United Education Institute's Management of Student Financial Assistance Programs.

Published by the Department of Education, Office of Inspector General on 2002-12-23.

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

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                                       u.s. Department of Education
        ~                                   Office of Inspector General
        , :z

         ;                               501 I Street,Suite9-200
        ~                              Sacramento, California 95814
                                  Phone(916)930-2388.Fax (916)930-2390

                                                   December23, 2002


TO:               TheresaS. Shaw
                  Chief OperatingOfficer
                                         n;;?           .I , W-              r
FROM:             Gloria Pilotti ~~"C~-;J!           ;d~-:tl::--"
                  RegionalInspectorGeneralfor Audit, RegionIX

                  United Education Institute's Administration                       of Student Financial Assistance
                  ControlNo. ED-OIG/A09-BO025

Attachedis our subjectreportpresentingour findings andrecommendations
                                                                    resultingfrom our
auditof United EducationInstitute.

In accordancewith the Department'sAudit ResolutionDirective, youhavebeendesignatedasthe
actionofficial responsiblefor the resolutionof the findings andrecommendations
                                                                             in this report.

If youhave anyquestions,pleasecontactme at (916)930-2399.

Pleasereferto the abovecontrol numberin all correspondence
                                                         relatingto this report.


             Our missionis to ensureequal accessto educationand to promoteeducationalexcellencethroughautthe Nation.
                                  U.S. Department of Education
                                             Office of Inspector General

                                             501 I Street, Suite 9-200
                                           Sacramento, California 95814
                                    Phone (916) 930-2388 • Fax (916) 930-2390

                                                    December 23, 2002

Mr. William P. Murtagh, Jr.
International Education Corporation
2201 Dupont Drive, Suite 800
Irvine, California 92612

Dear Mr. Murtagh:

This is the Office of Inspector General’s Final Audit Report, entitled United Education
Institute’s Management of Student Financial Assistance Programs. The purpose of the audit was
to determine whether United Education Institute (UEI) met eligibility requirements and
administered the Title IV programs in compliance with the Higher Education Act of 1965, as
amended (HEA).

                                                 AUDIT RESULTS
UEI continued to return unearned Title IV funds late for students who withdrew from school.
We concluded that UEI had generally complied with the HEA and Federal regulations in the
areas of student eligibility, ability-to-benefit testing, award and disbursement of Title IV funds,
and calculation of the return of Title IV amounts. We also concluded that UEI met program
eligibility and institutional eligibility requirements.

In its comments to the report, UEI disagreed with the Office of Inspector General’s (OIG) use
of the date check cleared the institution’s bank for evaluating the timeliness of UEI’s return of
Title IV funds and the recommended corrective action. UEI also provided comments on a draft
finding related to compliance with the 90/10 Rule. After further evaluation, we removed the
finding and reported our concerns regarding the 90/10 Rule in the OTHER MATTERS section
of the report. UEI’s comments and our response concerning the late return of Title IV funds are
summarized in the report. The text of UEI’s comments is included as an attachment to the

FINDING — UEI Continued to Return Unearned Title IV Funds Late For
          Students Who Withdrew From School

UEI’s Independent Public Accountants (IPA) disclosed in its annual audit reports for fiscal years
ended October 31, 1999 and 2000, that UEI had not returned unearned Title IV funds timely for

           Our mission is to ensure equal access to education and to promote educational excellence throughout the Nation.
Control No: ED-OIG/A09-B0025                                                                      Page 2 of 9

withdrawn students.1 We found that UEI continued to return unearned Title IV funds late.
Pursuant to 34 C.F.R. § 668.22(j)(1), an institution has 30 days from the date the institution
determines that a student withdrew to return all unearned Title IV funds for which it is

In its corrective action plan for the audit report covering its fiscal year ended October 31, 2000,
UEI explained actions taken to address findings on the late return of funds:

        UEI has struggled with this very important issue. Corrective actions undertaken
        in the past have had disappointing results. Consequently, executive management
        has made a decision to review the entire refund process, including the “Return of
        Title IV funds” issue, from beginning to end. The objective of this action is to
        implement a process that will ensure that refunds are consistently made in a
        timely manner. This review process began March 2001 and computer-
        programming modifications have been identified. Upon completion of the final
        testing of the computer programming revisions, the new process will be

Officials of International Education Corporation (IEC), UEI’s parent corporation, informed us
that, effective July 1, 2001, new procedures were implemented for processing the return of
Title IV funds for students who had withdrawn. Under the new procedures, each UEI campus is
responsible for calculating the amount of Title IV funds to be returned. The calculation is
forwarded to IEC for verification. Then, IEC issues a check to return the Title IV funds to the
program account or lender. Previously, Global Financial Aid Service, a third-party servicer,
performed the return of funds calculations and sent the result to IEC for issuance of the refund

To evaluate the effectiveness of UEI’s new procedures, we obtained a list of the 262 students
who withdrew from school during the period July 1 to September 30, 2001, and were due a
refund. We found that refunds for 94 of the 262 students were not paid within the 30-day time
frame. The late refunds were paid an average of 12 days late and ranged from 1 to 100 days late.


We recommend that the Chief Operating Officer for Federal Student Aid—

1.1    Require UEI to take additional actions to improve its procedures for ensuring that
unearned Title IV funds are returned timely.

1.2    Impose a fine, limit participation, or take other appropriate action as provided under
34 C.F.R. § 668, Subpart G.

  In the fiscal year 1999 audit, the IPA reported that Title IV funds were returned late for 2 of the
25 students in the refund sample. The IPA reviewed two samples in the fiscal year 2000 audit. The IPA
reported that UEI returned Title IV funds late for 5 of the 50 students in the initial sample. In the second
sample, Title IV funds were returned late for 13 of the 59 students sampled.
Control No: ED-OIG/A09-B0025                                                              Page 3 of 9

UEI’s Comments

UEI disagreed with the finding and recommendations. In its response to the draft report,
UEI took exception to the OIG’s use of the date a check cleared the institution’s bank to evaluate
UEI’s compliance with 34 C.F.R. § 668.22(j)(1). The regulation states—

       An institution must return the amount of title IV funds for which it is
       responsible... as soon as possible but no later than 30 days after the date the
       institution’s determination that the student withdrew…. [Bold emphasis added]

UEI stated that the HEA and regulations do not define the term “return” or specify how to
determine when 30 days has elapsed. UEI stated that the only guidance issued by the
U.S. Department of Education (Department) on the timeliness of returns is the cited regulation,
which merely requires that funds be returned within 30 days. UEI acknowledged that the
OIG provided a definition in its audit guide for Audits of Federal Student Financial Assistance
Programs at Participating Institutions and Institution Servicers, dated January 2000, but
maintained that the definition was never adopted by the Department and did not have the
force of law.

UEI noted that the Department’s regulation at 34 C.F.R. § 668.166(c)(2) defined “return,” but
UEI stated that the definition only applied to determining whether an institution has maintained
excess cash. The regulation states—

       For the purpose of this section, upon a finding that an institution has maintained
       excess cash, the Secretary—
           (i) Considers the institution to have issued a check on the date that the check
       cleared the institution’s bank account, unless the institution demonstrates to the
       satisfaction of the Secretary that it issued the check shortly after the institution
       wrote the check....

UEI concluded “...if the Secretary had intended to define the term ‘return’ for purposes of the
R2T4 [return of Title IV funds] Rule to mean the date on which a check clears an institution’s
bank, the Secretary could have done so, as he effectively did in the Cash Management
regulations. Instead, the Secretary did not proffer such a definition in Section 668.22(j) and the
Secretary pointedly limited the definition in Section 668.166(c)(2) exclusively to that regulation.
This action makes clear that under Section 668.22(j), the Secretary does not require an
institution’s repayment checks to have been cleared by its bank for such checks to be considered

UEI also stated that applying the 30-day timeframe to the date check cleared the institution’s
bank presumes an institution can be held responsible for the time required by the bank to process
and clear a check, as well as the time for the mail service to deliver the check. UEI cited the
Department recently issued Notice of Proposed Rule Making (NPRM) (67 Fed. Reg. 51717,
51739, issued August 8, 2002), which considers the return of Title IV funds by check to be late if
(1) the check is issued more than 30 days after the date the student withdrew or (2) the cancelled
check shows that the check was received more than 45 days after the date the student withdrew.
UEI acknowledged that the proposed regulations did not establish criteria for the period covered
Control No: ED-OIG/A09-B0025                                                                 Page 4 of 9

by the finding, but stated that the proposed regulations confirm that the regulations do not
currently use a check-cleared date to measure timeliness of payments.

UEI stated that the date the OIG used in its analysis was the date shown on UEI’s bank
statements rather than the bank cancellation stamp on the back of the checks. According to UEI,
the date shown on the bank statement is normally several days after the date the bank stamped
the check. UEI also stated that the OIG included in its review seven students who had earned
100 percent of the Title IV funds disbursed to them, and thus, the refunds were not subject to the
30-day requirement.

Using the date the check was prepared,2 UEI determined that it returned Title IV funds on time
for 250 of the 262 students (95.4 percent). UEI stated that an error rate of less than five percent
did not warrant the additional oversight measures or adverse action recommended by the OIG.

OIG Response

While UEI is correct that current Federal regulations covering the return of Title IV funds
applicable to our audit period did not define the term “return,” we take exception to UEI’s use of
the date the check was prepared to assess its compliance with the 30-day requirement. The term
“return” means more than placing a date on a check. The check date provides no assurance that
the funds were, in fact, returned timely. The check clearance date shown on UEI’s bank
statements, which was used for the OIG’s analysis, provides evidence that the funds were
returned by that date. We confirmed with a bank representative that the date shown on the bank
statements was the date the check was honored by the bank.

As noted in UEI’s comments, the date used by the OIG is consistent with the guidance given to
independent public accountants performing audits of institutions that participate in Title IV
programs. The 2000 audit guide states “[r]efunds paid by check are considered paid on the date
the check is honored by the institution's bank.” Since its 1997 publication, the audit guide has
consistently instructed auditors to use this definition. Also, as noted in UEI’s comments, the
audit guide definition is consistent with the definition of “return” used in the cash management
regulations. Thus, the OIG appropriately used the date check cleared the institution’s bank to
evaluate UEI’s compliance with 34 C.F.R. § 668.22(j)(1).

We revised the number of students cited in the report to exclude the seven students who had
earned 100 percent of the Title IV funds. UEI’s comments regarding the fairness of the 30-day
timeframe may be relevant during the negotiated rulemaking process, but they are not relevant to
an evaluation of the institution’s compliance with the cited regulation.

As UEI appropriately concluded, the cited NPRM did not establish criteria for the period covered
by our audit. Yet, we found that, even under the new regulations, UEI did not make refunds
timely. The Department issued the final regulations related to the NPRM on November 1, 2002.
The final regulations at 34 C. F. R. § 668.173 (b) state—

 In Attachment Q of UEI’s response to the draft report, UEI shows the date used in its analysis as
“Check Sent Date.” We confirmed with UEI’s Executive Vice President of Student Financial Services
that the dates in this column actually represented the date on the check (i.e. the date the check was
Control No: ED-OIG/A09-B0025                                                                 Page 5 of 9

       [A]n institution returns unearned title IV, HEA funds timely if—...
       (4) The institution issues a check no later than 30 days after the date it determines
       that the student withdrew. However, the Secretary considers that the institution
       did not satisfy this requirement if—
           (i) The institution’s records show that the check was issued more than
       30 days after the date the institution determined that the student withdrew; or
           (ii) The date on the cancelled check shows that the bank used by the Secretary
       or FFEL [Federal Family Education Loan] lender endorsed that check more than
       45 days after the date the institution determined that the student withdrew.
Based on available information,3 we concluded that refunds for 20 of the 262 students did not
meet the above requirements. This 7.63 percent error rate exceeds the compliance threshold of
5 percent specified in 34 C. F. R. § 668.173 (c) (i). Given the results of our analyses and the fact
that UEI has been cited for late refunds in prior audit reports, our recommendations that UEI take
additional corrective action, and that Federal Student Aid take appropriate action as provided
under 34 C. F. R. § 668, Subpart G, are warranted.

                                      OTHER MATTERS
Recourse Loans Used in Revenue Percentage Calculation for 90/10 Rule. IEC calculated the
revenue percentage for UEI and the corporation’s other schools. The calculations included
amounts from recourse loan transactions related to private loans that Sallie Mae, Inc. provided to
UEI students under the condition that IEC guarantee the loans. Under its agreement with Sallie
Mae, Inc., IEC was obligated to maintain a reserve fund equal to 30 percent of the principal
balance of all outstanding recourse loans. The reserve fund was held and controlled by Sallie
Mae, Inc.

IEC’s experience with the recourse loans shows that most students will default and that IEC will
be required to make full payment on the loans to Sallie Mae, Inc. The following are other
indicators that IEC will be responsible for the recourse loans:

       IEC recognized a liability for losses in excess of the reserve amount held by
       Sallie Mae, Inc. As of October 31, 2001, IEC reported a liability of $2,358,524 in its
       financial statements for future defaults on recourse loans provided to UEI students and
       students at other IEC schools.

       IEC recognized bad debt expense when recording recourse loan transactions in its
       accounting system. When UEI received a recourse loan disbursement, it recorded
       30 percent of the loan principle as bad debt expense in the school’s accounting records.
       When Sallie Mae, Inc. withdrew funds for defaulted loans from the reserve fund and
       conveyed the rights to collect on the loans, IEC recorded a bad debt expense in
       UEI’s accounting records for the defaulted amount.

  We did not have information in our audit working papers on the date lenders endorsed the refund
checks. Therefore, for purposes of our analysis, we considered refunds to be timely if the checks were
issued within 30 days of the withdrawal date and cleared by UEI’s bank within 48 days of the withdrawal
date. The 48-day period allowed 3 days for the endorsed check to be received and cleared by the
institution’s bank.
Control No: ED-OIG/A09-B0025                                                                      Page 6 of 9

        IEC has not collected significant amounts from former students on defaulted loans.
        According to IEC officials, IEC routinely provided defaulted recourse loans to collection
        agencies and that, in fiscal year ended October 31, 2001 the collection agencies recovered
        only $31,920 on defaulted recourse loans.

In our opinion, the above facts demonstrate that the recourse loan disbursements and other
recourse loan transactions, in reality, represent financing transactions for which IEC bears the
risk of loss similar to institutional loans with recourse. As such, only actual loan payments made
by students to Sallie Mae, Inc. or IEC should be included as revenue for 90/10 Rule purposes.
While IEC’s inclusion of recourse loan receipts, net of amounts returned to Sallie Mae, Inc., in
revenue percentage calculations does not appear to be prohibited by the regulations, we are
concerned about the manipulation of the recourse loan transactions that occurred at UEI and the
potential for future abuse. 4

Delays in Title IV Receipts. IEC monitored its Title IV and non-Title IV revenues through the
year to ensure that UEI and the corporation’s other institutions meet the 90/10 Rule. When it
appeared that UEI would exceed the 90 percent limit on Title IV receipts, IEC took steps to alter
the timing of its cash receipts. We found that UEI stopped drawing funds from its Pell account
and stopped receiving Federal Family Education Loan disbursments from lenders during the last
months of its fiscal years ended October 31, 2000 and 2001. Also, during the last quarter of its
fiscal year ended October 31, 2001, UEI encouraged students to refinance the balance due on
their UEI retail installment contracts with loans provided under Sallie Mae Inc.’s Customized
Career Training Loan Program.5 While these actions do not appear to violate applicable
regulations or harm students, they could impact on UEI’s ability to meet the 90/10 Rule in future
fiscal years.

Financial Responsibility. An institution participating in the Title IV programs must demonstrate
to the Department that it is financially responsible. IEC did not satisfy the Department’s
standards for financial responsibility as of October 31, 1999 and 2000. In response, IEC agreed
to provisional certification of the Title IV participation agreements for UEI and its other
institutions. IEC also provided the Department with letters of credit totaling $3.5 million. As of
May 2002, the Department continued to hold the letters of credit.

 IEC arranged with Sallie Mae, Inc. to delay the required reserve fund payments to the reserve for August
and September 2001 until after October 31, 2001, the end of the fiscal year. The agreement, which Sallie
Mae, Inc. signed on September 5, 2001, contained the following statement: “We appreciate your
agreement to help us satisfy the U.S. Department of Education regulation generally referred to as the
90/10 rule.” As evidenced by this statement, the purpose of the delay was to shift reserve payments
between fiscal years for purposes of IEC’s 90/10 revenue calculations. Even though this arrangement had
no impact on whether UEI met the 90/10 Rule for fiscal year October 31, 2001, we considered the
arrangement to be an inappropriate manipulation of non-Title IV revenue.
 Sallie Mae Inc.’s Customized Career Training Loan Programs offered student’s payment terms and an
interest rate that was lower than terms and interest rate contained in the institution’s retail installment
Control No: ED-OIG/A09-B0025                                                             Page 7 of 9

UEI is a proprietary institution with a main campus in Los Angeles, California, and six
additional locations in San Bernardino, Huntington Park, San Diego, Ontario, Van Nuys and
Chula Vista, California. Its corporate office, IEC, is located in Irvine, California. UEI received
initial approval to participate in the Title IV, Student Financial Assistance programs on
April 18, 1988. The Accrediting Council for Continuing Education and Training accredits the
institution. UEI offers vocational training programs in the computer, medical, dental, and
business fields.

UEI records show that the institution received over $24 million of Title IV funds during the
period November 1, 1999, to October 31, 2000. The 1999 Cohort Default Rate (most recent
Department’s published rate) for UEI was 5.5 percent.

On September 6, 2001 the OIG issued its Final Audit Report (ED-OIG/A06-B0014) on its audit
of UEI’s compliance with the Title IV, Student Financial Assistance, verification requirements.
The auditors found that UEI reported incorrect verification results for 31 of 50 sampled Federal
Pell Grant recipients. The OIG recommended that the Chief Operating Officer for Federal
Student Aid confirm that UEI is reporting correct verification results to the Department.

The objective of our audit was to determine if UEI met eligibility requirements and administered
the Title IV program in compliance with the HEA. As described later in this section, our review
covered varying periods depending on the area reviewed.

To accomplish our objectives, we obtained background information about the institution.
We also reviewed applicable HEA provisions and Title IV regulations. We interviewed IEC
and UEI administrators and staff and reviewed UEI’s policies and procedures, accreditation
document, licensure, and Title IV program participation agreement. We reviewed the
Compliance Attestation Examination of the Title IV Student Financial Assistance Programs for
its fiscal year ended October 31, 2000, prepared by UEI’s independent public accountant.
We also reviewed IEC’s Consolidated Financial Statements as of October 31, 2000 and 1999.

Our review of the revenue percentage calculation for the 90/10 Rule covered UEI’s fiscal years
ended October 31, 2000 and 2001. As part of our review of the calculations, we reviewed files
for 30 randomly selected students who received Sallie Mae loans to confirm that eligible students
were provided the opportunity to obtain funds under the Title IV programs. The students were
selected based on Sallie Mae loan dates and amounts.

To evaluate UEI’s newly implemented procedures for the return of funds, we analyzed data for
262 students who had withdrawn from UEI during the period July 1 to September 30, 2001, and
were due a refund. To evaluate UEI’s other policies and procedures, we reviewed files for
50 randomly selected students from the universe of 3,903 students who started classes between
July 1, 2000, and July 31, 2001 and received Title IV disbursements.
Control No: ED-OIG/A09-B0025                                                               Page 8 of 9

We relied on computer-processed data obtained from the institution’s CLASS system for our
review of the revenue percentage calculation for the 90/10 Rule, student eligibility, Title IV
disbursements, and the return of Title IV funds. Our tests were limited to comparing the data to
information in student files and tracing summary amounts by transaction codes to the worksheet
used by IEC in its monthly tracking of the revenue percentage. We compared Title IV fund
totals from the Department’s National Student Loan Data System to information extracted by
UEI from its CLASS System database. Based on these tests, we concluded that the data used
were sufficiently reliable for meeting our objective.

We performed our fieldwork at IEC and UEI offices from August 2001 through January 2002.
We held an exit conference with UEI officials on July 3, 2002. Our audit was performed in
accordance with generally accepted government auditing standards appropriate to the scope of
the review described above.

As part of our review, we assessed UEI’s management controls, policies, procedures, and
practices applicable to the scope of the audit. We assessed the level of control risk for
determining the nature, extent, and timing of our substantive tests. For the purposes of this
report, we assessed and classified the significant controls related to the Title IV program as

       Oversight of program eligibility
       Monitoring of institutional eligibility and financial responsibility requirements
       Student eligibility determinations
       Ability-to-benefit testing procedures
       Award and disbursement of Title IV funds
       Refunds/returns of Title IV funds

Because of inherent limitations, a study and evaluation made for the limited purposes described
above would not necessarily disclose all material weaknesses in management controls.
However, our assessment disclosed weaknesses related to the return of Title IV funds for
students who withdrew. This weakness is discussed in the AUDIT RESULTS section of this

                            ADMINISTRATIVE MATTERS
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.

If you have any additional comments or information that you believe may have a bearing on the
resolution of this audit, you should send them directly to the following ED official, who will
consider them before taking final action on the audit:
ControlNo: ED-OIG/AO9-BOO25                                                           Page9 of9

                             Ms. TheresaS. Shaw
                             Chief Operating Officer
                             Federal StudentAid
                             Union Center Plaza Building, Room 112G1
                             830 1stStreet, NE
                             Washington, D.C. 20202-5402

Office of Management and Budget Circular A-50 directs Federal agenciesto expedite the
resolution of audits by initiating timely action on the findings and recommendationscontained
therein. Therefore, receipt of your comments within 30 days would be greatly appreciated.

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

If you have any questions,please call me at (916) 930-2399. Pleaserefer to the control number
in all correspondencerelated to this report.


                                            ~&~l)2b                        -:tt:f.j
                                            Gloria Pilotti
                                            Regional Inspector General
                                               for Audit

cc: w/attachment

   Mr. Ralph E. Acaba
   IEC -Vice President of StudentFinancial Services

              UEI’s Comments to the Report

The draft report provided to UEI for comment included a finding
concerning compliance with the 90/10 Rule, which was revised and
moved to the OTHER MATTERS section of the final report.
Comments related to this finding and information subject to
protection under the Privacy Act of 1974 have been omitted from
this attachment. Also, we have not included the numerous
attachments provided with the letter. The complete letter and its
attachments are available upon request.
    It           .
.   ~           JONATHON           C.   GLASS
                                                  Dow,          LOHNES

                                                                                    &    ALBERTSON,
                                                                                          AT     LAW


                                                                                                                             ONE RAVINIADRIVE.SUITE 1600
                      I     DIAL
                            @ d I202.776.2691
                                   h               1200 NEW HAMPSHIRE AVENUE, N.W.. SUITE 800. WASHINGTON, D.C. 20036.6802   ATLANTA. GEORGIA 303462108
                    JS ."      ow 0 n".com                 TELEPHONE    202.776.2000  .FACSIMILE  202.776.4691               TELEPHONE 770.901.8800
    ..:    .FACSIMILE                                                                                                                    770.901.8874

    : -eptem                                                             S          b er 5, 2002

    -Via                    FedEx

                     Ms. Gloria L. Pilotti
It                   Regional Inspector General for Audit-Region IX
                     U.S. Department of Education
I                    Office of Inspector General
~                    501 I Street, Suite 9-200
                     Sacramento,CA 95814

-Attn:                         Beverly A. Dalman

.Re:                                       United Education Institute
~                                          ACN: ED-OIG/A09-BO025
-Dear                        Ms. Pilotti:

                             On behalf of United Education Institute ("UEI" or the "School"), we hereby respond to
"                    the Office of Inspector General's ("OIG") Draft Audit Report dated August 6, 2002, concerning
~                    VEl's compliance with the eligibility and administrative requirements applicable to the federal
                     student financial assistanceprograms under Title IV of the Higher Education Act of 1965, as
.amended                       ("Title IV Programs") ("HEA"), Audit Control No. ED-OIG/A09-BO025 ("Draft
~                    Report"). This responseis timely filed, within 30 days of such report.

.We                              submit that there is no legal basis for Finding No.1 of the Draft Report alleging
~                    UEI's failure to meet the requirements of the so-called "90/10 Rule" for fiscal year 2000.
                     Furthermore, Finding No.2 alleging late return of Title IV Program funds is not based on
'                    applicable regulations and does not accuratelyassessVEl's compliance with the return of funds
                     requirements. Accordingly, both Findings should be withdrawn from the Final Report and the
                     audit closed with no further action required on the part of the School.

,                            DIG Note:

I                            Comments contained on pages 1 through 17 addressing finding No.1
                             of the draft report were omitted since, in the final report, we made no
I                            recommendation for corrective action by Federal Student Aid related
                             to the 90/10 Rule.


    a               Ms. Gloria L. Pilotti
    I               September5, 2002



                          The praft Reportassertsthatthe Schoolmadelatepaymentsunderthe Returnto Title IV
II                 Funds("R2T4") Rule codified at 34 CFR668.22for 101 of269 studentswho withdrew in the
 ..period                from July 1,2001 throughSeptember  30,2001. We note thatthe Draft Reportdoesnot
I                  raiseanyquestionsaboutthe accuracyof the School'sR2T4 calculationanddoesnot propose
    t-             anyrepaymentliability for this finding.

                           VEl stronglydisagreeswith this Findingbecause,for the transactionsreviewedby the
I                  DIG, the Schoolin fact issuedmorethan95% of its repaymentcheckswithin 30 daysasrequired
                   by the applicableregulation. Suchissuancewithin 30 daysis all thatis requiredofUEI under
I                  federallaw. The GIG, in contrast,is seekingto imposea standardthatrepaymentsmustclearan
                   institution's bank accountwithin 30 daysin orderto be consideredreturnedin a timely manner.
                   This standardis in no way requiredby federalstatuteor regulation,nor hasthe Department
I                  issuedanyguidanceto that effect. Consequently,  the OIG is without authorityto imposesucha

I                                                     LEGALSTANDARD§
    ,-                     Section484Bof the REA requiresthat whena studentwho.receivesTitle IV program
I                  fundswithdraws,the institutionmustreturnthe appropriateamountof Title IV aid disbursedto
                   thatstudent,ascalculatedaccordingto the legalformula. While the statutedoesnot setout any
         -specific        standardfor timelinessof repayments,it providesin pertinentpart:

I                                 (a) RETURN OF TITLE IV FUNDS.-(l) IN GENERAL.-Ifa recipient
    ~                      of assistance
                                       underthis title withdrawsfrom an institution duringa payment
I                          period or period of enrollmentin which the recipientbeganattendance, the
                           amountof grantor loan assistance(otherthanassistance   receivedunderpart C) to
         --be                 returnedto the title IV programsis calculatedaccordingto parar;laph(3) and
I                          returnedin accordancewith subsection(b).

  I             Ms. GloriaL. Pilotti
                September5, 2002
     I          Page18

 I.      -(20      USC 1091b).

                       The applicableregulation,codified at 34 CFR668.22(j)(1),setsforth the time frame for
  I             returningTitle IV fundsasfollows:

                       An institutionmustreturnthe amountof title IV funds for which it is responsible
 I                     underparagraph(g) of this sectionas soonaspossiblebut no laterthan 30 days
                       afterthe dateof the institution's determinationthatthe studentwithdrew [...]

i I                    The regulationdoesnot definethe term "return," andno discussionof the meaningof that
I               termappearedin eitherthe preambleto the final regulationsgoverningthe R2T4 process(64               :
  -Fed.              Reg. 59038,Nov. 1, 1999)or theNotice of ProposedRulemaking("NPRM") (64 Fed.Reg.                :
  I             43024,43036,Aug. 6, 1999). Moreover,the Departmenthasnot provided any clarificationin
                the StudentFinancialAid Handbookor othersourcesof guidanceto institutions, suchasthe
                expansiveDearColleagueLetterissuedby the Departmentin December2000,to explainthe
 I              workings of the R2~4 re~ulation(GEN-?0-24). Therefo:e,the only "~uidance"issuedby.the
                Departmenton the tImelInessof returnsISthe aforementIoned regulatIon,34 CFR668.22(j),
 =              which merelystateswithout elaborationthat fundsmustbe returnedwithin 30 days.
 I                                             FACTUAL

 I                     1.     The GIG examineda list of 269 studentswho withdrew from VEl duringthe
                periodof July 1 to September30, 2001 for timelinessof return. Underthe GIG's standard,the
  '"            Draft Reportassertsthatreturns"were notpaid within the 30-daytime frame" for 101 of those
 I              students.(SeeDraft Audit Reportpage7).

                       2.    Althoughthe Draft Reportdoesnot explainthe standardthe GIG usedto
 I              determinewhetherthesereturnsweremadein the requiredtime frame,the GIG purportedlyused
                the dateon which the checkclearedthe institution'sbankaccount.

 I                     3.     While the Draft Reportdoesnot explainthe GIG's methodology,it appearsthat
                the GIG did not actuallyusethe check-cleareddateassignified by the bank cancellationstamp
                onthe backof the check,but ratherusedthe datethe checkwaspostedaccordingto the School's
 I              bank statement.
                      4.      Basedon the School'spreliminaryreviewto date,it appearsthe GIG included7
 I              studentsin the reviewwho had earned100%of the Title IV aid disbursedto themsotherewas
                no R2T4 paymentto be made,andthereforethe actualuniverseof studentsappropriatefor
                reviewwould be 262. (SeeR2T4 calculationsheetsat AttachmentF).
 I                    5.      Basedon the legal standardcited above,i.e.,30 daysfor the institutionto issue   -~.
                the returncheck the SchoolreturnedTitle IV fundson time for 250 of the 262 studentsfor a
 I              95.4%complian'cerate. (Seespreadsheet  at AttachmentQ).

        I             Ms. Gloria L. Pilotti
            ~,        September5, 2002
    I                 Page 19

    :I                                                          DISCUSSION
            -.Based                 on the actual legal requirement that governs this process,VEl has determined that
    I"                R2T4 payments were timely for 250 of the studentsreviewed, for a compliance rate of more than
                      95%. An error rate of less than 5% does not warrant a "late refund" letter of credit under 34
            ,-,       CFR 668.173(b), and it certainly does not warrant any additional oversight measuresor adverse
    I                 action as proposed in this Finding. We ask that this Finding be withdrawn in its entirety.sI

             .,              I.   Federal Regulations Do Not Require That R2T4 Checks Clear The Bank Within
    I                             30 bays, And An Institution Cannot Control The Timing Of The Bank's Clearance

                              Neith~r the statute nor t~e ~pplicable regu!ation authorize the.OIG to measure whether an
                      mstItutIon paId R2T4 refunds wIthm the 30-day tIme frame by refemng to the date the checks
      n               clear the institution's bank. As noted above, the statute and regulation are silent on the issue of
    -how                   to determine when 30 days has elapsed,and the Department has not clarified this issue in
                      any sourcesof guidance to institutions. The Dear Colleague Letter (GEN-00-24) does not state
   -.or                  even suggestthat funds are not consideredto have beenreturned until they have cleared the
-institution's                      bank account.

   -,                         Therefore, the only "guidance" issued by the Department on the timeliness of returns is
.the                      aforementioned regulation, 34 CFR 668.22(j), which merely requires that funds be returned
                      within 30 days. This regulation does not dictate the point in the process at which funds are
                      consideredto have been returned, such as the date the check is issued, the date the check is
Ii                    mailed, the date the check is received by the institution's bank, or the date the check is cleared by
                      suchbank. While the OIG has set forth such a standard in its Audit Guide (page 11-28of the
.                     2000 Audit Guide), that standardhas never been adopted by the Department and does not have
                      the force of law. The OIG has no authority to unilaterally define the term "return" such that
                      return payments are consideredto have beenmade only on the date the check clears the bank and
.                     appearson the institution's bank statement. Only the Secretarycan establish such a requirement,
                      and the Secretaryhas not done so.

. ,                   s We also note that the School has been significantly handicapped in responding to this Finding
.since                      the Draft Report does not provide a listing ofR2T4 payments that the OIG deemsto be
                      late. The School has had to do its bestto determine which studentsare on the OIG's list for that
...purpose.                      Furthermore, based on discussions,with the au.ditors,it appearsthey did not even use
..the                     check-cleareddate as shown by the bank s cancellatIon stamp on the back of the check, but
                      rather used the cleared date as listed on the School's monthly bank statement. The date that a
.                     check is listed on the bank statementis normally several days or more after the date the bank
                      stampedthe check, so the DIG's standardis not only wrong, but its method to measure
                      cumpliance with that improper standardis significantly inaccurate.

           Ms. Gloria L. Pilotti
           September5, 2002
           Page 20

                    ~he OIG'.s interpretation of the standardpresumesan institution can be held responsible
           for the tIme requIred by the bank to process and clear a check (as well as the time for the mail
           service to deliver the check). That position is untenable and fundamentally unfair since an
           institution cannot be held responsible for the activities of third parties, such as banks, that it
           cannot control. Indeed, we would note that different banks have different check clearance
           procedures, which may vary in time and which are not necessarily efficient.

                  An institution can control when it issuesa check, but it has no control over when a bank
           honors that check, and the institution cannotbe held accountable for the timing of the bank's
I          actions (or inactions). Given the limited 30-day time period in which institutions must calculate,
           processand "return" R2T4 payments, the Department cannot and has not defined the "return"
I          date ba$ed on action other than those actions within the institution's control, i.e., the date on
I          which the check is issued.

I                          A. The Department Uses A Check-Cleared Standard For One Purpose Under The
J                             Cash ManagementRegulations But Not Under The R2T4 Regulations

t                  It is telling that in a different regulation, 34 CFR 668.166(c)(2), the Secretary specified
           that a payment is consideredto have beenreturned when an issued check clears the institution's
           bank account, and the Secretarymade clear that this check-clearing standard applies only to that
.section           of the Department's regulations. Specifically, the Cash Management regulation at
I          Section 668. 166(c)(2), which solely addressesconsequencesfor maintaining excess cash
t                  For the purposes of this section, upon a finding that an institution has maintained
                   excesscash, the Secretary-

I                  (i) Considers the institution to have issued a check on the date that the check
                   cleared the institution's bank account, unless the institution demonstratesto the
I                  satisfaction of the Secretarythat it issued the check shortly after the institution
                   wrote the check;
I          (Emphasis added.) Clearly, if the Secretaryintended to define the term "return" for purposesof
           the R2T 4 Rule to mean the date on which a check clears an institution's bank, the Secretary
           could have done so, as he effectively did in the Cash Managementregulations. Instead, the
I          Secretary did not proffer such a definition in Section 668.220), and the Secretary pointedly
           limited the definition in Section 668.166(c)(2) exclusively to that regulation. This action makes
I          clear
                   to under Section
                      have been      668.220),
                                 cleared        the Secretary
                                         by its bank for suchdoes nottorequire
                                                              checks           an institution's
                                                                        be ~onsidered           repayment
                                                                                        returned. As the          .
            Secretaryhas not promulgated such a requirement for purposes of the R2T4 Rule, the OIG                     :
            cannot unilaterally impose one in an audit report.

I     .'   Ms. Gloria L. Pilotti

I          September5, 2002

I                         B. The SecretaryHas IssuedA ProposedRule Adopting A Check-Cleared
                             StandardFor R2T4PurposesFor The Future,But No SuchRegulation
                             CurrentlyExists In Law
i                 The Secretaryrecentlyissuedan NPRM thatwouldfor thefirst time andfor thefuture
           specifywhatthe term"return" meansregardingR2T4checks,andthis standardis not the harsh
I          standardthatth~ OIG is seekingto e~forcehere. Specificall~,the proposedregulation,34 ~FR
           668.173(b),whichwould take effect m the future,would clanfy that R2T4 fundsreturnedVIa
           checkareconsideredreturnedin a timely mannerif theyare issuedby the institution within 30
I          daysof the dateof the institution's determination.thatthe studentswithdrewand,asevidenceof
           such"return," clearthe bank within 45 days. ProposedSection668.173(b)specificallystates:          ,

I                 (b) Timelyreturn oftitle IV; HEAprogramfunds. In accordancewith procedures
                  establishedby the Secretaryor FFELProgramlender,an institutionreturns
I                 unearnedtitle IV, HEA funds timely if-

                  (1) The institutiondepositsor transfersthe fundsinto the bank accountit
I                 maintainsunder§ 668.163no laterthan30 daysafterthe date it determinesthe

i                 (2) The institutioninitiatesan electronicfundstransfer(EFT)no laterthan30
~                 daysafterthe dateit determinesthatthe studentwithdrew;
I                 (3) The
                  the dateinstitution initiates
                           it determines       anstudent
                                          thatthe electronictransaction,
                                                         withdrew, thatno laterthan
                                                                       informs      30 days
                                                                               an FFEL      after
                                                                                        lender to           i:'
L                 adjustthe borrower'sloan accountfor the amountreturned;or

I                 (4) The institutionissuesa checkno laterthan30 daysafterthe date it determines
                  the studentwithdrew. However.the Secretarvconsidersthe institutiondid not
                  satisfythis requirementif-
8                  (i) The institution's recordsshowthatthe checkwasissuedmorethan30 days
  ,                afterthe datethe institutiondeterminedthatthe studentwithdrew; or                        :-
I                  (ii) The dateon the cancelledcheckshowthatthe Secretaryor FFEL Program                   :

 ,                 lenderreceivedthat checkmorethan45 daysafterthe datethe institution
I                  determinedthatthe studentwithdrew.

            67Fed.Reg.51717,51739(Aug. 8,2002) (emphasisadded). (SeeAttachmentR).
I                 In the negotiatedrulemakingleadingto this proposedrule, the negotiatorsexpressed      .
           concernaboutthe "ambiguity" in measuringtimely returnof Title IV funds by checksince(as
.discussed           above)the Audit Guideusesa check-cleared      standardbut the regulationdoesnot.
~          (Seepreambleto the NPRM, 67Fed.Reg. at 51730). The Secretaryrecognizedthe validity of
           the negotiators'Position that "it was unfairto hold an institutionresponsiblefor a check

                                                                                ~.,'     ...
        Ms. Gloria L. Pilotti
        September5, 2002
        Page 22

        clearanceprocess that is beyond its control." Accordingly, the Secretaryproposed a rule
        expressly confirming that Title IV funds are consideredreturned on time if the institution "issues
        a check" within 30 days and, as evidence of such issuance,the check clears the bank in 45 days.
        The NPRM, for the first time and for the future, is expectedto incorporate a check-cleared date
        into the regulation, but it will provide a 45-day time frame for the check clearanceprocess, not
        the 30-day deadline that the OIG is seeking-toenforce here.
                While the NPRM does not govern the finding in the Draft Report, it servesto confirm
I       that the regulations do not currently use a ~heck-cleareddate to measuretimel~nessof payment
        for purposes of the R2T4 rule, not to mentIon a 30.;dayscheck-cleared date. SImply put, there
        would be no need for the Department to add a check-cleared standardto the regulation now if
I       such a standardwere already in force. As such, the Secretary's action in proposing this new
        regulation makes plain that the Department currently does not require R2T4 checks to cleared by
        the bank within 30 days to be consideredreturned in a timely manner, contrary to the OIG's
I       position.

               II. The School Made Timely Returns In 95.4% Of All CasesUnder Existing Law

    J           The correct legal standardis highly relevant to this Finding becausethe School has
        determined that it issued checks within 30 days for 250 of the students cited in the Draft Report.
I       (See spreadsheetat Attachment Q). As further discussedin Section III below, the School also
        has determined that at least sevenstudentswho withdrew and who were included in OIG's
        calculation were not even eligible for any R2T4 payment. Consequently, no R2T4 returns were
'       due for these students and, accordingly, no suchreturns can be considered late. Therefore, the
        School made timely payments to 250 of the 262 studentswho actually qualified for a R2T4
        payment, for timely performance in 95.4% of all cases.6Based on this performance, there is no
,       rationale for any penalty, and this Finding should be withdrawn in its entirety.

               III. The Draft Report Erroneously Labeled Seven Other Refunds As Return to Title IV
f                   PaYments
                The Draft Report erroneously included tuition-related refunds that the School made to the
I       Department in con..'1ection
                                  with sevenwithdrawn students within the universe ofR2T4 payments.
        Under 34 CFR 668.22(e), an institution is required to make a R2T4 payment only if a student
        withdrew up to the 60% point of the payment period or period of enrollment. After the 60%
,       point, no R2T4 payment is required. However, an institution may still be required to make a
        non-R2T4, tuition-related refund to the Department in certain circUmstancesor under state law,

,       6 It is notable that the additio~al15 days that the proposed Section 668.173(b) provides for a       .'.
        check to clear the bank correlates with the OIG's own finding in the Draft Report (page 7) that            .
I       the returned funds that the OIG deemedto be late under its check-cleared standardwere late by
        an averageof 12 days, well within the 15-dayperiod that the proposed rule would allow for a
        check to clear the bank.


         I           Ms. Gloria L. Pilotti
                     September5, 2002
         I           Page23                                                              .

         8          as.~as the casehere. Specifically,up~na stud~nt's~thdrawal~~ institutionr~calculateswhat
                    tuItion the studentowesor hasoyerpaidaccordingto its own tuition-refundpohcy. If the student
         Ii .ov~rpays,         Californiarequiresthatthe institutionpaythe overpaidtuition to the Department.
         .-However,            suchpaymentsarenot R2T4refunds.                                                .

         '"               Indeed,in the preambleto the final R2T4Rule,the Secretaryclearlydistinguished
     I               betweenR2T4returnsand otherpaymentsresultingfrom a school'srefundpolicy:

                            The School'srefund policy will governwhatchargesa studentmayowe after
     J                      withdrawing,but that policy will not affectthe amountof aid the studenthas
                            earnedunderthe returncalculation. An institution'srefund policy is also not
     8i                     takeninto considerationfor establishingthe repaymentobligationsof the School
     W                      andthe student.

         r           64Fed.Reg. 59015,59033(Nov. 1, 1999).
     I                      VEl madepaymentsto the Departmentbasedon statelaw requirementsfor sevenof the
                     studentscited in the Draft Report,eventhoughall sevencompletedmorethan 60% of the
     -payment                 period andthereforeearned100%of the Title IV fundsthatwere disbursedor could
                     havebeendisbursed,as shownon the following chart,andsupportedby the R2T4 calculation
     *               sheetsat AttachmentP.7

     ..PAYMENT                                                            PERIOD -.PAYMENT           PERIOD-
                                 STUDENT        Soc. SECJt         % ATTENDED                % AID EARNED

     .1                    GIG   Nt.                                   91.1%                     100.0%
     .2                            0 e.                                81.5%                     100.0%
                      3   Student names and                           100.0%                     100.0%
     ~                4   social security numbers                     74.3%                      100.0%
     ~                5   contained in this table have                77.0%                      100.0%
                      6   been redacted to comply      I              82.3%                      100.0%
     I                7   with the Privacy Act of 1974                77.0%                      100.0%

     ~                      As thesetransactionshad nothingto do with R2T4, they cannotbe consideredlate R2T4
     .returns               in this Finding, and they shouldbe eliminatedfrom the Final Report. Accordingly,there

     -7             The Schoolhasonly beenableto conducta preliminaryreviewof this.issueat ~hispoint i~
                  time. The Schoolis still checkingwhethermorethan 7 of the studentsIncludedm the OIG s             .
       .calculation         were not eligible for a R2T4payment.However,dueto time limitations andthe                   .
     -difficulty           of respondingto a Draft Reportthat does?otspecifypre~iselywh~chre~.s OIG
                   determinedwere late, UBI hasnot had an opportumtyto completeits analysisof thISIssue.

         ., Ms. Gloria L. Pilotti,
 '-'        September5, 2002
     I      Page24

     I      were262 studentsin the universeUnderreviewand,usingthe actuallegal standard,the School
            madetimely paymentsfor 250, for a 95.4%compliancerate.

     I -CONCLUS~
                    Baseduponthe GIG's erroneousfinding thatVEl hadreturnednearly 38%of its R2T4
  I        checkslate,t~: Draft ~udit R~ort con~ludesthis finding with.two recommendations:(1) That
           VEl take addItIonalactIonsto ImproveIts proceduresfor ensunngUnearnedTitle N fundsare
           returnedin a timely manner,and (2) thatFederalStudentAid imposea fine, limit participationin
  I        the Title N programs,or take otheractionagainstVEl Under34 CFR668, SubpartG.

                  Both of theserecommendations  shouldberemovedfrom the GIG's Final Reportbecause
 I        the entireFinding is basedon a standardfor timelinessthatthe Departmenthasnever
          promulgatedor endorsed.Eventhe NPRM, which adoptsa check-clearedstandardfor the
          future,proposesa 45-daystandard.As demonstrated    above,VEl in fact returnedmorethan 95%
 I        of the R2T4checksat issuein a timely manner,i.e., within 30 days. This high percentage
          satisfiesthe compliancethresholdfor determiningwhetheran institutionmust posta letterof
          creditUnder34 CFR668.173,andthereforeno fine, limitation or otheradverseactionis
 r        appropriate.

                With regardto correctivemeasures,
                                                the School'scompliancerate demonstrates thatthe
 I        measuresVEl hasimplementedin the lasttwo yearsto ensureit returnsR2T4 checksin a timely
          mannerhavebeensuccessfulandthereis no reasonfor the Departmentto require additional
          measures.We briefly recOUntthosemeasureshere:
 I             .Rather thanhaveits third-partyservicermanagethe R2T4calculationsandpayments,
          beginningin July2001 VEl hashandledthosefunctionsinternallyto assumetotal control over
 J        the process.

                 .Also in the springof 2001, afterreviewingthe Departmentalworksheetsandsoftware
 ,       availableon the market,VEl createdits own worksheetformatto accuratelycalculatethe Title
         N fundsearnedby studentsandthe Unearned     portionto be returned. This worksheethasproven
         to be quite workablein enablingVEl to complywith the R2T4requirements.

               .Throughout this period,the Schoolhashired additionalstaff for R2T4 purposes,
         conductedadditionalstaff training, anddevelopedadditionalproceduresandtools to monitorand
         managethe R2T4process.

                .In May 2002,the Schoolimplementeda procedureto electronicallyinform an FFEL
         lenderto adjustthe borrower'sloan accoUntfor the amoUntreturnedand transferR2T4fundsto
         the FFEL lenderby electronicfundstransfer.                                                                          -.-

               All of theseactionshaveproducedpositiveresults,asevidencedby VEl's 95%                                        ., .
         compliancerate,asmeasuredunderthe actuallegal standard,for the period of the Draft Report.
         Moreover,the School'smostrecentTitle N ComplianceAttestationExamination,for the stub

I~'                                                                       "".."",..."...~"'"fu'C","".",   ,"c.,.".~'"'"'""
        u     ...Ms.        Gloria L. Pilotti
        ~               September5, 2002
        .Page               25

        I               period November 1,2001 to December 31, 2001 performed by its independentauditor,
                        Almich & Associates, did not find any late R2T4 payments for that period, even though the
        I               auditor used the Audit Guide's standard of measuring returns by check clearancedate. (Seepage
                        22 of Attachment S).

                                In July 2002, Almich also prepared an IndependentAccountant's Report, at the requestof
    8                  the Accrediting Council for Continuing Education and Training ("ACCET"), the School's
                       accrediting agency, with favorable results. (See Attachment T). The auditors examined records
                        for 261 studentswho withdrew from four VEl campuses(Los Angeles, Huntington Park, Ontario
    I                  and Van Nuys) in the first five months of2002, and found that returns for all but 9 (3.5%) of the
                       studentswere paid within 30 days of the date the School determined the student withdrew. That
    I                  representsa compliance rate of 96.5%.

                               Clearly, based on the two most recent reviews conducted by an independentauditor, the
                       steps that VEl has taken to improve its R2T4 procedureshave resulted in a high level of
    I                  compliance. While VEl continues to strive for 100% compliance, there is no basis for the ~IG
                       to recommend that the Department take any adverse action or demand further corrective actIon.

    "                                                               *****
                              Thank you for the opportunity to respondto the Draft Report. If you need additional
    I                  information, please let us know.


    I                                                                     Jo    on C. Glass
                                                                          Mi h el B. Goldstein
            -Cou                                                                el to International Education
    g                                                                       Corporation and United Education Institute

    ~                  Enclosures
    ~                  cc: Mary Mitchelson, OIG/GC [Via Courier]

    I                                                                                                                      ..0.



                                                 ~                                  '"
                         REPORT DISTRIBUTION LIST

Auditee                                                ED Action Official
 William P. Murtagh, Jr.                                 Theresa S. Shaw
 President                                               Chief Operating Officer
 International Education Corporation                     Federal Student Aid
 2201 Dupont Drive, Suite 800
 Irvine, California 92612

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