oversight

Audit of the Illinois Student Assistance Commission's Review of Lender Due Diligence and Post-Default Collections Related to Wage Garnishment.

Published by the Department of Education, Office of Inspector General on 2004-08-20.

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

                                 UNITED STATES DEPARTMENT OF EDUCATION 

                                      OFFICE OF INSPECTOR GENERAL 

                                                      !lEQlONV 

                                              III NORTH CANAl,., SUm! 9<10 

                                                CHICAGO. ILLINOIS 60606 


                                                   FAX: (Jill )53·02« 

    AudIt 

                                                                                                         lnveSlia;alion
(312)886-6503                                                                                           (312)3 S3.7891

           Mr. Larry E. Matejka
           Executive m~tor
                                                                           AUG 20 2004
           Illinois Student Assistance Commission
           500 West Monroe Street, Third Floor
           Springfield, Illinois 62704

            Dear Mr. Matejka:

            Enclosed is our final audit report, Control Number ED·QIG/A05· D0040, entitled Audit
            of the Illinois Student Assistance Commission's Review of Lender Due Diligence and
            Post-Default Collections Related to Wage Garnishment. This report incorporates the
            comments you provided in response to the draft report. If you have any additional
            comments or infonnation that you believe may have a bearing on the reso lution of this
            audit, you should send them directly to the following Education Department officials,
            who will consider them before taking final Departmental action on this audit:

                                  Theresa S. Shaw, Chief Operating Officer
                                  Federal Student Aid
                                  U.S. Department of Education
                                  Union Center Plaza
                                  Room 11 2GI
                                  830 First Street, NE
                                  Washington, D.C. 20202·5132

            It is the policy of the U.S. Department of Education to expedite the resolution of audits
            by initiating timely action on the findings and recommendations contained therein.
            Therefore, receipt of your comments within 30 days would be appreciated.

            In accordance with the Freedom of Infonnation Act (5 U.S.C. §552), reports issued by
            the Office of Inspector General are available to members oflhe press and general public
            to the extent infonnation contained therei n is not subject to exemptions in this act.



                                                                     Sin~«,:-~          (
                                                                7o~~QRegional Inspector General
                                                                     for Audit

                Enclosure
                                 UNITED STATES DEPARTMENT OF EDUCATION 

                                      OFFICE OF INSPECTOR GENERAL 

                                                      REGION V 

                                              III NORTH CANAL. SUITE 'NO 

                                                CHICAGO. ILLINOIS 60606 


                                                  FAX :(112)JH..()loU
    Audit
                                                                                                         Invcsfi,"t;on
(JIl)886-6S03
                                                                                                        (312)353-7891



        MEMORANDUM
                                                                             AUG 20 2004
        TO:            Theresa S. Shaw
                       Chief Operating Officer
                       Federal Student Aid


                    (\?-~Q
        FROM:          Rich;;-~
                       Regional Inspector General for Audit

        SUBJECT:       Final Audit Report
                       Audit of the Illinois Student Assistance Commission's Review of Lender Due
                       Diligence and Post-Defauh Collections Related to Wage Garnishment
                       Control Number ED-OIG/A05-D0040

        You have been designated as the action official responsible for the resolution of the findings and
        recommendations in the attached fi nal report. We have also provided a copy to the auditee and
        to your audit liaison officer.

        The Office of Inspector General is required to review and comment on the proposed program
        determination letter (POL) and the audit clearinghouse document (ACD) before the PDL is
        forwarded to the auditee. Our review of these documents will be handled through the
        Department's Audi t Accountability and Resolution Tracking System (AARTS).

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

        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.

        If you have any questions, please contact me at 312-886-6503.

        Enclosure
              Audit of the Illinois Student Assistance 

        Commission’s Review of Lender Due Diligence and Post-

          Default Collections Related to Administrative Wage 

                             Garnishment 





                                 FINAL AUDIT REPORT 

                                            ED-OIG/A05-D0040
                                               August 2004




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

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

In accordance with the Freedom of Information Act (5 U.S.C. §552), reports
   issued by the Office of Inspector General are available, if requested, to
members of the press and general public to the extent information contained
               therein is not subject to exemptions in the Act.
Table of Contents
         Audit of the Illinois Student Assistance Commission’s Review of
         Lender Due Diligence and Post-Default Collections Related to
         Administrative Wage Garnishment

         Control Number ED-OIG/A05-D0040
                                                                                                                       Page

Executive Summary ...................................................................................................1 


Audit Results 


    Finding 1– ISAC Needs to Enhance Its Claim Review Procedures to Ensure 

                Lender Default Claims are Fully Supported .....................................3 


    Finding 2– ISAC Needs to Strengthen Controls Over Document Imaging to 

                Ensure Adequate Support for Reinsurance Claims .........................10 


    Finding 3– ISAC Did Not Maintain Adequate Support for Forms 2000 

                Information Submitted to ED ..........................................................11 


Background ..............................................................................................................12 


Objectives, Scope, and Methodology ......................................................................14 


Statement on Management Controls ........................................................................16 


Attachments

         ISAC Claim Form …………………………………………………………..A

         ISAC’s Comments to the Draft Report ……………………………………..B
Control Number ED-OIG/A05-D0040 	                                                              Page 1


                                 Executive Summary

The objectives of our audit were to determine if, for the period October 1, 2002, through
June 30, 2003, the Illinois Student Assistance Commission (ISAC) (1) adequately
processed post-default collections related to administrative wage garnishments (AWG)
and (2) properly submitted eligible reinsurance claims, specifically, default claims, to the
U.S. Department of Education (ED). Our audit disclosed that the ISAC complied with
the Higher Education Act of 1965, as amended, and relevant regulations regarding
processing of post-default collections related to AWG. However, ISAC did not comply
with the regulations regarding the submission of eligible reinsurance claims.
Specifically, ISAC’s

• 	 Claim review process was not adequate to ensure that it claimed reinsurance only if
    the lender exercised due diligence in servicing the loan. ISAC's claim review process
    was limited to a brief review of summary information shown on its claim form.
    ISAC's claims analysts generally did not verify that the summary collection
    information shown on the claim form was supported by the underlying detailed
    collection history information and rarely used available software that would review
    claims for lender due diligence. We reviewed 50 claims, totaling $123,521, selected
    from a universe of 21,732 claims that ISAC submitted for reinsurance during the
    audit period. We identified 32 claims, totaling $75,077, that ISAC should have
    returned to the lenders because the claim packet was missing accurate collection
    and/or payment histories or contained evidence of a due diligence violation.

• 	 Imaging policies and procedures did not ensure that ISAC maintained complete and
    accurate computer images of original claim packets. This is a repeat finding from our
    December 1999 audit report to ISAC (ED-OIG/A05-90002).

• 	 Policies and procedures did not ensure that it maintained adequate support for Forms
    2000 information to meet the records retention requirements in the regulations.

We recommend that the Chief Operating Officer, Federal Student Aid (FSA) instruct
ISAC to:

1. 	Adhere to its policies and procedures and require lenders to provide accurate
    collection and payment histories sufficient for ISAC’s claim analysts to review the
    claims for lender due diligence;

2. 	Require its claims analysts to verify lender due diligence activities shown on the claim
    form’s summary of lender due diligence against detailed collection history
    information;

3. 	Review all claims submitted for reinsurance to ED during the period October 1, 2002,
    through June 30, 2003, and determine which claims had due diligence violations
    resulting in lost reinsurance or penalties;
4. 	Obtain the missing documentation for the 32 claims it should have returned to lenders
Control Number ED-OIG/A05-D0040 	                                                              Page 2


   or repay ED $75,077 for the claims that lost reinsurance and could not be cured;

5. 	Establish written policies and procedures requiring that the completeness and
    accuracy of imaging are verified before claim packets are destroyed and establish
    adequate management controls to ensure that the policies and procedures are
    followed;

6. 	Identify the claims that were improperly imaged during the period October 1, 2002,
     through June 30, 2003, and obtain the missing collection and payment histories;

7. 	Obtain the missing documentation for the 20 claims that were not adequately imaged
    or repay ED $47,673 for the claims that lost reinsurance and could not be cured; and

8. 	Revise its policies and procedures and retain the electronic files used in preparing the
    Forms 2000 report and records of any manual adjustments long enough to meet the
    records retention requirement in the regulations.

We provided a draft of this report to ISAC. In its response, ISAC partially disagreed
with Finding 1 and agreed with Findings 2 and 3. ISAC affirmed that its adherence to
relevant provisions in the Common Manual more than satisfactorily meet the federal
regulation requirements governing claim payments and reinsurance. ISAC’s response did
not cause us to change our findings or recommendations. We have summarized ISAC’s
comments after each finding and included them in their entirety as an attachment.
Control Number ED-OIG/A05-D0040 	                                                                           Page 3


                                              Audit Results

Finding No. 1 	ISAC Needs to Enhance Its Claim Review Procedures to Ensure
               Lenders’ Default Claims are Fully Supported

ISAC’s claim review process was not adequate to ensure that it claimed reinsurance only
if the lender exercised due diligence in servicing the loan. ISAC's claim review process
was limited to a brief review of summary information shown on its claim form. ISAC's
claims analysts generally did not verify that the summary collection information shown
on the claim form was supported by the underlying detailed collection history
information as part of their review of due diligence, or utilize available software that
would review claims for due diligence violations.

ISAC’s claim form is a two-page form with nine sections. The sections are:

1. 	Claim information - described the type of claim and the date the condition occurred
    (DCO)1;
2. 	Borrower information – contained the borrower’s Social Security Number, name,
    address, phone number, etc.;
3. 	Loan information – included the loan type and identification, first distribution date,
    current principal balance, and interest rate;
4. 	Endorser/co-maker information;
5. 	Conversion to repayment - described the out of school date, notification date, and first
    payment due date;
6. 	Repayment information - included the total borrower payments, number of monthly
    payments, number of months of deferments/forbearances, and payment due date;
7. 	Requested claim amount – included the total amount disbursed, capitalized interest,
    principal repaid, principal used for the interest claimed and principal claimed;
8. 	Lender/servicer information and certification; and
9. 	Collection history.

The collection history is on page 2 of the claim form and summarizes the 270-day period
prior to default. Page 2 is comprised of four columns of dates and codes corresponding
to various collection activities, such as letters to borrowers and telephone contacts,
performed by the lender. The claim form does not detail the specified due diligence letter
or phone call attempts the lender is required to perform according to 34 C.F.R § 682.411
(c)-(n).2

ISAC required lenders to submit the claim form and supporting collection and payment
histories as part of the claim packet. An ISAC claims analyst began the review of the
claim form by matching it with ISAC’s loan data system to verify the date and type of
loan, lender code, and disbursement date. Once the claims analyst determined it was the
proper loan and guaranteed by ISAC, he or she would begin the review of the lender’s

1
    For default claims, the DCO is due date of the first unmet installment of the borrower’s delinquency.
2
    We have included an example of ISAC’s claim form as an attachment.
Control Number ED-OIG/A05-D0040                                                                Page 4


servicing. First, the claim analyst reviewed the claim packet to ensure the DCO was
correct. To determine if the DCO was correct, the analyst started with the out of school
date and added six months (grace period) and up to 45 days to arrive at the first payment
due date listed on the claim form. Then the analyst added the number of borrower
payments and deferment/forbearance months to the first payment due date (this total
should equal the payment due date listed on the claim form). The payment due date
should have been the same as the DCO. If the analyst did not arrive at the DCO, the
analyst returned the claim to the lender.

ISAC officials informed us that claims analysts perform a brief "visual review" of the
lender's due diligence efforts using the summary of due diligence activities sheet (page 2
of the claim form). The analysts review the form to determine if the lender performed the
required activities. The analysts check for 4 letters, 4 phone contacts, a request for
default aversion, a final demand, skip-tracing (if there is an invalid address or telephone
number), and no 45 day gaps between each activity. After the brief “visual review” of
due diligence efforts, the claims analyst then indicates verification of proper lender’s due
diligence by placing a check mark in the "Due Diligence Reviewed Checkbox" in
Odyssey3 for that specific loan. This process is referred to as using the "turbo" feature of
Odyssey because it bypasses the need to enter the dates and codes for due diligence
performed by the lender.

The process also bypasses Odyssey's built-in due diligence checks. ISAC officials
informed us that Odyssey has the capability to electronically evaluate lender due
diligence provided the dates and codes of due diligence activities are entered into the
system. However, ISAC officials decided that entering the due diligence information
into Odyssey was too time-consuming and claims analysts rarely entered the information.

A claims analyst supervisor and a claims analyst told us supervisors seldom reviewed the
analyst’s work. The supervisors review was limited to a small sample of claims as part of
the analysts job evaluation and claims the analysts would bring to the supervisor with
questions.

Process Not Sufficient to Fulfill Administrative Oversight Responsibilities
According to 34 C.F.R. § 682.406(a)(1) and (3), a guaranty agency is entitled to
reinsurance payments on a loan only if the lender exercised due diligence in making,
disbursing, and servicing the loan as prescribed by the rules of the agency. Also, the
lender must provide accurate collection and payment histories. The histories must be
sufficient to support guarantor review for claim payment and show that the lender
exercised due diligence in collecting the loan meeting the requirements in 34 C.F.R.§
682.411. In addition, 34 C.F.R. § 682.411(b)(2) states lenders may not permit a gap in
collection activities of more than 45 days.

The accuracy of the collection and payment histories in support of the claim submission
cannot be determined without verifying the claim summary data included on the claim

3
    Odyssey is ISAC’s computer system used in performing its due diligence review.
Control Number ED-OIG/A05-D0040                                                                 Page 5


form to the supporting documentation. A guaranty agency cannot make a determination
that the lender has complied with all due diligence requirements, particularly timely
conversion to repayment, deferments/forbearances, first date of delinquency, required
skip-tracing, and due diligence contacts, without reviewing and verifying the supporting
documentation (collection and payment histories) to the claim summary. Without this
review, a guaranty agency cannot be said to be fulfilling its administrative oversight
function on behalf of the Secretary envisioned in 34 C.F.R. § 682.406.

We found the codes, on page 2 of the claim form, identified only the general nature of the
collection activities. The form did not contain information sufficient to assess the
adequacy of the lenders’ due diligence. For example, the code LC indicates a letter
contact was made, but does not identify the type of letter, such as the initial 15-day letter
or one of the other required follow-up letters, that was sent. Page 1 of the claim form
also does not require the lender to provide an accurate borrower payment history; the
form only contains summary information. The claim form states the total amount paid by
the borrower. It also contains the equivalent number of monthly payments corresponding
to the total amount of payments. However, it does not list the dates and amounts of
payments made by the borrower that comprise the total amount paid. Pursuant to 34
C.F.R. § 682.414(a)(1)(ii)(C), a payment history must show the date and amount of each
payment that was attributed to principal, accrued interest, collection costs, and other
costs.

Further, the claim forms reviewed did not show the beginning or ending dates of the
borrower’s deferments/forbearances. The claim form does contain
deferment/forbearance beginning and ending date codes. However, the lenders did not
use the codes, and ISAC accepted the claims without the codes. ISAC’s brief "visual
review" did not include reviewing any of the collection and payment history the lender
provided in support of the dates/codes for due diligence.

The regulations require a lender to convert a loan to repayment timely, to complete
required due diligence efforts, engage in the required skip-tracing activities, ensure there
are no 45 day gaps, and submit the claim timely. [34 C.F.R. §§ 682.406 & 682.411
(2002)] Except for administrative forbearances, deferments/forbearances generally
require signed requests from the borrower and also require specific support. [34 C.F.R
§§ 682.210 & 682.211 (2002)] If a lender fails to meet the due diligence requirements,
the regulations specify penalties, ranging from loss of interest for specified periods to
loss of loan guarantee. ED allows lenders to cure the violations by receiving a full
borrower payment and through reinstatement. [34 C.F.R § 682 Appendices C and D
(2002)]

Claims Should Have Been Returned to Lenders
We reviewed 50 claims, totaling $123,521, selected from a universe of 21,732 claims that
ISAC submitted for reinsurance during the audit period. We reviewed the information on
the ISAC claim form and the supporting documentation included in the claim packet. We
identified 32 claims, totaling $75,077, that ISAC should have returned to the lenders
because the claim packet was missing accurate collection and/or payment histories or
Control Number ED-OIG/A05-D0040                                                            Page 6


contained evidence of a due diligence violation. We found 30 claims missing support for
deferments/forbearances, 12 with contradictory information, 11 with incomplete
collection histories, 9 with due diligence violations, and 7 with incomplete borrower
payment histories. Twenty-four claim files had more than one deficiency. Based on the
results of our testing, we had a 64 percent sample occurrence rate. We are 90 percent
confident that that the actual error rate is between 51 and 75 percent.

Examples of claims that ISAC should have returned to lenders.

Example 1
The claim contained an unexplained gap from November 20, 1997, through March 20,
1998. The gap was 4 months long and occurred between the borrower’s last payment and
the beginning of forbearance. There was no explanation regarding this gap on page 2 of
the claim form or in the supporting documentation. Because the gap was greater than 45
days, the claim had a due diligence violation.

The claim’s collection history documentation showed 48 months of forbearances, but
page 2 of the claim form did not list out the beginning and ending dates of the
forbearances. The claim packet did not contain the borrower requests or documentation
showing the borrower was eligible to receive the forbearances.

Based on ISAC's policy of using the first payment due date, plus the borrower payments,
plus the months of deferments/forbearances, to arrive at the DCO on page 1 of the claim
form, the DCO is off by 5 months. The DCO should be November 19, 2001, but page 1
of the claim form has April 19, 2002. ISAC’s claim analyst did not catch this difference
after performing the normal claim review and passed this claim through for reinsurance.

Example 2
The claim was missing the beginning and ending dates for 12 months of forbearances.
The collection history documentation and page 2 did not make reference to a forbearance
or contain supporting documentation showing the borrower was eligible to receive a
forbearance.

The claim was missing the collection history from August 2, 2001, through June 16,
2002. The missing collection history was for the past 270 days of delinquency.

On page 2 of the claim form there was an unexplained gap from December 16, 2001,
through May 3, 2002. The gap could not be explained because the collection history was
missing from the claim packet.

The lender did not file the claim timely. The lender sent the borrower a final demand
letter on December 16, 2001. Based on our review, the lender should have submitted the
claim by January 16, 2002. The lender submitted the claim on April 4, 2003. As a result
of filing the claim late, the lender violated the due diligence requirements.

Example 3
Control Number ED-OIG/A05-D0040                                                             Page 7


The claim was missing the beginning and ending dates for 29 months of deferments and
69 months of forbearances. Page 2 of the claim form did not list the
deferments/forbearances. The repayment information on the claim form showed the
borrower had deferments/forbearances, but did not support the exact beginning and
ending dates for each. Also, the claim packet did not contain any documentation
supporting the borrower was eligible to receive the deferments/forbearances.

The claim packet was missing collection history documentation from May 31, 2002,
through November 26, 2002. Page 1 of the claim form showed a DCO of March 5, 2002.
The collection history documentation and page 2 of the claim form supported a 6th day
delinquent letter (opening letter of delinquency) sent to the borrower on February 11,
2002. The due diligence dates on page 2 of the claim form supported a DCO of February
5, 2002. The DCO on page 1 of the claim form was off by 1 month.

As a result of the contradiction mentioned above, there were 2 due diligence violations.
The lender sent both the default aversion and final demand letters early for the DCO date
of March 5, 2002.

Example 4
The claim was missing support for 6 months of deferments and 6 months of forbearances.
The collection history documentation contained a deferment/forbearance history;
however, it did not contain the supporting documentation showing the borrower was
eligible to receive either one. The claim was missing the complete borrower payment
history. The borrower payment history documentation included in the claim packet did
not contain the entire payment history.

This claim contained a skip-tracing due diligence violation. The lender found a valid
telephone number for the borrower on May 15, 2002. The lender called the number on
May 17, 2002, and learned the number was disconnected. The lender continued to call
the number and stated it left a message on June 5, 2002. The lender called back on June
21, 2002, and got no answer. Then on July 8, 2002, the lender again said the number was
disconnected. According to 34 C.F.R. § 682.411 (l)(3), the lender should have begun
skip-tracing activities on May 17, 2002, when it learned the number was disconnected.

Example 5
The claim was missing support for 19 months of forbearances. Page 2 of the claim form
did not identify any borrower forbearances. The collection history documentation
included a deferment/forbearance history, but it did not contain documentation
supporting the borrower was eligible to receive the forbearance. The claim was missing
the payment history. There was no payment history documentation to support the
accuracy of the $740 of borrower payments or repaid principal of $339.58 stated on page
1 of the claim form.
The collection history documentation was missing activity prior to December 31, 2002.
Page 1 of the claim form stated the DCO was August 15, 2002. However, page 2 of the
claim form showed the first due diligence activity was on June 17, 2002, and contained
due diligence activity dates supporting an earlier DCO. Also, the collection history
Control Number ED-OIG/A05-D0040 	                                                            Page 8


documentation on March 14, 2003, stated the lender changed the due date from June 11,
2002, to August 11, 2002, because the borrower made 5 payments since a prior
forbearance. Page 1 of the claim form showed zero borrower payments and there was no
payment history included in the claim packet to support the borrower made 5 payments.

Because of the contradictory information above, there were 2 due diligence violations
claim. The lender sent the default aversion and final demand letters too early for the
August 15, 2002, DCO.

ISAC Cannot Support Its Claim for Reinsurance
Without an adequate review of the lenders' claims, ISAC cannot support its claims for
reinsurance or that the lenders serviced the claims according to 34 C.F.R. § 682.411. An
accurate collection history, including beginning and ending dates for deferments and
forbearances, and borrower payment information is critical in determining whether (1)
the lender performed all required due diligence while servicing the loan; (2) the loan’s
guarantee was lost; (3) there were any due diligence violations that would result in
penalties; and (4) information submitted by lenders on the claim form is accurate and
reliable.

Recommendations

We recommend that the Chief Operating Officer, FSA, instruct ISAC to:

1.1 	   Adhere to its policies and procedures and require lenders to provide accurate
        collection and payment histories sufficient for ISAC’s claims analysts to review
        the claims for lender due diligence.

1.2 	   Require its claims analysts to verify lender due diligence activities shown on the
        claim form’s summary of lender due diligence against all detailed collection
        history information, support for periods of deferments/forbearances, and dates and
        amount of borrower payments.

1.3 	   Obtain the missing documentation for the 32 claims it should have returned to
        lenders or repay ED $75,077 for the claims that lost reinsurance and could not be
        cured.

1.4 	   Review all claims submitted for reinsurance to ED during the period October 1,
        2002, through June 30, 2003, and determine which claims had due diligence
        violations resulting in lost reinsurance or penalties.


Auditee Comments
ISAC partially disagreed with the finding. ISAC affirmed that it adheres to the relevant
provisions in the Common Manual, which more than satisfactorily meet the federal
regulations governing claim payments and reinsurance. ISAC also believes that the
manner in which certain documentation was collected and reviewed by the OIG provided
Control Number ED-OIG/A05-D0040 	                                                         Page 9


reasonable assurance that claims were being thoroughly evaluated and properly paid.

ISAC realizes that the OIG and ED have called select provisions of the Common Manual
into question. In response to this, ISAC prepared a work plan, which will enable it to
implement the four recommendations. The work plan will ensure that ISAC:

• 	 Adheres to its policies and procedures and requires lenders to provide accurate
    collection and payment histories.

• 	 Requires its claim analysts to verify lender due diligence activities on the claim
    form’s summary of due diligence against all detailed collection and payment history
    information.

• 	 Reviews the claim volume for one month during the nine month period (October 1,
    2002, through June 30, 2003) the OIG reviewed. ISAC then will make a
    determination whether to generalize from the sample in question leading either to a
    recovery of funds from lenders or a payment to the ED from ISAC’s Operating Fund.
    The results of the sampling will be shared with FSA and OIG. If ISAC’s sampling
    results in a meaningful variance between claims paid and submitted for reinsurance,
    ISAC will implement a plan to systematically work, over a time period, all of the
    claims for the nine month period.

• 	 Obtains the missing documentation for the 32 claims it should have returned to the
    lender. ISAC will review the documentation and determine whether the claims will be
    returned to the lender or a payment to ED will be made.

OIG Response
ISAC’s response did not cause us to change the finding or recommendations. ISAC
stated it prepared a work plan, which will help it implement our recommendations.
However, ISAC did not provide us with the work plan or any indication a work plan was
being developed. We do not know how ISAC is planning to draw a sample of the
monthly claims or which month it will choose to review. In addition, ISAC said it would
obtain the missing documentation for the 32 claims and review the documentation to
determine whether the claims will be returned to the lender or to repay ED. We do not
have a timeframe of when ISAC will obtain or review the documentation.
Control Number ED-OIG/A05-D0040 	                                                          Page 10


Finding No. 2 	ISAC Needs to Strengthen Controls Over Document Imaging to
               Ensure Adequate Support for Reinsurance Claims

ISAC’s imaging policies and procedures did not ensure that ISAC maintained complete
and accurate computer images of original claim packets. This is a repeat finding from
our December 1999 audit report to ISAC (ED-OIG/A05-90002). We reported that ISAC
did not maintain copies of all documents lenders submitted with their request for claim
reimbursement and recommended ISAC improve management controls over imaging.

According to 34 C.F.R. § 682.406(a)(3), a guaranty agency is entitled to a reinsurance
payment on a loan only if the lender provided accurate collection and payment history.
The histories must be sufficient to support guarantor review for claim payment and show
that the lender exercised due diligence in collecting the loan meeting the requirements in
34 C.F.R. § 682.411.

Also, 34 C.F.R. § 682.414(a)(ii)(A) and (G) state a guaranty agency shall maintain all
documentation supporting the claim filed by the lender and any additional records that
are necessary to document its right to receive or retain payments made by the Secretary.

ISAC’s Imaging Department did not have a written policy to verify that it imaged
lenders’ claim packets correctly. ISAC’s Imaging Department Manager informed us that
ISAC had an unwritten rule requiring imaging personnel to verify that the first 10 pages
of each claim packet were imaged correctly. The first 10 pages generally include the
most important documents for the claim including the two-page ISAC claim form. After
ISAC images the claim, it destroys the claim packet, leaving the computer image as the
only evidence of its right to reinsurance.

We found that 20, totaling $47,673, of 50 claims, totaling $123,521, sampled from a
universe of 21,732 claims that ED paid reinsurance to ISAC between October 1, 2002,
and June 30, 2003, were not adequately imaged. Four claim packets were missing the
second page of the ISAC claim form, a summary of the lender’s due diligence activities
from the latest 270-day period of delinquency. We found 15 claim packets,4 all from the
same lender, that had dates cutoff from the imaged copy, including collection, payment,
deferment, and forbearance dates. Also, we found one claim that did not have an imaged
copy in ISAC’s computer system. Based on the results of our testing, we had a 40
percent sample occurrence rate. We are 90 percent confident that that the actual error
rate is between 28 and 53 percent.

Without a complete and accurate computer image of the claim packet, ISAC does not
have adequate documentation to support its request for reinsurance or support that the
lender serviced the claim properly.




4
    Two claims were also missing page 2..
Control Number ED-OIG/A05-D0040 	                                                             Page 11


Recommendations

We recommend that the Chief Operating Officer, FSA, instruct ISAC to:

2.1 	Establish written policies and procedures requiring that the completeness and
     accuracy of imaging are verified before claim packets are destroyed and establish
     adequate management controls to ensure that the policies and procedures are
     followed.

2.2 	Identify the claims, from our audit period, that were not adequately imaged and
     obtain the missing collection and payment histories.

2.3 	Obtain the missing documentation for the 20 claims that were not adequately imaged
     or repay ED $47,673 for the claims that lost reinsurance.

Auditee Comments
ISAC agreed with the finding and recommendations and said it obtained the necessary
documentation for the sample of 20 claims we questioned. ISAC said it would review
the documentation to ensure that it is properly imaged. In addition, ISAC said
management has revised operating policies and procedures for imaging claim packets and
communicated the new policies to staff, and provided additional training to staff. ISAC’s
Imaging and Claims Services departments are working together to implement a quality
assurance process.

ISAC did not provide us with the revised operating policies and procedures for the
imaging department.

Finding No. 3 	ISAC Did Not Maintain Adequate Support for Forms 2000
               Information Submitted to ED

ISAC's policies and procedures did not ensure it met the records retention requirements.
ISAC reports AWG collections and claims reinsurance payments to ED through Forms
2000 reports. We requested support for the summary AWG and reinsurance amounts
ISAC reported on its Forms 2000 for the period October 2002 through June 2003.
Although ISAC was eventually able to provide supporting records that reconciled
reasonably close to the amounts reported on Forms 2000, it required several weeks of
effort and several extracts from its computer system.

According to 34 C.F.R § 682.414(a)(1)(ii)(G), a guaranty agency shall maintain any
additional records that are necessary to document its right to receive or retain payments
made by the Secretary and the accuracy of reports it submits to the Secretary. The
regulation further states in section (a)(2) a guaranty agency must retain the records for
not less than 3 years following the date the borrower repays the loan, or for not less than
5 years following the date the agency receives payment in full from any other source.

To prepare its Forms 2000 reports, ISAC extracts information at the end of each month
Control Number ED-OIG/A05-D0040 	                                                          Page 12


from its Odyssey computer system. The data extract is compared to the previous month’s
data extract to create a file containing the detailed records for the current month’s
activity. ISAC summarizes the current month’s activity to prepare the Forms 2000 report
submitted to ED for payment. Any adjustments to the Guaranty Agency Monthly
Financial Report are processed manually. ISAC retains electronic copies of the data
extracts for approximately 6 months.

ISAC provided us a series of AWG and reinsurance data extracts. ISAC officials stated
that much of the discrepancy in the Forms 2000 totals and data extracts resulted from an
incomplete and consensual understanding between ISAC officials and the OIG audit team
relative to the precise data elements required for review. ISAC officials also said another
contributing variable was the fact that ISAC had to pull data from two different computer
systems, one of which was deactivated September 2002. ISAC officials did not believe
that similar problems would recur because any data requested in the future would be
provided entirely from its current computer system and substantial internal controls are in
place. ISAC officials also believe that its information systems and record retention
efforts satisfy regulatory requirements.

However, we believe support for Forms 2000 data could still be a problem because ISAC
currently only maintains the data used to populate Forms 2000 for approximately 6
months. System changes, subsequent adjustments to account balances, and other factors
could adversely affect ISAC’s ability to reconstruct support for the amounts reported on
the Forms 2000.

Recommendation

We recommend that the Chief Operating Officer, FSA, instruct ISAC to:

3.1 	Revise its policies and procedures and retain the electronic files used in preparing the
     Forms 2000 report and records of any manual adjustments long enough to meet the
     records retention requirement in the regulations.

Auditee Comments
ISAC agreed with the finding and recommendations and said it has revised policies and
procedures to ensure that documentation used to prepare Forms 2000 are consistent with
the records retention requirement found in the federal regulations.

ISAC did not provide us with its revised policies and procedures.

                                       BACKGROUND

Title IV of the Higher Education Act of 1965, as amended, authorizes several Federal
Family Education Loan (FFEL) programs. These programs include the federal: (1)
Stafford Loan, which encourages making loans to eligible undergraduate, graduate, and
professional students; (2) PLUS, which encourages making loans to parents of eligible,
dependent undergraduate students; and (3) Consolidation Loan, which encourages
Control Number ED-OIG/A05-D0040                                                                           Page 13


making loans to eligible borrowers for the purpose of consolidating their payment
obligations.

A guaranty agency guarantees a lender against losses due to borrower default on FFEL
loans, and ED reinsures the guaranty agency for all or part of the default claims the
agency pays to lenders. As part of the reimbursement claim process, a guaranty agency
reviews claim packets to determine that the lender exercised due diligence in collecting
loans. The collection efforts must meet the requirements of 34 CFR §§ 682.406 and
682.411. All regulatory citations in this report are to the compilation dated July 1, 2002.

A guaranty agency must engage in collection efforts on a loan on which it paid a default
claim. As part of this process, it must initiate AWG proceedings against all eligible
borrowers. If a guaranty agency decides to garnish the disposable pay5 of a borrower who
is not making payments on a loan held by the agency, it follows the procedures in 34
C.F.R. § 682.410(b)(9)(B-I). Some of the requirements the guaranty agency must
perform are to (1) properly notify the borrower of the wage garnishment action at least 30
days before initiation of garnishment proceedings, (2) offer the borrower an opportunity
to inspect and copy agency records related to the debt, (3) offer the borrower an
opportunity to enter into a written repayment agreement, (4) offer the borrower an
opportunity for a hearing concerning the existence and amount of the debt, and (5) send a
withholding order to the employer within 20 days after the borrower fails to make a
timely request for a hearing.

In 1957, the Illinois General Assembly created ISAC (originally called the Illinois State
Scholarship Commission) to provide all Illinois residents access to higher education.
ISAC is a state agency backed by the faith and credit of the State of Illinois and has three
different locations (Springfield, Chicago, and Deerfield, Illinois). Its main operations are
in Deerfield, Illinois.

ISAC guarantees loans for qualified borrowers for use at any eligible institution of higher
learning, provided the borrower is eligible for a loan under the Higher Education Act of
1965, as amended. All lenders must execute an ISAC Lender Agreement prior to
participating in the FFEL program through ISAC. The lenders must have received ED
approval prior to executing a Lender Agreement. ISAC will cancel a guarantee if the
lender fails to comply with federal regulations or ISAC’s rules or procedures.

According to its computerized records, ED paid ISAC $95,648,039 in claims and ISAC
received $11,726,470 in AWG collections from October 1, 2002, through June 30, 2003.
ISAC guarantees approximately $1.1 billion in student loans each year and has a
portfolio of defaulted loans valued at $650 million. ISAC collects approximately $14
million annually through AWG action.



5
  Disposable pay is defined as the remaining part of the borrower’s compensation from an employer after
the deduction of any withheld amounts required by law.
Control Number ED-OIG/A05-D0040 	                                                                       Page 14


                OBJECTIVES, SCOPE AND METHODOLOGY 


The objectives of our audit were to determine if, for the period October 1, 2002, through
June 30, 2003, ISAC (1) adequately processed post-default collections related to AWG
and (2) properly submitted eligible reinsurance claims, specifically, default claims, to
ED. Specifically, we wanted to ensure ISAC adhered to laws and regulations related to
processing of post-default collections received through AWG and ED’s payment to ISAC
of reinsurance on lender claims.

To accomplish our objectives we –

• 	 Talked to ED officials, key ISAC officials and staff, representatives from the State of
    Illinois’ Auditor General’s office, and its special assistant auditors.
• 	 Reviewed written AWG and claims review polices and procedures.
• 	 Reviewed prior audit reports on ISAC conducted by other entities and ED-OIG’s
    1999 ISAC audit report.
• 	 Reviewed imaged claim packet information submitted by lenders.
• 	 Reviewed imaged claim packets on ISAC’s computer system.
• 	 Developed a spreadsheet to capture the information we collected through our review
    of imaged claim files on ISAC’s computer system.
• 	 Developed a series of spreadsheets for our review of post-default AWG collections
    on ISAC’s computer system.
• 	 Reviewed accounting and AWG collection information contained in ISAC’s
    computer system.
• 	 Reviewed 50 claims selected from ISAC’s universe of 21,732 claims paid by ED
    from October 1, 2002, to June 30, 2003.
• 	 Reviewed ISAC’s processing of post-default AWG collections for 56 borrowers
    selected from ISAC’s universe of 10,351 borrowers making payments on defaulted
    loans from October 1, 2002, to June 30, 2003.

We used statistical sampling techniques to select borrowers for our review of ISAC’s
processing of post-default collections related to AWG. We first defined the sample unit
(the borrower’s SSN), sample universe (10,351 borrowers), and sampling frame (all the
borrower SSNs in the data extract). We randomly selected a total of 70 borrowers. We
selected 50 borrowers from a universe of 9,290 borrowers as shown on ISAC’s Odyssey
computer system.6 ISAC officials later informed us that the universe did not include
1,061 borrowers due to a problem with truncated loan identification numbers. We later
selected 20 borrowers from the universe of 1,061 borrowers not included in the original




6
  The 50 borrowers selected from the universe of 9,290 borrowers included 4 replacement borrowers. We
replaced 4 borrowers because they were included in a list of 395 borrowers having an increased chance for
selection due to making payments on student loans of their own in addition to making payments on loans
for dependent children.
Control Number ED-OIG/A05-D0040                                                                         Page 15


universe.7 We reviewed ISAC’s processing of post-default collections for 56 of the 70
borrowers selected.8 We did not review processing of post-default collections for all 70
borrowers selected for testing due to lack of reportable findings during our testing of 50
borrowers selected for review from the original universe and 6 borrowers tested from the
second universe. We used a computer software random number generator to select a
sample from each strata.

We used statistical sampling techniques to select the reinsurance claims for review. We
first defined our sample unit (one default claim), sample universe (21,732 claims), and
sampling frame (defaulted claims in the data extract). We analyzed the sampling frame
and divided our universe of claims into two strata based on dollar volume per month.9
We randomly selected 50 claims paid by ED from October 1, 2002, to June 30, 2003.
We selected 15 claims paid by ED in May 2003, and 35 claims paid by ED from October
2002, to April 2003, and June 2003. We used a computer software random number
generator to select a sample from each strata.

To achieve the audit’s objectives, we relied in part on computer-processed data contained
in ISAC’s Odyssey system. ISAC converted to the Odyssey system in October 2002 and
there were no existing reports or studies on its computer-processed data. We decided not
to test any data from ISAC’s prior system because the data was not in a comparable
format with the Odyssey data. The prior system was based on a borrower level, while the
Odyssey data is based on a loan level.

We tested the accuracy and completeness of the data by comparing Forms 2000 amounts
to the AWG and reinsurance data extracts. We also compared selected data in the hard
copies for the sampled items to the data extracts. Based on these tests, we concluded that
the data were sufficiently reliable to be used in meeting the audit’s objectives.

We performed our work at ISAC’s Deerfield, Illinois offices from August 20, 2003
through March 8, 2004. We completed additional work in our Chicago office from
March 9, 2004 through March 26, 2004. We discussed the results of our audit with ISAC
officials on March 19, 2004. We conducted our audit in accordance with generally
accepted government auditing standards appropriate to the scope of review described
above.




7
  The 1,061 borrowers were not included in the original universe of 9,290 borrowers provided by ISAC due
to a problem with the final digit being dropped off the loan identification number in ISAC’s Odyssey
database.
8
  We tested 50 borrowers from ISAC’s original universe of 9,290 borrowers and 6 borrowers from ISAC’s
second universe of 1,061 borrowers.
9
  Approximately 30 percent of the total reinsurance amount paid by ED during the October 1, 2002, to June
30, 2003 period was paid in May 2003. The large payment increase from ED in May 2003 corresponded to
an increase in claims processed by ISAC during March 2003.
Control Number ED-OIG/A05-D0040                                                           Page 16


             STATEMENT ON MANAGEMENT CONTROLS

As part of our review, we assessed the system of management controls, policies,
procedures, and practices applicable to ISAC’s claims review and post-default collections
related to wage garnishment. Our assessment was performed to determine the level of
control risk for determining the nature, extent, and timing of substantive tests needed to
accomplish the audit objectives.

For the purpose of this report, we assessed and classified ISAC’s significant controls into
the following:

•   Processing of post default collections related to AWG

•   Reinsurance claim processing

Because of inherent limitations, a study and evaluation made for the limited purpose
described above would not necessarily disclose all material weaknesses in the
management controls. However, our assessment disclosed significant management
control weaknesses, which adversely affected ISAC’s ability to administer the FFEL
programs. These weaknesses included inadequate procedures for (1) reinsurance claim
processing, (2) document imaging, and (3) retaining support for Forms 2000 information
submitted to ED. These weaknesses and their effects are fully discussed in the Audit
Results section of this report.
Control Number ED-OIG/A05-D0040                                                                                                                                              Attachment A




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Control Number ED-OIG/A05-D0040                                           Attachment A


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Control Number ED-OIG/A05-D0040                                                                                   Attachment B




                                                                                  Illinois
                                                                                 Student
             July 8, 2004                                                      Assistance
                                                                              Commission
             Mr. Richard J. Dowd
             Regional Inspector General for Audit
             United States Department ofBducation
             Office of Inspector Ckneral
             III North Canal Street, Suite 940
             Chicago, Ill inois 60606-n04

             Dear Mr. Dowd:

             I am responding on behalfofLarry Matejka in response to the drafi audit repon (Control Number
             ED-OIG/AOS-DOO40) dated June 8, 2004.

             With resp«t to the Ihree findings presented in the report, ISAC's positions an: stated below;

             Fi ndina No. I : ISAC needs to enh ance its claim review procedures to ensu re lenders'
             d efa ult claim. are fully I Upported.

             ISAC Response: Partially Disagree. [SAC continues to affirm that Ihe adherence to relevant
             provisions in the Common Manual are more than satisfactory to meet the requirements of federal
             regulations govcrning the processing of claims fot reimbursement of defaulted student loans.
             Throughout the process of the OIG's review of claims processing, documentation was presented
             reinfOl'dng ISACs proper handling of claims and. funller, the belief that the manner in which
             certain doo::umentalion was co llected and reviewed provided reasonable assurance that claims
             were being thoroughly evaluated and properly paid.

             However, we understand thaI select provisions of the Common Manual have been called inlo
             question by both the OIG as well as representatives of the Department ofBducation. Recognizing
             this reality, we are moving to comply with the specific terms of the recommendations proffered as
             described below.

             We have prepared a v.ork plan which will enable us to implement the four recommendations
             outlined in the report. This work plan specifically identifies actions which will ensure thatiSAC:

             Adheres In its policies and procedures and requires lenden to provide accurate collection and
             payment histories sufficient for lSAC's claims analysts to review the claims for lender due
             diligence(I . I).

             Requires its claims analysIS 10 verify lender due diligence activities show on the claim form's
             summary of lender due diligence against all detai led collection history information.support for
             periods of defermentslforbearances, and dates and amount of borrower payments ( I.2).

             Reviews all claims submitted for reinsurance to ED during the period October 1,2002, through
             June 30, 2003, and detennine wliich claims had due diligence violations resul ting in lost
             reinsurance or penalties (1.3). Note that the proje<:t team to be formed for the purpose of
             implementing the work plan will first review the claim volume for one month during the 9 month
             period afier which a determination will be made as to whether to general ize from the sample in
             question leading either to a recovery of funds from lenders or serv icers or a payment to the
             Department from existing Student Loan Operating Fund resouroes. 1l!e results of the sampling
             will be shared with both FSA as well as the OIG prior 10 any cost recovery actions. The agency




                                       1755 Lake Cook Road· Deerfield. !l600IS·S209
Control Number ED-OIG/A05-D0040                                                                                        Attachment B




                                                                                                                 2

            does not expect that the sampling will resu lt in a meaningfu l variance between claims paid and
            submitted for reinsurance during the time period and the outcome of tbe post-facto review.
            However, if such should be the case, lSAC will then implement a plan to systematically work,
            over a lime period yet to be identified, all of the claims for the ni ne- month period in question.
            Obtain the missing documentation for 32 claims included in the: OIG sample (1.4). The missing
            documentation will be reviewed and a determination made as 10 whether the cla ims will be
            returned 10 lenden Of a payment 10 E,r) in the amount $75,077 will be made for the claims in
            question.

            Findin g No. 1 : ISAC needs to If"nglb co ntrols ovtr doc ument imaging to ens ure IIdeq ua te
            supPOrt for reins urance claims

             [SAC Response: Co ncur. ISAC has initialed the necessary documentat ion for the sample of 20
             in question in order to verify thaI !he claims were paid properly lrld reinsurnnce wa.< received
             appropriately. This documentation will be reviewed to ensure that it is properly imaged.

             ISAC has taken the following steps 10 address the finding 2.1:

             [SAC management has revised documented operating pol icies and p~ures for imaging claim
             packets and has communicated the polities and procedures to staff. A s~ilic effort is being
             made to ensure that adequale controls are in place 10 address imaging exceptions. StafT has also
             received additional training in this area.

             An internal reeoncil iatiOtl process has been establ ished to ensure that a complete claim file resides
             on (SACs imaging system. StafTfrom the Imaging and Claims Services departments are working
             collaboratively to implement this quality assurance process fO/"eiaim file documentation. Follow­
             up is occurring on im:gularities and exceptions to determ ine the cause and implement corrective
             action.

             F ind in g Nn. 3: ISAC d id not malll!a!!! a dequa te s upPOrt for Forms 2000 infor mat ion
             s ubmitted to ED.

             !SAC ReJponse.       Co ncur.       ISAC Ilas revised policies and procedures to ensulll that
             documentation used in preparing the Forms 2000 report as well as that substantiating manual
             adjustments made for Illporting period(s) are consistent with the records retention requirement
             found in federnl "'8ulstiolls III 34 C .F.R. 682.414 (1I)(1)(iiXG) and (a)(2).

                   If you have any questions concerning our Illsponses, please don' t hesitate to contaet me.

               n Illly.



              teven D. Hen ksen
             Director. Business and Financial Services Division
             minois Student Assistance Commiss ion

             CC:       Larry Matejka
                       Marcia Thompson
                       Theresa Morgan
                       Ch ris Peterson