oversight

Audit of the Guarantor and Lender Oversight Service's Oversight of Lenders Participating in the Federal Family Education Loan Program.

Published by the Department of Education, Office of Inspector General on 1998-09-24.

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

MEMORANDUM
DATE:          September 24, 1998

TO:            Dr. David A. Longanecker
               Assistant Secretary for Postsecondary Education



FROM:          Richard J. Dowd
               Regional Inspector General
               for Audit, Chicago, Illinois


SUBJECT: Audit of the Guarantor and Lender Oversight Service’s Oversight of Lenders
               Participating in the Federal Family Education Loan Program, Control Number:
               A0570015)


Attached is our Management Information Report that informs you of the results of our audit of
the Guarantor and Lender Oversight Service’s (GLOS) oversight of lenders. Please let us know
what actions, if any, you plan to take as a result of the issue we describe.

In accordance with the Freedom of Information Act (Public Law 90-23), reports issued by the
Office of Inspector General are available, if requested, to members of the press and general public
to the extent information contained therein is not subject to exemptions in the Act. Copies of this
report have been provided to the offices shown on the distribution list enclosed in the report.

We appreciate the cooperation given us during our review. If you have any questions concerning
this report, please call me at 312-886-8647.


ATTACHMENT
       Audit of the Guarantor and Lender Oversight Service’s
       Oversight of Lenders Participating in the Federal Family
                      Education Loan Program




              MANAGEMENT INFORMATION REPORT




                                     Control Number A05-70015
                                          September 1998




Our mission is to promote the efficient                    U.S. Department of Education
and effective use of taxpayer dollars                      Office of Inspector General
in support of American education                           Chicago, IL
                             NOTICE

Statements that management practices need improvement, as well as other
 conclusions and recommendations in this report, represent the opinions of
 the Office of Inspector General. Determination of corrective action to be
taken will be made by appropriate Department of Education officials. This
 report may be released to members of the press and general public under
                      the Freedom of Information Act.
ED OIG Management Information Report CN A05-70015
Audit of GLOS’Oversight of Lenders Participating in the FFEL Program

     Summary               The purpose of this Management Information Report is to provide
                           the results of our audit of the sufficiency of the Guarantor and
                           Lender Oversight Service’s (GLOS) oversight of lenders
                           participating in the Federal Family Education Loan (FFEL)
                           program. In general, we found that GLOS has controls in place to
                           ensure that the required lender audits are completed. Our audit
                           disclosed that nearly all lenders with outstanding loan portfolios
                           equal to or greater than $10 million are audited by Independent
                           Public Accountants (IPA).

                           We also found that GLOS management has developed and
                           disseminated to all its review staff a detailed lender review guide.
                           As part of each lender review, GLOS review specialists are:

                           1.     Completing all applicable steps in the guide;

                           2.     Documenting their work; and

                           3.     Reviewing the audit report issued by the IPA if one is
                                  available.

                           However, we did find significant overlap among IPA audits, GLOS
                           reviews, and guaranty agency reviews. GLOS managers believe
                           that overlap with IPAs is necessary because they question the
                           quality of IPA audits.

                           To reduce the overlap and increase the resources available to
                           manage other areas of the FFEL program, we recommend that:

                           1.     GLOS compare specific data on the results of its lender
                                  reviews to the results of IPA audits;

                           2.     If the comparison discloses significant differences,
                                  immediately refer the IPA audit to the Office of Inspector
                                  General (OIG) for quality control review;

                           3.     GLOS require guaranty agencies to report comparable data
                                  regarding their lender reviews; and

                           4.     As part of the continuing dialog between the Office of
                                  Postsecondary Education (OPE) and the OIG, meet
                                  quarterly to assess the results of the comparisons and
                                  develop appropriate corrective actions.




                                           Page 1
ED OIG Management Information Report CN A05-70015
Audit of GLOS’Oversight of Lenders Participating in the FFEL Program

Audit Requirement          Section 428(b)(1)(U)(iii) of the Higher Education Act of 1965, as
Meant to Provide           amended, requires all lenders participating in the FFEL program to
Reasonable                 have an annual compliance audit. In Dear Colleague Letter 95-L-
Assurance of               176, the Department provided that the deadline for completion and
                           submission of the initial audit completed according to this
Lender
                           requirement would be September 30, 1995. However, the acts
Compliance
                           providing fiscal years 1996 and 1997 appropriations for the
                           Department (Pub. L. 104-134 and 104-208) included provisions
                           prohibiting the Department from using funds made available under
                           the acts to enforce the lender compliance audit requirement against
                           lenders with loan portfolios equal to or less than $5 million.
                           Though the provisions did not eliminate the audit requirement for
                           lenders with this volume of FFEL program loans, the provisions did
                           delay the date by which the audits must be completed. Therefore,
                           the Department currently requires only lenders originating and/or
                           holding loans totaling $5 million or more to have audits completed
                           annually. Those lenders originating and/or holding $10 million or
                           more and other lenders whose audit reports disclose findings of
                           noncompliance must submit their independent audit reports to the
                           Department by September 30. Lenders originating and/or holding
                           FFEL program loans totaling $5 million but less than $10 million
                           for any audit period need not submit the report to the Department
                           unless requested to do so. We noted that GLOS has controls in
                           place to ensure that the required audits are completed. We also
                           found that nearly all lenders with outstanding loan portfolios equal
                           to or greater than $10 million complied with the requirement and
                           submitted audit reports to the Department.

                           According to the audit guide, the purpose of the audit requirement
                           is to gain assurance that (1) the lender’s ED Form 799s are
                           materially correct and in conformity with applicable laws and
                           regulations, and (2) the lender has complied with the statutory and
                           regulatory provisions applicable to its participation in or
                           administration of the FFEL program. Further, the reports required
                           should provide the Department’s program managers with assurance
                           that lender management’s assertions relative to the matters
                           specified in the audit guide are fairly stated in all material respects.

GLOS and                   Despite the assurances that the lender audit requirement should be
Gurantor Reviews           providing, we found significant overlap between IPA audits and the
of Lenders Overlap         reviews conducted by GLOS and guaranty agencies. Using fiscal
                           years 1995 and 1996 data that GLOS provided, we noted that 495
with IPA Audits
                           lenders should have submitted audit reports to the Department
                           because they had portfolios of $10 million or more. Using fiscal
                           years 1995 through 1997 data that GLOS provided, we found that
                           220 of the 789 reviews guaranty agencies completed overlapped

                                           Page 2
ED OIG Management Information Report CN A05-70015
Audit of GLOS’Oversight of Lenders Participating in the FFEL Program

                           IPA audits. We also found that 68 of the 406 reviews GLOS
                           completed overlapped with IPA audits.

                           GLOS’lender review guide (we were told that the revised guaranty
                           agency lender review guide will be very similar to GLOS’lender
                           review guide) and our review of a sample of GLOS’lender review
                           files indicate that GLOS routinely obtains a copy of the IPA audit
                           report as part of each lender review. However, we found that
                           GLOS review specialists do not use those reports to focus or
                           restrict the scope of their reviews. Instead, review specialists
                           adhere to the guide, generally complete all applicable steps, and
                           document their work in the form of work papers on each review.

                           By completing all applicable steps regardless of the results of the
                           IPA audit, GLOS is duplicating some of the work that the IPAs are
                           required to perform. If GLOS management and staff believed they
                           could use the IPAs’results to focus or streamline reviews, review
                           specialists would be available to work on other high priority
                           projects. We recognize that some overlap might be necessary until
                           GLOS’concerns are resolved. However, given the number of
                           GLOS reviews conducted for fiscal years 1995 and 1996, and our
                           observations that each review, at a minimum, takes approximately
                           one staff month to complete, relying on IPA audit results could
                           provide GLOS management with about 3 staff years annually for
                           other priorities.

                           GLOS management and review specialists do not believe they can
                           use IPA audits to focus their reviews. Our audit disclosed a
                           number of potential reasons for GLOS’concerns. First, the IPAs’
                           work could be substandard. The OIG’s non-federal audit team’s
                           initial quality control reviews disclosed that not all IPA work was
                           conducted according to the guide or government auditing
                           standards. Second, the audit guide might need to be revised. Both
                           OPE and the OIG have recognized this possibility and are taking
                           steps to improve the lender audit guide. Third, GLOS management
                           and review specialists expect more than the reasonable assurance
                           lender audits are intended to provide. We were told that GLOS
                           reviews disclosed problems that IPA audit reports did not, even
                           though GLOS and the IPA reviewed the same lender for the same
                           time period. However, GLOS reviews can be very detailed.
                           Review specialists pursue and report on every potential instance of
                           noncompliance. IPAs, on the other hand, base the extent of their
                           testing on materiality. We believe that a combination of these
                           reasons is causing the overlap.



                                          Page 3
ED OIG Management Information Report CN A05-70015
Audit of GLOS’Oversight of Lenders Participating in the FFEL Program

                           GLOS and the guaranty agencies are best positioned to gather data
                           on the differences between the results of IPA audits and lender
                           reviews completed by GLOS and the guaranty agencies. GLOS
                           routinely obtains IPA audit reports as part of its lender reviews.
                           Also, GLOS issues review guidance to the guarantors who conduct
                           lender reviews. Both GLOS and the guarantors, as the last step of
                           each lender review, could, with minimal effort, compare the results
                           of their reviews with the results disclosed in the IPA audit reports.

Recommendations            GLOS could further efforts to provide improved fiscal management
                           of the FFEL program by:

                           1.     Comparing GLOS lender review results with the results of
                                  the IPA audit. The comparative data could include (a) the
                                  scope of GLOS’review and IPA audit, (b) whether the
                                  lender was required to submit the audit report, (c) the
                                  nature of the differences in results, (d) the type of audit
                                  engagement, (e) whether the lender used a loan servicer,
                                  and (f) any other factor GLOS believes might have
                                  influenced the review or audit.

                           2.     Referring the IPA audit immediately to the OIG non-Federal
                                  audit team for quality control review if GLOS’comparison
                                  discloses significant differences.

                           3.     Requiring guarantors to report comparable data regarding
                                  guarantor lender reviews.

                           4.     As part of the continuing dialog between OPE and OIG on
                                  audit quality, meeting quarterly to assess the results of
                                  GLOS and guarantor comparisons and develop appropriate
                                  corrective action for lender audits.

Audit Objective,           The objective of our audit was to evaluate GLOS’oversight of
Scope, and                 lenders and determine whether controls were sufficient to provide
Methodology                reasonable assurance that the lenders were complying with federal
                           regulations. The objective included IPA audits, GLOS’lender
                           reviews, and guaranty agencies’lender reviews. A secondary
                           objective was to ensure that these three types of oversight activities
                           did not result in duplication. To achieve our objectives, we
                           collected information on the universe of lenders participating in the
                           FFEL program, lender audit reports, guaranty agency reviews of
                           lenders conducted for fiscal years 1995 through 1997, and GLOS
                           reviews of lenders conducted during fiscal years 1995 through
                           1997. The data that GLOS provided is the only data available
                           (both to us and GLOS). Though we did not verify the accuracy of

                                           Page 4
ED OIG Management Information Report CN A05-70015
Audit of GLOS’Oversight of Lenders Participating in the FFEL Program

                           data, we did assess the reasonableness of the data. We reviewed
                           the files from (a) 6 of 12 lender reviews conducted by one GLOS
                           region between October 1, 1994 and September 30, 1997, and (b) 5
                           of 164 lender reviews conducted by another region over the same
                           period. We selected our sample from data GLOS provided us,
                           limiting our universe to those reviews that were not part of GLOS’
                           origination fee project. We also interviewed officials from OPE and
                           OIG, and managers and staff from two GLOS field offices. Finally,
                           we accompanied GLOS staff on two lender reviews.

                           We conducted our field work at GLOS’offices in Washington, DC,
                           New York, NY, and Dallas, TX from November 5, 1997 through
                           March 11, 1998. We conducted additional analyses at our Chicago
                           office from March 12 through July 15, 1998.

                           We conducted our audit according to government auditing
                           standards applicable to the scope of review described.

Management                 As part of our audit of GLOS’ oversight of lenders
Controls Statement         participating in the FFEL program, we conducted a limited
                           assessment of the management controls, policies, procedures,
                           and practices applicable to GLOS’oversight of lenders. We
                           performed our limited assessment to determine the level of control
                           risk for determining the nature, extent, and timing of our tests to
                           accomplish the audit objectives. For the purpose of this audit, we
                           classified the significant controls into the following categories:

                           <      Use of IPA lender audits;
                           <      Use of Guaranty agency reviews of lenders; and
                           <      Procedures followed during GLOS reviews of lenders.

                           Because of inherent limitations, a study and evaluation made for the
                           limited purpose described would not necessarily disclose all
                           material weaknesses in GLOS’management controls structure.
                           Our assessment did not disclose any material management control
                           weaknesses that affected GLOS’ability to oversee lenders.
                           However, our assessment did disclose overlapping coverage
                           between lender audits and reviews, which, if corrected, would
                           increase the resources available to strengthen GLOS’management
                           controls.




                                          Page 5
                           REPORT DISTRIBUTION LIST
                           CONTROL NUMBER A0570015

Action Official/Auditee                                                No. of Copies
Dr. David A. Longanecker
Assistant Secretary for Postsecondary Education
Office of Postsecondary Education
U. S. Department of Education

Other ED Officials
Deputy Assistant Secretary for Student Financial Assistance Programs                      1
Director, Guarantor and Lender Oversight Service                                          1
Director, Accounting and Financial Management Service, OPE                  Electronic Copy
Supervisor, Post Audit Group                                                              1
Office of the Chief Financial Officer
Office of Public Affairs                                                                  1

ED-OIG Officials
Inspector General                                                           Electronic Copy
Deputy Inspector General                                                    Electronic Copy
Director, Planning, Analysis, and Management Services                       Electronic Copy
Assistant Inspector General for Audit                                       Electronic Copy
Assistant Inspector General for Investigations                              Electronic Copy
Assistant Inspectors General for Operations                            Electronic Copies (2)
Director , Advisory and Assistance, SFA                                     Electronic Copy
Director, PAMS                                                              Electronic Copy
Regional Inspectors General for Audit                                  Electronic Copies (7)