oversight

Federal Student Aid Paid Private Collection Agencies Based on Estimates

Published by the Department of Education, Office of Inspector General on 2013-05-15.

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

                                    UNITED STATES DEPARTMENT OF EDUCATION
                                                         OFFICE OF INSPECTOR GENERAL




                                                                          May 15, 2013


FINAL ALERT MEMORANDUM

To:	                 James W. Runcie
                     Chief Operating Officer
                     Federal Student Aid

From:	               Patrick J. Howard /s/
                     Assistant Inspector General for Audit

Subject:	            Federal Student Aid Paid Private Collection Agencies Based on Estimates
                     Control Number ED-OIG/L02N0002

The purpose of this final alert memorandum is to inform you of our concern that Federal Student
Aid (FSA) paid estimated commissions and bonuses to Private Collection Agencies (PCAs)
because of system modification delays with the Debt Management and Collection System 2
(DMCS2). FSA was unable to calculate the actual commissions earned by PCAs and the
Competitive Performance and Continuous Surveillance (CPCS) scores used to calculate PCA
bonuses. As a result, FSA paid an estimated $448 million in commissions, without reviewing
supporting documentation, and paid an estimated $8.3 million in bonuses based on a revised
methodology. FSA’s revised methods for paying commissions and bonuses may have resulted in
overpayments or underpayments to the PCAs.

During fiscal year (FY) 2012, FSA had individual contracts with 23 PCAs to perform collection
services on defaulted loans. According to the contracts, PCAs are paid commissions based on
successfully collecting on defaulted loans, and a PCA qualifies for bonuses based on its
performance relative to other PCAs. Section B.8 of the PCA contracts states that FSA is to
prepare and submit invoices and supporting documentation to the PCAs for review in order for
FSA to pay the PCAs. Before FSA transitioned to DMCS2 in September 2011, FSA prepared
invoices using collection data from the Debt Management and Collection System (DMCS) to
calculate commissions for PCAs and used various other DMCS data to calculate CPCS scores to
determine bonuses for qualifying PCAs.1 However, DMCS2 has been unable to produce the data
necessary for FSA to calculate PCA commissions based on actual collections data and PCA
bonuses based on actual CPCS scores. Therefore, during FY 2012, FSA staff modified the
contract to (1) require PCAs to submit to FSA invoices, without supporting documentation, that
calculated estimated commissions and (2) pay estimated bonuses based on bonus payments made

1
 CPCS scores are calculated based on performance indicators related to the borrower payments received, the
number of accounts that were serviced, and the amount of administrative resolutions performed.

       The Department of Education’s mission is to promote student achievement and preparation for global competitiveness by fostering
                                             educational excellence and ensuring equal access.
Final Alert Memorandum
ED-OIG/L02N0002                                                                                     Page 2 of 7

for the prior year. As of February 20, 2013, DMCS2 is still unable to provide accurate data to
calculate PCA commissions and bonuses based on CPCS scores, and FSA has been unable to
provide us with a formal plan containing sufficient details as to how and when it will resolve the
DMCS2 data problems.

FSA Paid Estimated Commissions
Due to issues with DMCS2, FSA instructed all PCAs to prepare and submit invoices for
estimated commissions without providing supporting documentation. FSA has been unable to
determine the amount to invoice PCAs for commissions since September 2011. During
FY 2012, the director of the Default Division e-mailed the PCAs monthly instructions to create
and submit their invoices. In these e-mails, the PCAs were instructed not to submit supporting
documentation to FSA but were required to maintain documentation supporting the estimated
invoices the PCAs calculated. According to FSA officials, the PCAs were to submit invoices,
with estimated commission calculations, based on data the PCAs maintained and incomplete
collection data FSA provided. This revised methodology differs from section B.8 of the
contracts, which requires FSA to prepare and provide invoices to the PCAs with calculated
commissions.

The Department’s Directive on Contract Monitoring,2 Section VII.O, states that contracting
officers approve invoices for payment, usually after an analysis concerning the contents of the
invoice and the contractor’s performance relative to what is being billed. Because FSA did not
require the PCAs to submit supporting documentation with their invoices, FSA was unable to
ensure invoices, totaling $448 million, were acceptable before payment. FSA performed no
oversight before paying PCA invoices to determine whether the PCAs had overstated or
understated their estimated commissions. Consequently, FSA must address any overpayments or
underpayments of invoices for estimated commissions.

Effective February 1, 2013, FSA issued a formal contract modification to section B.8, stating that
the PCAs are to prepare and submit invoices, with supporting documentation, to FSA in order to
be paid their commissions. However, as of February 20, 2013, PCAs were still submitting
estimated commissions without supporting documentation, and FSA had not finalized a process
to reconcile prior estimated commission amounts paid with actual collection data from DMCS2.

FSA Paid Estimated Bonuses
Due to data issues with DMCS2, FSA was unable to calculate actual CPCS scores to determine
which PCAs earned bonuses during FY 2012. FSA then modified 12 of 23 PCA contracts to pay
bonuses based on prior quarters’ bonus payments instead of the quarters’ actual CPCS scores.
The remaining 11 PCAs did not receive a notification of the revised process because they did not
receive a bonus in these prior quarters. This revised process modified section H.6 of the
contracts, which stated that bonuses would be paid based on a PCA’s CPCS scores during the
current quarter. FSA and the 12 PCAs agreed to the revised process of awarding bonuses with a
provision that any bonus overpayments would have to be returned. For quarters 8, 9, and 10 of
the contract, FSA awarded the same bonus amounts to the same PCAs as in quarters 5, 6, and 7,
respectively, despite not knowing how their performance compared with the other PCAs in

2
    Departmental Directive, OCFO: 2-108, “Contract Monitoring for Program Officials,” August 6, 2009.
Final Alert Memorandum
ED-OIG/L02N0002                                                                      Page 3 of 7

quarters 8, 9, and 10. See Table 1 for total amount of bonuses paid to the PCAs by quarter.
Bonuses for quarters 8, 9, and 10 were paid in September 2012 and October 2012 invoices.

                     Table 1: Total PCA Bonuses Paid By Quarter
       FY 2011 Quarters          For Quarter Ending               Amount
               5                     March 31, 2011             $2,450,461.47
               6                     June 30, 2011              $2,531,797.68
               7                  September 30, 2011            $3,313,947.89
                                                     Total      $8,296,207.04
       FY 2012 Quarters
               8                  December 31, 2011             $2,450,461.47
               9                     March 31, 2012             $2,531,797.68
              10                     June 30, 2012              $3,313,947.89
                                                     Total      $8,296,207.04


The process FSA used to pay estimated bonuses may have resulted in (1) overpayments or
underpayments to PCAs that received an estimated bonus, (2) some PCAs that earned a bonus
but not awarded an estimated bonus payment, and (3) some PCAs that received the estimated
bonus payments may not have been entitled to the bonus payment. Therefore, FSA will have to
resolve any overpayments or underpayments of bonuses.

Effective December 31, 2012, FSA issued a formal contract modification to revise its
methodology of calculating CPCS scores to determine the final FY 2012 PCA bonuses. FSA
calculated CPCS scores using its revised methodology but has not finalized PCA bonus
payments for FY 2012 because of data issues with DMCS2. FSA plans to revert to the contracts’
original methodology for calculating CPCS scores and bonuses for FY 2013. However, FSA has
not calculated CPCS scores or awarded bonuses for FY 2013 due to continued data issues with
DMCS2.

Because FSA paid $448 million in PCA estimated commissions without supporting
documentation and $8.3 million in estimated bonuses without knowing actual quarterly CPCS
scores, FSA may have created liabilities due to or from the Department after final commissions
and bonuses are determined. Therefore, FSA will have to resolve any overpayments or
underpayments of estimated commissions and bonuses.

Recommendations

We recommend that the Chief Operating Officer for FSA:

1.1 Require FSA to calculate any overpayments or underpayments of PCA commissions and
    bonuses based on actual collections data and CPCS scores and require PCAs to return any
    overpayments, with applicable interest, to the Department. Likewise, FSA should address
    any underpayments made to the PCAs.
Final Alert Memorandum
ED-OIG/L02N0002                                                                      Page 4 of 7

1.2 Require PCAs to submit supporting documentation for all commissions invoiced since
    October 2011.

FSA Response

We provided a draft of this alert memorandum to FSA for comment. In its response, dated
April 10, 2013, FSA stated that it shares our concerns and is committed to resolving the
problems with the DMCS2 invoice process. FSA stated it is in the process of addressing each
recommendation. However, FSA believes that the alternative invoice process in place since
DMCS2 was implemented has reduced the risk of significant underpayments and overpayments
and will ensure that all payments to PCAs are ultimately reconciled and adjusted as needed. In
addition, FSA stated that commission payments were based on actual collection data from the
Department of Treasury. The collection data was posted to the borrower’s account in DMCS2.
DMCS2 generates a daily file, which is provided to the PCAs, containing the collection
payments allocated to collection costs, interest, and principal.

In response to Recommendation 1.1, FSA stated that CPCS scores for FY 2012 have been
calculated and validated, and the bonus payment calculation for FY 2012 is in process. In
addition, appropriate adjustments will be calculated in April 2013 and PCAs will reimburse the
Department, with interest, for any overpayments.

In response to Recommendation 1.2, FSA stated that PCAs were required to keep all supporting
documentation for invoices the PCAs created. When the DMCS2 invoice reporting is functional
for the periods of October 2011 through March 2013, DMCS2 will provide invoice reports to the
PCAs that will allow the PCAs to ensure each invoice matches the data within DMCS2. FSA
will maintain documentation on the results of the reconciliations.

We included FSA’s response in its entirety as an attachment to this memorandum.

OIG Comments

In response to our finding that commission payments were based on estimates, FSA stated that
commission payments were based from actual collection data from the Department of Treasury.
However, the Department of Treasury data has to be loaded into DMCS2 in order to allocate
collection detail that PCAs can use to develop invoices. The resulting daily file from DMCS2
was incomplete because some collections were not being accepted by DMCS2. FSA has noted
that the PCA invoice reporting function was one of the non-functioning areas of DMCS2. Since
complete collection data was not available and because DMCS2’s invoice reporting function was
not working, FSA has instructed PCAs to estimate their commissions earned for the period
October 2011 through March 2013 using the detailed collection data on their system.

We considered FSA’s comments to be responsive to our recommendations. However, FSA
described many of its corrective actions as in progress or subject to future completion. FSA
stated that bonus payments and appropriate adjustments would be calculated in April 2013.
However, as of April 30, 2013, FSA has not calculated the final FY 2012 bonus payments and
adjustments. In addition, FSA expects that the reconciliation process will be performed by the
Final Alert Memorandum
ED-OIG/L02N0002                                                                      Page 5 of 7

PCAs, however FSA did not provide a date regarding when the reconciliation process will be
completed. When DMCS2’s invoice reporting is functional, FSA stated that the invoice report
will allow them to ensure each invoice matches DMCS2 data. However, FSA had not
established a date when DMCS2’s invoice reporting will be functional. While the invoice
reporting process is not functional, the PCAs will have to continue submitting estimated
invoices. Therefore, FSA should require PCAs to submit supporting documentation and FSA
should review such documentation before paying monthly invoices.

Corrective actions proposed (resolution phase) and implemented (closure phase) by your office
will be monitored and tracked through the Department’s Audit Accountability and Resolution
Tracking System.

This alert memorandum issued by the Office of Inspector General will be made available to
members of the press and the general public to the extent information contained in the
memorandum is not subject to exemptions in the Freedom of Information Act (5 U.S.C. § 552)
or protection under the Privacy Act (5 U.S.C. § 552a).

We conducted our work in accordance with the Office of Inspector General quality standards for
alert memorandums.

For further information, please contact Daniel P. Schultz, Regional Inspector General for Audit
at (646) 428-3888.

cc: Philip H. Rosenfelt, Acting General Counsel, Office of the General Counsel
    Dawn Dawson, Audit Liaison Officer, Federal Student Aid
    W. Christian Vierling, Director, Student Financial Assistance Advisory & Assistance Team,
    Office of Inspector General
    Patrick Bradfield, Director, Federal Student Aid Acquisitions Group
    Dwight Vigna, Director, Federal Student Aid, Default Division
Final Alert Memorandum
ED-OIG/L02N0002                                                                                               Page 6 of7



                                UNITED STATES DEPARTMENT OF EDUCATION
                                                        fcdcra I Srud~m Aid




                                                                              -~~   .1 0 2013
         TO:            Daniel P. Schultz
                        Regional Inspector General for Audit
                        Office of lnspector General


         'FROM:    ./~es W. Runde~~
                  r;r- Ch1ef Operating offife/.,/~
                                  f/

         SUBJECT: 	 Draft Alert Memorandum- "Federal Student Aid Paid Private Collection
                    Agencies Bm:ed on Estimates," Control Number ED-OIG/UJ2-N0002.

         Thank you for providing Federal Student Aid with an opportunity to respond to the OfTice of
         Inspector General's (OIG) concerns expressed in the draft alert memorandum regarding the
         Private Collection Agency (PCA) invoice process. FSA's management shares these concerns
         and is commined to resolving the problems with the new Debt Management and Collection
         System (DMCS) invoice process as quickly as possible.

         We should note. however, that we believe the alternative invoice process FSA has had in place
         since DMCS was implemented in October 2011 ha~ reduced the risk of significam under- and
         overpayments and will ensure that all payments to PC'..As are ultimately reconciled and adjusted
         as needed. As discussed in more detail below, all commission payments to PCAs have been
         based on actual collection data from the Department of the Treasury. All invoices have been
         reviewed prior to payment, compared with historical invoice data for reasonability, and reviewed
         with PCAs as needed to resolve questions. Estimated bonus payments were made with the
         explicit understanding that any overpayments would be repaid to the Department with interest.
         More broadly, in an effort to provide further interim validation, in FY 2012 FSA &'>.ked the
         Defense Contract Audit Agency (DCAA) to inspect PCA invoices and supporting documentation
         and match it against the Treasury lockbox files and DMCS. DCAA advised us that they believed
         it would be wasteful for them to provide these services since under FSA's plan all payments
         would ultimately be validated tltrough DMCS. In summary, we do not believe this issue has put
         significant taxpayer funding at risk.

         More specifically, the dran alert memorandum notes that FSA is required to pay commissions
         and bonuses based on actual collections data and Competitive Performance and Continuous
         Surveillance (CPCS) scores. For commission payment~. PCAs have been creating monthly
         invoices from actual collection data. All borrower payments come through the Treasury
         Lockbox contractor, Bank of America, and are posted to the borrower's account in DMCS.
         PCAs receive a daily file with payment amounts and allocations across each debt; this file details
         amounts applied to collection costs, interest and principal. PCAs apply this data to the borrower
         accounts in their systems to match the DMCS data.
Final Alert Memorandum
ED-OIG/L02N0002                                                                                               Page 7 of7



         Dr:lfl Akl'l M emorandum                                                         Pnge 2 of 2
         Ef>-Ol0/L02-N0002


         For each month since the new DMCS was implemented, FSA has instructed PCAs to create their
         invoices using the detailed collection data on their system rather than the DMCS invoice report.

         It has always been FSA's intention to perform a consolidated reconciliation for all invoices once
         the necessary reporti ng was available in DMCS and then make adjustments as necessary for
         overpayments and underpayments. TI1is prc:x.:ess was completed last month and will be used to
         reconcile invoices for the months of October 2011 through March 2013. When the DMCS
         invoice reporting is functional for the periods of October 201 J through March 2013, DMCS will
         provide invoice reports to the PCAs that will allow them to ensure each invoice matches the data
         within DMCS.

         CPCS scores for fiscal yenr 20l2 have been calculated and validated by FSA and were sent to
         the PCAs on April 5. 2013. The terms for the alternative CPCS methodology. which were used
         to calcul<Jte the CPCS scores for fiscal year 2012, were agreed to by all 22 PC As via bilateral
         modifications. Tin~ scores will be used to calculate bonus values as well as Long Term Bonus
         winners and values. Once the bonus amounts for nscal year 2012 are calculated, the estimated
         b<.muses that were provided for fiscal year 2012 will be adjusted accordingly and the !>CAs will
         rei mburse the Department with interest for any overpayments. 'This was a condition they agreed
         to in order to receive the estimated bonuses.

         FSA is still validating new reports developed to move forward wit.h the CPCS scores for t1scal
         year 2013. FSA expects these reports to be validated by the end of May 2013.
         Our w;ponse ro each of the recommendalions follows:

         Recommendation 1.1: Require FSA to calculate any overpayments or underpayments of PCA
         com missions and bonuses based on actual collections data and CPCS scores and require the
         PCAS to return any overpayments with applicable interest to the Department. Likewise, FSA
         should address any underpayments made to the PCAs.

         Response to Recommendation 1.1: This process is already in place and is set to begin in April
         2013. The bonus calculation process for fiscal year 2012 is also in process and appropriat.e
         adjustments will be calculated in April 2013.

         Recommendation 1.2: Require PCAs to submit supporting documentation for all commissions
         invoiced since October 2011.

         Response to Recommendation 1.2: PCAs were required to keep all supporting documentation
         for invoices they created. As part of the invo.ice reconciliation process . this information along
         with DMCS data will be used to ensure all invo.ices from October 2011 through March 2013 arc
         reconciled. FSA will maintain documentation of the results of the reconciliations.

         Thank you again for the opportun ity to comment on your draft alert memorandum.



         cc: W. Christian Vierling, Director. Student Financial Assistance Advisory Team