oversight

Audit of Direct Consolidation Loans.

Published by the Department of Education, Office of Inspector General on 2005-02-10.

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

                        UNITED STATES DEPARTMENT OF EDUCATION

                                      OFFICE OF THE INSPECTOR GENERAL

                                                                                                        ED-OIG/A07-D0027


Theresa S. Shaw
Chief Operating Officer
Federal Student Aid
U.S. Department of Education
Union Center Plaza, Room 112G1
830 First Street, NE
Washington, DC 20202

Sally Stroup
Assistant Secretary for Postsecondary Education
Office of Postsecondary Education
1990 K Street NW, Room 7115
Washington, DC 20006

Dear Ms. Shaw and Ms. Stroup:

This final audit report (Control Number ED-OIG/A07-D0027) presents the results of our audit of
Direct Consolidation Loans. Our objective was to determine if the Department of Education
(Department) takes appropriate action when loan verification certificates (LVCs) are delayed or
denied by loan holders in the Federal Family Education Loan (FFEL) Program. Our audit
covered the period July 1, 2002, through June 30, 2003.

We provided the Department with the draft of this report on December 22, 2004. In its response,
dated January 27, 2005, the Department agreed with the findings and provided planned actions
which addressed each of the recommendations. We have summarized the planned actions
following each finding, and the response in its entirety is attached as Attachment F.

                                                   BACKGROUND

Section 455(g) of the Higher Education Act of 1965, as amended (HEA), provides for loan
consolidation in the William D. Ford Federal Direct Loan (Direct Loan) Program. Under Section
428C(b)(5) of the HEA, if an eligible borrower in the FFEL Program applies for a Direct
Consolidation Loan, the borrower is entitled to receive that loan:

       In the event that a borrower is unable to obtain a consolidation loan from a lender
       with an agreement under subsection (a)(1), or is unable to obtain a consolidation
       loan with income-sensitive repayment terms acceptable to the borrower from such
       a lender, the Secretary shall offer any such borrower who applies for it, a direct
       consolidation loan.



                                 400 Maryland AVE., S.W., WASHINGTON, DC 20202-1510
                                                      www.ed.gov

          Our mission is to ensure equal access to education and to promote educational excellence throughout the nation
Theresa S. Shaw and Sally Stroup                                               ED-OIG/A07-D0027


A borrower is eligible for a Direct Consolidation Loan if –

       . . . at the time the borrower applies for such a loan, the borrower meets the
       following requirements:
                 (i) The borrower either—
                 (A) Has an outstanding balance on a Direct Loan; or
                 (B) Has an outstanding balance on an FFEL loan and asserts either—
                 (1) That the borrower is unable to obtain an FFEL consolidation loan; or
                 (2) That the borrower is unable to obtain an FFEL consolidation loan with
       income-sensitive repayment terms acceptable to the borrower and is eligible for
       the income contingent repayment plan under the Direct Loan Program. . . . (34
       CFR 685.220(d)(1))

During our audit period, Federal Student Aid (FSA) contracted with Electronic Data Systems
Corporation (EDS) for Direct Consolidation Loan support. To obtain a Direct Consolidation
Loan, a borrower submits an application that identifies the loans that he or she wishes to
consolidate. The assertion required for the borrower’s eligibility, under 34 C.F.R. §
685.220(d)(1)(i)(B), is made when the borrower signs the Direct Consolidation Loan application:

       If my student loans are in a grace or repayment period and if none of the loans I
       am consolidating is a Direct Loan Program loan, I further certify that I have
       sought and been unable to obtain a Federal Consolidation Loan from a FFEL
       Program lender, or a lender would not provide me with a Federal Consolidation
       Loan with income-sensitive repayment terms acceptable to me. If I have parent
       PLUS loans and none of the loans I am consolidating is a Direct Loan Program
       loan, I further certify that I have sought and been unable to obtain a Federal
       Consolidation Loan from a FFEL Program lender. If, however, I am
       consolidating jointly with my spouse, only one borrower, my spouse or I, must
       have sought a Federal Consolidation Loan from a FFEL Program lender.

After receiving a borrower’s application for a Direct Consolidation Loan, EDS sends an LVC to
each of the borrower’s loan holders, to ensure that EDS has all the information required to
determine each loan’s eligibility for consolidation and its payoff balance. Under 34 C.F.R. §
685.220(f)(1)(i), the loan holder must—

       . . . complete and return the Secretary’s request for certification of the amount
       owed within 10 business days of receipt or, if it is unable to provide the
       certification, provide to the Secretary a written explanation of the reasons for its
       inability to provide the certification.

We determined that loan holders either failed to return LVCs timely or returned LVCs
incomplete for 47,021 of the 436,761 Direct Consolidation Loan applications received from July
1, 2002, through June 30, 2003 (10.8 percent).




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                                       AUDIT RESULTS 


The Department’s procedures do not ensure that all of an applicant’s eligible loans will be
consolidated in a Direct Consolidation Loan. When a loan holder fails to return an LVC timely,
or fails to provide all the information requested on the LVC, the Department does not take
effective action to ensure that the applicant’s loan is consolidated. In addition, the Department
provides inappropriate guidance to applicants when their loan holders fail to return LVCs timely
or complete.

Finding 1 	    The Department’s Procedures Do Not Ensure Complete and Timely
               Consolidation for Eligible Borrowers

The Department’s procedures do not ensure that all of an applicant’s eligible loans will be
consolidated in a Direct Consolidation Loan. The Department—

   • 	 Has not provided clear sub-regulatory guidance about the requirements for a FFEL
       Program loan holder’s return of a Direct Loan LVC,

   • 	 Does not take adverse administrative actions to address loan holders’ non-compliance
       with LVC requirements, and

   • 	 Has not established any alternative method for consolidating a loan for which an LVC
       has not been received.

As we noted in the background section, we determined that loan holders either failed to return
LVCs timely or returned LVCs incomplete for 47,021 of the 436,761 Direct Consolidation Loan
applications received from July 1, 2002, through June 30, 2003 (10.8 percent). The following
table provides additional details about loan holders’ responses to LVCs, and the effect of their
responses:

Table 1:
                                     Applications with—
                               Incomplete Untimely Incomplete All Other   Total
                                 LVCs      LVCs & Untimely Applications Applications
                     Funded          2,502   18,953          572      295,635        317,662
                 Not Funded          7,018   17,174          802       94,105        119,099
                       Total         9,520   36,127        1,374      389,740        436,761
              Percent Funded       26.3%     52.5%        41.6%         75.9%         72.7%
         With Denied Loan           9.2%     37.0%        11.1%
       Without Denied Loan         17.1%     15.5%        30.5%

As Table 1 shows, when LVCs are returned incomplete or untimely, a significantly lower
percentage of applicants receive fully funded Direct Consolidation Loans. For example, only
2,502 of 9,520 applications for which one or more LVCs were returned incomplete (26.3




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Theresa S. Shaw and Sally Stroup                                             ED-OIG/A07-D0027


percent) resulted in a Direct Consolidation Loan, and of the 9,520 applications, only 9.2%
included the loan(s) for which the loan holder had originally sent an incomplete LVC.

The Department’s procedures have resulted in additional costs for applicants, the Department,
and loan holders. Applicants often submit one or more additional applications after being denied
a Direct Consolidation Loan, and each new application must be logged into the system,
documents must be imaged, and new LVCs must be generated. Loan holders that complied
previously, and returned LVCs, must now complete and return another LVC.

We also found that funded applications for which LVCs were returned untimely or incomplete
took, on average, 20 days longer to process, from application to initial funding, than did funded
applications for which all LVCs were returned timely and complete. These delays were often the
result of multiple requests for LVCs (either mailing more than one LVC to the same loan holder
or providing another type of manual intervention). Furthermore, additional work is often
required to adjust payoff amounts to account for additional interest accruals and payments made
on underlying loans during the delay.

Dear Colleague Letters Fail to Adequately Clarify the Requirements for Completing and
Returning a Direct Consolidation Loan LVC

From the beginning of our audit period until our fieldwork was completed, the Department
issued two Dear Colleague Letters that reminded FFEL Program loan holders of their obligation
to respond within 10 business days to the LVCs they receive. The Dear Colleague Letters were
issued on January 24, 2003 (GEN-03-02, see Attachment A) and February 17, 2004 (FP-04-02,
see Attachment B). Although the February 2004 letter provided guidance specific to LVCs
generated for FFEL Consolidations, the letter did not clearly limit its applicability and may have
led recipients to believe they could refuse to complete a Direct Loan LVC if they determine that
a borrower was ineligible for the consolidation loan.

For the Direct Consolidation Loan applications received by the Department from July 2002
through June 2003, we identified 65 loan holders that refused to return information required on
the LVC, citing either the single-holder rule or asserting that the applicant was otherwise
ineligible for a Direct Consolidation Loan. The single-holder rule does not apply to Direct
Consolidation Loans. The requirements for the single-holder rule are provided in Section
428C(b)(1)(A) of the HEA. Under that section, certain FFEL Program lenders agree that they—

       . . . will make a consolidation loan to an eligible borrower (on request of that
       borrower) only if the borrower certifies that the borrower has no other application
       pending for a loan under this section and (i) the lender holds an outstanding loan
       of that borrower which is selected by the borrower for consolidation under this
       section, except that this clause shall not apply in the case of a borrower with
       multiple holders of loans under this part, or (ii) the borrower certifies that the
       borrower has sought and has been unable to obtain a consolidation loan with
       income-sensitive repayment terms from the holders of the outstanding loans of
       that borrower (which are so selected for consolidation) . . . .




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This rule applies only to FFEL Program loan holders, for the purpose of making FFEL
Consolidation Loans. The HEA provides separate requirements for consolidating a FFEL
Program loan into a Direct Consolidation Loan, at Section 428C(b)(5), as cited in the
Background section.

The Department’s Dear Colleague Letters do not explain the differences in the two programs’
requirements or state specifically that the single-holder rule does not apply to applicants for
Direct Consolidation Loans. Though we were informed by Office of Postsecondary Education
(OPE) Policy, Planning and Innovation staff that the second Dear Colleague Letter (FP-04-02)
was intended only to address procedures for making FFEL Program Consolidation Loans, the
letter’s language is ambiguous, and may be misinterpreted by FFEL Program loan holders to
justify refusing to return Direct Loan LVCs based on the single-holder rule. The letter did not
explicitly limit its applicability to FFEL consolidation. The Dear Colleague Letter states—

       In Dear Colleague Letter GEN-03-02 (January 2003), we reminded loan holders
       of the regulatory requirements to respond to requests from another lender (FFEL
       or Direct Loans) for certification of the status of a loan included on a borrower’s
       application for a consolidation loan.
                                        . . . . . . .
       The regulations allow a loan holder to provide the requesting lender with a written
       explanation as to why it cannot provide the certification. This option addresses
       situations in which the loan holder has a technical problem in providing the
       information within the 10-day timeframe (such as a computer malfunction) or
       where the loan holder simply does not have information on the borrower’s loan.
       Loan holders also can provide a written explanation if they believe that they are
       the single holder of the borrower’s FFEL loans and that the borrower thus does
       not qualify for a consolidation loan from the requesting lender.

The Department’s instructions on its Direct Loan consolidation web site clearly state that the
loan holder should not make determinations about an applicant’s eligibility:

       The regulations governing a borrower’s eligibility for a Direct Consolidation
       Loan are different than those governing borrower eligibility for FFEL Program
       loans. A FFEL loan holder (or a school in the case of Federal Perkins Loans) is
       not responsible for determining if a borrower is eligible for a Direct
       Consolidation Loan. The Department makes this determination.

Nevertheless, some loan holders justify their return of incomplete Direct Loan LVCs by asserting
that the applicant was ineligible for a Direct Consolidation Loan. The loan holder is not
responsible for determining a borrower’s eligibility for a Direct Consolidation Loan and does not
have the information needed to make that determination.




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No Adverse Administrative Action Taken Against Loan Holders That Failed to Return
Completed LVCs

During our review we identified many examples of FFEL Program loan holders that delayed or
failed to return completed Direct Consolidation Loan LVCs. Attachment C provides a list of the
FFEL loan holders with the highest incidences of returning LVCs untimely or incomplete. We
were informed by EDS staff that the Department follows up regularly with loan holders that have
failed to return an LVC, to remind or encourage them to complete and return the LVC. However,
the Department has not initiated adverse administrative actions against any of the listed loan
holders, or any other loan holders, that continue to delay or fail to return completed Direct Loan
LVCs.

Both of the Dear Colleague Letters we described previously address the consequences of the
failure of a FFEL Program loan holder to respond to an LVC from another FFEL Program loan
holder. However, only the first of the two letters (GEN-03-02, see Attachment A) describes the
consequences of a loan holder’s failure to return a Direct Loan LVC. After citing FFEL and
Direct Loan regulations requiring the return of FFEL and Direct Loan LVCs within 10 business
days, the letter goes on to state, “Failure to comply with this requirement could result in a lender
being subject to fines or other sanctions consistent with 34 CFR 682, Subpart G.”

The Dear Colleague Letters provide additional guidance specific to FFEL LVCs. The January
2003 Dear Colleague letter requested FFEL consolidation lenders to inform the Department’s
regional lender review staff of FFEL LVCs not returned. The February 2004 letter cited the
importance of returning FFEL LVCs in a timely manner and stated—

       Accordingly, we have begun to take enforcement action against lenders that fail to
       meet these requirements. Also, we anticipate that guaranty agencies will take
       appropriate action if they become aware that a lender in its guaranty program is
       failing to comply with this requirement.

       Consolidation lenders that do not receive loan certification information within 10
       business days or that question the propriety of the loan holder’s written
       explanation should continue to inform their FSA regional lender review staff of
       such matters so that we can follow up with the loan holder and, if necessary, take
       appropriate remedial action.

FSA Lender Review managers stated that they have received and investigated complaints from
FFEL consolidation lenders. Both the Direct Loan Consolidation director and FSA Lender
Review regional managers confirmed that no lenders have been referred for enforcement action
as a result of non-compliance with requirements to complete and return Direct Loan LVCs.

No Alternatives to LVCs

The procedures currently used by the Department do not allow the inclusion of a loan in a Direct
Consolidation Loan without the receipt of an LVC from the loan holder. If a loan holder fails to




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return a completed LVC, the Department either cancels the Direct Consolidation Loan
application or excludes the uncertified loan(s) from the applicant’s consolidation.

Neither the HEA nor regulations prohibit the Department from including an applicant’s loan in a
Direct Consolidation Loan without an LVC. The HEA does not address the use of LVCs, and
requirements for LVCs in regulations only address a loan holder’s responsibility to return LVCs.
As such, the Department is not prevented from obtaining a loan’s payoff amount from another
source, when a loan holder fails to provide a timely or complete LVC, and using that alternate
payoff amount to consolidate the loan.

By using an alternate source to determine a loan’s payoff amount, the Department can ensure
that eligible applicants are able to obtain timely, complete Direct Consolidation Loans, even
when a loan holder refuses to provide information required on the LVC. For example, the
Department could obtain an alternate payoff amount from the National Student Loan Data
System (NSLDS) or by asking an applicant to provide his or her most recent bill from the lender.

Under the Department’s regulations, using an alternate source would not result in the payment of
an inaccurate payoff amount. Under 34 C.F.R. § 685.220(f)(4) and (5), a loan holder is required
to return any excess payoff funds it receives from the Department and to notify the Department
of the amount due if the funds it receives are insufficient to discharge the loan.

Recommendations

We recommend that the Chief Operating Officer for FSA and the Assistant Secretary for
Postsecondary Education—

   1.1 	 Issue clear guidance to loan holders, describing the loan holders’ statutory and
         regulatory responsibilities to complete and return timely Direct Consolidation Loan
         LVCs. At a minimum, the guidance needs to inform loan holders that the single-holder
         rule, in Section 428C(b)(1)(A) of the HEA, does not affect a borrower’s eligibility for a
         Direct Consolidation Loan, and that loan holders are required to provide the
         information requested on the Direct Loan LVC, regardless of the lender’s assessment
         of the borrower’s eligibility for a Direct Consolidation Loan.

   1.2 	 Initiate and pursue adverse administrative actions, under 34 C.F.R. Part 682, Subpart
         G, against loan holders that fail to comply with the Department’s regulations for the
         return of Direct Loan LVCs.

   1.3 	 Implement alternate methods for determining applicants’ payoff amounts, to ensure
         that applicants’ loans are consolidated, even if the applicants’ loan holders fail to
         provide the information requested on the LVC.

Auditee Response

Working with OPE and the Office of the General Counsel, FSA has developed a letter that will
be sent to loan holders that have not been timely in responding to LVCs. The letter will remind



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the holders of the statutory and regulatory requirements related to LVCs and the potential
consequences of failing to comply with the rules.

FSA’s Borrower Services has notified its contractor to refer cases of noncompliance to FSA’s
Financial Partners Service, which is preparing procedures to receive and initiate administrative
actions. Also, FSA will begin to use the National Student Loan Data System (NSLDS) to
determine applicants’ payoff amounts if loan holders fail to respond to the LVC.

Finding 2      Department Provides Inappropriate Guidance to Consolidation Applicants

The Department has authorized EDS to send one of two servicer letters to borrowers when their
loan holders fail to return timely, complete LVCs. The two letters provide inappropriate
guidance. Both letters effectively delay or deny consolidation to borrowers who cannot convince
their loan holders to complete and return LVCs. A statement in one of the letters conflicts with
regulations, because it reflects a requirement that, in order for a borrower to receive a Direct
Consolidation Loan, the borrower’s loan holder must have a record of the borrower’s attempt to
obtain a FFEL Consolidation Loan.

The two letters are described below:

• 	 Delayed Certification Letter (BCR letter, see Attachment D). When an LVC is not
    returned within 26 days from the date it was sent to the loan holder, this letter is sent to the
    borrower. The letter gives the applicant three options: (1) contact the loan holder and
    “request” that the LVC be completed and returned, (2) remove the loan from the
    consolidation, or (3) cancel the application. If the applicant does not respond to the letter
    within 15 days of the date it is sent, the application is cancelled.

• 	 Un-Certifiable Loan Notification Letter (CNC letter, see Attachment E). When an LVC
    is returned by a loan holder that refuses to provide the information requested on the LVC,
    this letter is sent to the borrower. The letter informs the borrower that the loan holder refuses
    to provide the verification because it has no record of an attempt by the borrower to obtain a
    FFEL Consolidation loan from it. This letter gives the borrower four options, three of which
    require the borrower to contact the lender(s) and “tell them they must complete” and return
    the LVC. The fourth option asks the applicant to contact EDS if he or she needs more
    information or wants to cancel the Direct Consolidation Loan application. The borrower is
    advised to respond within 21 days or the consolidation will proceed without the unverified
    loans.

Servicer Letters Instruct Borrowers to Tell Loan Holders to Complete LVCs

Both the BCR and CNC servicer letters require the applicants to contact their loan holders and
either direct or persuade those loan holders to provide information requested on the LVC. The
letters indicate that the Department “cannot include” the unverified loans in the applicant’s
consolidation if the applicant is not successful.




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This guidance is inappropriate because it does not reflect applicable requirements in the HEA
and in the Department’s regulations. As cited in this report’s Background section, under 34
C.F.R. § 685.220(f)(1)(i), the Department requires lenders to provide the information requested
on the LVC within 10 business days. Requirements in Section 428C(b)(5) of the HEA and in 34
C.F.R. § 685.220(d)(1) do not require a borrower to convince his or her loan holder to provide
information as a criterion for determining whether that applicant is entitled or eligible for a
Direct Consolidation Loan. The effect of the BCR and CNC letters is to delay or deny
consolidation to eligible, entitled applicants.

Position That Eligibility Cannot Be Determined Based on the Borrower’s Assertion
Conflicts with Regulations

The CNC servicer letter contains guidance that conflicts with requirements in the Department’s
regulations. The letter states—

       . . . According to your loan holder, they have no record that you attempted to
       obtain a Federal Consolidation Loan through them.

       According to our guidelines, in some instances when you attempt to obtain a
       Direct Consolidation Loan, you must first check with your FFEL lender that
       makes consolidation loans before you can obtain a Direct Consolidation Loan.

       Specifically: If you have student loans that are in the grace or repayment period
       and none of the loans you are consolidating are Direct Loan Program loans, you
       must have been unable to obtain:
          • 	 a Federal Consolidation Loan from a FFEL lender; or
          • 	 a Federal Consolidation Loan with income-sensitive repayment terms
              that are acceptable to you.

The eligibility criteria in Section 428C(b)(5) of the HEA and applicable regulations do not
require an applicant to check with his or her loan holder before applying for a Direct
Consolidation Loan, or that the applicant’s loan holder maintain documentation of that contact.
Under 34 C.F.R. § 685.220(d)(1)(i)(B)(2), a borrower is only required to assert that he or she “is
unable to obtain a FFEL consolidation loan with income-sensitive repayment terms acceptable to
the borrower and is eligible for the income contingent repayment plan under the Direct Loan
Program. . . .” Direct contact with the loan holder is not the only way a borrower may satisfy
this requirement: he or she may base the assertion on review of the lender’s materials, use of a
calculator on the lender’s web site, past experience with the lender, or any other criteria the
borrower determines is relevant.

The preamble for the final regulations, published December 1, 1994, verifies that the intent of the
language in 34 CFR 685.220(d)(1)(i)(B) is to require only a written assertion to meet this
eligibility criteria:

              Comments: Some commenters suggested that documentation be required
       to prove that a borrower is unable to obtain a Federal Consolidation Loan, or one


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Theresa S. Shaw and Sally Stroup 	                                         ED-OIG/A07-D0027


       with income-sensitive terms satisfactory to the borrower. Others suggested that
       the phrase “* * * acceptable to the borrower” be deleted since it gives broad
       discretion to any FFEL borrower, eligible for ICR under Direct Loans, to apply
       for a Direct Consolidation Loan.
               Discussion: On the Direct Loan Consolidation Application and Promissory
       Note, the borrower certifies that he or she meets the eligibility criteria to
       consolidate under the Direct Loan Program. The Secretary believes that this
       certification is sufficient documentation and that requiring further documentation
       would be unnecessarily burdensome. The phrase “acceptable to the borrower” is
       statutory. (59 FR 61683)

The guidance in the CNC letter increases the burden on the applicant by requiring him or her to
initiate a contact with his or her loan holder, so that the loan holder may document the
applicant’s decision. The borrower has already made the required assertion on his or her
application. No further assertion or proof is required under the HEA or under the regulations.

Recommendation

We recommend the Chief Operating Officer for FSA—

   2.1 	 Stop sending the BCR and CNC letters, and any letters containing similar guidance, to
         applicants for Direct Consolidation Loans.

Auditee Response

FSA’s contractor has been instructed to stop sending the BCR and CNC letters and any other
letters containing similar guidance.

                     OBJECTIVES, SCOPE, AND METHODOLOGY

The objective of our audit was to determine if the Department takes appropriate action when
LVCs are delayed or denied by FFELP holders. To accomplish our objective, we

   • 	 Reviewed applicable requirements in the HEA and regulations.
   • 	 Interviewed FSA staff and OPE staff.
   • 	 Reviewed policy guidance issued during the period July 2002, through September 2004,
       concerning completion of LVCs.
   • 	 Interviewed EDS staff.
   • 	 Analyzed Department procedures and policies relating to Direct Consolidation Loans.
   • 	 Analyzed data from the Direct Loan system to estimate the effects of delayed and
       incomplete LVCs on borrowers and their abilities to obtain a Direct Consolidation Loan
       for applications received July 1, 2002, through June 30, 2003.


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To achieve our objective, we relied on data obtained from EDS’ electronic Direct Loan
consolidation data system to determine the number of LVCs delayed or denied. We tested the
accuracy, authenticity, and completeness of the data by comparing the data to contemporaneous
reports submitted to the Department by EDS of the numbers of applications received and
performed additional analyses of application receipt dates, certification, and correspondence
records. In addition, we randomly selected a sample of servicer letter recipients to verify the
information contained in EDS’ Direct Loan consolidation database agreed with the information
contained in the Imaging system. The 436,761 applications we obtained from the database was
less than the 470,134 applications reported as received from July 2002 – June-2003 because the
contemporaneous reports included applications before being edited for acceptance and some data
was missing for some applications sent BCR or CNC letters. We were able to derive some
missing data from other records and determined that our findings and recommendations would
not be affected if the numbers of applications or unreturned/untimely LVCs were slightly
understated. Therefore, we concluded that the data contained in these systems were sufficiently
reliable to be used in meeting the audit’s objective.

We performed on-site fieldwork at EDS’ offices in Montgomery, Alabama from October 15,
2003, through October 17, 2003. We conducted interviews with Department staff in Washington
D.C. from April 13, 2004 through April 15, 2004. We conducted additional analyses in our
Kansas City office. A final exit conference was held on October 6, 2004. We conducted the
audit in accordance with generally accepted government auditing standards appropriate to the
scope of the audit described above.

                        STATEMENT ON INTERNAL CONTROLS

To perform our audit, we gained an understanding of the Department’s process for Direct Loan
consolidation, as applicable to our audit. However we did not perform an assessment of the
Department’s internal control structure, because such an assessment was not necessary to meet
the audit objective.

                               ADMINISTRATIVE MATTERS

Corrective actions proposed and implemented 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.

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.



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Theresa S. Shaw and Sally Stroup                                            ED-OIGIA07 -D0027


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

We appreciate the cooperation given us during this review. If you have any questions, please
call Janice Keeney, Assistant Regional Inspector General for Audit, at 816-268-0500 or Richard
J. Dowd, Regional Inspector General for Audit, at 312-886-6503.




                                             Helen Lew
                                             Assistant Inspector General for Audit Services


Attachments




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Theresa S. Shaw and Sally Stroup                                                   ED-OIG/A07-D0027
                                                                                       Attachment A


Publication Date: January 2003

DCL ID: GEN-03-02




Federal Family Education Loan (FFEL) Program loan holders must respond to
Consolidation Loan verification requests within 10 business days.

Posted on 01-24-2003

January 2003

GEN-03-02
G-03-334
L-03-238

SUBJECT: Federal Family Education Loan (FFEL) Program loan holders must respond to Consolidation
Loan verification requests within 10business days.

Dear Colleague:

It has come to our attention that some FFEL loan holders may not be complying with regulatory
requirements to respond to requests from another lender (FFEL or Direct Loans) for certification
of loan status for a loan included on a borrower's application for a consolidation loan. Under the
FFEL Consolidation Program, 34 CFR 682.209(j) states:

        (j) Certification on loans to be repaid through consolidation.Within 10 business days
        after receiving a written request for a certification from a lender under 682.206(f), a
        holder shall either provide the requesting lender the certification or, if it is unable to
        certify to the matters described in that paragraph, provide the requesting lender and the
        guarantor on the loan at issue with a written explanation of the reasons for its inability
        to provide the certification.

Under the Direct Loan Consolidation Program, 34 CFR 685.220(f)(1)(i) states -

        (f) Origination of a consolidation loan.(1)(i) The holder of a loan that a borrower wishes
        to consolidate into a Direct Loan shall complete and return the Secretary's request for
        certification of the amount owed within 10 business days of receipt or, if it is unable to
        provide the certification, provide to the Secretary a written explanation of the reasons
        for its inability to provide the certification.

This is an important obligation that every loan holder must fulfill in order to ensure that a borrower's
Consolidation loan is processed in a timely fashion. Loan holders must, within 10business days after
receiving a request for loan certification, provide the requesting lender with the requested certification
information or a reason why it is unable to provide the information. Failure to comply with this requirement
could result in a lender being subject to fines or other sanctions consistent with 34 CFR 682, Subpart G.


                                                     13

Theresa S. Shaw and Sally Stroup                                                 ED-OIG/A07-D0027
                                                                                     Attachment A
Requesting lenders who do not receive loan certification information or responses informing them why 

that information is not being provided from a loan holder in a timely manner, should inform their FSA 

regional lender review staff, so that the Department can follow up with the loan holder.


We hope that this information helps you fully comply with the requirements of the Federal student loan 

programs. 

Sincerely,





Jeffrey Andrade

Deputy Assistant Secretary

Postsecondary Education 





                                                    14

Theresa S. Shaw and Sally Stroup                                                    ED-OIG/A07-D0027
                                                                                        Attachment B


Publication Date: February 2004

DCL ID: FP-04-02

Mandatory timely completion of Loan Verification Certificates (LVC)




Posted on 02-17-2004


February 2004

FP-04-02

Subject: Mandatory timely completion of Loan Verification Certificates (LVC)

Summary:          This letter reminds lenders in the Federal Family Education Loan (FFEL) Program of the
regulatory requirements related to the timely completion and return of Loan Verification Certificates (LVC) in
support of a borrower’s application for a consolidation loan from another lender.

Dear Colleague:

In Dear Colleague Letter GEN-03-02 (January 2003), we reminded loan holders of the regulatory requirements to
respond to requests from another lender (FFEL or Direct Loans) for certification of the status of a loan included on a
borrower’s application for a consolidation loan. In accordance with 34 CFR 682.209(j), a loan holder has 10
business days after receiving a written request for an LVC to provide the requesting lender with a completed LVC
or, if it is unable to certify, a written explanation as to the reason why the holder is unable to provide the
information.

The regulations allow a loan holder to provide the requesting lender with a written explanation as to why it cannot
provide the certification. This option addresses situations in which the loan holder has a technical problem in
providing the information within the 10-day timeframe (such as a computer malfunction) or where the loan holder
simply does not have information on the borrower’s loan. Loan holders also can provide a written explanation if
they believe that they are the single holder of the borrower’s FFEL loans and that the borrower thus does not qualify
for a consolidation loan from the requesting lender. In this instance, the written explanation sent by the loan holder
to the requesting lender must provide information to support this claim, such as a printout provided by a guaranty
agency from NSLDS that shows that the lender is the only holder or a statement from the guarantee agency that it
has reviewed the borrower’s NSLDS records and has determined that a single lender is the holder of all FFEL loans
for that borrower. It is not the borrower’s responsibility to demonstrate to the loan holder that multiple lenders hold
his or her loans.

In addition, a loan holder is not required to provide the requested loan information when:
• there is a judgment against the borrower on the loan that the borrower wants to consolidate;
• a loan has been sold; or
• a loan is more than 270 days delinquent and a default claim has been submitted to a guaranty agency.

As explained in this letter, there are only a few acceptable reasons why a loan holder would not be required to return
the LVC within 10 business days, and the desire to simply hold on to a borrower’s loan at the borrower’s expense is



                                                          15

Theresa S. Shaw and Sally Stroup                                                   ED-OIG/A07-D0027
                                                                                       Attachment B
not one of those reasons. Any continued failure on the part of loan holders to respond in a timely manner to requests
for LVCs will be considered a violation of the regulations.

As stated in DCL GEN 03-02, the timely certification of information, as required by the regulations, is an important
obligation that every loan holder must fulfill in order to ensure that a borrower’s consolidation loan application can
be processed in a timely manner. Accordingly, we have begun to take enforcement action against lenders that fail to
meet these requirements. Also, we anticipate that guaranty agencies will take appropriate action if they become
aware that a lender in its guaranty program is failing to comply with this requirement.

Consolidation lenders that do not receive loan certification information within 10 business days or that question the
propriety of the loan holder’s written explanation should continue to inform their FSA regional lender review staff
of such matters so that we can follow up with the loan holder and, if necessary, take appropriate remedial action.

We thank you for your cooperation. If you have any questions on the issues discussed in this letter, please contact
Victoria Bateman by email at victoria.bateman@ed.gov or by phone at (202) 377-3301.

Sincerely,


Sally L. Stroup
Assistant Secretary for
Postsecondary Education




                                                         16

Theresa S. Shaw and Sally Stroup                                        ED-OIG/A07-D0027
                                                                            Attachment C

       FFEL Holders With Highest Incidence of Untimely or Incomplete Certifications

     (At Least 100 Untimely or Incomplete Certifications and 10% Certifications Mailed) 

         For Direct Consolidation Loan Applications Received 7/1/2002 - 6/30/2003 

                                                               Where VCs Were Returned
                                                                   Untimely  Incomplete
   FEEL Holder Name in EDS Database              LVCs Mailed   Num. Perct. Num. Perct.
   ACS                                                 7,177   1,557 22%     253    4%
   ACS/AFSA-NDSL                                       1,809     266 15%
   AELMAC/Southwest Student Loan Services              1,072     380 35%
   AES Graduate Services                               1,026     551 54%       1    0%
   AES/PHEAA                                             674     449 67%       1    0%
   AFSA - NDSL                                         1,809     304 17%
   American Student Assistance                         1,158     375 32%       1    0%
   Brazos Higher Education                             1,237     155 13%      34    3%
   Citibank Student Loan Center (Citicorp)             6,649     876 13%     255    4%
   Colorado Student Loan Program                       3,003     443 15%
   Edsouth/Educational Funding Of The South,Inc.       1,239     418 34%
   Educaid                                               823     497 60%       3    0%
   Education Financial Services (EFS)                  1,276     272 21%
   Georgia Student Finance Authority (GSFA)              689     100 15%
   Great Lakes Educational Loan Services, Inc.           531     132 25%
   Great Lakes Higher Education Corp.-GA               1,543     153 10%       4    0%
   IDAPP                                                 621     384 62%
   Illinois Student Assistance Commission (ISAC)       7,337     873 12%
   Iowa Student Loan Liquidity Corporation               856     235 27%       1    0%
   M.H.E.A.A.-M.G.A                                    3,615     729 20%
   Michigan Higher Education Student Loans               196     133 68%
   Missouri Coordinating Board Higher Ed.              4,862   1,915 39%       1    0%
   Missouri Higher Education Loan Authority (MOHELA) 1,388       219 16%     142 10%
   National Student Loan Program                       3,079     372 12%
   Nelnet                                              2,104     398 19%
   New Jersey Higher Education Assistance              1,302     273 21%       1    0%
   New Mexico Educ. Assist. Foundation                 2,149     284 13%       1    0%
   New Mexico Student Loan Guarantee                   3,276     919 28%
   New York State Higher Education Services           15,759   2,385 15%       1    0%
   Pennsylvania Higher Ed. Assist. Agency-GA (PHEEA) 6,601       774 12%       3    0%
   Regions Bank                                          558     311 56%
   SLMA/Loan Servicing Center/Florida (Sallie Mae)    29,555       0    0% 9,528 32%
   SLMA/Loan Servicing Center/Pa (Sallie Mae)          1,107       0    0%   324 29%
   SLSC - PHEAA                                        5,331     996 19%     156    3%
   South Carolina Student Loans                        1,021     113 11%      79    8%
   Student Loan Guarantee Fnd. Of Arkansas             1,817     288 16%
   Suntech, Incorporated                               1,682     186 11%       2    0%
   Suntrust Bank                                         360     120 33%       4    1%
   Tennessee Student Assistance Corporation (TSAC)     2,098     812 39%
   Wells Fargo Education Financial Services            3,601     586 16%       3    0%




                                             17

Theresa S. Shaw and Sally Stroup 	                                                    ED-OIG/A07-D0027
                                                                                          Attachment D

                                                               Ltr: 175
                                                               Pkg: BCR
                                                               Sys Gen
                                                               Revised: Rel. 7.02
                                                               Trigger: Certification not returned by loan
                                                               holder in a timely manner



NAME                                                                                            DATE
ADDRESS1
ADDRESS2
CITY, STATE ZIP

                                   Borrower Account Number: 123456789

Dear Borrower,

Thank you for your participation in the Direct Consolidation Loan Program. This letter is to provide you
with the status of your Direct Consolidation Loan application.

Your Loan Holder Has Not Responded
We are processing your Direct Consolidation Loan application/promissory note, but have been unable to
verify the loan balance(s) needed to pay off your account(s). The holder of your loan(s) listed below has
not responded to our requests for verification.

                 Loan Holder: LOAN HOLDER NAME

                 Phone Number:PHONE NUMBER 


                         Account #                 Loan Type

                 999999999999999999                PLUS 

                 333333333333333333                NON-PLUS              


Unless we receive the pay-off amount(s) from your loan holder(s), we cannot include the loan(s) in your
Direct Consolidation Loan. Please help us obtain this information.

Your Options
Option 1:  You may contact your loan holder directly and request that the “Federal Direct
                 Conolidation Loan Verification Certificate” be completed and returned to the address on
                 the certificate.

Option 2:	       You may remove the unverified loan(s) from the conolidation. Contact us, and we will
                 continue the consolidation process for the eligible loans that have been verified.

Option 3:	       You may cancel your loan application



Immediate Attention Required
We encourage you to take the necessary action immediately. If we do not hear from you within 15
calendar days of the date of this letter, we will cancel your application. If your application is cancelled,
you must reapply if you wish to receive a Direct Consolidation Loan.



                                                      18

Theresa S. Shaw and Sally Stroup 	                                                ED-OIG/A07-D0027
                                                                                      Attachment D

Continue Making Payments
Continue making your monthly loan payments (if required to do so) until you receive written notification
that your loan(s) are consolidated.

If you are having difficulty making your loan payments, contact your current loan holder(s) for ways to
postpone payments. Ask specifically about your “deferment” or “forbearance” options.

Our Contact Information
Please contact us if you need assistance or have questions:

•   E-mail	     loan_consolidation@mail.eds.com

•   Web	        www.loanconsolidation.ed.gov

• 	 Phone       1-800-557-7392 (1-800-557-7395 TDD for the hearing impaired)
                8AM to 8PM (EST), Monday through Friday

• 	 Mail        U.S. Department of Education
                Consolidation Department
                P.O. Box 242800 

                Louisville, KY 40224-2800


Thank you for your assistance.

Consolidation Department
Loan Consolidation Center




                                                    19

Theresa S. Shaw and Sally Stroup 	                                                   ED-OIG/A07-D0027
                                                                                         Attachment E
                                                            Ltr: 354
                                                            Pkg: CNC
                                                            Online CSR generated letter
                                                            New: Rel. 7.0
                                                            Trigger: Loan holder will not certify loans
                                                            because the borrower has not tried to
                                                            consolidate the loans through the loan holder



NAME                                                                                         DATE
ADDRESS1
ADDRESS2
CITY, STATE ZIP

                                 Borrower Account Number: 123456789

Dear Borrower,

This letter is to update you as to the status of your Direct Consolidation Loan application and to inform
you of the action(s) that you need to take. We have not been able to verify the loan amounts needed to
pay off your loan balance.

You May Need to Check with Your Loan Holder Before We Can Continue to
Process Your Federal Direct Consolidation Loan
The Federal Family Education Loan (FFEL) Program loan holder(s) identified below has not provided us
with a verification of the amount and status of your loans. According to your loan holder, they have no
record that you attempted to obtain a Federal Consolidation Loan through them.

According to our guidelines, in some instances when you attempt to obtain a Direct Consolidation Loan,
you must first check with your FFEL lender that makes consolidation loans before you can obtain a Direct
Consolidation Loan.

Specifically: If you have student loans that are in the grace or repayment period and none of the loans
you are consolidating are Direct Loan Program loans, you must have been unable to obtain:
        • 	 a Federal Consolidation Loan from a FFEL lender; or
        • 	 a Federal Consolidation Loan with income-sensitive repayment terms that are acceptable to
             you.

If you are consolidating jointly with your spouse, only one of you must meet the requirements described
above.

We cannot include the loan(s) listed below in your Direct Consolidation Loan unless we receive the
verified pay-off amount of these loans from your loan holder.

Loan Holder: [ Loan Holder Name ]
Phone Number: ( 000 ) 000 - 0000

Account Number                                   Loan Type
XXXXXXXXXXXX                                        X



You Have Four Options



                                                    20

Theresa S. Shaw and Sally Stroup 	                                                     ED-OIG/A07-D0027
                                                                                           Attachment E
1. 	 If you believe that you do not have to meet the requirements described above because you are
     consolidating at least one Direct Loan or are consolidating at least one loan that is in an in-school
     period, you should contact your loan holder, and tell them they must complete the “Loan Verification
     Certificate” and return it to us at the address shown on the certificate.

2. 	 If you believe that you have met the requirements described above, you should contact your loan
     holder, and tell them they must complete the “Loan Verification Certificate” and return it to us at the
     address shown on the certificate.

3. 	 If the requirement described above applies to you, you must contact a FFEL lender to discuss your
     options for obtaining a Federal Consolidation Loan through them. If you are then unable to obtain a
     Federal Consolidation Loan through them, or are unable to obtain a loan with income-sensitive
     repayment terms that are acceptable to you, tell them they must complete the “Loan Verification
     Certificate” and to return it to us at the address shown on the certificate.

4. 	 If you need more information, or wish to cancel your Direct Consolidation Loan application, contact us
     using the information provided below.

You Need to Respond Within 21 Days
We encourage you to take the necessary action(s) as soon as possible. If we do not receive the needed
verifications from your loan holder, or do not hear from you within 21 days of the date of this letter, we will
process your Direct Consolidation Loan application without these loans.

You Need to Continue Making Payments
Continue making your monthly loan payments (if you are required to do so) on all of your student loans
until you receive written notification that your loan(s) has been successfully consolidated.
If you are having difficulty making your loan payments, contact your current loan holder(s) to find out how
you might be able to temporarily postpone making payments until the consolidation loan is finalized. Ask
specifically about deferment or forbearance options.

If You Need Assistance
Please contact us if you need assistance or have any questions:

• 	 E-mail       loan_consolidation@mail.eds.com

• 	 Web          www.loanconsolidation.ed.gov

• 	 Phone        1-800-557-7392 (TDD for the hearing impaired: 1-800-557-7395)
                 8AM to 8PM (EST), Monday through Friday

• 	 Mail         U.S. Department of Education
                 Consolidation Department
                 P.O. Box 1723 

                 Montgomery, AL 36102-1723 


Thank you for your interest in the Federal Direct Consolidation Loan Program.


Consolidation Department
Loan Origination Center




                                                      21

             UNITED STATES DEPARTMENT OF EDUCATION
                                                                                                       ED/OIG/A07-D0027
                                                                                                            Attachment F




MEMORANDUM


DATE:                     Januray 27, 2005

TO:                       Richard J. Dowd
                          Regional Inspector General for Audit
                          Office of the Inspector General

FROM:                     Theresa S. Shaw s/s
                          Chief Operating Officer
                          Federal Student Aid

                          Sally L. Stroup s/s
                          Assistant Secretary for Postsecondary Education
                          Office of Postsecondary Education

SUBJECT:                  Response to Audit “Direct Consolidation Loans,” (Control Number
                          ED-OIG/A07-D0027)

Thank you for providing us with an opportunity to respond to the draft report of the results of
the Office of Inspector General’s (OIG’s) audit of Direct Consolidation Loans.

As you know based on our comments at the exit conference, we agree with your findings that the
Department’s procedures and guidance to loan holders have not ensured complete and timely
consolidations for all eligible borrowers.

We have addressed each of your report’s recommendations. We have developed a letter that will
be sent to loan holders that have failed to respond to loan verification certificates (LVCs) in a
timely manner. This letter addresses your concerns that the Department clarify the statutory and
regulatory requirements for loan holders to complete and return timely LVCs. The letter informs
loan holders that have not been timely in responding to LVCs of the potential consequences of
their failure to comply with these rules. Also, we will pursue adverse administrative actions
against loan holders that willfully fail to comply with the Department’s regulations for the return
of Direct Loan LVCs.




                                                               22
          Our mission is to ensure equal access to education and to promote educational excellence throughout the nation
                                                                          ED/OIG/A07-D0027
                                                                                Attachment F
Page 2 – Richard J. Dowd

We have responded to each of your recommendations in greater detail in the attachment to this
memorandum. Once again, thank you for providing us with this opportunity to comment.

Attachment

cc: 	 Helen Lew, Office of Inspector General
      Pat Howard, Office of Inspector General
      Sue Szabo, Borrower Services, Federal Student Aid
      Matt Fontana, Financial Partners Services, Federal Student Aid
      Jeff Baker, Policy Liaison & Implementation Staff, Federal Student Aid
     David Bergeron, Office of Postsecondary Education




                                               23

                                                                             ED/OIG/A07-D0027
                                                                                   Attachment F
                                                                                ATTACHMENT A

Recommendation 1.1: Issue clear guidance to loan holders, describing the loan holders’
statutory and regulatory responsibilities to complete and return timely Direct Consolidation Loan
LVCs. At a minimum, the guidance needs to inform loan holders that the single- holder rule in
Section 428C(b)(1)(A) of the HEA does not affect a borrower’s eligibility for a Direct
Consolidation Loan, and that loan holders are required to provide the information requested on
the Direct Loan LVC, regardless of the lender’s assessment of the borrower’s eligibility for a
Direct Consolidation Loan.

Response: Working with the Office of Postsecondary Education (OPE) and the Office of the
General Counsel (OGC), Federal Student Aid (FSA) has developed a letter that will be sent to
loan holders that fail to respond to loan verification certificates (LVCs) in a timely manner. This
letter will remind loan holders of the statutory and regulatory requirements related to LVCs.
The letter will inform loan holders that have not been timely in responding to LVCs of the
potential consequences of failing to comply with these rules.

Recommendation 1.2: Initiate and pursue adverse administrative actions, under 34 CFR Part
682, Subpart G, against loan holders that fail to comply with the Department’s regulations for the
return of Direct Loan LVCs.

Response: FSA’s Borrower Services has notified its contractor to implement procedures to be
followed to refer cases of noncompliance to FSA’s Financial Partners Services for administrative
action. FSA’s Financial Partners Services is preparing procedures to receive and initiate
administrative action(s) against non-compliant loan holders referred by Borrower Services.

Recommendation 1.3: Implement alternate methods for determining applicants’ payoff
amounts to ensure that applicants’ loans are consolidated, even if the applicants’ loan holders fail
to provide the information requested on the LVC.

Response: To ensure eligible applicants’ loans are consolidated, we will begin to use the
National Student Loan Data System (NSLDS) to determine applicants’ payoff amounts if the
applicants’ loan holders fail to provide the information requested on the LVC.

Recommendation 2.1: Stop sending the BCR and CNC letters, and any letters containing
similar guidance to applicants for Direct Consolidation Loans.

Response: FSA’s contractor has been instructed to stop sending the BCR and CNC letters, and
any letters containing similar guidance to applicants for Direct Consolidation Loans.




                                                24