oversight

Federal Student Aid: Statement of Assistant Inspector General for Audit Bryon Gordon on the OIG's Audit of FSA's Oversight of student Loan Servicing, before the U.S. House of Representatives, Committee on Appropriations, Subcommittee on Labor, Health and Human Services, Education, and Related Agencies, March 6, 2019. Testimony

Published by the Department of Education, Office of Inspector General on 2019-03-06.

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

             Testimony of Bryon Gordon, Assistant Inspector General for Audit
           U.S. Department of Education, Office of Inspector General, before the
  Subcommittee on Labor, Health and Human Services, Education, and Related Agencies
                  Committee on Appropriations, U.S. House of Representatives
                                          March 6, 2019


Chairwoman DeLauro, Ranking Member Cole, members of the Subcommittee:


Thank you for inviting me here today to discuss the U.S. Department of Education (Department)

Office of Inspector General’s (OIG) recent audit of the Federal Student Aid office’s (FSA)

oversight of student loan servicing. Through FSA, the Department awards more than

$122 billion in student aid to some 13 million students each year. It also manages a loan

portfolio of more than $1 trillion, making the Department one of the largest financial institutions

in the country.



To help manage the Department-owned student loan portfolio, as of September 30, 2017, FSA

contracted with 9 companies, called “servicers.” The largest 4 servicers are responsible for about

93 percent of the $1 trillion in loans. The servicers collect payments on loans, advise borrowers

on resources and benefits to manage their Federal student loan obligations, respond to customer

service inquiries, and perform other administrative tasks associated with maintaining a loan on

behalf of the Department. The servicers must comply with all requirements for servicing

federally held student loans. For example, servicers must correctly record the borrowers’ interest

rates and calculate the borrowers’ balances, properly grant forbearances and deferments to

borrowers, properly process borrowers’ applications for income-driven repayment plans, and

correctly calculate borrowers’ monthly payments under income-driven repayment plans.



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Audit of FSA’s Oversight of Loan Servicing Summary

The objective of our audit was to determine whether FSA had established policies and

procedures to mitigate the risk of servicers not servicing federally held student loans in

accordance with Federal requirements. We assessed FSA’s operations as of September 2017.



At the time of our audit, FSA had several processes in place to oversee the work of the loan

servicers to ensure that they were meeting Federal requirements for servicing the loans. FSA had

teams conducting four types of periodic reviews, including listening to recorded telephone calls

between the loan servicers and borrowers. FSA also reviewed the annual audits of the servicers’

independent auditors for findings related to internal controls. FSA met with the servicers once or

twice a month to go over issues FSA found or handle any other concerns. It also surveyed

borrowers and FSA employees twice a year to gauge their satisfaction with the servicers. Our

audit examined whether these activities, as well as FSA’s policies and procedures, provided

reasonable assurance that the risk of servicers not servicing federally held student loans in

accordance with Federal requirements was mitigated or reduced.



Our audit found that FSA’s oversight policies, processes, and activities collectively did not

provide reasonable assurance that the risk of servicer noncompliance with requirements for

servicing federally held student loans was being mitigated or reduced. Our audit found that

FSA’s oversight activities regularly identified instances of servicer noncompliance. Specifically,

we found that FSA identified servicer noncompliance in 210 (about 61 percent) of the

343 monitoring reports that we analyzed. FSA management routinely tracked the instances of

noncompliance when servicers did not remediate them before FSA issued a final monitoring



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report. However, FSA did not track the identified instances of noncompliance if servicers

remediated them. For example, if during the course of a review, FSA found 5 instances of

noncompliance in a sample of 30 borrower accounts, and the servicer corrected 4 of them during

the course of the review, FSA tracked only the single uncorrected instance of noncompliance.

Further, FSA management did not analyze the information it did have to track and identify trends

and recurring instances of noncompliance at each servicer and across all servicers.



We concluded that FSA management has information that FSA could use to identify recurring

instances of and trends in noncompliance. For example, FSA’s monitoring reports disclosed

recurring instances of noncompliance primarily in two areas: consumer protection

(representatives not informing borrowers of the available repayment options) and income-driven

repayment (servicers incorrectly calculating income-driven payment amounts). The monitoring

reports also disclosed that some servicers had noncompliance rates that were higher than

average.



Additionally, we found that FSA management rarely used available contract provisions to hold

servicers accountable for instances of noncompliance and did not incorporate a performance

metric relevant to servicer compliance into its methodology for assigning loans to servicers.

FSA uses metrics (such as percentage of borrowers who are current in repaying their loans, the

percentage of borrowers who are delinquent, and customer satisfaction scores based on surveys

of borrowers and FSA staff) to measure the performance of each servicer. It then allocates the

volume of new loans to servicers based on a formula that considers each of the metrics. Our

audit also found that FSA employees did not always follow policy when evaluating the quality of



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servicer representatives’ interactions with borrowers. FSA also did not provide servicers with

reports of failed calls during a 10-month period, from June 2016 through March 2017, because

FSA was revising the report format.



Because FSA’s oversight policies, processes, and activities collectively did not provide

reasonable assurance that the risk of servicer noncompliance was being mitigated, FSA

management did not have reasonable assurance that servicers were complying with Federal loan

servicing requirements when handling borrowers’ inquiries. Additionally, borrowers might not

have been protected from poor services, and taxpayers might not have been protected from

improper payments. Because it was not holding loan servicers accountable for instances of

noncompliance, FSA did not provide servicers with incentive to take actions to mitigate the risk

of continued servicer noncompliance that could harm borrowers. For example, a borrower might

not have received the most favorable repayment terms available to them. Or, if a borrower was

enrolled in an income-driven repayment plan and the servicer incorrectly calculated the

affordable monthly payment, the borrower could be negatively affected.



We recommended that FSA (1) track all instances of noncompliance identified during its

oversight activities; (2) analyze the records relevant to noncompliance, identify trends and

recurring noncompliance for each servicer and across all servicers, and use the information as a

basis for assessing servicer performance; (3) use the contractual provisions available to hold

servicers accountable for instances of noncompliance; (4) verify that call monitors are

completing all necessary data fields before submitting call evaluation scoresheets; (5) ensure that

FSA management has implemented a quality control process and is evaluating call monitors’



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completed work each month; and (6) regularly share the results of any FSA loan servicing

oversight activities with servicers.



In its December 7, 2018, comments on a draft of our report, FSA responded that it already had or

will implement all six recommendations, and it described improvements it has made to its

oversight activities since September 2017. However, FSA strongly disagreed with the overall

conclusion that it did not establish policies and procedures that provided reasonable assurance

that the risk of servicer noncompliance with Federal requirements was mitigated. FSA stated

that the wording of our first finding implied a much broader risk than indicated by the examples

included in the report. FSA also disagreed that it rarely held servicers accountable, stating that

enforcement actions since September 2017 have resulted in about $2 million in recommended

recoveries.



Because the post-September 2017 improvements that FSA described in its comments did not

occur during our audit period, we did not evaluate them and did not discuss them in our audit

report. However, and as we stated in our audit report, the improvements as described are aligned

with our recommendations. Other than providing further emphasis that we based our overall

conclusion and findings on an assessment of FSA’s control activities as of September 2017, we

did not make any changes to our report based on FSA’s comments.



This concludes my remarks on our audit of FSA’s oversight of student loan servicing. As you

know, the Federal student aid programs are exceptionally large, complex, and inherently risky

because of the numerous entities involved in administering the programs and the characteristics



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of student populations. Accordingly, FSA management needs to improve its oversight to provide

reasonable assurance that its contractors are complying with all applicable laws, regulations, and

guidance, and serving the interests of students. In addition to the audit covered in this testimony,

we have a number of ongoing and planned audits involving the Federal student aid programs, as

outlined in our FY 2019 Annual Plan. In addition to a copy of our audit, I have attached a copy

of our FY 2019 Annual Plan for your review. We look forward to working with FSA, the

Department, this Subcommittee, and the 116th Congress to help improve Federal student

assistance programs and operations so they meet the needs of America’s students and families,

and ensure that the vital tax dollars that fund these programs are protected from waste, fraud, and

abuse. I’m happy to answer any of your questions.




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