oversight

Oversight of Guaranty Agencies During the Phase-Out of the Federal Family Education Loan Program

Published by the Department of Education, Office of Inspector General on 2014-09-29.

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

                              UNITED STATES DEPARTMENT OF EDUCATION
                                              OFFICE OF INSPECTOR GENERAL

                                                                                                                     AUDIT SERVICES



                                                       September 29, 2014

                                                                                                    Control Number
                                                                                                    ED-OIG/A06L0003
James W. Runcie
Chief Operating Officer
Federal Student Aid
U.S. Department of Education
Washington, D.C. 20202

Dear Mr. Runcie:

This final audit report, entitled Oversight of Guaranty Agencies During the Phase-Out of the
Federal Family Education Loan Program, presents the results of our audit. The audit objectives
were to evaluate Federal Student Aid’s (FSA) (1) process for ensuring the continued protection
of Federal funds at Guaranty Agencies (GA); (2) oversight of GAs’ ability to perform their
duties; and (3) actions for the GAs’ successful participation during the phase-out of the Federal
Family Education Loan Program (FFELP) loans. The SAFRA Act (SAFRA), part of the Health
Care and Education Reconciliation Act of 2010 (Pub. L. 111-152), mandated that no new loans
be made or insured under FFELP after June 30, 2010. The audit evaluated FSA’s policies and
procedures for its oversight of GAs during the phase-out of FFELP from July 1, 2009, through
June 30, 2011, and we performed additional audit work related to updates to FSA’s actions for
the GAs' FFELP participation through May 1, 2014.

We determined that FSA does not have an adequate process to protect Federal funds because the
methodology FSA uses to calculate a GA’s current reserve ratio is not in compliance with the
requirement that the Federal fund balance used in the reserve ratio is calculated using an accrual
basis of accounting. FSA’s method overstates the financial position of the GAs.

We found that FSA performed monitoring of the GAs’ ability to perform their duties. However,
FSA did not establish criteria for GAs to use to develop the financial projections that FSA
required GAs to report on the Guaranty Agency Financial Report Annual Form 2000 (Annual
Form 2000). We also found that FSA did not document the procedures for actions it should have
taken on information GAs reported on the Guaranty Agency Financial Report Monthly Annual
Form 2000 (Monthly Annual Form 2000) that identified GAs under possible financial stress.

FSA developed a methodology, named the Transition Evaluation Process, to select a successor
GA for a GA that requested to end its participation in FFELP in fiscal year (FY) 2011. FSA
subsequently modified that methodology for another GA that also wanted to end its participation
in FFELP in FY 2012. We determined that both the initial and modified methodologies
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Final Report
ED-OIG/A06L0003                                                                                       Page 2 of 21

contained deficiencies. During a follow up interview, FSA officials stated that they planned to
use the second Transition Evaluation Process for GAs that want to transition out of FFELP.
FSA took actions for the GAs’ successful participation during the phase-out of FFELP by
attempting to implement Voluntary Flexible Agreements (VFA). 1 FSA issued two Federal
Register notices (on May 31, 2011 and August 14, 2013) to invite GAs to submit proposals to
enter into VFAs. The VFAs would have permitted a more flexible agreement between the
Secretary of Education (Secretary) and the GAs than the standard agreements and would have
permitted GAs to develop, use, and evaluate alternative models for ensuring that they carried out
their responsibilities in a more cost effective and efficient manner. The purpose of the May 2011
VFA solicitation was to establish new GA structures and financing mechanisms to protect the
Federal fiscal interest in light of the diminishing outstanding FFELP portfolio. However, FSA
did not enter into any VFAs because the GAs did not submit proposals that met FSA’s
requirements in the Federal Register notice. The purpose of the August 2013 VFA solicitation
was to establish VFAs with a small number of GAs, each of which would assume responsibility
of some or all of a terminating GA’s defaulted and non-defaulted loans. FSA received 13 letters
of request and completed an analysis of the letters. However, FSA put the August 2013 VFA on
hold because of changes to GA compensation made in the Bipartisan Budget Act of 2013 (Public
Law 113-67)(Act). 2 According to FSA, the Act changed the payment schedule for the GAs and
FSA’s Director of Policy Liaison and Implementation stated that FSA did not think it could
select GAs based on the requirements it had identified for the August 2013 VFA. When we
contacted FSA on May 1, 2014, to update our information regarding plans for GA FFELP
participation, the Director of Policy Liaison and Implementation stated that FSA has had
minimal discussions regarding the August 2013 VFA and is unsure about how to go forward
with the VFA. FSA officials stated that if several moderately sized GAs chose to transition out
of FFELP, FSA could easily use larger GAs as successors. As a result, there has been no change
in the relationships between FSA and the GAs participating in FFELP because of SAFRA.

In its response to the draft of this report, FSA concurred with the findings and agreed to take
action that is responsive to the recommendations in the report. We made changes to the report in
response to FSA’s comments. Specifically, we changed the Finding 2 caption, removed the
discussion in the draft report under Finding 3 about the GA recovery rate, and changed the
Finding 3 draft report conclusion to identify that the reordering of the Transition Evaluation
Process steps would result in a more logical process. The comments are summarized at the end
of each finding along with the OIG’s response. The full text of FSA’s comments to the draft
report is included as Attachment 5 to the report.




                                              BACKGROUND


According to Section 141(a)(1) of the Higher Education Act of 1965, as amended (HEA), FSA is
responsible for managing the administrative and oversight functions supporting the Title IV

1
  Section 428A of the HEA authorizes the Secretary to enter into VFAs with GAs in lieu of the standard agreements
between the Secretary and the GAs.
2
  The Act reduced the maximum fee GAs could charge borrowers when GAs sold their rehabilitated FFELP loans
and required GAs that sold rehabilitated loans to repay all (rather than a portion) of the default insurance payments
on such loans beginning on July 1, 2014.
Final Report
ED-OIG/A06L0003                                                                        Page 3 of 21

student financial assistance programs. As such, FSA is responsible for monitoring GAs’
program compliance with the HEA. FSA’s responsibilities include ensuring that GAs
(1) maintain adequate service levels to perform default aversion activities, (2) report on loan
default collections, and (3) protect Federal funds.

A GA is a State or private nonprofit agency that has agreements with the Secretary to administer
certain aspects of the FFELP loans, including insuring private lenders against losses due to a
borrower’s default. FFELP is a federally guaranteed loan program in which private lenders
provided loans, GAs insure those loans, and the U.S. Department of Education (Department)
reinsures the loans. One GA stated that it is also responsible for informing schools, students,
lenders, secondary markets, and servicers of FFELP requirements. Although there are no new
FFELP loan originations, GAs continue to insure FFELP loans already disbursed, perform
default aversion activities, oversee lenders, collect defaulted FFELP loans, pay lender default
claims, and report on loan statuses. In addition to performing their responsibilities under their
agreements with the Department, GAs’ other lines of business can include managing State
grants, managing non-Federal student loan programs, and developing financial literacy training
programs.

As of September 30, 2013, the guaranteed loan portfolio consisted of about $264 billion in
outstanding FFELP loans held by private lenders. FSA held $59.7 billion in defaulted FFELP
loans, which included both loans that GAs were responsible for collecting and loans that were
assigned to FSA to collect.

Significant statutory changes affecting FFELP included the Ensuring Continued Access to
Student Loan Act (ECASLA) of 2008 (Pub. L. 110–227), which authorized the Secretary to
create programs to allow FFELP loan holders to sell certain FFELP loans to the Secretary. The
Secretary concluded that as a result of ECASLA “the outstanding portfolio of [FFELP] loans
under guarantee has declined by more than $100 billion, reducing both the short-term and long-
term revenues of [GAs].” In addition, SAFRA mandated that no new loans be made or insured
under FFELP after June 30, 2010. According to the Federal Register, as a result of SAFRA,
GAs would not have an “estimated $75 billion of annual new loan volume that otherwise would
have been added to their portfolios, resulting in further reductions to [GA] revenues.” The total
dollar amount of FFELP loans held or insured by GAs has diminished and will continue to
diminish, resulting in less revenue available to these agencies and jeopardizing their ability to
meet their FFELP responsibilities.

Voluntary Flexible Agreements
The purpose of a VFA is to permit a more flexible agreement than the standard agreements
between the Secretary and the GAs. Under Sections 428(b) and (c) of the HEA, GAs perform
certain roles in FFELP pursuant to agreements with the Secretary. Section 428A of the HEA
authorizes the Secretary to enter into VFAs with GAs in lieu of the agreements entered into
under Sections 428(b) and (c) of the HEA. This authority allows the Secretary to work with GAs
to develop, use, and evaluate alternate ways of ensuring that the responsibilities of the GAs are
fulfilled in the most cost-effective and efficient manner possible.

FSA Selection of Successor GAs for GAs Ending Participation in FFELP
FSA may decide to terminate its agreement with a GA. A GA can choose to continue
performing the activities under its FFELP agreement with FSA or request to end participation in
Final Report
ED-OIG/A06L0003                                                                       Page 4 of 21

FFELP. When a GA’s participation in FFELP ends, its FFELP loan portfolio is transitioned to
another GA.

FSA Monitoring of GAs

Federal Fund and Operating Fund
GAs are responsible for managing two separate funds: the Federal fund and the operating fund.
The Federal fund is the property of the Federal Government. The operating fund is the property
of the GA. The HEA requires a GA to deposit revenue from specified sources into the Federal
fund and limits the use of Federal fund assets. GAs must use assets from the Federal fund to pay
lender claims and to pay default aversion fees they earn into their operating fund. Default
aversion fees are paid to a GA for performing default aversion activities. These activities are
directly related to providing collection assistance to the lender on a delinquent loan before the
loan is placed in a default status. The HEA also specifies deposits into the operating fund and
the general uses of operating fund assets. Except for funds transferred from the Federal fund, the
GA owns the operating fund and uses it to pay its daily operating expenses. GAs use money in
the operating fund for repayment status management, default aversion activities, default
collection activities, financial aid awareness and related outreach activities, and compliance
monitoring.

Guaranty Agency Financial Report Annual Form 2000
GAs report their annual financial information on the Annual Form 2000. The Annual Form 2000
is used for billing and information purposes and contains data for the GAs’ operating fund,
Federal fund, balance sheet, and financial information used to calculate the reserve ratio. The
reserve ratio is a financial indicator calculated by FSA to determine a GA’s ability to pay claims
on defaulted student loans. FSA also uses the information on the Annual Form 2000 to monitor
the GAs’ financial activities, including activities relating to the operating and Federal funds. In
addition, information in the balance sheet is used by FSA to conduct annual reconciliations. The
annual reconciliation is the process by which FSA compares the information each GA reported
on its Annual Form 2000 to the information it reported on its Monthly Annual Forms 2000 to
determine whether inconsistencies or data anomalies exist. If FSA finds inconsistencies or
anomalies, it contacts the applicable GA for corrections and updates as necessary. The Annual
Form 2000 is also used by GAs to request payments from and make payments to the Department.

Guaranty Agency Financial Report Monthly Annual Form 2000
GAs report their financial information on the Monthly Annual Form 2000. GAs submit their
monthly financial data to FSA by the 20th day of the month following the month the financial
activity occurred. The Monthly Annual Form 2000 includes the same line items as the Annual
Form 2000; however, all of the individual line items in the Monthly Annual Form 2000 are
estimates. According to FSA, the line items are estimates because the information is due on a
monthly basis from the GAs and subject to change when finalized numbers are reported on the
Annual Form 2000.

FSA prepares three reports using the information on the Monthly Annual Form 2000: the
Monthly Variance Report, the Monthly Annual Data Report, and the Quarterly Trend Analysis.
The Monthly Variance Report displays the dollar and percentage changes from month to month.

The Monthly Annual Data Report displays the financial data for beginning and ending balances;
the reinsurance amounts compared to the claims expensed to the lenders that hold the loans
Final Report
ED-OIG/A06L0003                                                                       Page 5 of 21

guaranteed by the GAs; the Secretary’s and GAs’ share of collections, if applicable; default
aversion fees; and other expenses for each agency. The report also includes monthly amounts of
each GA’s Federal and operating funds and balance sheet calculations.

The Quarterly Trend Analysis report contains information regarding the GAs’ financial solvency
and ability to pay claims based on changes in the Federal fund and operating fund balances and
the trigger rate. The trigger rate is calculated by dividing the total reinsurance claims the
Department paid to a GA during the current fiscal year by the amount of loans in repayment
insured by that GA at the end of the preceding fiscal year. The trigger rate determines the
percentage rate at which the Department will reimburse a GA for losses on default claims paid to
lenders.




                                     AUDIT RESULTS


The objectives of our audit were to evaluate FSA’s (1) process for ensuring the continued
protection of Federal funds at GAs; (2) oversight of GAs’ ability to perform their duties; and
(3) actions for the GAs’ successful participation during the phase-out of FFELP loans.

We determined that FSA does not have an adequate process to ensure the continued protection of
Federal funds because the methodology FSA uses to calculate a GA’s current reserve ratio is not
in compliance with the requirement that the Federal fund balance used in the reserve ratio be
calculated using an accrual basis of accounting. The current reserve ratio calculation overstates
GAs’ Federal fund and results in an inflated reserve ratio and understates the level of financial
stress a GA may be under.

We also found that FSA performed monitoring of the GAs’ ability to perform their duties.
However, FSA did not establish criteria for GAs to use to develop financial projections that FSA
required GAs to report on the Annual Form 2000. We also found that FSA did not document the
procedures for actions it should have taken on information GAs reported on the Monthly Annual
Form 2000 that identified GAs under possible financial stress.

We also determined that FSA’s initial methodology used to select successor GAs for GAs ending
participation in FFELP was deficient. FSA modified the initial methodology but the modified
methodology also contained deficiencies. FSA officials stated that they planned to use the
second Transition Evaluation Process for GAs that want to transition out of FFELP. FSA has
used the modified process to transition two GAs out of FFELP and transfer their portfolios to
other GAs.

In addition, FSA took actions for the GAs’ successful participation during the phase-out of the
FFELP program by attempting to implement VFAs. The VFAs would have permitted a more
flexible agreement between the Secretary and the GAs than the standard agreements and would
have permitted GAs to develop, use, and evaluate alternative models for ensuring that they
carried out their responsibilities in a more cost effective and efficient manner. However, FSA
did not enter into any VFAs. The GAs did not submit proposals that were responsive to FSA’s
requirements in the May 2011 Federal Register notice and FSA placed the August 2013 VFA
Final Report
ED-OIG/A06L0003                                                                      Page 6 of 21

process on hold to consider the impact of the Act on the revenues available to GAs. As a result,
there has been no change in the relationships between FSA and the GAs participating in FFELP
because of SAFRA.

In its response to the draft of this report, FSA concurred with the findings and agreed to take
action that is responsive to the recommendations in the report. We made changes to the report in
response to FSA’s comments regarding the suggestion for a revised Finding 2 caption, the use of
the gross GA recovery rate as a performance indicator and that the reordering of the Transition
Evaluation Process steps for identifying the future successor GAs would make the process more
logical. Specifically, we changed the Finding 2 caption, removed the discussion in the draft
report under Finding 3 about the GA recovery rate, and changed the Finding 3 draft report
conclusion to identify that the reordering of the Transition Evaluation Process steps would result
in a more logical process. The comments are summarized at the end of each finding along with
the OIG’s response. The full text of FSA’s comments to the draft report is included as
Attachment 5 to the report.

 FINDING NO. 1 – FSA’s Methodology for Calculating a GA’s Federal Fund
                   Reserve Ratio Overstates the GA’s Financial Health

We determined that the methodology FSA uses to calculate a GA’s Federal fund reserve ratio is
not in compliance with the requirement at 34 C.F.R. § 682.419(f)(1) that the Federal fund
balance used in the calculation be based on accrual accounting, which resulted in the
overstatement of GA financial health.

Accrual accounting matches revenues to expenses when the transaction occurs rather than when
payment is made or received. FSA’s current methodology for calculating a GA’s reserve ratio
overstates the GA’s reserve ratio, which FSA uses to assess the financial solvency of the GA.

Section 428(c)(9)(A) of the HEA requires GAs to meet a minimum reserve ratio of at least
0.25 percent. This means that a GA’s Federal fund balance must equal at least 0.25 percent of
the outstanding loans it guaranteed. Under Section 428(c)(9)(C) of the HEA, if the GA does not
meet the reserve ratio for 2 consecutive years, or if the Secretary determines that the GA’s
administrative or financial condition jeopardizes the agency’s continued ability to perform its
responsibilities under its guaranty agreement, the Secretary will require the GA to submit and
implement a management plan that is acceptable to the Secretary within 45 days of any such
event. Under Section 428(c)(9)(D) of the HEA, the management plan must include the means by
which the GA will improve its financial and administrative condition to the required level within
18 months.

FSA uses data from the Annual Form 2000 Balance Sheet Section (Federal fund) to calculate the
reserve ratio. The Annual Form 2000 reporting instructions for this section state, “The balances
reported in this section should reconcile to amounts reported on the Guarantor’s audited financial
statements Balance Sheet as of the end of the Federal fiscal year.” The reporting instructions
further state that “[a]ll reporting [on the form] should be on an accrual basis and in accordance
with Generally Accepted Accounting Principles.” In addition, the instructions for the Federal
fund balance line item state “this amount should represent the equity on the audited balance sheet
section of the Federal Fund.” The Federal fund balance line item is reported on an accrual basis.
FSA’s methodology for calculating the reserve ratio adds allowances and other non-cash charges
Final Report
ED-OIG/A06L0003                                                                      Page 7 of 21

from the Annual Form 2000 to the accrual accounting Federal fund balance, resulting in an
inflated reserve ratio calculation as shown below.

               Federal Fund Balance + Allowances and Other Non-Cash Charges
                               Original Principal Outstanding

Because the Annual Form 2000 already requires accrual accounting, no adjustments to the
Federal fund balance line item are needed to meet the accrual accounting requirement for the
Federal fund balance used in the reserve ratio calculation. That is, the allowances and other non-
cash charges have already been properly deducted from the Federal fund balance reported in the
Annual Form 2000 and should not be added back to the Federal fund balance line item.

In our April 2009 audit report, “Federal Student Aid’s Oversight and Monitoring of Guaranty
Agencies, Lenders, and Servicers Needs Improvement” (ED-OIG/A20I0001), we identified that
FSA’s reserve ratio calculation improperly overstated the financial condition of GAs.

We recalculated the reserve ratio using the accrual basis of accounting for all 32 GAs for
FY 2010. We used only the accrual accounting Federal fund balance from the FY 2010 Annual
Form 2000 in the numerator without adding allowances and other non-cash charges, as required
by the regulations. We determined that using FSA’s current methodology made GAs appear to
have a stronger financial position. As shown in Table 1, three GAs would not have met the
minimum reserve ratio using the accrual accounting Federal fund balance, but met the minimum
reserve ratio requirement using FSA’s current methodology. Overall, FSA’s current
methodology inflated GA reserve ratios by an average of 27 percent above the reserve ratios
calculated using accrual accounting.

              Table 1. Comparison of Reserve Ratio Calculation for FY 2010
                                              FSA’s Reserve           Accrual
                                                   Ratio             Accounting
     Guaranty Agency                            Calculation           Reserve
                                                                       Ratio
                                                                    Recalculation
     American Student Assistance
                                                    0.30                0.22
     (Massachusetts)
     Kentucky Higher Education Assistance
                                                    0.36                0.24
     Authority
     College Assist (Colorado)                      0.26                0.19

We performed the same recalculation described above for the 32 GAs using the FY 2011
Annual Form 2000 information. As shown in Table 2, four GAs would not have met the
minimum reserve ratio using the accrual accounting Federal fund balance, but met the minimum
requirement using FSA’s current methodology. American Student Assistance did not meet the
minimum reserve ratio using either calculation. FSA’s current methodology inflated GA reserve
ratios by an average of 30 percent above the reserve ratios calculated using accrual accounting
and presented each GA in a stronger financial position in FY 2011.
Final Report
ED-OIG/A06L0003                                                                    Page 8 of 21

               Table 2. Comparison of Reserve Ratio Calculation for FY 2011
                                               FSA’s Reserve           Accrual
                                                    Ratio             Accounting
     Guaranty Agency                             Calculation           Reserve
                                                                         Ratio
                                                                     Recalculation
     American Student Assistance
                                                     0.24                0.16
     (Massachusetts)
     Kentucky Higher Education Assistance
                                                     0.31                0.19
     Authority
     College Assist (Colorado)                       0.25                0.18
     Student Loan Guarantee Foundation of
                                                     0.33                0.20
     Arkansas
     New York State Higher Education
                                                     0.28                0.19
     Services Corporation

We performed the same recalculation described above for the all GAs using the FY 2012
Annual Form 2000 information. As shown in Table 3, seven GAs would not have met the
minimum reserve ratio using the accrual accounting Federal fund balance, but met the minimum
requirement using FSA’s current methodology. FSA’s current methodology inflated GA reserve
ratios by an average of 43 percent above the reserve ratios calculated using accrual accounting
and presented each GA in a stronger financial position in FY 2012.

               Table 3. Comparison of Reserve Ratio Calculation for FY 2012
                                               FSA’s Reserve           Accrual
                                                    Ratio             Accounting
     Guaranty Agency                             Calculation           Reserve
                                                                         Ratio
                                                                     Recalculation
     American Student Assistance
                                                     0.25                0.18
     (Massachusetts)
     Kentucky Higher Education Assistance
                                                     0.29                0.16
     Authority
     College Assist (Colorado)                       0.26                0.19
     Student Loan Guarantee Foundation of
                                                     0.27                0.15
     Arkansas
     New York State Higher Education
                                                     0.28                0.20
     Services Corporation
     Michigan Guaranty Agency                        0.35                0.24
     Higher Education Student Assistance
                                                     0.84                0.14
     (New Jersey)
Final Report
ED-OIG/A06L0003                                                                      Page 9 of 21

FSA’s erroneous calculation identified that all GAs met the minimum reserve ratio in FY 2010,
all but one GA (Massachusetts) met the minimum reserve ratio in FY 2011, and all GAs met the
minimum reserve ratio in 2012 (see attachments 2, 3 and 4 for all GAs reserve ratio
recalculations). Based on the correct calculation, College Assist, Kentucky Higher Education
Assistance Authority, Student Loan Guarantee Foundation of Arkansas (Arkansas), American
Student Assistance, and New York State Higher Education Services Corporation fell below the
minimum ratio for two consecutive years and should have been placed on management plans.

Recommendations
We recommend that the Chief Operating Officer of Federal Student Aid—

 1.1   Cease adding allowances and other non-cash charges to the accrual accounting Federal
       fund balance when calculating the reserve ratio.

 1.2   Recalculate the reserve ratio for all GAs for the two most recently completed fiscal years
       using the accrual basis of accounting Federal fund balance to determine whether any of
       the GAs would have failed to meet the ratio and should be required to submit a
       management plan.

FSA’s Comments

FSA concurred with Finding No. 1 and stated it would take the actions described in the
recommendations.

OIG Response

FSA’s planned corrective actions, if properly implemented, are responsive to the finding and
recommendations.

FINDING NO. 2 – FSA Did Not Document the Procedures for Actions it
                Should Have Taken on Information That Identified
                Guaranty Agencies Under Possible Financial Stress
FSA did not establish criteria for GAs to use in developing the financial projections that FSA
required GAs to report on the Annual Form 2000 and FSA did not document the procedures for
actions it should have taken on the information GAs reported on the Monthly Annual Form 2000
that identified GAs under possible financial stress. FSA required GAs to project revenues and
expenses for 5 years in both the Federal and operating funds accounts on the Annual Form 2000.
In the absence of criteria for developing projections, each GA used its own methodology, which
made it impossible for FSA to meaningfully compare GAs. Also, FSA did not require GAs to
submit support for the projections, so FSA could not be confident that the projections were
reasonable estimates.

In addition, GAs must submit a Monthly Annual Form 2000 that contains financial information
for both the Federal and operating fund accounts. We found that FSA’s procedures state that
FSA staff should use the Monthly Variance Report, the Monthly Annual Data Report, and the
Quarterly Trend Analysis to identify inconsistencies or data anomalies and for the annual
reconciliation process. The procedures do not state that staff should act on information in the
Final Report
ED-OIG/A06L0003                                                                      Page 10 of 21

three reports that identifies GAs under possible financial stress, and we did not find evidence that
staff used the three reports for that purpose. For example, the Quarterly Trend Analysis report
contains information regarding the GAs’ financial solvency and ability to pay claims. For the
first quarter of FY 2011, the Quarterly Trend Analysis report identified four GAs with a high risk
of becoming insolvent and 14 GAs as not having the ability to pay claims. There was no
indication that FSA increased its monitoring of the GAs identified with a high risk of insolvency
or the inability to pay claims based on the information reported in the Quarterly Trend Analysis.

Based on our work discussed in Finding 1, six GAs we identified as failing to meet the reserve
ratio were also identified in the Quarterly Trend Analysis report as not having the ability to pay
claims. Two of the six GAs were also identified as having a high risk of becoming financially
insolvent. On March 19, 2014, Arkansas submitted a formal request to FSA to transition out of
FFELP and have its portfolio transferred to a GA better suited to pay claims. Arkansas requested
that FSA complete the process by September 30, 2014. As reported in Finding 1, Arkansas
failed to meet the reserve ratio requirement for FY 2011 and FY 2012 as recalculated by the
Office of Inspector General (OIG) and should have been placed on a management plan.
Arkansas was one of the GAs identified in the FY 2011 Quarterly Trend Analysis report as not
having the ability to pay claims and as having a medium risk for financial insolvency.

According to Section 428(c)(9) of the HEA the Secretary is required to evaluate the financial and
administrative condition of GAs. The statute also allows the Secretary to terminate GA
agreements if the GA is not meeting the requirements of the program.

According to the Director of Business Operations, FSA recognizes that the projections are not
calculated consistently between each GA and, as such, FSA places little importance on the
accuracy of the GA projections on the Annual Form 2000. Although FSA uses the Monthly
Annual Form 2000 to identify anomalies and discrepancies, FSA did not use the reported data to
determine whether a GA is under financial stress and did not take action based on that
information.

Recommendations
We recommend that the Chief Operating Officer of Federal Student Aid—

    2.1 Develop criteria for fund projections that GAs are required to report on the Annual
        Form 2000.

    2.2 Develop action plans when available information indicates that a GA is under possible
        financial stress.

FSA’s Comments

FSA concurred with Finding No. 2 and stated it would take the actions described in the
recommendations. However, FSA stated that the finding caption was not accurate.

OIG Response

Based on FSA’s response, we changed the finding caption. FSA’s planned corrective actions, if
properly implemented, are responsive to the finding and recommendations.
Final Report
ED-OIG/A06L0003                                                                     Page 11 of 21

FINDING NO. 3 – FSA’s Transition Evaluation Process for Selecting
                Successor GAs Has Deficiencies

We identified deficiencies in the methodology FSA developed to transition two GAs out of
FFELP. Specifically, the analysis FSA used to select these potential successors GAs contained
deficiencies related to projected fund balances, used subjective factors, and did not provide a
rationale for why the variables FSA selected to predict GA financial solvency were the most
relevant variables.

FSA Initial Methodology for Identifying Successor GAs
For GAs that no longer want to participate in FFELP, FSA developed a methodology to select
successor GAs. In response to a GA’s request to exit FFELP in March 2011, FSA developed a
process it called the “Transition Evaluation Process” to evaluate successor GA capacity.

The Transition Evaluation Process involved FSA officials reviewing eight variables and using
their personal knowledge about individual GAs to identify acceptable successors. The eight
variables were Financial Health, trigger rate, recovery rate, 2010 Federal fund, 2010 operating
fund, financial bandwidth, data and asset security, and cohort default rate FY 2009. We
identified deficiencies with this process. Specifically, as part of its analysis, FSA used the
reported operating and Federal fund projections through 2015, which GAs submitted on their
Annual Forms 2000. As discussed in Finding 2, since each GA used its own methodology for
these projections, FSA cannot make meaningful comparisons among them.

In addition, FSA officials used their personal knowledge of the GAs to add or remove GAs from
consideration as successor GAs. FSA officials did not have documentation of or explanations
for the criteria they used to make these decisions. The personal knowledge criteria varied and
were based on FSA officials’ experience working with the GAs.

FSA used this process to identify three acceptable successors GAs for the GA that requested to
exit FFELP in March 2011. As of October 2013, the requesting GA was still participating in
FFELP.

FSA’s Modified Methodology for Identifying Successor GAs
In November 2011, a second GA requested to end its participation in FFELP. FSA modified the
initial Transition Evaluation Process by using seven instead of eight variables—it eliminated the
use of the operating and Federal fund projections variable. FSA also did not rely on FSA
officials’ personal knowledge about individual GAs to make successor selections. Nonetheless,
this modified process also contained deficiencies.

The modified methodology was a two-step process. First, FSA ranked the 32 GAs according to
the seven variables. Second, FSA selected the 10 highest ranked GAs for further evaluation
based on GA capacity and size. In the first step of the process for ranking GAs, FSA gave a
higher score to GAs with lower 2-year cohort default rates and lower trigger rates.

In the second step of the process, FSA evaluated the GAs ranked in the top 10 from step one.
FSA then eliminated six GAs that it determined did not have the capacity to serve as a successor
GA. FSA’s criteria for determining whether a GA had the capacity to serve as a successor GA
was whether the GA had both defaulted and non-defaulted loan portfolios at least two-thirds the
Final Report
ED-OIG/A06L0003                                                                     Page 12 of 21

size of the transitioning GA. FSA should have eliminated GAs that did not meet the capacity
threshold from consideration before establishing relative rankings based on the seven variables
so that the GAs that ultimately were ranked among the top 10 would all have been viable
candidates for selection. This would have resulted in a more logical process.

This modified process resulted in FSA selecting four GAs as potential successor GAs. FSA
allowed the transitioning GA to select which of the four potential successors the GA preferred to
work with. The transitioning GA selected a successor, which the Secretary then approved. FSA
terminated the exiting GA’s participation in FFELP and transitioned the GA’s portfolio to the
successor GA.

Recommendation
We recommend that the Chief Operating Officer of Federal Student Aid—

   3.1 Correct the deficiencies in the Transition Evaluation Process, if circumstances require
       this process to be used in future selections of successor GAs, and consider these
       deficiencies in developing a process to evaluate GAs in the future.

FSA’s Comments

FSA concurred with Finding No. 3 and stated it would take the actions described in the
recommendation. In its response, FSA stated that it considers the GA recovery rate to be a
performance indicator, not an indicator of financial health. FSA also agreed to reconsider the
steps for selecting successor GAs in the Transition Evaluation Process to make the process more
logical.

OIG Response

Based on FSA’s comments we removed the discussion in the draft report about the GA recovery
rate. Additionally, we changed the draft Finding 3 conclusion that a ranking process that first
eliminated from consideration any GAs that did not meet the capacity threshold would have been
more efficient than the existing process. We now conclude that such a process would be more
logical rather than more efficient. FSA’s planned corrective actions, if properly implemented,
are responsive to the finding and recommendation.




                 OBJECTIVES, SCOPE, AND METHODOLOGY


The audit objectives were to evaluate FSA’s (1) process for ensuring the continued protection of
Federal funds at GAs; (2) oversight of GAs’ ability to perform their duties; and (3) actions for
the GAs’ successful participation during the phase-out of FFELP loans.

We revised the second objective which originally included a review of FSA’s oversight of GAs’
compliance with program requirements. While FSA had policies and procedures for oversight of
GAs, we did not develop sufficient, appropriate evidence to answer the second objective as
originally written. For the program reviews conducted prior to SAFRA, we did not believe the
Final Report
ED-OIG/A06L0003                                                                     Page 13 of 21

reviews were relevant to our audit because we decided to focus only on the oversight of financial
solvency of GAs. During the audit period, FSA’s oversight included developing and
implementing annual risk matrices, annual work plans, and conducting various program reviews
focused on the risk identified. We identified risk areas within FSA’s annual risk matrices that
were related to the audit objectives, such as GAs transitioning out of FFELP and the financial
solvency of GAs. FSA also developed and implemented work plans aligned to the risk areas
identified. After SAFRA, FSA completed five program reviews during FY 2012. We evaluated
the reports for the programs reviews conducted and determined that the reviews did not focus on
the financial solvency of the GAs.

To complete our audit work, as discussed below, we limited our review to FSA’s policies and
procedures for its oversight of GAs during the phase-out of FFELP. The audit evaluated FSA’s
policies and procedures for its oversight of GAs during the phase-out of FFELP from
July 1, 2009, through June 30, 2011, and we performed additional audit work related to FSA’s
actions for the GAs FFELP participation through May 1, 2014. During the follow up
discussions, we learned that FSA planned to use the second Transition Evaluation Process for
GAs that wanted to end their participation in FFELP and that two GAs had successfully
transitioned out of FFELP and transferred their portfolios to other GAs within the last two years.
We interviewed officials from FSA’s Business Operations, Financial Institution Oversight
Service, and Funds Control and Operations Branch at the FSA headquarters in Washington, D.C.
We also performed audit work at three GAs: College Assist, Texas Guaranty, and United Student
Aid Funds. We selected 3 of the 32 GAs to review based on the following criteria: one GA with
a small FFELP portfolio that applied for a VFA (May 2011), one GA with a large FFELP
portfolio that applied for a VFA (May 2011), and one GA with a large FFELP portfolio that did
not apply for a VFA.

To accomplish our objectives, we performed the following procedures.

   •   Reviewed FSA’s organizational charts.
   •   Reviewed prior reports issued by OIG related to FSA’s oversight, FFELP, and GAs and a
       Government Accountability Office report related to a prior VFA process.
   •   Interviewed FSA officials from the office of the Chief Operating Officer, the Business
       Operations Group, the Financial Institution Oversight Service, the Funds Control and
       Accounting Branch, and GA management and staff.
   •   Reviewed and verified Monthly Annual Form 2000 and Annual Form 2000 information
       at the three GAs visited. We also reviewed the Annual Form 2000 for all GAs, used by
       FSA to calculate the reserve ratios.
   •   Reviewed the initial VFA proposals submitted in reference to the Federal Register issued
       on May 13, 2011, and the resubmitted proposals to determine whether the initial and
       revised proposals met the requirements of the Federal Register.
   •   Reviewed the Federal Register issued on August 14, 2013, to evaluate the VFA
       requirements for GAs submitting proposals.
   •   Evaluated FSA’s risk matrices for FY 2009 through FY 2012 to determine whether FSA
       included risk elements associated with the decline in loan balances at GAs after the
       passage of the SAFRA Act. The risk matrices identified critical and high-risk areas.
   •   Evaluated the program review guides to determine that the methodologies used by FSA
       would address the risk identified and were reviewed in FY 2009 through FY 2012. We
       identified the following program reviews: Analysis of Managerial Controls, Verification
Final Report
ED-OIG/A06L0003                                                                         Page 14 of 21

          of Claims, Post Default Due Diligence, Payment Application, Conflict of Interest
          Review, GA Profitability Program Review, and Financial Reviews.
      •   Reviewed FSA’s work plans for FY 2009 through FY 2012 3 to determine the number and
          type of reviews that were conducted by FSA with regards to the risk areas associated with
          GAs. The work plans included reviews that were pertinent to our objectives; specifically,
          12 profitability reviews; 2 reviews of merging GAs, 4 GA transition reviews, and 15 GA
          program reviews.
      •   Evaluated the review guides and reports for the five financial reviews conducted after
          SAFRA in FY 2012.
      •   Reviewed policy and procedures of the Business Operations Group, as it relates to
          monitoring the GAs and reports submitted by GAs; and the Financial Institution
          Oversight Service, as it relates to program reviews.
      •   Reviewed two Transition Evaluation Processes.
      •   Recalculated reserve ratios of all 32 GAs for FY 2010, FY 2011, and FY 2012 using the
          accrual calculation and compared to FSA’s current reserve ratio methodology.

To achieve our audit objective related to evaluating FSA’s ability to protect Federal funds, we
relied, in part, on computer-processed data. To recalculate the reserve ratio, we obtained the
Annual Form 2000 data for FY 2010 and FY 2011 from FSA’s Financial Management System.
To verify data completeness, we obtained a copy of the Annual Form 2000 information from
FSA. We then reviewed the Annual Form 2000 information to ensure that all appropriate data
fields were completed for each of the 32 GAs. We verified the reliability of the data by
reviewing 3 months of Monthly Annual Form 2000 at the three GAs visited and compared all the
fields in the Monthly Annual Form 2000 to source documents. We noted that the information in
the GAs source documents agreed with the information reported on the Annual Form 2000.
Based on our testing, we concluded that the data were complete and sufficiently reliable for the
purposes of our audit. For FY 2012, we obtained Annual Form 2000 information from FSA’s
Financial Partners Publications website.

We conducted site visits at FSA during the weeks of July 11, 2011, and January 30, 2012. We
also completed audit work at College Assist during the week of September 19, 2011, Texas
Guaranty during the week of October 11, 2011, and United Student Aid Funds during the week
of November 14, 2011. We held an exit conference with FSA on May 30, 2013, to discuss the
results of the audit. We also held a subsequent meeting with FSA in September 2013 and
another meeting in May 2014 to gain an understanding of the status of the VFA solicitation
issued on August 14, 2013.

Internal Controls
We gained an understanding of the internal controls concerning oversight of GAs at FSA. We
determined the control activities standard of internal control was significant to our audit
objectives. We tested the control activities through inquiries of FSA and GA personnel, review
of written policies and procedures, and inspection of documents and records. We identified
weaknesses in the auditee’s control activities, which are fully discussed in the audit findings.
We determined FSA did not have adequate control activities to ensure the continued protection
of Federal funds at GAs.


3
    The work plan and program reviews for FY 2012 were completed after the SAFRA Act.
Final Report
ED-OIG/A06L0003                                                                      Page 15 of 21

We conducted this performance audit in accordance with generally accepted government
auditing standards, except for obtaining sufficient, appropriate evidence to address our
second objective. 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


Corrective actions proposed (resolution phase) and implemented (closure phase) by your office
will be monitored and tracked through the Department’s Audit Accountability and Resolution
Tracking System (AARTS). ED policy requires that you develop a final corrective action plan
(CAP) for our review in the automated system within 30 days of the issuance of this report. The
CAP should set forth the specific action items, and targeted completion dates, necessary to
implement final corrective actions on the findings and recommendations contained in this final
audit report. An electronic copy of this report has been provided to your Audit Liaison
Officer(s).

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.

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.
Determination 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 to members of the press and general public to the extent
information contained therein is not subject to exemptions in the Act.

We appreciate the cooperation given us during this review. If you have any questions, please
call Daniel P. Schultz at (646) 428-3888.

                                             Sincerely,

                                             /s/

                                             Patrick J. Howard
                                             Assistant Inspector General for Audit
Attachment(s)
Final Report
ED-OIG/A06L0003                                                            Page 16 of 21

      Attachment 1: Abbreviations, Acronyms, and Short Forms Used in This
                                    Report
Act                       Bipartisan Budget Act of 2013

Annual Form 2000          Guaranty Agency Financial Report Annual Form 2000

Department                U.S. Department of Education

ECASLA                    Ensuring Continued Access to Student Loan Act of 2008

FFELP                     Federal Family Education Loan Program

FSA                       Federal Student Aid

FY                        Fiscal Year

GA                        Guaranty Agencies

HEA                       Higher Education Act of 1965, as amended

Monthly Annual Form 2000 Guaranty Agency Financial Report Monthly Annual Form 2000

OIG                       The Office of Inspector General

SAFRA                     The SAFRA Act

Secretary                 Secretary of Education

VFA                       Voluntary Flexible Agreement
Final Report
ED-OIG/A06L0003                                                              Page 17 of 21

 Attachment 2: OIG’s Recalculation of the Reserve Ratio for FY 2010 for All
                                  GAs


                        FSA’s        Accrual                                Percentage
                     Reserve Ratio Reserve Ratio       Percentage Point   Increase from
 GA Short Name        Percentage    Percentage            Difference      Accrual to FSA
     Arkansas            0.41          0.27                  0.13              52%
     Colorado            0.26          0.19                  0.07              37%
      Florida            0.92          0.73                  0.19              26%
     Georgia             0.73          0.57                  0.16              28%
      Illinois           0.76          0.67                  0.09              13%
       Iowa              0.79          0.71                  0.08              11%
     Kentucky            0.36          0.24                  0.11              50%
    Louisiana            0.64          0.48                  0.15              33%
      Maine              0.46          0.40                  0.06              15%
  Massachusetts          0.30          0.22                  0.08              36%
     Michigan            0.40          0.28                  0.12              43%
     Missouri            0.69          0.59                  0.11              17%
     Montana             0.47          0.44                  0.03               7%
     Nebraska            0.51          0.39                  0.13              31%
 New Hampshire           0.75          0.40                  0.34              88%
    New Jersey           0.74          0.34                  0.40             118%
   New Mexico            0.55          0.47                  0.08              17%
    New York             0.33          0.26                  0.07              27%
  North Carolina         0.62          0.57                  0.04               9%
   North Dakota          0.87          0.76                  0.11              14%
    Oklahoma             0.75          0.62                  0.13              21%
   Pennsylvania          0.39          0.33                  0.06              18%
   Rhode Island          0.85          0.60                  0.25              42%
  South Carolina         0.60          0.56                  0.04               7%
    Tennessee            0.55          0.45                  0.09              22%
       Texas             1.47          1.39                  0.09               6%
       Utah              2.09          1.82                  0.26              15%
     Vermont             0.80          0.76                  0.04               5%
   Washington            0.45          0.38                  0.07              18%
    Wisconsin            0.74          0.68                  0.07               9%
  United Student
                          0.40             0.33
    Aid Funds                                                0.07              21%
      ECMC                1.22             1.05              0.16              16%

     Average                                                 0.12              27%
Note: All numbers rounded to the nearest percentage point.
Final Report
ED-OIG/A06L0003                                                             Page 18 of 21

 Attachment 3: OIG’s Recalculation of the Reserve Ratio for FY 2011 for All
                                  GAs


                       FSA’s           Accrual                             Percentage
                    Reserve Ratio    Reserve Ratio    Percentage Point   Increase from
 GA Short Name       Percentage       Percentage         Difference      Accrual to FSA
     Arkansas           0.33             0.20               0.13              65%
     Colorado           0.25             0.18               0.07              39%
      Florida           0.99             0.80               0.19              24%
     Georgia            0.66             0.55               0.11              20%
      Illinois          0.76             0.67               0.09              13%
       Iowa             0.88             0.81               0.06               9%
     Kentucky           0.31             0.19               0.13              63%
    Louisiana           0.65             0.52               0.13              25%
      Maine             0.49             0.43               0.06              14%
  Massachusetts         0.24             0.16               0.08              50%
     Michigan           0.41             0.32               0.10              28%
     Missouri           0.72             0.61               0.12              18%
     Montana            0.44             0.40               0.04              10%
     Nebraska           0.47             0.34               0.13              38%
 New Hampshire          0.89             0.59               0.30              51%
    New Jersey          0.81             0.26               0.55             212%
   New Mexico           0.55             0.48               0.07              15%
    New York            0.28             0.19               0.09              47%
  North Carolina        0.60             0.57               0.03               5%
   North Dakota         0.86             0.71               0.15              21%
    Oklahoma            0.81             0.65               0.16              25%
   Pennsylvania         0.40             0.34               0.06              18%
   Rhode Island         0.89             0.62               0.27              44%
  South Carolina        0.57             0.52               0.05              10%
    Tennessee           0.44             0.33               0.11              33%
       Texas            1.91             1.81               0.11               6%
       Utah             2.32             2.12               0.19               9%
     Vermont            0.81             0.77               0.04               5%
   Washington           0.42             0.35               0.06              20%
    Wisconsin           0.74             0.69               0.06               7%
  United Student
                         0.39             0.33               0.07             18%
    Aid Funds
      ECMC               1.70             1.55               0.15             10%

     Average                                                 0.12             30%
Note: All numbers rounded to the nearest percentage point.
Final Report
ED-OIG/A06L0003                                                              Page 19 of 21

 Attachment 4: OIG’s Recalculation of the Reserve Ratio for FY 2012 for All
                                  GAs


                       FSA’s            Accrual                             Percentage
                    Reserve Ratio     Reserve Ratio    Percentage Point   Increase from
 GA Short Name       Percentage        Percentage         Difference      Accrual to FSA
     Arkansas           0.27              0.15               0.12              79%
     Colorado           0.26              0.19               0.08              40%
      Florida           1.02              0.84               0.18              22%
     Georgia            0.62              0.51               0.11              23%
      Illinois          0.80              0.72               0.08              11%
       Iowa             1.01              0.93               0.07               8%
     Kentucky           0.29              0.16               0.13              78%
    Louisiana           0.61              0.50               0.11              22%
      Maine             0.47              0.39               0.08              20%
  Massachusetts         0.25              0.18               0.08              42%
     Michigan           0.35              0.24               0.11              44%
     Missouri           0.72              0.62               0.10              17%
     Montana            0.43              0.39               0.03               9%
     Nebraska           0.40              0.26               0.14              55%
 New Hampshire          0.99              0.73               0.26              35%
    New Jersey          0.84              0.14               0.70             490%
   New Mexico           0.44              0.36               0.08              21%
    New York            0.28              0.20               0.07              36%
  North Carolina        0.56              0.50               0.06              12%
   North Dakota         0.89              0.86               0.04               4%
    Oklahoma            0.93              0.77               0.16              21%
   Pennsylvania         0.35              0.28               0.08              28%
   Rhode Island         0.95              0.42               0.53             125%
  South Carolina        0.52              0.46               0.07              14%
    Tennessee           0.47              0.37               0.10              29%
       Texas            2.26              2.17               0.09               4%
       Utah             2.58              2.42               0.17               7%
     Vermont            0.84              0.79               0.05               7%
   Washington           0.40              0.33               0.07              20%
    Wisconsin           0.73              0.65               0.07              11%
  United Student                                                               24%
                                                             0.07
    Aid Funds            0.35              0.28
      ECMC               0.92              0.77              0.14              18%

     Average                                                 0.13              43%
Note: All numbers rounded to the nearest percentage point.
Final Report
ED-OIG/A06L0003                                                                                                                             Page 20 of 21

               Attachment 5: FSA’s Comments on the Draft Report




       Federal Student                                                                               PROU D SPONSOR of
                                                                                                     th• AMERICAN MIND '"

                                                           Se ptember 24. 20 14


       M.r·. Daniel P. Schuitl
       Rt!gim al Jnspcctur Cicneml lb: /\udir
       Otlice of Inspector General
       "2 Old Slip
       ~6° Fk10r
       Ne.w York. NY I 0005

       Oe<~r ~.<Jr.   S<.:hultz:

       SUBJECf: R~lf)<lfll'IC In Ornli A .tdir ficpvr1. Ow:r;~lgh: u_{Grr<n-cm~v A~tt:ndl':i Dwiu,g tk('             .''ha.~·~~-Out o.f
       t!t(• / .....'(/cr<d Fumi(y J::ducatioul..omr Prop.mm. (ED-OlG AOl>-l0003)

       On .o\ugusr I , 2014, rh:: Ollicc of Inspector General (OIGi issued a dr-aft <llld:t report en!iliOO ..uv~sighr
       of(.iuar.lnly Age:tcit-s Du.riuj,p hc l' hasc-Out oflhe Ft.'tler<al Family Ed u~:ui on Loan Progr;;m" (Cootrol
       Nutubcr ED·OIG :\06·l0003). Jn thc t'e port. the OIG COllCJIJded :IKrl federal S!udent .Atd ( 1 ·~/o.) d<1cs not
       l:aw an <cdt.'<Juatc pn>e:.-ss to p r<)lect Fcrlcrl'll fiu.1ds and lh;;tl fSA did 001~ct on iafCm:ation that Guar<'mty
       Agencies (GAs) rcpor110 us. While we agree with l'lli\Oy o f !lu: OtG's liudings and rc<:Qmmcndations. we
       do helic\c that we have an 01doquatc process to proccc• Fcdcr.d funds and tbm we do act oo infonnation
       •h.,tthc GAs rcpon to us. FS1\ closely monitors guaranty <tJ.;CilC)' Opcr:lling and Pcderlll fund ba.lances to
       pmtcct f cde-m) as:o:ets, to ensure timd}' l).'l)'Lnent Qf l; nda claimS-, and to cnsur~ that Feder.1l Fam i l~·
       1-'.<h:c;:.tion L 0..11) (FFEJ..) bon'Owc;-s n~cei v~ 6c service to which they 1.m~. entitled. T he succcs; of <:au•·
       eft<.:.rts h) control tO: risks me evident in that there have bee n no k-sscs o f PcdCI'JI I'UJ)(I assets. we an: not
       awf.rc ora ny kndcr clairns be i n~ p:t.id UJltintely: ;;;nd w<: m-e :aut aware of r;ny instance where an
       iosullicient Operatir)g fund Je,el has cau~cd u FF'f. l. borrower to no( receive the ser,•iees to wbjch the
       borrower is e mitlod.

       J.'JNDtNG XO. I - FSA 's f\f<•thodulogy for C11.lculatin~ a (;A •s l<'ederal Fund Recc rve R:trl<t
                         O'•erstatc~ the GA ~~ F iuanciul tlenlch


       FSA C01l Cu1,; wilh the lindi•lJ:;.th:\1 thc- l'll~'.hcd<>l<)g_y 1hm FS;\ uses h.) cvl (l~llt• tc:: the: gtu,tnmtor 's FOOcrnl
       f:sml r~crvc ratio is not in oompliancc: witJ1the regulntory roquiremcnts o f 34 CFR 6S2.41'J(f)(l) and that
       i1 •'CS~• I ts in an Ut)(k.:'SfO'l¢lll\.1U <>ftl..:. ri:s.k t~:>~OCi <tted wilb th.,; OA ':s ability to pay lender ci<Jims t:mely.
       T he skltancnt t hat it "overstates GA' s fi nancial health'' spedlicnlly refers t ~) the •isk associated wjth Ihe
       OA·~ al>iJity tv pay );.:ul t:~ ~.:laim:> t im~.:ly. T o c!foxd •,.t:l:r· UJjJigatc thi:s.tisk iu tht pa..;t, o i\cn OA:i will
       1r.:msfCr money ifom •he Operating fund t:) ~be Fede ral fimd a ft~r ba\ing. di s~ussions with us.

       Startiug with the fisca1 y~.u 20 1 5 <:rucdatiou. FSA will cease adding allowaltces a1<1 otbct ll(ln-tash
       charges to lhe accrual accountu1g Ft'lderal fund balanc~;; \Vbt.-'1: <:<tlculahng lhc ol h CHII rcs:cne mtm. Any
       GAs fa_il ing to meet th ·~ rntio calcui:Jtcd tOr fiscol )"Car 2015 ~ od the revised rntio calculated fO•· liscal yet~r
       20 14 wil: bc.reqLirtd tu :.ubmit a ru;u1<.~emen t plan.




                                          830 Fnst St·ee:. NE. Washngtcn. DC 20202
                                                        StucentAd.go·,
Final Report
ED-OIG/A06L0003                                                                                                                                              Page 21 of 21




       fiND ING NO. 2- Fetlcnd Studcnl Aid Did NOI Act on lnJonnation ihal Identified (;uaranly
                      Agencies Under Possible Fi1:mcill Stress

       FSA concurs wi1h thi~ lindins,. lhous h "'"'believe:. :.lOre :.<:cur:ue tl ..:~ripli on c r 1hc lindin~ :.: lhal J!SA
       did ll<)l il:)l:u n•tln l the prO;;e~s Or <M iou~ wo;: l.ook on :n fon:mtio•~ tb~t id~nt: fics GAs under po~>siblc
       fl nanckli str-cs~.

       SJ~i fic:. ll y.      we <.:(ltiCllr th<lt lltt.re is n<.•.st:;~n<.iard methodok' b.'Y n:quirento:nt for Annul!! form 2000
       projections. FSA will determine the fca~ibili1 y :.r.d develop con s:i~•cnl <: riceri:tl~l :lrld::u•d mechodoll)gy
       r¢q\•i r<:m~n l s (wbcrc appl i c:.<~blc) for fund projections that GAs are noqu:rcd to report on the Annual Form
       2000 :tnd upd:'ltC the ('.uar:uuy Agency Fill:"u te ial Reponing lllflii'U<:Ii()n ;K."e(Jn:l          '         insly. bl :)ddilion, rsA will
       modit} tbc :abcling on the Quarterly Tr-end Analysis to more accurately reflect the accual risks that the
       J)l'()j.:Cl i C)a.~ highligln $0 l ht~ ! :'t$$lunpc i<'I1H mfo<lc onti1C dt~ l:l :'I:'C :i<:Cur:ilC. f.<.lrC:<:llt)pfc, 1hc OIC piJiJ)\<:d
       out that u is repol1 i:icnliliod four G!\s with a ltigh risk of bc~oming insolvent and 14 GAs as not having
       the abilit}' \v JJI.'IY ~lai•.ns. Tbi ~ i;S fl.~"~ (1\·;,a:;tr.\-.:u·n;:ul since i1) \l1c 1l11t.v 1<.:o~1~ ~ii)~.:C Lllc dJ~,n •..:•.101t w;,1s li.• ~t
       issutal m; u. ~ Otx·amc insoh·cm <~uti we a~ um:warc ofa ny lender claim thai went unpa.d.

       PSA J~ r10 nfi;S ;.m ;:.mtlys-ill o f Ill¢ prOj<.:ttiotu pJVvidW by lhC G:\ ·~ <.1o tl1c Annual Form 2{11)0 to m<tke
       lllCE.ningful ASSC$$1HCiliS. The analysis <•I' j)l(lj<:Ctions used in C)UI' o~lolli.'IU1)' ~CO~)' Analy~illo Oui...h: i:;
       used to d~h::nnin~ tht! lung tenn \liability ~•fd.e agency and a lt:\'1:1 u f risk. T!tcse pr~c:tt inn.'i are also
       reviewed in C(lnjunc~ion wi1b 1hc Annu;ll F'orm 2000 onnlysis for rc<\SOU.1blc•:css. Ahhough foore is not;,)
       <:onsis~l!.nt methodolt,J;Y n:quiremcm fbr the projcclions, as JXln ofonr Fonns 2000 review, FSA e nsures
       1hat tOC' projcC~:kms at-e reason::.ble. :\geoc.ies il.re :x.n1ac100 as part of the n::vtew process 1u cJiS<.:uss the
       recon<:1halion ·:)I ;my disaepanctes, In ensure lhm j)l\)jections :uc rc:'l:;()n:;.blc. ~nd ,..,·hen ;~pplicai;Jc, 10
       diSCtlSS long·tenu plans that th·; projections :nay requiu::, We wiJJ ·;,euer docwnent the p:lx:edu~s we
       lbll ~lw w:·u:n laking ac1ion with ( iAl'> r<) !ldclr.::ss risks a:)::;ocimcd w tb dctcrio rtJling op~ mt i ng l'olld C•l'
       redero: fund balances.

       l'lNUlNt; NU. 3- to~A •s Tr:uuitinn EY.aluutjon Process for Selecting Succ~w r GAs Has
                       Deficiencies

       J"!SA concurs with tbc OIG's find ing tl'<\1 previous itermio:as oflbe p•ooess to identify a su~x:.t::ssor GA had
       clcficien<:ic:s.. As the Ql(i points c)ut in their repoli, r:SA impro\'cd upon tbc J)roccss in 201 1. e liminating
       two oft h~ dcfici~ocies c ited fonllc ;>t'e-201 i process.
       T he other two ddcicncics cited by the O:G a rc tl:c usc o f t h~ liA rcCO\'Cr:' r;ue in the selection proce.-.s
       and the order <of the Sh!pS in the selc..:tion pn1<:~. We do not bdicvc that :he u~c <1fthe ~ross fiA
       recover,• rot~ is a deficiency. The GA J'COO\'Ct'Y rate is mcam as a pe:t'lbmlance indicator. not ne;:ccssarily
       an indit::aturnf the-GA 's lin.1ncial health. therefore we would kocp the g:rO$S recovery rate as p.'llt oft be
       mcthodoloJW. We will re-consider the otdet o r the process s!eps wltfo~l identif)'inJil: furore sucressor GJ.\s
       and mu\:c the process more-logical. :L" nCCC$.<iaty.
       Thank you for pnwidiog us wi:h an opportu nit~· to ~vi ew atld respoud 10 the OIG's dratl repOrt.



                                                                            Sinceoely,                  ~


                                                                        9!:::.::!~
                                                                            ChiefOpcroti11g Oniecr
                                                                             Fcdcrul Student Aid




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