Review of Master Promissory Note (MPN) Process for Federal Family Education Loan (FFEL) and Direct Loan.

Published by the Department of Education, Office of Inspector General on 2005-03-28.

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

                             UNITED STATES DEPARTMENT OF EDUCATION
                                         OFFICE OF THE INSPECTOR GENERAL

                                                   lIAR 28 m5
                                                                                            Control Number

Theresa S. Shaw
Chie f Operating Officer, Federal Student Aid
U.S. Department of Education
Union Center Plaza
830 First Street, NE, Room 112Gl
Washi ngton, DC 20202

Dear Ms. Shaw:

This Final Audit Report, entitled Review ofMaster Promissory Note (MPN) Process /01' Federal
Family Education Loan (FFEL) and Direct Loan, presents the results of our audit. The purpose of
the review was to evaluate the Department of Education's (Department) internal controls over the
MPN process for loan disbursements under the two loan programs. OUf review covered William D.
Ford Federal Direct Loan (Direct Loan) and FFEL program disbursements for award year 2003­
2004 (July I, 2003, Illl"ough June 30, 2004).

We received Ofal comments from the Department at OUf ex it conference, on January 28,2005. We
prepared summaries of the comments and provided them to the Department, to verify that its
comments are accurately stated in our report. The summaries of lhe Department's comments are
mcluded at the end of the Audit Results and Other Mailers sections of thi s report.

                                             AUDIT RESULTS 

We did not identify any significant problems with the Department's internal controls over the MPN
process for the two loan programs. According to 34 C.F. R. § 682.206(a)( I ) and § 685 .201 (a)(2)( i)
and (b), borrowers must comp lete an MPN to obtain a FFEL or Direct Loan. To evalu ate the MPN
process, we perfonned site visits to the Direct Loan contractor, Education Account Monlgomery­
Anci llary Services (EAM~AS). and to two FFEL lenders (Sallie Mae and EdfinanciallEdamcrica).
We selected a random sample of 100 to 110 disbursements at each entily, for a total of 3 13 tolal
disbursements. To review these disbursements, we examined 213 MPNs, to ensure Ihat the MPN
supported the loan disbursements.' The three entities were able to provide us with an MPN to
support each of the Direct Loan and FFEL disbursements.

The Department monitors the FFEL MPN process through Federal Student Aid 's (rSA) Financial
P;lrtners Group. This group oversees FFEL guarantors, lenders, and scrvicers; conducts program

I   Some of the 213 MPNs supponed more than one of the 313 loan disbursements sampled.

                                     400 MARYlAND AVE., S.W., WASHlNCTON. DC 20202·1510

Final Report
ED-OIGIA04E0008                                                                                       Page 2 of6

reviews; and reviews third-party audits of guaranty agencies and lenders. The Department monitors
the Direct Loan MPN process through the Department's on-site monitor, who oversees the MPN
work performed at EAM-AS, the Department's contractor for Direct Loans. A second control for
the Direct Loan MPN process is through the Common Origination Disbursement System, which
includes edits to prevent a loan from being processed without first being electronically linked to an

Each of the three entities we visited had policies and procedures manuals to ensure that all MPNs
are handled in a consistent manner. Through interviews and observations of the actual MPN
processes, the audit team determined that each entity followed its procedure manual to ensure that
all MPNs are scanned, information is keyed in correctly, and loans are not approved or processed
until an MPN is received. All of the entities' vaults are fire protected and personnel have limited

Because of inherent limitations in any internal control structure, error or irregularities may occur
and not be detected. Also, projection of any evaluation of the system to future periods is subject to
the risk that procedures may become inadequate because of changes in conditions, or that the degree
of compliance with the procedures may deteriorate.

We provided written summaries of our results to the Department, and its officials concurred with
our results.

                                             OTHER MATTERS 

As a part of our review of the MPN process, we examined the record retention policies and the
types of disbursement data maintained by the two FFEL lenders. We noted that there is a potential
disconnect between the record retention regulations for FFEL lenders and the record retention
regulations for schools. The Department's regulations require­

    • 	 FFEL lenders to maintain their disbursement records for "not less than 3 years following the
        date the loan is repaid in full by the borrower, or for not less than 5 years following the date
        the agency receives payment in full from any other source." (34 C.F.R. § 682.414
        (a)(4)(ii)(D) and (a)(4)(iii))

    • 	 FFEL schools to maintain their disbursement (delivery) records for three years after the end
        of the award year in which the student last attended the institution. (34 C.F.R.
        § 668.24(a)(6), (c)(1)(iv)(B), and (e)(2)(i)) 2

2 FFEL lenders and schools are also required to "develop and document a conftrmation process in accordance with
guidelines established by the Secretary." (34 C.F.R. §682.401(d)(4)(vi» The guidance in the Federal Student Aid
Handbook directs schools to maintain this documentation indefinitely. (FSA Handbook 2004-2005, p. 2-164) The
confirmation process is to be used to ensure that borrowers want subsequent loans made on the MPN. These
documentation requirements are applicable only to the process itself, not to individual students' records. We did not
examine lenders' compliance with this requirement as part of our audit.
Final Report
ED-OIGIA04E0008                                                                       Page 3 of6

Sallie Mae's written record retention policy for disbursement records exactly mirrors the
Department's policy, per 34 C.F.R. § 682.414 (a)(4)(ii)(D) and (a)(4)(iii). Edfinanciall Edamerica
does not have a written record retention policy. It is EdfinanciallEdamerica's practice not to discard
any records relating to FFEL loans.

Student disbursement record information that both Sallie Mae and Edfinancial/Edamerica maintain
includes the student's identifying information, disbursement dates (date the funds were disbursed
electronically to the school), disbursement amounts, and the loan principal amount. In addition,
EdfinanciallEdamerica's disbursement record contains the loan sequence number, the loan program,
the owner and guarantor of the loan, the original and current balance of the loan, and the code for
the bond that funded the loan, if applicable. However, neither of the FFEL lenders receives
disbursement records from schools; therefore, lenders have no record of the date on which the loan
proceeds were actually delivered to the students or credited to the students' accounts.

Unlike previous promissory notes, MPNs do not require a signature for each of the loans they
support. As such, if a borrower claims that he or she did not receive a loan, it may be difficult for
the Department to enforce the loan and recover the funds. If the school's three-year retention period
has expired, and the lender only has the borrower's MPN, records that document general
confirmation procedures, and records ofthe disbursement of funds to the school (not the borrower),
there may not be sufficient documentation to demonstrate that the loan proceeds were in fact
disbursed to, or on behalf of, the borrower. FSA should consider how it plans to pursue these cases
if the schools do not have the records, and the borrower is not signing for each disbursement on the

We provided a written summary of this section of our report (Other Matters) to the Department.
The Department's officials generally agreed, but asked us to emphasize that the concern noted
above does not pertain to the Direct Loan program.


The Higher Education Amendments of 1998 (Pub. L. 105-244) amended Section 432(m)(1)(D) of
the Higher Education Act of 1965 (HEA), to codify the use of an MPN in the FFEL and Direct
Loan programs. Using an MPN, eligible borrowers are able to receive "in addition to initial loans,
additional loans for the same or subsequent periods of enrollment through a student confirmation
process approved by the Secretary. Such forms shall be used for loans made under this part or part
D [Direct Loans] as directed by the Secretary."

The Department, in consultation with the financial aid community, developed an MPN process for
multi-year use for student loans in the FFEL and Direct Loan programs. Beginning with the 1999­
2000 academic year, Direct Loan student borrowers were required to use MPNs in order to obtain
Direct Loans. FFEL student borrowers had the option of using the traditional application or the
MPN during the 1999-2000 academic year. In the 2000-2001 academic year, all FFEL student
borrowers were required to use an MPN. The MPN process for parent borrowers (PLUS loans) was
Final Report
ED-OIGI A04E0008                                                                    Page 4 of6

implemented for Direct Loans in the 2003-2004 academic year and for FFEL Program loans in the
2004-2005 academic year.

MPNs are designed to be used as single year or multi-year notes. Using the multi-year feature of
the MPN, borrowers sign an MPN only once, when they get their first loan. They may obtain
additional loans, based on the same MPN, without having to sign another MPN. However, schools
and borrowers may decline to use the multi-year feature of the MPN. Schools may require their
students to complete new MPNs for each loan, and borrowers may choose to sign a different MPN
each time they apply for loans. For loans made under the multi-year feature of the MPN, schools
and lenders must develop and document a confirmation process in accordance with the guidelines
established by the Secretary. Borrowers participating in the multi-feature ofMPNs must also be
given a Plain English Disclosure Statement.


Our objective was to evaluate the Department's internal controls over the MPN process for loan
disbursements under the FFEL and Direct Loan programs. The scope of our audit included FFEL
and Direct Loan disbursements for award year 2003-2004 (July 1, 2003, through June 30,2004).

To determine the Department's controls over the MPN process, we­
   • 	 Interviewed FSA personnel involved in the MPN process for Direct Loan and FFEL,
   • 	 Reviewed FSA policies and procedures relating to the MPN process for the two loan
       programs, and
   • 	 Reviewed select program reviews performed by the Financial Partners Group on FFEL

To evaluate the MPN process, we visited the Direct Loan contractor and two FFEL lenders to­
   • 	 Interview and observe personnel involved in the MPN process,
   • 	 Review policies and procedures relating to the MPN process at each entity, and
   • 	 Test a sample ofFFEL and Direct Loan disbursements to ensure there was an MPN for each

To evaluate the record retention practices and types of records maintained for FFEL loan
disbursements, we­
    • 	 Reviewed the structure of disbursement records at the two FFEL lender locations
    • 	 Reviewed disbursement record retention policies at the two FFEL lender locations

The FFEL lenders were selected using the report entitled, "Top 100 Current Holders ofFFELP
Loans for 2003 and 2002". This report was issued by FSA and ranks the participating lenders by
outstanding dollar amount ofloans held for fiscal years 2003 and 2002. From the list of top 25
lenders, we selected the number one top lender (Sallie Mae) and a top lender from the middle of the
list (EdfinanciallEdamerica).
Final Report
ED-OIG/A04E0008                                                                               Page 5 of6

Using the National Student Loan Data System (NSLDS), we selected a random sample of Direct
Loan disbursements and FFEL disbursements for the two lenders selected for review. To verify that
the imaged MPNs match the original MPNs, for each site visit we picked a judgmental sample of
hardcopy/original MPNs by selecting the first 20 disbursements for MPNs maintained on-site. We
compared the hardcopy/original MPNs to its image copy. The sample sizes, number of MPNs, and
hardcopy/original MPNs reviewed are shown in the following chart.

                                        No. Of                                  No. Of Hardcopy/
     Loan Program!                 Disbursements In        No. Of MPNs           Original MPNs
     Entity Reviewed                   Sample               Reviewed 3              Reviewed4
     Direct Loans
      EAM-AS                               100                   80                     20
     FFEL Lender
      Sallie Mae                           110                   78                     20
     FFEL Lender
      EdfinanciallEdamerica                103                   55                     20
              Totals                       313                   213                    60

During the audit, we relied in part on computer-processed data contained in the MPN imaging
systems at the three entities we visited. We tested the accuracy and completeness of the images by
comparing a sample of the MPN images to its original copy stored in vaults. Based on this test we
concluded that the images were sufficiently reliable for use in meeting the audit objectives.

We conducted our audit fieldwork during the period September 2004 through December 2004, and
held an exit conference with FSA staff on January 28,2005. Our audit was performed in
accordance with generally accepted government auditing standards appropriate to the scope of the
review described above.

                                 ADMINISTRATIVE l\1ATTERS

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

J Some of the MPNs supported more than one of the disbursements sampled. For example, one MPN could be used to 

support a Fall semester disbursement and a Spring semester disbursement. 

4 Some of these MPNs were paper hardcopies (EAM-17, Sallie Mae-16, Edfinancial-19) and the remaining MPNs were 


Final Report
ED-OIGIA04E0008                                                                     Page 60f6

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

We appreciate the cooperation and assistance extended by your staff during the audit. If you have
any questions, please contact Denise M. Wempe, Regional Inspector General for Audit, at 404-562­


                                            Helen Lew
                                            Assistant Inspector General for Audit Services

cc: 	 William C. Adams, Sallie Mae
      Wanda Hall, ED Financial Services