oversight

Carnegie Student Loans' Compliance with Lender Inducement Provisions

Published by the Department of Education, Office of Inspector General on 2010-02-24.

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

[Type text]


                                      UNITED STATES DEPARTMENT OF EDUCATION
                                                           OFFICE OF INSPECTOR GENERAL

                                                                                                                      Audit Services
                                                                                             Chicago/Kansas City/Dallas Audit Region

                                                                    February 24, 2010


                                                                                                       Control Number
                                                                                                       ED-OIG/A05I0026

Thomas V. Melillo
President
Carnegie Student Loans, Inc.
5005 Rockside Road
Suite 1125
Independence, OH 44131

Dear Dr. Melillo:

This Final Audit Report, Carnegie Student Loans’ Compliance with Lender Inducement
Provisions, presents the results of our audit. The objective of the audit was to determine whether
Carnegie Student Loans, Inc. (CSL), offered, directly or indirectly, points, premiums, payments,
or other inducements to secure applicants for loans made under the Federal Family Education
Loan (FFEL) Program for the period July 1, 2007, through June 30, 2008 (award year
2007-2008). During our audit, we did not identify any evidence that indicated CSL offered,
directly or indirectly, points, premiums, payments, or other inducements to secure applicants for
loans made under the FFEL Program. Because we tested a judgmental sample of transactions,
our results may not be representative of the universe of CSL’s expenditures.


                                                         BACKGROUND


CSL, located in Independence, Ohio, is registered with the South Carolina Department of
Insurance as a captive insurance company for Carnegie Health Systems.1 Carnegie Health
Systems owned CSL and Ohio College of Podiatric Medicine (OCPM) until it spun off CSL in
January 2006. Thomas V. Melillo is President of CSL and OCPM.

For award year 2007-2008, CSL participated in the Federal Stafford Loan Program and the
Federal PLUS Program and offered private loans. According to the National Student Loan Data
System, CSL originated $462,628,013 in FFEL Program loans for award year 2007-2008 for
1
 Captives are an alternate type of self-insurance vehicle that affords businesses some flexibility with their risk
management strategies. CSL issued one insurance policy in South Carolina for its President. Under Section
435(d)(1)(C) of the Higher Education Act of 1965, as amended, an insurance company can be an eligible lender.


    The Department of Education's mission is to promote student achievement and preparation for global competitiveness by fostering educational
                                                      excellence and ensuring equal access.
Final Report
ED-OIG/A05I0026                                                                      Page 2 of 7

students attending 214 schools. Subsequent to award year 2007-2008, CSL stopped originating
FFEL Program loans.

As a lender, CSL did not participate in direct marketing activities to students, conduct any of its
own advertising, or have any contact with schools. Instead, CSL had a partnership agreement
with Sallie Mae, Inc. (Sallie Mae), dated June 1, 2006, that specified, among other things, that
Sallie Mae would market CSL’s Federal Stafford Loan Program and Federal PLUS Program
loans to schools and produce marketing materials at its expense. CSL and Sallie Mae were also
parties to a Financing Agreement, dated November 12, 1993, that provided funds for CSL to
conduct student lending activities. Therefore, students applied to Sallie Mae for all FFEL
Program loans that CSL originated.

Under Section 435(d)(5) of the Higher Education Act of 1965, as amended (HEA), and 34 Code
of Federal Regulations (C.F.R.) § 682.200(b), in the definition of “lender,” paragraph (5),2 an
“eligible lender” does not include any lender that the Secretary determines has (1) offered,
directly or indirectly, points, premiums, payments, or other inducements to secure applicants for
loans made under the FFEL Program; (2) conducted unsolicited mailings to students of student
loan application forms, except to students who have previously received loans from the lender;
(3) offered, directly or indirectly, loans as an inducement to a prospective borrower to purchase a
policy of insurance or other product; or (4) engaged in fraudulent or misleading advertising.


                                                AUDIT RESULTS


During our audit, we did not identify any evidence that indicated CSL offered, directly or
indirectly, points, premiums, payments, or other inducements to secure applicants for loans made
under the FFEL Program during award year 2007-2008. To determine whether CSL practiced
improper inducement activities, we reviewed CSL’s (1) lender agreements; (2) mailing, loan, and
advertising activities; and (3) financial transactions. (Note: Other than discussing Sallie Mae’s
activities on behalf of CSL with a Sallie Mae official and reviewing a brochure promoting CSL’s
FFEL Program loans that Sallie Mae produced, we did not review any of Sallie Mae’s activities
on behalf of CSL).

Review of Lender Agreements
We did not identify any evidence that CSL participated in any agreements or offered incentives
that were prohibited by Section 435(d)(5)(A) of the HEA and 34 C.F.R. § 682.200(b), in the
definition of “lender,” paragraph (5)(i). Specifically:

          CSL’s agreements with Sallie Mae did not set forth improper inducement activities aimed
           at securing applicants for loans made under the FFEL Program.
          CSL did not have any relationships, contact, or agreements with schools aimed at
           securing applicants for loans made under the FFEL Program, and did not have any
           exclusive relationships with the schools that suggested any conflict of interest.
2
    All regulatory citations are to the July 1, 2007, volume.
Final Report
ED-OIG/A05I0026                                                                                     Page 3 of 7

          CSL did not pay schools, school affiliated individuals, or other entities improper
           inducements to secure applicants for FFEL Program loans.
          CSL did not sponsor any advisory board, council, or similar entity, or hire any
           consultants on behalf of schools.
          Minutes from CSL’s board meetings did not include any discussions related to lender
           inducement activities, and CSL’s policies and procedures did not provide for any
           incentives to borrowers or institutions.

Review for Prohibited Activities – Mailing, Loan, and Advertising Activities
We did not identify any evidence that CSL participated in prohibited activities related to mailing,
loan, or advertising activities that are specified in Section 435(d)(5)(B), (C), and (D) of the HEA
and 34 C.F.R. § 682.200(b), in the definition of “lender,” paragraphs (5)(ii) through (iv).
Specifically:

          CSL did not participate in direct marketing activities to students, conduct any of its own
           advertising, or have any contact with schools to secure applicants for loans made under
           the FFEL Program.
          A brochure promoting CSL’s FFEL Program loans that Sallie Mae produced did not
           contain fraudulent or misleading advertising or offer an incentive to secure applicants for
           FFEL Program loans.

Review of Financial Transactions
We did not identify any evidence that CSL participated in prohibited activities specified in
Section 435(d)(5)(A) of the HEA or 34 C.F.R. § 682.200(b), in the definition of “lender,”
paragraph (5)(i). During our review of documentation supporting $4,001,169 (28 percent) of
CSL’s expenditures totaling $14,472,108,3 we did not identify any transactions between CSL and
any school, any school affiliated individual, or Sallie Mae that included evidence of improper
inducements.


                        OBJECTIVE, SCOPE, AND METHODOLOGY


The objective of the audit was to determine whether CSL offered, directly or indirectly, points,
premiums, payments, or other inducements to secure applicants for loans made under the FFEL
Program for award year 2007-2008.

To achieve our objective, we performed the following procedures.

      1. Gained an understanding of the FFEL Program and CSL relevant to our audit objective
         by reviewing the Department of Education’s Web site, reviewing work performed by
         Federal Student Aid, Financial Partners Eligibility and Oversight related to one of its
         lender inducement program reviews, and reviewing CSL’s Web site and organizational
         chart.
3
    See the Objective, Scope, and Methodology, number 8, for description of our sample selection.
Final Report
ED-OIG/A05I0026                                                                                 Page 4 of 7

    2. Identified and gained an understanding of the HEA, regulations, and program guidance
       significant within the context of the audit objective and in effect for the audit period.
    3. Reviewed CSL’s policies and procedures regarding incentives related to student loans
       that may be provided to borrowers and institutions, and CSL’s board meeting minutes.
    4. Reviewed the following reports to determine whether they included any findings relevant
       to our audit objective: CSL’s independent auditor’s financial audit report, Carnegie
       Student Loans, Inc., Financial Statements and Supplemental Information, June 30, 2007
       and Six Months Ending June 30, 2006; the Government Accountability Office report,
       Federal Family Education Loan Program: Increased Department of Education Oversight
       of Lender and School Activities Needed to Help Ensure Program Compliance
       (GAO-07-750), dated July 2007; the United States Senate Health, Education, Labor and
       Pensions Committee’s Report on Marketing Practices in the Federal Family Education
       Loan Program, dated June 14, 2007, and Second Report on Marketing Practices in the
       Federal Family Education Loan Program, dated September 4, 2007; and SallieMae
       Lender Servicing Compliance Attestation Examination for Lenders and Lender Servicers
       Participating in the Federal Family Education Loan Program, year ended
       December 31, 2007.
    5. Reviewed CSL’s agreements for indications of improper inducement activities aimed at
       securing applicants for loans made under the FFEL Program: Agreement between
       Sallie Mae and CSL, dated June 1, 2006; ExportSS Agreement of May 1, 2004 between
       Student Loan Marketing Association, Ohio College of Podiatric Medicine, and Carnegie
       Insurance Company, dated May 1, 2004; Amendment of July 1, 2005, to ExportSS
       Agreement, dated May 1, 2004; Financing Agreement between Sallie Mae and OCPM,
       dated November 12, 1993; and Amendment of April 1, 2006, to Financing Agreement,
       dated November 12, 1993.
    6. Gained an understanding of CSL’s system of internal control over its administration and
       marketing activities aimed at securing applicants for loans made under the FFEL Program
       by interviewing CSL and National Marketing Consultants, LLC4 officials and a Sallie
       Mae official. Other than discussing Sallie Mae’s activities on behalf of CSL with a Sallie
       Mae official and reviewing a brochure promoting CSL’s FFEL Program loans that Sallie
       Mae produced, we did not review any of Sallie Mae’s activities on behalf of CSL.
    7. Obtained and reviewed CSL’s complete chart of accounts and identified accounts, such
       as Consulting Fees, Marketing, Travel & Meetings, Contribution, and Royalty to
       OCPM, that might have contained financial transactions for payments other than FFEL
       Program proceeds; and a list of financial transactions for all of CSL’s accounts to identify
       any transactions between CSL and any school, any school affiliated individual, or Sallie
       Mae that appeared to be payment for something other than FFEL Program proceeds.
    8. Reviewed invoices, cancelled checks, and other supporting documentation for a
       judgmentally selected sample of CSL’s expenditures and adjusting journal entries (AJE).
       We judgmentally selected (a) 38 of 222 non-AJE transaction lines totaling $814,102,
       which was 45 percent of the total dollar amount of non-AJE expenditures ($1,797,882);
       and (b) 6 of 32 AJEs, consisting of 31 transaction lines and totaling $3,187,067, which
       was 25 percent of the total dollar amount of the 32 AJEs ($12,674,226). We based our
       judgmental sample selection, in part, on the accounts to which the transactions were
4
  During award year 2007-2008, CSL outsourced its administration (including interaction with Sallie Mae
representatives), accounting, and legal functions to National Marketing Consultants, LLC.
Final Report
ED-OIG/A05I0026                                                                                   Page 5 of 7

        charged, transaction descriptions, and vendor names. We generally selected larger
        transactions and those that appeared out of the ordinary. In total, we reviewed 69
        transaction lines totaling $4,001,169, which was 28 percent of the total dollar amount of
        expenditures.5 Because we selected our sample judgmentally, our results might not be
        representative of the universe of CSL’s expenditures.

In addition, we relied, in part, on computer-processed general ledger reports from CSL’s
accounting system. To assess the reliability of the reports, we reviewed them for completeness,
validity, and accuracy. We ensured that the universe of financial transactions generally agreed
with supporting, non-computer generated evidence, such as original invoices or images of
cancelled checks, or both. We concluded that the computer-processed data were sufficiently
reliable for the purpose of our audit.

We conducted our audit from August 2008 through November 2009 at CSL’s office in
Independence, Ohio, and at our offices. We discussed the results of our audit with CSL’s
President on November 17, 2009.

We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
based on our audit objectives. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objectives.



                                 ADMINISTRATIVE MATTERS


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

No action on your part is required. However, if you would like to comment on this report, please
send your comments to:

                                   William J. Taggart
                                   Chief Operating Officer
                                   Federal Student Aid
                                   U.S. Department of Education
                                   Union Center Plaza, Room 112G1
                                   830 First Street, N.E.
                                   Washington, DC 20202

5
  The universe of CSL’s expenditures for the audit period consisted of 340 transaction lines totaling $14,472,108.
Within this universe of 340 transaction lines, 222 transaction lines, totaling $1,797,882, were non-AJE expenditures
and 118 transaction lines, totaling $12,674,226, comprised 32 AJEs. All dollar amounts in this report are rounded to
the nearest dollar.
Final Report
ED-OIG/A05I0026                                                                  Page 6 of 7

We appreciate the cooperation and assistance extended by your staff during the audit. If you
have any questions, please contact me at 312-730-1620.


                                            Sincerely,

                                            /s/

                                            Gary D. Whitman
                                            Regional Inspector General
                                            for Audit
Final Report
ED-OIG/A05I0026                                                 Page 7 of 7

               Acronyms and Abbreviations Used in This Report


AJE          Adjusting Journal Entry

C.F.R.       Code of Federal Regulations

CSL          Carnegie Student Loans, Inc.

FFEL         Federal Family Education Loan

HEA          Higher Education Act of 1965, as amended

OCPM         Ohio College of Podiatric Medicine

Sallie Mae   Sallie Mae, Inc.