Over Loan Purchases Under the Ensuring Continued Access to Student
Loans Act of 2008. An electronic copy has been provided to your Audit Liaison Officers. We
received FSA's comments and its corrective action plan for each of the recommendations in our
draft report.

Corrective actions proposed (resolution phase) and implemented (closure phase) by your offices
will be monitored and tracked through the U.S. Department of Education' s (Department) 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 3 0 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.




 The Department of Education's mission is to promote student achievement and preparation for global competitiveness by fostering educational
                                                    excellence and ensuring equal access.
In accordance with the Inspector General Act of 1 978, as amended, the Office ofInspector
General is required to report to Congress twice a year on the audits that remain unresolved after
six months from the date of issuance.

In accordance with the Freedom ofInformation Act (5 U.S.C. § 552), reports issued by the
Office ofInspector 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 Bernard Tadley, Regional Inspector General for Audit, at 2 1 5-656-6279.


Enclosure

Electronic cc:
Marge White, Audit Liaison Officer, Federal Student Aid
Janie Funkhouser, Audit Liaison Officer, Office of Postsecondary Education
(This page intentionally left blank) 

                                        TABLE OF CONTENTS




                                                                                                                                     Page

ACRONYMS/ABBREVIATIONS USED IN THIS REPORT......................................i 


EXECUTIVE SUMMARy                ................................ . . . . . . . ............ ...............................              1


BACKGROUND      .............................................................................................                                3

AUDIT RESULTS      .
                  ..              .
                       .... . . . .          .
                                      ........   ............................. .     .
                                                                                   ...            . .
                                                                                         ..........   ..    ....   .   ................      5


      FINDING - FSA Did Not Have Adequate Controls and System Edits
                       in Place to Reasonably Ensure that the Department Did
                       Not Purchase Participation Interests in Ineligible Loans                                                          5

                                                                                                                       ............•. ....




OTHER MATTERS          .... . .... . .. . ............. . ........................... . ..............        .   ..................    17 


OBJECTIVE, SCOPE, AND METHODOLOGy                                 .................................. . ......... . . . . ...            18 


ENCLOSURE - FSA's Comments                   .... ...........................................         .   .......................       25 

Final Report
ED-OIGIA03J0005                                                          Page i of 28


                  Acronyms/Abbreviations Used in this Report



A-123                   Office of Management and Budget Circular A- 1 23 , Management's
                        Responsibilityfor Internal Control

ACS                     Affiliated Computer Services, Incorporated

COO                     Chief Operating Officer

Department              U.S. Department of Education

ECASLA                  Ensuring Continued Access to Student Loans Act of 2008

FFEL                    Federal Family Education Loan

FMS                     Financial Management Systems

FSA                     Federal Student Aid

GAO                     United States Government Accountability Office

HEA                     Higher Education Act of 1 965, as amended

MLSA                    Master Loan Sales Agreement

MPA                     Master Participation Agreement

NOI                     Notice of Intent to Participate

NSLDS                   National Student Loan Data System

PPFR                    Participation Purchase Funding Request

Standards               GAO's Standardsfor Internal Control in the Federal Government
Final Report
ED-OIGIA03J0005                                                                                    Page 1 of28



                                       EXECUTIVE SUMMARY




The objective of our audit was to determine whether Federal Student Aid (FSA) established and
implemented adequate controls and system edits to ensure that the U.S. Department of Education
(Department) did not purchase ineligible loans under the Loan Purchase Commitment Program
or purchase participation interests in ineligible loans under the Loan Participation Purchase
Program. These programs were created by the Department under authority provided in the
Ensuring Continued Access to Student Loans Act of 2008 (ECASLA). Our audit covered the
Department's purchase of 2008-2009 academic year loans and participation interests in such
loans during the period August 1 , 2008, through December 3 1 , 2008.

Based on our review of controls and system edits implemented by FSA and its contractor,
Affiliated Computer Services, Incorporated (ACS), l we concluded that FSA established and
implemented adequate controls and system edits to reasonably ensure that the Department did
not purchase ineligible loans under the Loan Purchase Commitment Program. Conversely,
FSA' s controls and system edits were not adequate to reasonably ensure that the Department did
not purchase participation interests in ineligible loans under the Loan Participation Purchase
Program. However, the inadequate controls and system edits we identified had a minimal impact
on the number and amount of ineligible loans in which the Department purchased participation
interests.

We found significant weaknesses in the system edits that were in place to reasonably ensure that
lenders participating in the Loan Participation Purchase Program complied with the loan
eligibility requirements. Specifically, FSA did not ensure that the loans in which it purchased a
participation interest -

       1 . 	Were made for eligible loan periods;

       2. 	 Were submitted as "New" loan records only once;

       3. 	 Had a cumulative amount of disbursements, net of cumulative reductions (e.g.
            cancellations, borrower payments), equal to the outstanding borrower principal balance
            on the loan and equal to or less than the original loan amount;

       4. 	 Had eligible first and anticipated final disbursement dates; and

       5. 	 Had interest rates that did not exceed allowable limits.

The weaknesses found resulted in the Department purchasing participation interests in 2,328
ineligible loans, totaling $7, 1 06, 1 39 (about .055 percent and .057 percent, respectively, of the
number and amount of loans in which the Department purchased participation interests during
the audit period). In addition, the Department overpaid a total of $26,530 for participation

I   ACS serviced the F ederal F amily Education Loan P rogram loans purchased by the Department.
Final Report
ED-OIGIA03J0005                                                                                    Page 2 of28

interests in eight loans, with a total principal balance outstanding of $29,009, because sponsors
reported unsupported disbursement amounts on Participation Purchase Funding Request (PPFR)
Loan Schedules (the "PPFR Loan Schedule")? When the Department purchased a participation
interest in an ineligible loan, the lender obtained short-term liquidity from the Department equal
to the purchase price of the ineligible loan.

During the audit, we informed FSA of our preliminary findings concerning its system edits.
Effective June 1 4, 2009, FSA implemented revised system edits concerning "first disbursement
dates," "anticipated final disbursement dates," and "actual interest rates." We determined that
FSA's revised system edits addressed the weaknesses we identified regarding the first
disbursement dates and loan interest rates, and partially addressed the weaknesses we identified
regarding the anticipated final disbursement dates.

We recommend that the Chief Operating Officer (COO) for FSA ensure that -
                                    ,,
    1 . A "Net Disbursement Report 3 system edits, and other controls are implemented for the
        Loan Participation Purchase Program for 2009-20 1 0 academic year loans to address the
        weaknesses we identified; and

    2. The Department did not purchase loans under the Loan Purchase Commitment Program
       from the Loan Participation Purchase Program for 2008-2009 academic year loans that
       had -

            a. Ineligible loan periods;

            b. Cumulative disbursements, net of cumulative reductions, in excess of the loan' s
               outstanding borrower principal balance or original loan amount; or

            c. Ineligible first or anticipated final disbursement dates.

A draft of this report was provided to FSA. In its response, FSA concurred with all but one of
our recommendations. FSA proposed an alternative corrective action to address the objective of
the recommendation. We agreed and revised our recommendation. FSA' s comments are
summarized at the end of the recommendations and a copy of the complete response is included
as an enclosure to this report.




2The 8 loans were part of our sample of 25 loans randomly selected from the universe of 4,919 loans with more than
one "New" loan record that the Department purchased participation interests in during the audit period. The 4,919
loans with more than one "New" loan record were about .117 percent of all loans in which the Department
purchased a participation interest during the audit period.

3The "Net Disbursement R eport " would identify inconsistencies between a loan's cumulative disbursements, net of
cumulative reductions, the outstanding principal balance, and the original loan amount.
Final Report
ED-OIGIA03J0005                                                                                      Page 3 of 28



                                             BACKGROUND




ECASLA provided the Department with new authority to address concerns about the availability
of Federal Family Education Loan (FFEL) Program loans for the 2008-2009 academic year. 4
ECASLA added Section 459A to the Higher Education Act of 1 965, as amended (HEA), which
authorized the Department to purchase or enter into forward commitments to purchase FFEL
Program loans made under Sections 428 (subsidized Stafford loans), 428B (PLUS loans), and
428H (unsubsidized Stafford loans) of the HEA. The purchasing of loans was intended to
encourage lenders to provide students and parents access to Stafford and PLUS loans for the
2008-2009 academic year. Under the loan purchase authority, the Department established the
Loan Participation Purchase Program and the Loan Purchase Commitment Program.

Loan Participation Purchase Program

In addition to the Department, the entities involved in the Loan Participation Purchase Program
included:

    •   Sponsors - A sponsor is an eligible FFEL Program lender or holder of eligible FFEL
        Program loans. A sponsor may be a secondary market or beneficial holder under an
        eligible lender trustee agreement. 5 A sponsor sells participation interests in loans to the
        Department through a custodian.

    •   Custodians - A custodian is an eligible lender that is a national or state chartered bank
        that is not affiliated with the sponsor or eligible lender trustee. A custodian is granted the
        legal title to the loans for which a participation interest is sold to the Department.

    •   Originating lenders - This is the lender that originates the loan. In some instances, a
        sponsor may acquire and sell participation interests in loans that were originated by
        another lender. In these instances, both the sponsor and originating lender must submit a
        Notice of Intent to Participate (NOI) to the Department.

Under the Loan Participation Purchase Program, the Department purchased participation
interests in eligible loans made for the 2008-2009 academic year that were held by an eligible
lender or holder of FFEL Program loans approved as a sponsor under a Master Participation



4ECASLA (Public Law 110-2 2 7 ) was enacted on May 7 , 2 008. Public Law 110-350, enacted on O ctober 7 , 2 008,
extended the Department's loan purchase authority to loans for the 2 009-2 010 academic y ear. The Department
offered a separate Loan Participation Purchase Program and Loan Purchase Commitment Program for 2 009-2 010
academic y ear loans.

5A beneficial holder does not meet the H EA criteria to participate in FF EL Programs. However, a beneficial holder
may participate in F F EL Programs through an agreement with an eligible lender to serve as its trustee.
Final Report
ED-OIGIA03JO005                                                                                       Page 4 of28

Agreement (MPA). 6 Each sponsor was required to file an NOI with the Department and enter
into a MPA with the Department and a third-party custodian acceptable to the Department. The
date the Department received the sponsor' s NOI filing generally determined the eligibility of the
loans for which the sponsor sold participation interests. With the filing of the NOI, the sponsor
was vested with the option to sell participation interests in and "put" eligible loans to the
Department for purchase (i.e., sell the loans to the Department under the Loan Purchase
Commitment Program). The participation interest purchased by the Department entitled it to a
1 00 percent beneficial ownership interest in the principal portion of the loans and the right to
receive a yield on such loans equal to the commercial paper rate plus one-half percent.

In order to sell participation interests to the Department, sponsors were required to provide a
PPFR Loan Schedule that detailed the loans for which a participation interest was being offered
for sale to the Department. During the audit period, the Department purchased participation
interests in 4.2 million loans with disbursements totaling $ 1 2.5 billion, from 2 1 sponsors. 7 For
the entire duration of the Loan Participation Purchase Program for loans made for the
2008-2009 academic year, the Department purchased more than $33.3 billion in participation
interests of FFEL Program loans from 24 sponsors.

The Department held the participation interest in a loan until no later than October 1 5, 2009. To
redeem the participation interest, the sponsor had to use funds obtained from private sources, or
it sold the underlying loan to the Department under the Loan Purchase Commitment Program.

Loan Purchase Commitment Program

Under the Loan Purchase Commitment Program, the Department purchased from sellers
(i.e., lenders or beneficial holders) eligible loans made for the 2008-2009 academic year. In
order to participate in this program, each seller was required to file a NOI and enter into a Master
Loan Sales Agreement (MLSA) with the Department. The date the Department received the
seller' s NOI filing generally determined the eligibility of the loans that the seller sold to the
Department. Under the provisions of the MLSA, the Department purchased a loan at a price that
was the sum of the outstanding principal balance of the loan, plus the total accrued but unpaid
interest owed on the loan by the borrower, plus a reimbursement of the one percent lender fee,
and $75 (per loan). Sellers wishing to sell eligible fully disbursed loans to the Department were
required to provide a 45-Day Notice of Intent to Sell loans under this program and complete the
sale on or before October 1 5, 2009. During the audit period, the Department purchased
62.7 thousand loans, totaling $ 1 92 million from 5 sellers. 8 For the entire duration of the Loan
Purchase Commitment Program for loans made for the 2008-2009 academic year, the




6O ur references to the MPA in this audit report are to the version issued by the Department on July 25, 2008, as an
attachment to its Loan Purchase Programs Electronic Announcement #8. Portions of the MPA were included as an
Appendix to a notice published in the F ederal R egister on July 1, 2008 (7 3 F R 37422).

7   The data reviewed were the records included on the weekly PPF R Loan Schedul es.

8   The data reviewed were the records included on the Loan Detail Schedules.
Final Report
ED-OIG/A03JO005                                                                                   Page 5 of 28

Department purchased about 1 1 .6 million loans, totaling about $48.5 billion, from 72 sellers.
9

FSA used a contractor, ACS, to service the FFEL Program loans purchased by the Department. 

In order to sell loans to the Department, sellers submitted to ACS a Loan Transfer/Conversion 

File, which included required loan records for loans scheduled to be sold to the Department. 

FSA required ACS to perform loan eligibility and data integrity edits on the 

Loan Transfer/Conversion File's loan records to ensure the file included only loans eligible for 

the Loan Purchase Commitment Program. 





                                          AUDIT RESULTS




Based on our review of controls and system edits implemented by FSA and its contractor, ACS,
we concluded that FSA established and implemented adequate controls and system edits to
reasonably ensure that the Department did not purchase ineligible loans under the Loan Purchase
Commitment Program. Conversely, we found that FSA did not establish and implement
adequate controls and system edits to reasonably ensure that the Department did not purchase
participation interests in ineligible loans under the Loan Participation Purchase Program.
However, the inadequate controls and system edits we identified had a minimal impact on the
number and amount of ineligible loans in which the Department purchased participation
interests. Our audit covered the Department's purchase of 2008-2009 academic year loans and
participation interests in such loans during the period August 1 , 2008, through
December 3 1 , 2008.



FINDING:         FSA Did Not Have Adequate Controls and System Edits in Place to
                 Reasonably Ensure that the Department Did Not Purchase Participation
                 Interests in Ineligible Loans

FSA did not establish and implement adequate controls and system edits to reasonably ensure
that sponsors complied with the Loan Participation Purchase Program loan eligibility
requirements. Specifically, we found the following significant weaknesses -

    1 . 	FSA did not establish a system edit to ensure the PPFR Loan Schedule included only
         loans made for eligible loan periods.

    2. FSA did not establish a system edit to ensure it would accept only one "New" loan record
       for each loan.




9 O f the $48.5 billion in loans purchased by the Department, under the Loan Purchase Commitment Program, over

$31.2 billion were purchased from the Loan Partici pation Purchase Program.
Final Report
ED-OIG/A03J0005                                                                                          Page 6 of28

       3 . 	 FSA did not establish a control procedure to determine whether: (a) the cumulative
             amount of disbursements, net of cumulative reductions, for a loan did not equal the
             outstanding borrower principal balance on the loan, and (b) the cumulative amount of
             disbursements, net of cumulative reductions, for a loan did not exceed the original loan
             amount.

       4 . 	 For the period August 1 , 2008 , through June 1 3, 2009, FSA's "First Disbursement Date"
             edit did not ensure that the loans listed on the PPFR Loan Schedule met the first
             disbursement date eligibility requirements when a null was encountered in the First
                                             lo
             Disbursement Date data field.

       5. 	 For the period August 1 , 2008, through June 1 3, 2009, FSA's "Anticipated Final
            Disbursement Date" edit did not ensure that the loans listed on the PPFR Loan Schedule
            met the final disbursement date eligibility requirements when a null was encountered in
            the Anticipated Final Disbursement Date data field. Also, because the "Anticipated Final
            Disbursement Date" edit was a "soft" edit, it did not reject individual loans that it had
                                                                               II
            identified with an ineligible anticipated final disbursement date.

       6. 	 For the period August 1 , 2008, through June 1 3, 2009, FSA's "Actual Interest Rate" edit
            did not review the interest rates of Unsubsidized Stafford and Graduate/Professional
            PLUS loans listed on the PPFR Loan Schedule to ensure that the interest rates did not
            exceed the maximum rates permitted under the HEA.

During the audit, we informed FSA of our preliminary findings concerning its system edits.
Effective June 1 4, 2009, FSA implemented revised "First Disbursement Date," "Anticipated
Final Disbursement Date," and "Actual Interest Rate" system edits. We determined that FSA's
revised system edits addressed the weaknesses we identified regarding the first disbursement
date data field and loan interest rates and partially addressed the weaknesses we identified
regarding the anticipated final disbursement date data field.

We found that, during the audit period, the Department purchased participation interests in 2,328
ineligible loans, totaling $7, 1 06, 1 39. In addition, the Department overpaid a total of $26,530 for
participation interests in eight loans, with a total principal balance outstanding of $29,009,
because sponsors reported unsupported disbursement amounts on PPFR Loan Schedules. When
the Department purchased a participation interest in an ineligible loan, the lender obtained
short-term liquidity from the Department, equal to the purchase price of the ineligible loan.
Implementing adequate system edits to ensure sponsors' compliance with the provisions of the
Loan Participation Purchase Program is important to protect the Federal interest.

The Office of Management and Budget Circular A-I23, Management's Responsibilityfor
Internal Control, (A-1 23) and the United States Government Accountability Office's (GAO)
Standards for Internal Control in the Federal Government (Standards) require Federal managers
to develop and maintain effective internal control. Specifically, A-I23 states -

10
     A null represents missing or unknown information, for example a field consisting of zero or left blank.
11
  "Soft" edits identified an entire PPFR Loan Schedule or individual loans that failed to meet the criteria of the edit.
H owever, "soft" edits did not delay fu ndi ng of the PPFR Loan Schedule.
Final Report
ED-OIGIA03J0005                                                                                             Page 70f 28

         Internal control also needs to be in place over information systems - general and
         application control. . . . Application control should be designed to ensure that
         transactions are properly authorized and processed accurately and that the data is
         valid and complete. Controls should be established at an application's interfaces
         to verify inputs and outputs, such as edit checks.

In addition, the GAO' s Standards states, "Controls should be installed . . . to ensure that all
inputs are received and are valid and outputs are correct and properly distributed. An example is
computerized edit checks built into the system to review the format, existence, and
reasonableness of data."



FSA Purchased Participation Interests in Loans Made for Ineligible Loan Periods

During the audit period, the Department purchased participation interests, totaling
$ 1 2,45 1 ,957,67 1 , in 4, 1 80,2 1 8 loans. We analyzed the universe of loans and identified 2,328
ineligible loans in which the Department purchased participation interests, totaling $7, 1 06, 1 3 9
(about .055 percent and .057 percent, respectively, of the number and amount of loans in which
the Department purchased participation interests during the audit period).

In order to be eligible for the Loan Participation Purchase Program, each loan must be made for a
loan period that includes or begins on or after July 1 , 2008. (Section 3 of the MPA, Definition of
"Eligible Loan") The 2,328 loans we identified were for loan periods that did not include, or
begin on or after July 1 , 2008.

As part of the PPFR, sponsors submitted Loan Schedules that listed the loans for which
participation interests were offered for sale to the Department. The Loan Schedule file layout
and submission procedures were included in the Department's "Loan Purchase Programs
Electronic Announcement #1 6: Revised Document Submission Process for Request for Funding
(updated September 25, 2008)." The Loan Schedule file layout in Electronic Announcement #1 6
did not include a data field for the loan period end date. 12

FSA ran validation and edit checks against the PPFR Loan Schedule to ensure it included only
loans eligible for the Loan Participation Purchase Program. Because the PPFR Loan Schedule
file layout did not include a data field for the loan period end date, FSA could not establish a
system edit that reviewed the loan period beginning and ending dates to determine whether the
file listed only loans for loan periods that included, or began on or after July 1 , 2008.

Without a system edit to determine whether the loans included on the PPFR Loan Schedule were
made for eligible loan periods, the Department purchased and may continue to purchase
participation interests in ineligible loans.


12 Effecti ve June 14, 2 009, under "Loan P urchase P rograms Electroni c Announcement #62 : Loan P urchase

P arti ci pati on P rogram - R evi sed Loan Schedule and Eli gi bi li ty Edi ts Announcement (updated May 15 , 2 009)," F SA
revi sed the Loan Schedule lay out to include a data field for the loan peri od end date. H owever, the edi ts descri bed
i n Electronic Announcement #62 do not i nclude a revi ew to determi ne that each loan's loan peri od falls wi thi n the
 eli gi ble parameters.
Final Report
ED-OIGIA03J0005                                                                                       Page 80f 2 8

FSA Purchased Participation Interests in Loans that Had More Than One "New" Loan
Record

We analyzed the universe of "New" loan records for 4 , 1 74,963 loans, with disbursement
amounts greater than zero, totaling $ 1 1 , 1 05,672,275 , that the Department purchased participation
interests in during the audit period. From this universe, we identified 4,9 1 9 loans that had more
than one "New" loan record; these loans had disbursements totaling $20,42 1 , 1 78. Additional
analysis revealed that 4,899 of the 4,9 1 9 loans had two "New" loan records and 20 had more
than two "New" loan records.

The PPFR Loan Schedule file layout included a data field, titled Data Flag, which was required
to be completed, to identify: ( 1 ) whether the loan data was for a new loan, (2) whether there was
an update to a previously submitted loan, or (3) that there was no change to a previously
submitted loan. Consequently, each loan should have had only one "New" loan record.

We reviewed the PPFR Loan Schedule records, the Month-End Loan Schedule records,13 and
                                                                                        14
information on the loans contained in the National Student Loan Data System (NSLDS) for a
random sample of 25 loans selected from the 4,9 1 9 loans we identified with more than one
"New" loan record. All 25 of the loans (the "Duplicate Loan Sample") had two "New" loan
records. Based on the PPFR Loan Schedules, the Department purchased participation interests in
the 25 loans that had disbursements totaling $ 1 1 5,499. We found that -

       •   For 2 1 of the 25 loans, the sponsor had misclassified one of the two "New" loan records.
                                                                                               14
           One of the "New" loan records should have been classified as an "Updated" record.
           There were no duplicate payments associated with these 2 1 "New" loan records.

       •   For 4 of the 25 loans, one of the two "New" loan records was a duplicate record that the
           sponsor should not have submitted. IS Total disbursements, net of reductions, for the four
           loans was $ 1 8,00 1 , of which $8,084 was associated with the duplicate records
           (see Table 4).

FSA did not establish a system edit to determine whether a "New" loan record had been
previously submitted for a loan. As a result, FSA could not ensure that sponsors had completed
the PPFR Loan Schedule' s Data Flag field correctly and that it did not purchase participation
interests in loans for amounts that it had previously purchased.

Loans that are ineligible for the Participation Program include loans in which the Department has
previously purchased a participation interest, whether or not that interest has been redeemed.
(Section 3 of the MPA, Definition of "Eligible Loan")

13
 Collections on and reductions to loans in which the Department purchased a participation interest were reported
on the Month-End Loan Schedule.

14   NSLDS is the Department's central database for student aid.

15 Based upon our sample, we are 90 percent confident that of the 4,919 loans we identified with more than one

"New" loan record: (1) the number ofloans with misclassified "New" loan records range from 3,301 loans
(67.1 percent) to 4,639 loans (94.3 percent), and (2 ) the number of loans with duplicate "New" loan records range
from 280 loans (5.7 percent) to 1,618 loans (32.9 percent).
Final Report
ED-OIGIA03J0005                                                                                     Page 9 of28

Without a system edit to ensure that a loan can only be submitted as a "New" loan once,
sponsors may continue to incorrectly code the PPFR Loan Schedule's Data Flag field and the
Department may purchase participation interests in ineligible loans.



FSA Did Not Ensure that the Participation Interest Purchase Amount for a Loan Did Not
Exceed the Value of the Loan

Original Loan Amount and Outstanding Principal Balance

FSA did not establish a control procedure to determine whether: (a) the cumulative amount of
disbursements, net of cumulative reductions, for a loan did not equal the outstanding borrower
principal balance on the loan, and (b) the cumulative amount of disbursements, net of cumulative
reductions, for a loan did not exceed the original loan amount.

We found that for 8 of the 25 loans in our Duplicate Loan Sample either the outstanding
principal balance or the original loan amount was reported incorrectly on the PPFR Loan
Schedule. 16 For two of the eight loans, a sponsor under-reported the outstanding principal
balance of the loans on the PPFR Loan Schedule (see Table 1 ).

           Table 1 - Duplicate Loan Sample Outstanding Principal Balance Review Results


     Sample Loan ID         Outstanding Principal           Outstanding Principal             Amount of the
                           Balance Reported on the           Balance that Should               Outstanding
                             PPFR Loan Schedule            Have Been Reported on            Principal Balance
                                                                the PPFR Loan              Under-Reported on
                                                           Schedule According to             the PPFR Loan
                                                               NSLDS Records                     Schedule

           1                         $4,000                          $8,000                       $4,000

           2                         $5,666                          $8,500                       $2,834

         Totals                      $9,666                         $16,500                       $6,834



For six of the eight loans, sponsors reported incorrect original loan amounts on the PPFR Loan
Schedule. For four of the six loans, the original loan amounts were under-reported, and for two
of the six loans, the original loan amounts were over-reported (see Table 2).




16
  Based upon our sample, we are 90 percent confident that of the 4,91 9 loans we identified with more than one
"New" loan record, the number of loans with incorrect principal balances and/or original loan amounts reported
range from 841 loans (1 7 .1 percent) to 2 , 47 4 loans (50.3 percent).
Final Report
ED-OIGIA03J0005                                                                                    Page 1 0 of28

                  Table 2 - Duplicate Loan Sample Original Loan Amount Review Results

     Sample Loan ID        Original Loan Amount           Original Loan Amount          Original Loan Amount
                           Reported on the PPFR           that Should Have Been         Under-Reported (U) or
                                Loan Schedule             Reported on the PPFR           Over-Reported (0) on
                                                               Loan Schedule                 the PPFR Loan
                                                           According to NSLDS                    Schedule
                                                                  Records

           1                          $2,250                        $4,500                      $2,250 (D)

           2                          $3,667                        $5,500                      $1,833 (D)

           3                          $2,250                        $4,500                      $2,250   (U)

           4                          $1,750                        $3,500                      $1,750   (U)
                                                                             ll
           5                          $1,500                            $O                      $1,500 (0)

                                                                             11
           6                         $3,500                             $0                      $3,500 (0)

         Totals                     $14,917                        $18,000                      $3,083   (U)


We also selected a random sample of 25 loans that had disbursements totaling $97,078, from the
universe of 4, 1 75,250 loans with one "New" loan record that had disbursements totaling
$ 1 2,43 1 ,532, 1 59, in which the Department purchased participation interests during our audit
                                            ,,
period (the "Non-Duplicate Loan Sample ).18 We reviewed the PPFR Loan Schedule records
and information on the loans contained in NSLDS for our Non-Duplicate Loan Sample and
found that for 3 of the 25 loans either the outstanding principal balance or the original loan
amount was reported incorrectly on the PPFR Loan Schedule. 19 For one of the three loans, a
sponsor over-reported the original loan amount on the PPFR Loan Schedule by $4,250. The
original loan amount that was reported was $8,500; the original loan amount that should have
been reported was $4,25 0. For two of the three loans, sponsors over-reported the outstanding
principal balances of the loans on the PPFR Loan Schedule (see Table 3). However, the
participation interests purchased by the Department did not exceed the value of the loans for all
25 loans in our Non-Duplicate Loan Sample.




17
 According to NSLDS records, the loan was cancelled. The original loan amount should have been reported on the
PPFR Loan Schedule as the original principal amount of the loan, net of cancellations, as of the PPF R Loan
Schedule creation date.
18
  We tested the Non-Duplicate Loan Sample to determine whether the Department purchased participation interests
in loans that exceeded the value of the loans.

19Based upon our sample, we are 90 percent confident that of the 4,175 ,2 5 0 loans we identified with one "New"
loan record, the number of loans with incorrect principal balances and/or original loan amounts reported range from
141,95 9 loans (3.4 percent) to 1,177,42 1 loans (2 8.2 percent).
Final Report
ED-OlGIA03J0005                                                                                  Page 1 1 of 28

         Table 3 - Non-Duplicate Loan Sample Outstanding Principal Balance Review Results


     Sample Loan ID         Outstanding Principal          Outstanding Principal             Amount of the
                           Balance Reported on the          Balance that Should               Outstanding
                             PPFR Loan Schedule           Have Been Reported on            Principal Balance
                                                               the PPFR Loan              Over-Reported on
                                                           Schedule According to            the PPFR Loan
                                                              NSLDS Records                     Schedule

           1                         $1,000                           $0                         $1,000

           2                         $1,750                           $0                         $1,750

         Totals                      $2,750                           $0                         $2,750



Cumulative Disbursement Amounts

For 8 of the 25 loans in our Duplicate Loan Sample, the Department purchased participation
interests, totaling $26,53 0, for more than the outstanding principal balances on the loans
                 O
(see Table 4)? For all eight of the loans, the overpayments resulted from sponsors reporting
unsupported disbursement amounts (that is, amounts on the PPFR Loan Schedule did not agree
to information on the loans contained in NSLDS). For four of the eight loans the overpayments,
totaling $8,084, resulted from sponsors reporting the same disbursement twice on the PPFR Loan
Schedules.




20
  Based upon our sample, we are 90 percent confident that of the 4, 919 loans we identified with more than one
"New" loan record, the number of loans with disbursement amounts greater than the outstanding principal balances
range from 841 loans (17.1 percent) to 2, 474 loans (50.3 percent).
Final Report
ED-OIGIA03J0005                                                                         Page 12 of 28

        Table 4    -   Duplicate Loan Sample Cumulative Disbursement Amount Review Results




   Sample Loan ID              Total Disbursements     Principal Balance          Unsupported
                                Net of Reductions        Outstanding             Disbursements
                                                      According to NSLDS      Including Duplicate
                                                           Records               Disbursement
                                                                                  Amounts (D)

           1                          $4,500                 $2,250                     $2,250

           2                          $4,500                 $2,250                     $2,250 (D)

           3                          $5,501                 $3,667                     $1,834 (D)

           4                          $4,500                 $2,250                     $2,250 (D)

          5                           $2,000                 $1,000                     $1,000

          6                           $5,000                 $3,000                     $2,000

          7                          $26,038                $12,842                    $13,196

          8                           $3,500                 $1,750                    $1,750 (D)

        Totals 	                     $55,539                $29,009                    $26,530



In accordance with the MP A, Section 4(c), the Department purchases the participation interest
from the sponsor for "a purchase price equal to the Principal Balance of the related Eligible
Loans." Also, Section 1 O(a), "Representations and Warranties of the Sponsor, the Eligible
Lender Trustee and Custodian," states -

       The Sponsor, and to the extent expressly required below, the Eligible Lender
       Trustee (if applicable), represents and warrants to the Department and the
       Custodian, as of the date the Adoption Agreement is executed and as of each
       Purchase Date:



       (xiv) 	 The consideration received by the Sponsor upon the sale of the
               Participation Interests constitutes fair consideration and reasonably
               equivalent value for such Participation Interests . . . .

Without a control procedure in place to identify loans in which the cumulative amount of
disbursements, net of cumulative reductions, does not equal the outstanding principal balance or
exceed the original amount of the loan, the Department may continue to purchase participation
interests in loans for amounts that exceed the value of the loans.
Final Report
ED-alGIA03J0005                                                                         Page 1 3 of 28

FSA's First Disbursement Date Edit Did Not Ensure the Eligibility of the Loans Listed on
the PPFR Loan Schedule

The "First Disbursement Date" edit that FSA ran against the PPFR Loan Schedule for loans in
which participation interests were being offered for sale to the Department did not ensure that the
date of the first disbursement for the loans met the eligibility requirements. We identified 8,573
loans in which the Department purchased participation interests, totaling $ 1 8, 1 39,1 56, which did
not have a first disbursement date reported on the PPFR Loan Schedule.

In order to be eligible for the Loan Participation Purchase Program each loan's first disbursement
must have been made on or after May 1 , 2008, but no later than July 1 , 2009. (Section 3 of the
MPA, Definition of "Eligible Loan")

FSA's "First Disbursement Date" edit was a "hard" edit. For the First Disbursement Date data
field, a "hard" edit resulted in the rejection of individual loans that failed to meet the criteria of
the edit. In cases where an individual loan transaction was rejected, the PPFR amount was
reduced by the amount of that loan. The error on the individual loan transaction was required to
be corrected and resubmitted to the Department on the next PPFR Loan Schedule.

FSA's "First Disbursement Date" edit identified and rejected individual loans listed on the PPFR
Loan Schedule file for which the date entered in the First Disbursement Date data field was not
on or after May 1 , 2008, but no later than July 1 , 2009. However, the "First Disbursement Date"
edit was flawed. The edit was written so that when a null was encountered in the First
Disbursement Date data field, the edit substituted the "system date" (the date on which the PPFR
Loan Schedule edits were run) for the null and then checked to determine whether the "system
date" was on or after May 1 , 2008, and was no later than July 1 , 2009. As a result, FSA did not
ensure that the loans listed on the PPFR Loan Schedule, which had a null entered in the First
Disbursement Date data field, met the first disbursement date eligibility requirements, and that it
did not purchase participation interests in ineligible loans.

On June 1 , 2009, we reported the flaw in the "First Disbursement Date" edit to F SA. On
June 2, 2009, an FSA Analyst explained that FSA was already aware of the problem. The FSA
Analyst stated -

       You are correct that [the "First Disbursement Date"] edit 1 1 is flawed. It should
       never have used SYSDATE where a null value was reported . . ,. We identified
       the immediate extent of the issue and .. . contacted the servicers who originated
       the files. Those servicers have provided explanations for their mistakes, and are
       updating their ... files to include the First Disbursement Date. FMS [Financial
       Management Systems] is implementing a correction to the edit on June 1 4 .

We determined that effective June 1 4, 2009, FSA revised the "First Disbursement Date" edit to
also identifY and reject loans listed on the PPFR Loan Schedule when a null is reported in the
First Disbursement Date data field.
Final Report
ED-OIGIA03J0005                                                                      Page 1 4 of 2 8

FSA's Anticipated Final Disbursement Date Edit Did Not Ensure the Eligibility o f the
Loans Listed on the PPFR Loan Schedule

The "Anticipated Final Disbursement Date" edit that FSA ran against the PPFR Loan Schedule
for loans in which participation interests were being offered for sale to the Department did not
ensure that the anticipated final disbursement date for the loans met the eligibility requirements
when a null was encountered in the Anticipated Final Disbursement Date data field. We
identified 1 2 loans in which the Department purchased participation interests, totaling $36,680,
which did not have an anticipated final disbursement date reported on the PPFR Loan Schedule.

In order to be eligible for the Loan Participation Purchase Program, each FFEL Program loan, if
not fully disbursed on the purchase date, must be scheduled to be fully disbursed no later than
September 30, 2009. (Section 3 of the MPA, Definition of "Eligible Loan")

FSA's "Anticipated Final Disbursement Date" edit was a "soft" edit. "Soft" edits identified an
entire PPFR Loan Schedule or individual loans that failed to meet the criteria of the edit. "Soft"
edits did not delay funding. However, the error was required to be corrected and resubmitted to
the Department on the next PPFR Loan Schedule.

FSA's "Anticipated Final Disbursement Date" edit identified individual loans listed on the PPFR
Loan Schedule file for which the date entered in the Anticipated Final Disbursement Date data
field was after September 30, 2009. However, the "Anticipated Final Disbursement Date" edit
was flawed. The edit was written so that when a null was encountered in the Anticipated Final
Disbursement Date data field, the null was identified as an acceptable date. Also, because the
"Anticipated Final Disbursement Date" edit was a "soft" edit, it did not reject individual loans
that it had identified with an Anticipated Final Disbursement Date later than September 3 0, 2009 .
As a result, FSA did not ensure that the loans listed on the PPFR Loan Schedule, which had a
null entered in the Anticipated Final Disbursement Date data field, met the final disbursement
date eligibility requirements, and that it did not purchase participation interests in ineligible
loans.

We determined that effective June 1 4, 2009, FSA revised the "Anticipated Final Disbursement
Date" edit to identify loans listed on the PPFR Loan Schedule when a null or a date later than
September 3 0, 2009, is reported in the Anticipated Final Disbursement Date data field.
However, FSA did not revise the edit to a "hard" edit, which would reject the loans.



FSA's Actual Interest Rate Edit Did Not Include Unsubsidized Stafford Loans and
GraduatelProfessional Student PLUS Loans

The "Actual Interest Rate" edit that FSA ran against the PPFR Loan Schedule did not test
whether the interest rates of Unsubsidized Stafford loans and GraduatelProfessional student
PLUS loans listed on the PPFR Loan Schedule did not exceed the maximum rates permitted
under the REA for such loans.

The applicable rate requirements, according to Section 427A(l) of the HEA, for Stafford and
PLUS loans are displayed in the following table.
Final Report
ED-OIGIA03JO005                                                                        Page 1 5 of 28



               Table 5   -   Stafford and PLUS Loan Rate Requirements Under the HEA


                                                                 First Disbursement Date


                   Loan Type                  Grade Level     July 1,2006      July 1,2008
                                                               Through           Through
                                                             June 30, 2008     June 30, 2009



        Subsidized Stafford Loans            Undergraduate       6.8%              6.0%


                                             Graduate            6.8%              6.8%


        Unsubsidized Stafford Loans          Undergraduate       6.8%              6.8%


                                             Graduate            6.8%              6.8%


        PLUS Loans
                                                                 8.5%              8.5%
        (Parent or Graduate/Professional)    All


The "Actual Interest Rate" edit did verify that the interest rates of Subsidized Stafford loans and
PLUS loans for parents listed on the PPFR Loan Schedule did not exceed 6.8 percent and
8.5 percent, respectively. However, the edit was not written to include Unsubsidized Stafford
loans and GraduatelProfessional PLUS loans.

In order to be eligible for the Loan Participation Purchase Program each loan must bear interest
at a stated rate equal to the maximum rate permitted under the HEA for such loan.
(Section 3 of the MPA, Definition of "Eligible Loan")

We ran queries to determine whether the interest rate of any of the loans that the Department
purchased a participation interest in during the audit period did not bear interest at the applicable
rate under the HEA. Based upon the result of the queries, we determined that during this period
the Department did not purchase a participation interest in a loan that did not bear interest at the
applicable rate under the HEA.

We determined that effective June 1 4, 2009, FSA revised the "Actual Interest Rate" edit to verify
whether the interest rates of Subsidized and Unsubsidized Stafford loans, PLUS loans for
parents, and GraduatelProfessional student PLUS loans listed on the PPFR Loan Schedule did
not exceed the maximum rates permitted under the HEA for such loans.
Final Report
ED-OIGIA03J0005                                                                       Page 1 6 of 28

Recommendations:

We recommend that the COO for FSA -

1.1    Ensure that a "hard" system edit is implemented that will reject a loan made for a loan
       period that does not include or begin on or after July 1 , 2009, for the Loan Participation
       Purchase Program for 2009-20 1 0 academic year loans.

1.2    Ensure that all the 2008-2009 academic year loans, made for loan periods that do not
       include or begin on or after July 1 , 2008, in which the Department held a participation
       interest were redeemed by the sponsor and not purchased by the Department under the
       Loan Purchase Commitment Program.

1.3    Ensure that a report is implemented that will identify loans with more than one "New"
       loan record and require the sponsors to redeem any duplicate purchases of participation
       interests in such loans.

1.4    Identify all the 2009-20 1 0 academic year loans that have more than one "New" loan
       record and require the sponsors to identify and redeem any duplicate purchases of
       participation interests in such loans.

1.5    Ensure that a "Net Disbursement Report" is implemented that will identify loans reported
       on the PPFR Loan Schedule in which the cumulative amount of disbursements, net of
       cumulative reductions, do not equal the outstanding principal balance of the loan andlor
       exceed the original loan amount.

1.6    Identify all the 2009-20 1 0 academic year loans for which the Department purchased a
       participation interest, where the purchase price of the participation interest, net of
       cumulative reductions, exceeded the value (i.e., the original loan amount or outstanding
       principal balance) of the loan and require the sponsor to redeem the participation interest
       in excess of the value of the loan.

1. 7   Ensure that all 2008-2009 academic year loans, in which the cumulative purchase amount
       for the participation interest, net of cumulative reductions, exceeded the principal balance
       outstanding and/or the original loan amount, were redeemed by the sponsor or not
       purchased by the Department under the Loan Purchase Commitment Program at prices in
       excess of the value of the loans.

1.8    Ensure that for "New" loan records the "Anticipated Final Disbursement Date" edit is
       revised from a "soft" edit to a "hard" edit.

1.9    Identify purchases by the Department for participation interests in 2009-20 1 0 academic
       year loans with an Anticipated Final Disbursement date after September 3 0, 20 1 0, and
       require sponsors to redeem the participation interests in these loans.

1.10   Ensure that all 2008-2009 academic year loans, with an Anticipated Final Disbursement
       Date after September 3 0, 2009, in which the Department held a participation interest,
Final Report
ED-OIG/A03J0005                                                                                          Page 1 7 of 28

         were redeemed by the sponsor and not purchased by the Department under the Loan
         Purchase Commitment Program.

FSA's Response:


FSA concurred with all the recommendations, except for Recommendation 1 .3 . FSA concurred
with the objective of this recommendation; however, it did not concur with the approach
recommended. FSA explained that it had determined that a "hard" system edit that will only
allow a loan to be submitted as a "New" loan record once impaired FMS performance when
PPFR Loan Schedules were processed.

FSA proposed an alternative approach to address the objective of this recommendation. FSA
stated that in place of a "hard" edit it has developed a report to identify when a loan had been
submitted as a "New" loan record multiple times. The report was scheduled for implementation
on June 20, 20 1 0. 21 Exceptions noted will be reported to the custodians/sponsors with
instructions to redeem any duplicate purchases of participation interests.


DIG's Reply:


We believe that FSA's proposed alternative corrective action should satisfy the objective of
Recommendation 1 .3, and we have revised our recommendation.




                                            OTHER MATTERS




FSA Purchased Loans That Had No Remaining Principal Balance Outstanding

We identified two loans that had no remaining principal balance outstanding at the time the
Department purchased the loans under the Loan Purchase Commitment Program. The
Department purchased the loans for a total of $22 1 . 22

FSA's contractor, ACS, serviced the FFEL Program loans sold to the Department. ACS ran an
edit against the Loan Transfer/Conversion File, submitted by sellers, which identified and
rejected loans scheduled to be sold to the Department that had no remaining principal balance
outstanding. The edit reviewed loans at the "account level" and not the "loan level." As a result,
for a borrower with multiple loans, if one or more loans had a remaining principal balance, and
21
  F SA' s offi cial response to R ecommendation 1. 3, dated J une 2, 201 0, stated that the report was scheduled for
implementation on J une 1 3, 2010. O n J une 1 5, 201 0, F SA explained that it had the revised the report
implementation date to J une 20, 2010.

22
  T he total purchase price of $221 includes $71 for the reimbursement of the one percent loan fees previously paid
by the lender to the Depart ment plus $1 50 ( the fi xed amount of the $75 paid for each loan that was purchased by the
Department) .
Final Report
ED-OIG/A03J0005                                                                                           Page 1 8 of 28

one or more loans had no remaining principal balance, the loans with no remaining principal
balance were not identified as ineligible. Consequently, FSA could not ensure that it did not
purchase ineligible loans.

According to a Senior Advisor for FSA's Business Operations Group and an ACS Director of
Business Development, ACS revised the edit to identify and reject loans listed on the
Loan Transfer/Conversion File with no principal balance outstanding at the "loan level" in
November 2008. 23

We suggest that FSA require sponsors to redeem the $22 1 for the two loans purchased by the
Department that had no principal balance outstanding.




                       OBJECTIVE, SCOPE, AND METHODOLOGY




The objective of our audit was to determine whether FSA established and implemented adequate
controls and system edits to ensure that the Department did not purchase ineligible loans or
purchase participation interests in ineligible loans. Our audit covered the Department's purchase
of 2008-2009 academic year loans and participation interests in such loans during the period
August 1 , 2008, through December 3 1 , 2008.

To accomplish our objective, we performed the following procedures -

     •   Interviewed FSA officials, and reviewed FSA' s policies and procedures to gain an
         understanding of the internal controls applicable to processes relating to -

              1 . Processing the NOI, the MPA, and the MLSA.

              2. Purchasing participation interests in FFEL Program loans under the Loan
                 Participation Purchase Program including loan eligibility system edits and all
                 required documentation that must be submitted to the Department.

              3 . Purchasing FFEL Program loans under the Loan Purchase Commitment Program
                  including loan eligibility system edits performed by ACS and all required
                  documentation that must be submitted to the Department.

     •   Reviewed selected provisions of the REA, regulations, A- 1 23, the GAO's Standards, and
         FSA's ECASLA guidance.




23
 O ur revi ew di d not i dentify a ny loa ns sold to the Depa rtment from Novem ber 1, 2 008, thr ou gh
December 31 , 2 008, tha t ha d no remai ning pri nci pal bala nce ou ts tan di ng.
Final Report
ED-OIGIA03J0005                                                                        Page 1 9 of28

    •   Reviewed "Agreed Upon Procedures Attestation Engagement Guide for Ensuring
        Continued Access to Student Loans Act of 2008 Loan Participation Program" audits
        submitted to FSA by lenders, as of December 3 1 , 2008.

Additional Information

On June 1 7, 2009, four companies were awarded contracts to service student loans held by the
Department, including loans sold to the Department through the Loan Purchase Commitment
Program authorized under ECASLA. These contractors will service the FFEL Program loans
held by the Department in a manner similar to that of ACS. However, our review did not include
any loans serviced by the Department' s four new loan servicers and the impact these servicers
may have on the ECASLA program's control environment. The four new servicers
are -

    •   AESIPHEAA in Harrisburg, Pennsylvania
    •   Great Lakes Education Loan Services, Inc., in Madison, Wisconsin
    •   Nelnet, Inc., in Lincoln, Nebraska
    •   Sallie Mae Corporation in Reston, Virginia

Loan Participation Purchase Program

To achieve our audit objective, we relied, in part, on the computer-processed data in FSA's Excel
spreadsheet "Daily Rolling Disbursement Report," dated January 5, 2009. For each PPFR
submitted to the Department, the "Daily Rolling Disbursement Report" listed the PPFR
Reference Number, the Custodian Name and Identification Number, the Sponsor Name and
Identification Number, the Requested Purchase Price, the Expected Payment Date, the Actual
Payment Date confirmed by Treasury, and the Amount Paid.

We verified the completeness of the data by comparing the total amount paid according to the
"Daily Rolling Disbursement Report" to the total amount paid according to the Department' s
corresponding general ledger account. We verified the authenticity o f the data by comparing the
"Daily Rolling Disbursement Report" records for 1 2 PPFRs randomly selected from the universe
of 1 2 1 PPFRs included in FSA's Excel spreadsheet "Daily Rolling Disbursement Report," dated
January 5, 2009, to the PPFRs and the "Government Wide Accounting System Report on PPFRs
paid by Treasury," during our audit period. Based on our preliminary assessment, we concluded
that the computer-processed data included in FSA's Excel spreadsheet "Daily Rolling
Disbursement Report," dated January 5, 2009, were sufficiently reliable for the purpose of our
audit.

We used the data in the "Daily Rolling Disbursement Report" as our sampling universe for
testing whether -

    1 . FSA had obtained sponsors' required Loan Participation Purchase Program eligibility
        documents. We reviewed the eligibility documents for 1 0 sponsors. The 1 0 sponsors
        reviewed submitted 1 2 PPFRs, totaling $7 1 9, 1 85,247. The 1 2 PPFRs were randomly
        selected from the universe of 1 2 1 PPFRs, submitted by 2 1 sponsors, totaling
        $ 1 2,45 1 ,957,67 1 , which were paid during our audit period. The eligibility documents
Final Report
ED-OIGIA03J0005                                                                                         Page 20 of28

         reviewed included the NOI, MPA, Officer's Certification, and Opinion of Counsel for
         each of the 1 0 sponsors.

     2. FSA had obtained sponsors' required Loan Participation Purchase Program sales
        documents. We reviewed the sales documents for 1 2 PPFRs, totaling $7 1 9, 1 85,247,
        which were randomly selected from the universe of 1 2 1 PPFRs, totaling
        $ 1 2,45 1 ,957,67 1 , which were paid during our audit period. The sales documents
        reviewed included the Class A Participation Certificate, PPFR, Loan Schedule Data File,
        and Security Release Certificate for each of the 1 2 randomly selected PPFRs.

We also relied, in part, on the computer-processed data in FSA's PPFR Loan Schedules that
detail the loans that the Department purchased participation interests in. We verified the
completeness of the data by comparing the total participation interests purchased by the
Department, during our audit period, according to the PPFR Loan Schedules to the total
purchased according to the Department's corresponding general ledger account.24 We verified
the reliability of the data by comparing the PPFR Loan Schedules' loan records for loans
selected during our loan eligibility testing to the records in the NSLDS. Based on our
preliminary assessment we concluded that the computer-processed data included in FSA's PPFR
Loan Schedules' records for the loans that the Department purchased participation interests in
during our audit period were sufficiently reliable for the purpose of our audit.

We queried the PPFR Loan Schedules' loan records to test whether the loans complied with the
Loan Participation Purchase Program loan eligibility requirements. We queried the loan records
to identify -

     1 . Records where the original lender was not the same as the sponsor. We performed
         additional procedures, described below, on this group of loans to determine whether the
         original lenders submitted a NOI to the Department.

     2. Records for academic years other than 2008-2009, where the loan period begin date was
        before July 1 , 2008, the first disbursement date was before July 1 , 2008, and the
        anticipated final disbursement date was before July 1 , 2008. We performed additional
        procedures, described below, on this group of loans, to determine if the Department
        purchased participation interests in loans for loan periods that did not include, or begin on
        or after July 1 , 2008.

     3. Records with interest rates falling outside of permissible ranges based upon statutory
        interest rates, where the loan type was Stafford and the interest rates were not within the
        specified parameters of 0 .065 to 0.068 or 0.0575 to 0.06. Also, records where the loan




24During our audit period, the Department purchased partici pation i nterests i n 4, 180,2 18 FF EL P rogram loans that
had disbursements totaling $12 ,451,957 ,67 1, from 2 1 sponsors.
Final Report
ED-OIGIA03J0005                                                                                                            Page 2 1 of28

            type was PLUS and the interest rates were not within the specified parameters of 0.0825
            to 0.085 or 0.0575 to 0.06. 25

         4. Loans with two or more "New" loan records. We performed additional procedures,
            described below, on this group of loans, to determine if the Department purchased
            participation interests in loans in which it had previously purchased a participation
            interest.

         5. Loans with one "New" loan record. We performed additional procedures, described
            below, on this group of loans to determine whether the Department purchased
            participation interests in loans that exceeded the value of the loans.

      6. Records where the first disbursement date was not reported.

         7. Records where the anticipated final disbursement date was not reported.

      8. Records where the loan status was cancelled, the disbursement amount was greater than
         zero, the total reduction amount was zero, and the total loan proceeds amount was zero.26
         We performed additional procedures, described below, on this group of loans, to
         determine if participation interests in cancelled loans were redeemed by the Sponsor.

We used the results of Query 1 above as our sampling universe for testing whether FSA had
obtained NOls for the original lender when the original lender was not the same as the sponsor as
follows -

      1 . We identified 1 46 unique original lenderlsponsor combinations that had a total
          disbursement amount of $8,33 9,805,573 .

      2. We reviewed the disbursement data and stratified it into three strata as follows -

                                           Table 6     -   Stratified Disbursement Data
 Strata              Disbursed Amount                        Original Lender/Sponsor Count                          Dollar Amount
     1                   $0 - $50,000                                          134                                  $ 561,361,932
     2            $50,001 - $1,000,0000                                         11                                  $2,413,515,910
     3                   >$1,000,000                                            1                                   $5,364,927,73 ]


     . 3 . We randomly selected for review 1 5 original lenderlsponsor combinations that had
           disbursements totaling $6,459,067,447. From Strata 1 , we randomly selected 8 original
           lender/sponsor combinations that had a total disbursement amount of $7,246,303 ; from


25In ter est r ate r an ges r efl ect th e r an ges un der th e H EA for su ch lo an s an d per mi ssi ble in ter est r ate r edu ction s for
Eli gi ble Bo rro wer Ben efits un der th e MPA an d lor in ter est r ate li mi tation s un der th e Ser vi ce Member s Ci vi l R eli ef
Act.

26R edu ction s are r edu ction s in th e ou tstan din g lo an pr inci pal balan ce du e to can cellation s an d schoo l r efun ds. Lo an
pro ceeds ar e pro ceeds fro m lo an sales to th ird parti es an d pro ceeds fro m r edemption s by th e spon sor .
Final Report
ED-OIG/A03J0005                                                                          Page 22 of 28

            Strata 2 we randomly selected 6 original lender/sponsor combinations that had a total
            disbursement amount of $ 1 ,086,893,4 1 3; and from Strata 3 we selected the one original
            lender/sponsor combination that had a total disbursement amount of $5,364,927,73 1 .

       4 . For each of the 1 5 randomly selected original lenders/sponsor combinations we reviewed
           the NOI of the original lender.

We used the results of Query 2 above (99,447 loan records that had disbursements totaling
$285,257,7 1 0) as our universe for testing whether the Department purchased participation
interests in loans for loan periods that did not include, or begin on or after, July 1 , 2008. We
queried NSLDS to obtain each loan's loan period end date. Using the loan period end dates from
NSLDS, we identified all loans with a loan period end date prior to July 1 , 2008.

We used the results of Query 4 above as our sampling universe for testing whether the
Department purchased participation interests in loans in which it had previously purchased a
participation interest. We randomly selected for review 25 loans from the universe of 4,9 1 9
loans, which had more than one "New" loan record, with disbursements totaling $20,42 1 , 1 78.
The 25 randomly selected loans had disbursements totaling $ 1 1 5,499. We reviewed the PPFR
Loan Schedule records, the Month-End Loan Schedule records, and information on the loans
contained in NSLDS for each of the 25 randomly selected loans.

We used the results of Query 5 above as our sampling universe for testing whether the
Department purchased participation interests in loans that exceeded the value of the loans. We
randomly selected for review 25 loans from the universe of 4, 1 75,250 loans, which had one
"New" loan record, with disbursements totaling $ 1 2,43 1 ,532, 1 59. The 25 randomly selected
loans had disbursements totaling $97,078 . We reviewed the PPFR Loan Schedule records for
our audit period and information on the loans contained in NSLDS for each of the 25 randomly
selected loans.

We used the results of Query 8 above as our sampling universe for testing whether the
Department' s participation interests in cancelled loans were redeemed by sponsors. We
randomly selected for review 25 loans from the universe of 1 0,873 loans, with disbursements
totaling $33 ,458,960, that each had a cancelled status, with total disbursements greater than zero,
loan proceeds totaling zero, and reductions totaling zero. The 25 randomly selected loans had
disbursements totaling $73 ,807. We reviewed the PPFR Loan Schedules records for our audit
period, the Month-End Loan Schedule records for our audit period, and information on the loans
                                                                    27
contained in NSLDS for each of the 25 randomly selected loans.

Loan Purchase Commitment Program

To achieve our audit objective, we relied, in part, on the computer-processed data in FSA's Excel
spreadsheet "Master Loan Sales Agreement Activity Report," dated January 28, 2009. For each
sale the "Master Loan Sales Agreement Activity Report" included the Lender, the Lender's NOI
and MLSA receipt dates, the 45-Day Notice of Intent to Sell receipt date, the 45-Day Notice of


27   Th e partic ipation interests were redeemed by th e sponsors for all 2 5 loans.
Final Report
ED-OIGIA03J0005                                                                                         Page 23 of 28

Intent to Sell loan count and amount, the Bill of Sale loan count and amount and the Bill of Sale
Consummation date.

We verified the completeness of the data by comparing the total amount paid, during our audit
period, according to the "Master Loan Sales Agreement Activity Report" to the total amount
paid according to the Department's corresponding general ledger account. 28 We verified the
authenticity of the data by comparing the "Master Loan Sales Agreement Activity Report"
records for all sales during our audit period to supporting documentation in the 45-Day Notice of
Intent to Sell, Projected Loan S ummary Schedule of Loans, Final Loan Summary Schedule of
Loans, Bill of Sale, and the Bill of Sale Email Confirmation of Payment. Based on our
preliminary assessment, we concluded that the computer-processed data included in FSA's Excel
spreadsheet "Master Loan Sales Agreement Activity Report," dated January 28, 2009, were
sufficiently reliable for the purpose of our audit.

We used the data in the "Master Loan Sales Agreement Activity Report" for testing whether
FSA obtained required Loan Purchase Program-

     1 . Eligibility documents for the universe of five lenders that sold loans to the Department.
         Records reviewed included the NOI, MLSA, Officer's Certification, and Opinion of
         Counsel for each of the five lenders that sold loans to the Department during our audit
         period.

     2 . Sales documents for the universe o f nine sales o f FFEL Program loans to the Department.
         Records reviewed included the 45-Day Notice of Intent to Sell, Projected Loan Summary
         Schedule of Loans, Bill of Sale and Final Loan Schedule Summary for the universe of
         nine sales of FFEL loans to the Department during our audit period.

We also relied, in part, on the computer-processed data in FSA's Loan Detail Schedules' records
for the loans that the Department purchased during our audit period. We verified the
completeness of the data by comparing the total loans purchased by the Department, during our
audit period, according to the Loan Detail Schedules to the total purchased according to the
Department's corresponding general ledger account. We verified the authenticity of the data by
comparing the Loan Detail Schedules' loan records for 50 loans, totaling $ 1 5 1 ,039, randomly
selected from the universe of 62,279 loans, totaling $ 1 9 1 ,956, 1 23, to the records in the NSLDS.
Based on our preliminary assessment we concluded that the computer-processed data included in
FSA's Loan Detail Schedules' records for the loans that the Department purchased during our
audit period were sufficiently reliable for the purpose of our audit.

For the 50 loans randomly selected above we tested whether the loans' promissory notes were on
file with FSA's loan servicer, ACS.

We queried the Loan Detail Schedules' loan records to test whether the loans complied with the
ECASLA Loan Purchase Commitment Program loan eligibility rules and provisions and with the
loan eligibility terms of the MLSA. We queried the loan records as follows -


28
  During our audit period, the Department purc hased 62, 2 7 9 FFEL P rogram l oans, with a total purc hase pric e of
$191,95 6, 12 3, from 5 sellers.
Final Report
ED-OIG/A03J0005                                                                                                Page 24 of 28

     1 . Records where the original lender was not the same as the seller. We then performed
         procedures to determine whether the original lenders had submitted NOls.

     2. Records for ineligible loan types, where the loan type was not Stafford and PLUS.

     3 . Records with interest rates falling outside o f permissible ranges based upon statutory
         interest rates, where the loan type was Stafford and the interest rates were not within the
         specified parameters of 0.065 to 0.068 or 0.0575 to 0.06. Also, records where the loan
         type was PLUS and the interest rates were not within the specified parameters of 0.0825
                                     29
         to 0.085 or 0.0575 to 0.06.

     4. Records where the outstanding loan principal balance was equal to zero.

We reviewed and assessed FSA's internal controls significant to our audit objective. Our review
disclosed significant weaknesses in FSA's internal controls over the Loan Participation Purchase
Program for the period, August 1 , 2008, through December 3 1 , 2008. Specifically, FSA did not
establish and implement adequate controls and system edits to ensure that the Department did not
purchase participation interests in ineligible loans. These weaknesses and their effects are fully
described in the Audit Results section of this report.

We conducted fieldwork at FSA's offices in Washington, D .C., and at our offices from
January 2009, through February 20 1 0. We provided our audit results to FSA staff during an exit
conference conducted on January 20, 20 1 0. 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.


Enclosure




29I nterest rate ranges refl ect the rate req ui rements und er the H EA for such l oans and permi ssi bl e i nterest rate
red ucti ons for Eli gi ble B orrower B enefi ts und er the MPA and /or i nterest rate li mi tati ons und er the Servi ce Members
Ci vi l R eli ef Act.
Final Report
ED-OIGIA03JO005                                                                                     Page 25 of 28

                                                                                      Enclosure - FSA's Comments




                                 CHIEF OPERATING OFFICER

                                                                                                    June 2, 20 1 0
TO:            Mr. Keith K. West
               Assistant Inspector General for Audit
               Office of Inspector General

FROM:          William J. Taggart lsi
               Chief Operating Officer

SUBJECT:       Draft Audit Report - "Federal Student Aid's Controls over Loan Purchases under
               the Ensuring Continued Access to Student Loans Act of 2008," Control Number
               ED-OIG/A03-J0005.

Thank you for providing us with an opportunity to respond to the Office of Inspector General's
(OIG) Draft Audit Report, "Federal Student Aid's Controls Over Loan Purchases under the
Ensuring Continued Access to Student Loans Act (ECASLA) of 2008," dated April 28, 2 0 1 0 .

Federal Student Aid (FSA) i s committed t o the implementation o f a strong internal control
environment. FSA has taken many actions to establish, assess, and improve its controls for the
Loan Purchase Commitment Program and Loan Participation Commitment Program.

We are proud to observe that you "concluded that FSA established and implemented adequate
controls and system edits to reasonably ensure that the Department did not purchase ineligible
loans under the Loan Purchase Commitment Program." This is a significant achievement given
the size and complexity of the program and accelerated timeframe for implementation. As you
noted in your report, "the Department purchased about 1 1 .6 million loans, totaling about $48. 5
billion, from 7 2 sellers" under this program for the 2008-09 academic year.

For the Loan Participation Commitment Program, you identified weaknesses where controls
could be improved. The report notes that "the weaknesses found resulted in the Department's
purchasing participation interests in 2,328 ineligible loans, totaling $7, 1 06, 1 39 (about .055
percent and .057 percent, respectively of the number and amount of loans in which the
Department purchased Participation Interests during the audit period". During the audit period,


                                  830 First St. NE   ..   Washington, DC 20202
                                      www. FedcraIStudendAid.ed.gov
                                             1 -800 4-FED-AID


                 FEDERAL STUDENT AID - START HERE.                               GO   FURTHER.
Final Report
ED-OIG/A03J0005                                                                       Page 26 of28

the Department purchased participation interests in 4.2 million loans for $ 1 2.5 billion. We
appreciate your attention to detail in citing both the number of loans and dollar value of loans
affected by each issue relative to the population.

We take these findings very seriously and, with one exception, have either already implemented
your recommendations or are in the process of doing so. The one exception is recommendation
3. For this recommendation we concur with the intent, but not the specific approach outlined.
As noted below, we considered and system-tested the "hard" edit recommended and determined
that running and enforcing the edit impaired FMS performance.

Our response to each of the recommendations follows:

Recommendation 1 : Ensure that a "hard" system edit is implemented that will reject a loan
made for a loan period that does not include or begin on or after July 1 , 2009, for the Loan
Participation Purchase Program for the 2009-20 1 0 academic year.

Response :  We concur with this recommendation and have completed action items to implement
a "hard" system edit. On June 1 4, 2009, Financial Management System (FMS) Change Request
(CR) No. 1 346 was implemented in Release No. 7.030 imposing a "hard" edit on loan period.

Recommendation 2:       Ensure that all the 2008-09 academic year loans made for loan periods
that do not include or begin on or after July 1 , 2008, in which the Department held a participation
interest were redeemed by the sponsor and not purchased by the Department under the Loan
Purchase Commitment Program.

Response:   We concur with this recommendation and have completed action items to ensure that
2008-09 loans made for loan periods that do not include or begin on or after July 1 , 2008, in
which the Department held a participation interest, were not purchased by the Department.
Specifically, loan eligibility edits were applied against all loans purchased by the Department at
the time of sale/conversion under the Loan Purchase Commitment Program. These edits are
independent from those executed on loans participated within the Loan Participation Purchase
Program. The loan eligibility edit in the validation of the loan transfer conversion file confirms
that the loan either 'begins after or includes July 1 , 2008' for ECASLA 2008-09 or 'begins after
or includes July 1 , 2009 ' for ECASLA 2009- 1 0.

Recommendation 3:      Ensure that a hard system edit is implemented that will only allow a loan
to be submitted as a "new" loan record once.

Response:   While we concur with the intent of the recommendation (i.e., to ensure each first
disbursement is funded only once), we do not concur with the approach recommended. FSA
considered and tested implementation of a hard system edit, but concluded that running and
enforcing a hard edit when processing Participation Purchase Funding Request (PPFR) loan
schedules would impair FMS system performance.

To achieve the intent of the recommendation and to remediate the underlying issue, a report has
been developed to identify exceptions. This report will be implemented in CR No. 1 498
Final Report
ED-OIG/A03J0005                                                                     Page 27 of28

scheduled for implementation on June 1 3, 20 1 0, with FMS Release No. 7.034. Exceptions noted
will be communicated to the custodians / sponsors with instructions to redeem.

Recommendation 4:        Identify all the 2009- 1 0 academic year loans that have more than one
"new" loan record and require the sponsors to identify and redeem any duplicate purchases of
participation interests in such loans.

Response:    We concur with the recommendation and have developed a report to identify 2009-
1 0 loans that have more than one "new" loan record. This report will be implemented in CR No.
1 498 scheduled for implementation on June 1 3, 20 1 0 with FMS Release No. 7.034. Exceptions
noted will be communicated to the custodians / sponsors with instructions to redeem.

Recommendation 5:     Ensure that a "Net Disbursement Report" is implemented that will identify
loans reported on the PPFR Loan Schedule in which the cumulative amount of disbursements,
net of cumulative reductions, do not equal the outstanding principal balance of the loan and/or
exceed the original loan amount.

Response: We concur with the recommendation and will implement a "Net Disbursement
Report" on June 1 3, 20 1 0, in CR No. 1 498 with FMS Release No. 7.034.

Recommendation 6:     Identify all the 2009-20 1 0 academic year loans for which the Department
purchased a participation interest, where the purchase price of the participation interest, net of
cumulative reductions, exceeded the value (i.e., the original loan amount or outstanding principal
balance) of the loan and require the sponsor to redeem the participation interest in excess of the
value of the loan.

Response:    We concur with the recommendation and will implement functionality to query
weekly loan schedules to identify conditions where the "Participation Interest Loans Paid were
more than the Outstanding Principal or Original Loan Amount". Federal Student Aid CFO
Funds Control and Accounting Operations Branch will provide the results to custodian/sponsors
for review and action. Custodian/sponsor will be required to redeem interests in excess of
collateral, as applicable. This functionality will be implemented with CR No. 1 498 in FMS
Release No. 7.034.

Recommendation 7 :    Ensure that all 2008-09 academic year loans, in which the cumulative
purchase amount for the participation interest, net of cumulative reductions, exceeded the
principal balance outstanding and/or the original loan amount, were redeemed by the sponsor or
not purchased by the Department under the Loan Purchase Commitment Program.

Response:     We concur with this recommendation and have completed action items to ensure all
2008-09 academic year loans, in which the cumulative purchase amount for the participation
interest, net of cumulative reductions, exceeded the principal balance outstanding and/or the
original loan amount, were not purchased by the Department. Specifically, loan eligibility edits
were applied against all loans purchased by the Department at the time of sale/conversion under
the 2008-09 Loan Purchase Commitment Program. These edits are independent from those
executed on loans participated within the Loan Participation Purchase Program.
Final Report
ED-OIG/A03J0005                                                                      Page 28 of28

Recommendation 8 :      Ensure that for "new" loan records the "Anticipated Final Disbursement
Date" edit is revised from a "soft" edit to a "hard" edit.

Response:   We concur with this recommendation will revise edit # 1 2 from a "soft" edit to a
"hard" edit on June 28, 20 1 0 in CR# 1 497.

Recommendation 9:       Identify purchases by the Department for participation interests in 2009-
20 1 0 academic year loans with an Anticipated Final Disbursement date after September 30,
20 1 0, and require sponsors to redeem the participation interests in these loans.

Response: We concur with this recommendation and have developed corrective action plans to
identify applicable purchases and require redemption. Implementation of the hard edit described
above in the response to recommendation 8 will reject all future funding requests with an
Anticipated Final Disbursement date greater than September 3 0, 201 0. For PPFR loan schedules
processed before the hard edit is put in place, FMS will establish and execute a query to identify
any 2009- 1 0 loans with an Anticipated Final Disbursement date after September 3 0, 20 1 0, and
implement procedures to notify custodians/sponsors, instructing them to redeem such loans.

Recommendation 10:     Ensure that all 2008-09 academic year loans with an Anticipated Final
Disbursement Date after September 3 0, 2009, in which the Department held a participation
interest were redeemed by the sponsor and not purchased by the Department under the Loan
Purchase Commitment Program.

Response:    We concur with this recommendation and have completed action items to ensure that
2008-09 loans made with an Anticipated Final Disbursement Date after September 3 0, 2009, in
which the Department held a participation interest were not purchased by the Department.
Specifically, loan eligibility edits were applied against all loans purchased by the Department at
the time of sale/conversion under the Loan Purchase Commitment Program. These edits are
independent from those executed on loans participated within the Loan Participation Purchase
Program. The loan eligibility edit used by Business Operations in the validation of the loan
transfer conversion file verifies that the Last Disbursement Date is 'on or before September 3 0,
2009' for ECASLA 2008-09.

Once again, thank you for your recommendations and the opportunity to review and respond to
the report.




cc: Bernard Tadley, Regional Inspector General for Audit
    Daniel Madzelan, Office of Postsecondary Education