,. ---" , "","'- u.s. Department of Education ~ Office of Inspector General '6 , :z ; 501 I Street,Suite9-200 ~ Sacramento, California 95814 Phone(916)930-2388.Fax (916)930-2390 December23, 2002 MEMORANDUM TO: TheresaS. Shaw Chief OperatingOfficer FederalStudentAid n;;? .I , W- r FROM: Gloria Pilotti ~~"C~-;J! ;d~-:tl::--" RegionalInspectorGeneralfor Audit, RegionIX SUBJECT: FINAL AUDIT REPORT United Education Institute's Administration of Student Financial Assistance Programs 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. Attachment 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 ED-OIG/A09-B0025 Mr. William P. Murtagh, Jr. President 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 report. 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 responsible. 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 implemented. 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 checks. 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. Recommendations 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. 1 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 returned.” 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— 2 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 prepared). 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. 3 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. 4 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. 5 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 contract. Control No: ED-OIG/A09-B0025 Page 7 of 9 BACKGROUND 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. AUDIT OBJECTIVE, SCOPE, AND METHODOLOGY 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. STATEMENT ON MANAGEMENT CONTROLS 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 follows: 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 report. 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. Sincerely, ~&~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 ATTACHMENT 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 ATTORNEYS WASHINGTON, & ALBERTSON, AT LAW D.C. PLLC ONE RAVINIADRIVE.SUITE 1600 DIRECT 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 I : -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. I 1 c~!l'"i"'!l'!""ii a Ms. Gloria L. Pilotti I September5, 2002 Page17 1- - I I I .FINDING NO.2: UEI CONTINUED TO RETURN THE UNEARNED TITLE IV ~ FUNDS LATE FOR STUDENTS WHO WITHDREW FROM SCHOOL 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 standardonVEl. I LEGALSTANDARD§ ,- Section484Bof the REA requiresthat whena studentwho.receivesTitle IV program I fundswithdraws,the institutionmustreturnthe appropriateamountof Title IV aid disbursedto I. 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 BACKGROUND 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 I 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 Process 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 balances,specifies: 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 checksthat 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 J . t I .' Ms. Gloria L. Pilotti I September5, 2002 Page21 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 studentwithdrew; 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 I ... 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. I I I. ., 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). I I 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 .~ 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. M -1366765-11 ~-=-- ~ '" REPORT DISTRIBUTION LIST ED-OIG/A09-B0025 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 Other Departmental Officials/Staff (electronic copy) Audit Liaison Officer Assistant General Counsel Federal Student Aid Office of the General Counsel General Manager for Schools Deputy Secretary Federal Student Aid Office of the Deputy Secretary Case Management Team Director – San Francisco Chief of Staff Federal Student Aid Office of the Secretary Assistant Secretary Under Secretary Office of Legislation and Congressional Affairs Office of the Under Secretary Assistant Secretary Director Office of Intergovernmental and Interagency Affairs Office of Communications Director Chief Financial Officer Financial Improvement and Post Audit Operations Office of the Chief Financial Officer Office of the Chief Financial Officer Post Audit Group Supervisor Correspondence Control Financial Improvement and Post Audit Operations Office of General Counsel Office of the Chief Financial Officer
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)