oversight

S15L0001 - Title IV Additional Servicers Capacity Assessment. - Date Issued: 12/15/2011 PDF (3.99M)

Published by the Department of Education, Office of Inspector General on 2011-12-15.

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

                                   UNITED STATES DEPARTMENT OF EDUCATION
                                                         OFFICE OF INSPECTOR GENERAL

                                                                                                                           Audit Services



                                                                                                                 December 15, 2011

MEMORANDUM


TO:                  James Runcie
                     Chief Operating Officer
                     Federal Student Aid

FROM:                Keith West /s/
                     Assistant Inspector General for Audit

SUBJECT:             FINAL CONSULTING REPORT
                     Title IV Additional Servicers Capacity Assessment
                     ED-OIG/S15L0001

Attached is the subject final consulting report prepared by Ernst & Young, LLP, as a result of its
assessment of the current status of the Title IV Additional Servicers (TIVAS) to handle the
volume of servicing new Direct Loan Program originations and consolidations and the servicing
of Federal Family Education Loan Program loan purchases under the Ensuring Continued Access
to Student Loans Act of 2008. The assessment was performed on our behalf by Ernst & Young,
LLP, under the American Institute of Certified Public Accountants’ Consulting Standards. The
scope of the assessment was established in a Statement of Work agreed to by the Office of
Inspector General and Ernst & Young, LLP. The report’s Executive Summary contains an
overview of the assessment’s scope and procedures performed by Ernst & Young, LLP.

The report is intended solely for the information and use of the Office of Inspector General and
management of the Department. It is not intended and should not be used by anyone other than
these specified parties. In accordance with the Freedom of Information Act (5 U.S.C. § 522),
reports issued by the Office of Inspector General are available to members of the press and
general public to the extent information contained therein is not subject to exemptions in the Act.

We appreciate the cooperation given Ernst & Young, LLP, during this assessment. If you have
any questions, please contact Patrick Howard, Deputy Assistant Inspector General for Audit, at
(202) 245-6949 or Kenneth Smith, Director, Student Financial Assistance Advisory and
Assistance Team, at (202) 245-6968.

Attachments




 The Department of Education's mission is to promote student achievement and preparation for global competitiveness by fostering educational
                                                   excellence and ensuring equal access.
James Runcie                                          Page 2 of 2

Electronic Distribution List:

John Hurt, Chief Financial Officer, FSA
Patrick Bradfield, Director, Acquisition Group, FSA
Marge White, Audit Liaison Officer, FSA
Dawn Dawson, Audit Liaison Officer, FSA
U.S. Department of Education

TIVAS servicing capacity assessment

May 2011
                                                                                                                       Ernst & Young LLP
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May 16, 2011

To the Office of Inspector General and Management of the U.S. Department of Education:

We have completed our engagement to assess the current status of the Title IV Additional Servicers to handle the volume of servicing for all new
Direct Loan originations, consolidations, and Ensuring Continued Access to Student Loans Act loan purchases. Our engagement was performed
in accordance with our contract task order dated September 24, 2010, and our procedures were limited to those described in the Statement of
Work dated September 17, 2010 and in the Executive Summary of the attached report. The engagement was performed under the American
Institute of Certified Public Accountants (AICPA) Consulting Services: Definitions and Standards (CS Section 100).

Our findings and recommendations resulting from our procedures are provided in the attached report. We appreciate the cooperation and
assistance provided to us by the management of Federal Student Aid, the Office of Inspector General and each of the four TIVAS servicers
during the course of our work.

This report is intended solely for the information and use of the Office of Inspector General and management of the Department of Education and
is not intended to be and should not be used by anyone other than these specified parties. The nature and scope of our services was determined
solely by the agreement between Ernst & Young and the Department of Education. Our work was performed only for the use and benefit of the
Department of Education, and others who read this report that were not a party to our agreement with respect to the nature and scope of such
services do so at their own risk. The services we performed were advisory in nature. Ernst & Young did not render an assurance report or
opinion under our contract with the Department of Education, nor did our services constitute an audit, review, examination, or other form of
attestation as those terms are defined by the AICPA. None of the services we provided constituted any legal opinion or advice. We did not
conduct a review to detect fraud or illegal acts. Notwithstanding anything to the contrary in the contract, we do not assume any responsibility for
any third-party products, programs or services, their performance or compliance with the specifications of the Department of Education or
otherwise.



Ernst & Young LLP
May 16, 2011
Contents
►   Executive summary                                                      3
    ► Background                                                           3
    ► Engagement objectives                                                3
    ► Scope and approach                                                   4
    ► Assessment results                                                   5
►   Findings and recommendations                                           6
►   Supporting information
    ► Borrower volume estimates                                           10
    ► Allocation methodology                                              18
    ► Servicing capacity and per-borrower estimates                       24
    ► Contingency planning                                                31
    ► Fulfillment of contract requirements                                33
►   Appendix A - FSA responses to findings and recommendations            38
►   Appendix B - FSA original responses to findings and recommendations   45



Page 2                        TIVAS servicing capacity review
Executive summary

Background
                                                                                In June 2009, FSA awarded four new contracts to acquire additional
The U.S. Department of Education (Department), through Federal
                                                                                Title IV student loan management servicing under Federal Acquisition
Student Aid (FSA), administers programs that are designed to provide
                                                                                Regulations (FAR) Part 12. The new servicers are commonly referred to
financial assistance to students enrolled in post-secondary education
                                                                                as TIVAS and began servicing FFEL loans in September 2009. TIVAS
institutions as well as collect outstanding student loan balances. In
                                                                                include Sallie Mae (SLM), Nelnet (NN), Great Lakes (GL), and
2008, Congress enacted the Ensuring Continued Access to Student
                                                                                Pennsylvania Higher Education Assistance Agency (PHEAA).
Loans Act (ECASLA), which authorized the Department to purchase or
enter into forward commitments to purchase certain Federal Family
                                                                                On March 30, 2010, Congress enacted the Student Aid and Fiscal
Education Loan (FFEL) loans. The Department implemented three
                                                                                Responsibility Act (SAFRA) – legislation eliminating the origination of
activities under this temporary loan purchase authority, which were
                                                                                new FFEL loans. Beginning July 1, 2010, all student loans are
effective for the 2008-2009 and 2009-2010 academic years:
                                                                                originated through the William D. Ford Federal Direct Loan (DL)
► Loan Participation Program – the Department purchased a
                                                                                program. As a result, all schools participating in the FFEL program
     participation interest in FFEL loans, if the loans had been at least
                                                                                transitioned to the DL program. Previously, FSA had one servicing
     partially disbursed. Loans in the participation facility could be either
                                                                                contractor, ACS, to service its DL portfolio. The ACS contract is
     (1) sold (PUT) to the Department once fully disbursed by the lender,
                                                                                expected to expire in 2014. As a result, as of September 2010, FSA
     or (2) bought back by the lender. The program closed on September
                                                                                started to allocate newly originated DL to TIVAS.
     30, 2010.
► Loan Purchase Commitment Program – Lenders could PUT fully
     disbursed FFEL loans to the Department. Once sold to the                   Engagement objectives
     Department, they were considered Federally held FFEL loans, and            Both laws (ECASLA and SAFRA) resulted in additional servicing
     were no longer guaranteed loans. The Loan Purchase Commitment              volume, which had to be managed by FSA or its contractors. Ernst &
     program closed on September 30, 2010.                                      Young was engaged by the Office of Inspector General (OIG) to provide
► Asset-Backed Commercial Paper Conduit – the Department is                     consulting services to assess the current status of the TIVAS servicers
     considered the buyer of last resort to purchase the FFEL loans if the      to handle the volume of servicing for all new DL originations,
     conduit is unable to refinance commercial paper as it matures.             consolidations and ECASLA loan purchases. Ernst & Young was
                                                                                engaged to consider the following throughout its assessment: the
The Affiliated Computer Services (ACS) – Commercial application was             borrower and loan volume estimation process, servicer allocation
used to service certain FFEL loans purchased under ECASLA between               methodology, servicing capacity, information technology (IT) and
September 2008 and June 2010. Its FFEL volume has been since                    business capacity planning, servicer contingency plans and compliance
transferred to Title IV Additional Servicers (TIVAS).                           with contract requirements.




Page 3                                                     TIVAS servicing capacity review
Executive summary

Ernst & Young gathered information on current operations and             from FSA and TIVAS. Through the collection of information from FSA
processes across all TIVAS and provided findings and                     and TIVAS, Ernst & Young compared information across servicers to
recommendations to the OIG to be used as baseline information for its    identify gaps between expectations and requirements set by FSA that
future work.                                                             may affect satisfactory service delivery. The scope of our work did not
                                                                         require testing and validation of data, therefore, information provided to
Scope and approach                                                       Ernst & Young by the TIVAS and FSA was assessed as provided and
Ernst & Young conducted the assessment from February 2011 to April       was not subject to additional testing and validation.
2011 in accordance with scope and objectives defined in agreement
with OIG. Site visits and meetings were conducted with both FSA and      The following are the high level procedures performed for each in-scope
each TIVAS. The scope of the assessment was defined as follows:          area:

 FSA          • Borrower and loan volume estimates (budgetary
                estimates)                                                Borrower          • Understand drivers, methodologies and
              • Servicer allocation methodology                           and loan            assumptions for both FSA and TIVAS borrower
              • Fulfillment of contract requirements                      volumes             and loan volume costing estimates.
                                                                          (both FSA         • Understand estimate monitoring frequency and
 TIVAS        • Borrower and loan volume estimates (performed by          and TIVAS)          process for FSA and TIVAS.
                each servicer)                                                              • Compare point-in-time estimates to actual
              • Servicing capacity                                                            volumes allocated to servicers. Understand
              • Per-borrower estimates/IT and business capacity                               factors for differences including various
                planning                                                                      programs affecting volume.
              • Contingency plans and processes
                                                                          Servicer          • Understand various legislation, programs, related
In order to gain an understanding of the processes in place for volume    allocation          factors and contract terms affecting allocations.
estimates, capacity planning, and the ability of servicers to provide     methodology       • Understand allocation methodology as it varied
adequate service to FSA in light of requirements set forth in the                             between award years.
contracts, Ernst & Young reviewed documentation provided by FSA and                         • Understand the ongoing allocation methodology
TIVAS. Documentation that was reviewed included process flows and                             used for new DL originations.
procedures, relevant system policies, contract requirements and system                      • Review the drivers influencing the ongoing
specifications. In addition, Ernst & Young interviewed process owners                         allocation methodology: surveys, calculations,
                                                                                              frequency and sample sizes.



Page 4                                                TIVAS servicing capacity review
Executive summary

Fulfillment of   • Understand the contract requirements review       Servicer          • Review servicer contingency plans against
contract           and tracking process managed by FSA               contingency         NIST standards (SP 800-34 and 53).
requirements       (phases two and three only). Understand           planning          • Understand backup procedures in place and
                   involvement of process owners effected by                             ability to restore IT systems.
                   each requirement (e.g., users of required                           • Compare servicer contingency plans.
                   reports, system owners of interfaced                                • Discuss business operation contingency
                   applications, etc).                                                   planning as well as excess volume planning.
                 • Discuss contract requirement implementation
                   with TIVAS to understand process for
                   submitting and obtaining acceptance of           Assessment results
                   submitted artifacts (deliverables provided by    Ernst & Young assessed the current status of the TIVAS servicers to
                   TIVAS supporting contract requirements).         handle the volume of servicing for all new DL originations,
                 • For a sample of contract requirements, obtain    consolidations and ECASLA loan purchases. Detailed findings and
                   evidence that artifacts for each TIVAS were      recommendations have been provided in the next section, pages 6
                   submitted, tracked, retained and ultimately      through 9. As a result of our assessment, we found that:
                   accepted by FSA.                                 • While FSA has been able to on-board the four TIVAS, FSA should
                 • Review the FSA Contract Monitoring Plan for         develop more formal retention and management of documentation
                   activities performed and frequency of               related to contract requirements and clarifications in order to allow
                   monitoring.                                         FSA improved oversight of the contract requirements.

                                                                    • FSA has developed a formal methodology to determine the amount
 Servicing       • Document TIVAS servicing systems
                                                                      of borrowers to be allocated to each of the TIVAS every year;
 capacity and      configuration (hardware and software).
                                                                      however, FSA should develop baseline servicing standards and
 per-borrower    • Understand approach for development of the
                                                                      metrics in order to support FSA’s goal of improving services and to
 estimates/        FSA servicing platform.
                                                                      provide better customer service.
 capacity        • Understand capacity planning process for
 planning          TIVAS.
                                                                    • Currently, no TIVAS is able to support 50 million borrowers, the
                 • Determine current maximum capacity.
                                                                      maximum volume of borrowers for the basic ordering period of five
                 • Obtain servicing capacity estimates given
                                                                      years as required by the contract. However, the TIVAS currently
                   specific hypothetical scenarios.
                                                                      support 13.5 million borrowers collectively and FSA does not
                                                                      anticipate the total amount of borrower volume to grow to 50 million
                                                                      by 2014. FSA should actively monitor the constraints at each
                                                                      TIVAS as it relates to the TIVAS’ ability to service borrowers.

Page 5                                             TIVAS servicing capacity review
Findings and recommendations

#    Area        Finding                                                             Recommendation
1    Borrower    Growth assumptions used by the Department Budget Service            FSA should obtain information related to the
     estimates   office in developing borrower volume growth – as influenced by      growth assumptions used by the Department
                 the macroeconomic environment – are not formally communicated       Budget Service office for deriving borrower
     [Page 11]   to FSA. Knowledge related to applying factors of the                volume growth. The drivers and assumptions and
                 macroeconomic environment to borrower volume growth                 related impact to FSA TIVAS loan allocation
                 estimates is held by individuals involved in the process and is     estimates should be documented in order to
                 based on experience in the field rather than a documented set of    increase process sustainability for FSA and
                 economic indicators or specific population indicators.              increased transparency to stakeholders.

2    Borrower    FSA performs its own borrower volume estimates. While TIVAS         FSA should work with each TIVAS to understand
     estimates   are not contractually required to prepare independent borrower      the specific impact on loan servicing and
                 estimates, FSA expects TIVAS to do so in order to plan their        customer satisfaction levels caused by
     [Page 17]   operations.                                                         unexpected increases in servicing volumes.
                                                                                     Through the normal contract monitoring
                 Due to several unpredictable variables in the first 18 months of    communication channels, FSA should use
                 the program, some large discrepancies occurred between TIVAS’       information from its monitoring activities to update
                 estimates of borrowers and actual volumes received from FSA.        estimates as the information becomes available.
                 Despite the volume discrepancies, no major impact was noted to      These estimates and their revisions should be
                 loan servicing, largely due to the servicers’ monitoring of their   communicated on a regular basis to allow TIVAS
                 operations and the scalability of their systems.                    to manage acceptable customer service levels.
                 While ongoing allocations are expected to be more predictable       While FSA may choose to communicate
                 (due to allocation methodology put in place and less activity       estimates of the number of borrowers, and
                 around PUT and split borrower transfers), a communication           changes to those estimates, it is understood that
                 mechanism has not been defined to relay unexpected changes in       these communications do not imply a volume to
                 volumes to the TIVAS in order to prevent disruptions to borrower    each servicer and are provided for assistance in
                 servicing.                                                          each servicer’s planning process.




Page 6                                        TIVAS servicing capacity review
Findings and recommendations

#    Area           Finding                                                                Recommendation
3    Capacity       Each of the TIVAS indicated that they are not currently able to        FSA should work closely with each TIVAS to
     planning       support 50 million borrowers, the maximum volume of borrowers          understand their specific constraints and
                    for the basic ordering period of five years as required by the         understand the required lead time necessary to
     [Page 30]      contract. However, the TIVAS currently support 13.5 million            on-board specific loan and borrower volumes. In
                    borrowers collectively and FSA does not anticipate the total           addition, FSA should implement a process to
                    amount of borrower volume to grow to 50 million by 2014, the end       actively monitor these constraints at each TIVAS
                    of the basic ordering period.                                          and the appropriateness of the required lead time
                                                                                           for on-boarding of loan and borrower volumes.
                    TIVAS stated that they use scalable IT infrastructure to process
                    loans, which would allow them to accommodate loan volume
                    processing in excess of current capacity. While the servicers have
                    indicated the ability to increase their computer processing
                    capacity, their ability to increase staffing and physical space and
                    to deliver training pose constraints in the short term (three to six
                    months). More than six months’ notice would be needed for any
                    single servicer to accommodate 50 million borrowers, given the
                    staffing and training constraints.

4    Contract       Contract requirements as defined by FSA were documented at a           For future on-boarding of servicers, FSA should
     requirements   very high level. Detailed requirements were not defined by FSA         timely communicate the details of system and
                    until after the contract award in June 2009, which provided            functionality requirements in order to allow for
     [Page 36]      servicers with a short time frame to understand and implement the      sufficient planning, development and testing by
                    initial set of requirements and develop appropriate system design.     new servicers prior to the implementation phase.




Page 7                                            TIVAS servicing capacity review
Findings and recommendations

#    Area           Finding                                                             Recommendation
5    Contract       A final set of detailed requirements, which would aid in on-        FSA should document the contract requirements
     requirements   boarding a new servicer, was not maintained by FSA.                 and related clarifications in one location. Contract
                    Modifications that occurred following the initial implementation    requirements and clarifications should then be
     [Page 36]      were not tracked by FSA and compiled as part of the set of          used by FSA for oversight and enforcement of
                    contract requirements; instead they were only captured within the   contract terms and conditions.
                    meeting minutes of status meetings between the TIVAS and FSA.
                                                                                        For future implementations of servicers, FSA
                    In addition, while FSA noted that all servicers provided evidence   should develop documentation that supports a
                    of their compliance with each requirement clarification, that       sustainable on-boarding process. This includes
                    documentation was not available for each requirement. The           tracking of all clarifications and/or modifications,
                    source, date and acceptance of each contract requirement and/or     formal identification of key stakeholders within
                    clarification was not individually tracked by FSA.                  both TIVAS and FSA, and documented
                                                                                        verification of artifact submissions by those
                                                                                        business users responsible for various elements
                                                                                        of the program. Such documentation could be
                                                                                        used in the future to onboard new servicers, as
                                                                                        necessary, without incurring similar issues and
                                                                                        clarification procedures as in the past.

6    Contingency    Server capacity on one servicer’s backup server is smaller than     FSA should implement a process to monitor the
     planning       the production server, which may result in the slower processing    contingency planning of each servicer. Monitoring
                    of transactions in the event the backup server was required for     should include capabilities of back up servers and
     [Page 32]      processing during an outage of the production server.               facilities in the event the servicer is required to
                    Management at the servicer is in the process of upgrading its       utilize its non-production environment.
                    backup servers to meet processing capacity of its production
                    servers.




Page 8                                           TIVAS servicing capacity review
Findings and recommendations

#    Area            Finding                                                                 Recommendation
7    Contingency     Two of four servicers do not have formally documented processes         FSA should evaluate the processes in place at
     planning        or flowcharts that identify detailed steps that should be followed to   each TIVAS to support the on-boarding of excess
                     accommodate an unplanned increase in borrower volume                    borrower volumes in an organized and
     [Page 32]       transferred from FSA. Currently, these steps would be defined on        sustainable manner. FSA’s process evaluation
                     an ad hoc basis when such an event arises. Both servicers have          should include details on the coordination of
                     procedures in place for monitoring system and staffing capacity.        specific stakeholders to be notified within FSA
                                                                                             and TIVAS in the event of a TIVAS receiving
                                                                                             borrower volume in excess of plan and/or
                                                                                             capacity.

8    Allocation      FSA has not defined minimum survey ratings or maximum                   FSA should define minimum and maximum
     methodology     delinquency rates for servicers. With defined minimum customer          servicing standards to support the FSA’s goal of
                     satisfaction levels and maximum delinquency rates, servicers will       improving services to provide better customer
     [Page 23]       better understand the ultimate goals of FSA.                            service levels. Servicers should be notified of
                                                                                             these standards; a monitoring and probation
                                                                                             program should be considered to resolve issues
                                                                                             before servicers are below the defined minimum
                                                                                             standards.

9    Allocation      All metrics used for the ongoing allocation methodology are             FSA should weight evaluation metrics for future
     methodology     weighted equally for calculation of the final score for servicers;      allocations to give greater emphasis to metrics
                     however, not all appear to be equally important (i.e., number of        that reflect the long-term goals of the Department
     [Pages 21-23]   defaulted borrowers and dollar amounts in default appear to be          and FSA. Survey sample sizes should be defined
                     more significant than results of surveys). In addition, the sampling    to achieve representative samples from each
                     methodology for school survey population does not take into             distinct population group, which would take into
                     account number of schools or different types, as such public            account the varying needs of each customer
                     schools tend to be over-sampled.                                        population.




Page 9                                              TIVAS servicing capacity review
Borrower volume estimates
Supporting information
Borrower volume estimates
Federal Student Aid

►   Related to loan servicing, estimates developed by FSA are used for FSA’s budgetary
    purposes (i.e., estimating the cost per month by servicer for loan servicing), not to
    determine appropriate servicing capacity levels.
►   FSA relies on TIVAS to perform their own borrower estimations and servicing capacity
    planning.
►   FSA prepares estimates of borrower volumes based on loan status (e.g., in-school, in-
    grace/current repayment, deferment/forbearance or delinquent) to determine the cost of
    serviced loans.
►   The estimation process is performed twice a year (January and June) showing
    projections over three years
    ►     Estimates are reviewed monthly by FSA CFO, FSA Business Operations (BOPS), and the
          Department Budget Service office and may be updated if discrepancies are noted that have a
          significant impact on budgeted amounts.
►   FSA utilizes the data provided by the Department Budget Service office, which is based
    on Common Services for Borrowers (CSB) and National Student Loan Data System
    (NSLDS) data as well as growth assumptions
    ►     Growth assumptions are developed by the Department Budget Service office, while the monthly
          distribution assumptions are developed by FSA BOPS. While certain specific growth figures are
          provided to FSA BOPS, Department Budget Service does not provide formal documentation of
          its assumptions and drivers to FSA BOPS. [See Finding #1]

Page 11                                TIVAS servicing capacity review
Borrower volume estimates
Federal Student Aid

►    Summary of the process used to budget for TIVAS servicing payments:

 1    The Department Budget Service office prepares a baseline loan volume estimate (total dollar amount of loans, as
      well as loan borrower count) for DL and FFEL loans based on information from CSB and NSLDS. Using these
      figures, the Department Budget Service office then applies assumptions on growth.
 2    FSA BOPS uses the borrower count from the Department Budget Service and reduces this number by a
      percentage based on historical information (CSB, NSLDS) to estimate a number of borrowers expected to be new
      to the system.
 3    FSA BOPS distributes new borrower estimate over 12 months using monthly distribution historical trends.
 4    FSA BOPS uses current actual volume and adds in new volume estimates as they are expected to enter the
      system to determine a total borrower volume for each month of the year.
 5    FSA BOPS uses historical trends to estimate a percentage of borrowers expected to be in specific types of loan
      status (in-school, in-grace, current repayment, deferment/forbearance or delinquent) to estimate costs, as cost
      varies by loan status.




Page 12                                      TIVAS servicing capacity review
Borrower volume estimates
TIVAS
►    TIVAS estimate the number of borrowers who will be new to their system and total number of
     borrowers being serviced at a point in time.
►    TIVAS use their estimates to project an expected volume of loans (based on estimated volume of
     borrowers) and required processing capacity.
►    Loan volume is significant for computer processing and storage due to the data and processing
     associated with each loan.
►    Borrower volume is significant to both staffing levels and servicer revenue. Staffing is significant as
     one borrower, regardless of the number of loans likely, can be assisted by one individual servicer
     representative. The borrower volume is significant to revenue because servicers are only paid based
     on the number of borrowers in their system in a specific status. Servicers are not paid additional
     amounts if the borrower has multiple loans.
►    In the first 13 months (September 2009 – September 2010), loan transfers by FSA to TIVAS were
     mainly the result of qualified FFEL loans sold (PUT) to the Department by various lenders. Newly
     originated DL started to be allocated in June 2010.
►    PUT volume could be either:
     ►     “On the system” – Each TIVAS performs servicing for various lenders as a part of their commercial business. In
           addition the TIVAS may be lenders themselves. In the case where one of the TIVAS was the current servicer
           (either as a lender, or a contracted servicer for a third-party lender) of the loan being PUT – loans were kept with
           the same servicer to limit disruption to the borrower. For these loans, the TIVAS would migrate the loans from its
           commercial servicing systems to its federal servicing system (an internal transfer).
     ►     “Off the system” – loans being PUT that had not been previously serviced by one of the TIVAS.


 NOTE: “System” refers to the servicing system or application used by TIVAS.

Page 13                                              TIVAS servicing capacity review
Borrower volume estimates
TIVAS – FFEL PUTs

►   Servicers used different methods to estimate FFEL PUT volume based on the
    knowledge and relationships they may have had with lenders on their
    commercial system.
    ►     TIVAS A




    ►     TIVAS B




    ►     TIVAS C

    ►     TIVAS D




Page 14                      TIVAS servicing capacity review
Borrower volume estimates
TIVAS estimation process summary
              TIVAS A   TIVAS B                    TIVAS C   TIVAS D
 Estimate
 drivers




 Timing/
 frequency




 Monitoring




Page 15                    TIVAS servicing capacity review
Borrower volume estimates
Estimates vs. actuals
         FSA/TIVAS          October 2010     November 2010           December 2010          * TIVAS C
    FSA estimate                12,277,492           12,539,333                12,674,665
    FSA actual                  13,002,494           13,265,127                13,378,910
    Percentage difference           5.91%                 5.79%                    5.56%
                                                                                            ** TIVAS D
    TIVAS A estimate

    TIVAS A actual

    Percentage difference

    TIVAS B estimate***

    TIVAS B actual

    Percentage difference

    TIVAS C estimate

    TIVAS C actual                                                                          *** TIVAS B
    Percentage difference
    TIVAS D estimate
    TIVAS D actual
    Percentage difference

►    2010 Q1-Q3 estimates had a number of variables due to the type of allocations made during that
     period. Therefore, the table compares only 2010 Q4 estimates to actuals.
►    The above estimates were made in late 2009, typically December 2009. Estimates are for the
     borrower volume expected for October – December 2010 by servicer, or in total for FSA.

Page 16                                      TIVAS servicing capacity review
Borrower volume estimates
Estimates vs. actuals

►   Factors to consider when evaluating accuracy of borrower volume estimates performed
    by FSA and TIVAS:
    ►     Allocations in Year 1 (Sep. 1, 2009 – Aug. 14, 2010) included mostly FFEL and delinquent
          conduit transfers from lenders, based on existing relationships between servicers and sellers/
          lenders. TIVAS only knew the volume of FFEL loans/borrowers on their systems (“PUT” by
          lenders serviced on their commercial system).
    ►     Transfers of split borrowers between servicers could not be practically estimated by the TIVAS,
          as it would be difficult to identify a borrower on two separate systems while determining which
          of the servicers with a split would ultimately end up servicing the borrower. FSA determined
          that in the case of split borrowers, the servicer with the lower allocation of borrowers at the time
          the split was addressed would ultimately service that borrower.
    ►     DL allocations were not considered for 2010 estimates. SAFRA legislation was not passed until
          March 2010, and most initial annual estimates were completed at the end of 2009.
►   While some large differences between estimates and actuals for individual servicers
    are observed
                                                    estimates for all servicers in total are
    very close to FSA’s estimates              [See Finding #2]
►   The servicing capacity review shows that servicers are able to accommodate large
    increases in volumes given sufficient notice and lead time.


Page 17                                   TIVAS servicing capacity review
Allocation methodology
Supporting information
Allocation methodology
Transfer types

►   Allocation of borrowers to TIVAS addresses various transfer types:
    ►     Purchases and Participation (PUTs) – Fully disbursed FFEL loans purchased by
          the Department as part of the “loan participation program” or the “loan purchase
          commitment program” from various lenders. This transfer is applicable only
          between 9/2009 – 10/2010.
    ►     Conduit delinquent – FFEL loans that were purchased by the Department, as a
          buyer of last resort, when the loan becomes delinquent and is removed from the
          conduit. (Note: Conduit is also subject to other PUT events until 1/2014)
    ►     FFEL transfers from ACS-FFEL – FFEL loans serviced by ACS (Long Beach,
          CA). This transfer is mainly applicable for year one. Very low volume in year two.
    ►     DL transfers from ACS-DL – DL serviced by ACS (Germantown, MD) for “split
          borrowers.” This transfer is mainly applicable for year two onward.
    ►     COD originations – New originations of DL. This transfer is mainly applicable for
          year two onward.




Page 19                             TIVAS servicing capacity review
Allocation methodology
Allocation types
 Transfer type          Year one – September 1, 2009-August 14, 2010               Year two – August 15, 2010 – August 14, 2011
                                                                                   Allocation of borrowers based on calculated allocation
 Overall allocation
                        Conclude year with equal borrowers for each TIVAS          percentages. See slide 22 for details on allocation
 year goal
                                                                                   calculation
                        Based on TIVAS existing relationship with the seller,
                                                                                   Same as year one - Sales closed after 9/30/2010 are
 Purchases and          current workload and expected count at year-end; if no
                                                                                   allocated and counted in year two (earlier sales are
 participation          relationship – assigned to TIVAS with lowest number
                                                                                   considered year one sales).
                        of borrowers
                        Based on TIVAS existing relationship with the seller,      Each conduit seller/servicer was assigned a TIVAS
 Conduit                current workload and expected count at year-end; if no     servicer to handle all of that seller/servicer's sales
 delinquent             relationship – assigned to TIVAS with lowest current       during year one. That relationship was retained in year
                        volume                                                     two.
                        Based on TIVAS existing relationship with the seller; if
                        no relationship – assigned to TIVAS A, TIVAS B or
 FFEL transfers                                                                    All transfers to a single TIVAS (TIVAS A) due to very
                        TIVAS C based on the servicer with the lowest number
 from ACS-FFEL                                                                     low volume (anticipated < 15,000 borrower).
                        of borrowers (TIVAS D – none due to large PUT
                        transfers)
                                                                                   Only borrowers with loans already at one of the TIVAS
 DL transfers from                                                                 are transferred. These transfers are executed to
                        Not applicable in year one.
 ACS-DL                                                                            resolve “split borrowers” and move borrower's loans to
                                                                                   a single servicer.
                        If borrower is an existing borrower – loan assigned to
                        servicer with existing borrower relationship; if a new     Same as year one; however, FSA adjusted LDE
                        borrower – Loan Distribution Engine (LDE) assigns          percentages with the goal of allocating a specific
 COD originations
                        based on percentages entered by FSA, which were            percentage (of the total borrower volume) to each
                        adjusted periodically with the goal of making an even      servicer based on their allocation methodology score.
                        distribution among TIVAS

Note: Starting August 15, 2011, the ongoing allocation methodology will be used for allocation. See slides 21 and 22 for more details.

Page 20                                               TIVAS servicing capacity review
Allocation methodology
“Ongoing” allocation
►    Contracts were designed to incentivize TIVAS to obtain higher satisfaction rates and
     lower default rates.
►    “Ongoing” contracted allocation method
     ►      Only new DL, FFEL purchase/participation borrowers (allocated after August 15,
            2010 or “year two”) and conduit delinquent loans are counted for “ongoing”
            allocation distribution1).
     ►      Allocation is based on five factors:
            ►     Default2 dollar amount (as a percentage of total dollars for each servicer) – Encouraged
                  TIVAS to maintain a low value for borrowers in default.
            ►     Default borrower rate (as a percentage of total borrowers for each servicer) – Incentivizes
                  TIVAS to not only focus on large dollar amount defaults but to aid all borrowers.
            ►     School survey – Measures school satisfaction when interacting with TIVAS.
            ►     Borrower survey – Measures borrower satisfaction when interacting with TIVAS.
            ►     FSA representative survey – Measures FSA satisfaction when interacting with TIVAS.
     ►      TIVAS are ranked on each of the five factors equally (i.e., 20% each) [See Finding
            #9]

 1: Historical information is required to rank servicers (e.g., survey results). As a result, year one did not utilize the standard allocation
    methodology, so allocation for each loan type varied (see slide 20).
 2: Borrowers in default are defined as loans that have been sent to Debt Management and Collection System (DMCS) or are greater than 360
    days delinquent at the end of the quarter.


Page 21                                                TIVAS servicing capacity review
Allocation methodology
“Ongoing” allocation
 Metric1               Description                                  Factors considered

 Value of              Percentage of “In Repayment” portfolio       • Principal balance outstanding and interest of loans transferred to DMCS or
 portfolio             dollars that go into default                   more than 360 days delinquent during the period
 considered in         (percent in public schools, private          • Principal balance outstanding and interest of all loans in “repayment”
 default               schools, proprietary schools)                  status

 Unique                Percentage of unique “In Repayment”          • Number of delinquent borrowers transferred to DMCS or more than 360
 borrowers             portfolio borrowers that go into default       days during the period
 considered in         (percent in public schools, private          • Number of all borrowers in “repayment” status
 default               schools, proprietary schools)
 Surveys –             Measure of borrower satisfaction with        • Phone surveys for borrowers are conducted by the CFI Group, an
 borrowers             servicer (0-100%)                              independent survey company, across all borrowers (target is 900-1000
                       (In school, in grace, and in repayment         borrower surveys for each servicer per year)
                       borrowers)                                   • Phone surveys for schools conducted the by CFI Group for each school
                                                                      type (target is 300 school surveys for each servicer per year)
 Surveys –             Measure of school satisfaction with          • Online FSA surveys are administered by the CFI Group and sent to all
 schools               servicer (0-100%)                              personnel interacting with TIVAS (there are about 90 FSA employees
                       (public schools, private schools,              surveyed, with an average response rate of 42%)
                       proprietary schools)                         • All surveys are designed to prompt respondents to think about the type of
 Surveys – FSA         Measure of FSA satisfaction with servicer      service they receive by asking specific questions on individual
 personnel             (0-100%)                                       occurrences; however, only three questions are used for ranking.2 These
                                                                      questions provide a standardized system for rating customer satisfaction in
                                                                      various industries.

1 Each  metric is measured quarterly. Quarterly scores are averaged as of July 1 of each year to provide a year end score.
2 American   Customer Satisfaction Index (ACSI) Survey Ranking Questions:
►   Using a 10-point scale on which “1” means “very dissatisfied” and 10 means “very satisfied,” how satisfied are you with [servicer]?
►   Using a 10-point scale on which "1" now means "falls short of your expectations" and "10" means "exceeds your expectations," to what extent has
    [servicer] fallen short of or exceeded your expectations?
►   Imagine what an ideal process would be for dealing with your loan servicer. How well do you think [servicer’s] current process compares with that
    ideal you just imagined? Please use a 10-point scale on which "1" means "not very close to the ideal," and "10" means "very close to the ideal."


Page 22                                                  TIVAS servicing capacity review
Allocation methodology
“Ongoing” allocation calculation

                                             Year two allocation metrics
          Metric                                      TIVAS 1         TIVAS 2     TIVAS 3     TIVAS 4
          Default borrower rate (points awarded)      .46% (2)        .55% (1)    .27% (3)    .25% (4)
          Default amount rate                         .19% (2)        .25% (1)    .14% (3)    .12% (4)
          Borrower survey                             69.44 (4)       65.67 (1)   67.11 (2)   68.78 (3)
          School survey                               74.78 (2)       75.78 (3)   79.00 (4)   74.67 (1)
          Federal personnel survey                    65.00 (1)       69.33 (2)   73.33 (4)   71.67 (3)
          Total points awarded                           11               8          16          15
          Allocation percentage                         22%             16%         32%         30%


►   Points are awarded based on rank as related to other servicers. Allocation percentage
    is determined by dividing the servicer’s total points by the total available points (50).
    ►     Lowest allocation percentage (assuming one point in all metrics) is 10%
    ►     Highest allocation percentage (assuming four points in all metrics) is 40%
►   FSA does not define a minimum score in any category or in total to continue servicing.
    ►     Servicers will only be discontinued if they do not comply with contract requirements; customer
          satisfaction and default rate are not included as cause for discontinuing contracts
          [See Finding #8]


Page 23                                     TIVAS servicing capacity review
Servicing capacity and per-borrower estimates
Supporting information
Servicing capacity and per-borrower estimates
Background

►   We discussed with each servicer the capacity constraints and scalability of
    each servicer’s operations.
    ►     We obtained documentation from each servicer and held meetings to become
          familiar with the IT infrastructure and systems used by the servicers. In addition, we
          discussed the process to develop the systems used for FSA portfolio processing.
    ►     We discussed with each servicer the business planning and monitoring process as
          it relates to IT infrastructure and operational factors (personnel, physical space,
          etc.).
►   We obtained responses from each servicer on hypothetical scenarios for
    accommodating additional volume at defined intervals to determine the key
    factors and considerations each servicer makes when addressing excess
    volume.




Page 25                              TIVAS servicing capacity review
Servicing capacity and per-borrower estimates
IT infrastructure and systems – current state
                          TIVAS                        TIVAS                        TIVAS                         TIVAS
                            A                            B                            C                             D
    Servicing
    system



    Hardware


    CPU in use,
    remaining
    capacity on
    demand

    Average CPU
    utilization



    Database type



    Current disk
    utilization


 Average CPU utilization refers to the percentage of the processor in use, the excess capacity is not used and remains idle. Additionally, Current
 disk utilization refers to the percentage of disk space used, the remaining percentage is idle and is not in use for any other purposes.
 Note: Individual components of servicing systems are presented above; however, the adequacy of each servicing system
       depends on the entire system which includes the people, process and technology driving the servicers operations.



Page 26                                               TIVAS servicing capacity review
Servicing capacity and per-borrower estimates
Systems capacity summary

►   Each mainframe system may host multiple services (other than FSA loan processing).
    Utilization figures noted relay the total utilization for each processor or disk array
    inclusive of processing for FSA.


►   Each servicer currently has excess disk space and processing capacity, therefore,
    each servicer is able to handle current loan volumes as well as growth projected by
    each servicer.
►   The nature of each servicer’s IT environment appears to be scalable to accept greater
    servicing volume with appropriate lead time.
    ►




    ►




►   Data storage for all servicers is                     , which appears to allow enough head room
    for additional volume.
    ►     The nature of the systems also allows for near overnight data capacity expansion. In an
          emergency situation, it appears the systems could scale within a matter of days.

Page 27                                 TIVAS servicing capacity review
Servicing capacity and per-borrower estimates
Systems development summary

►     Each servicer leveraged existing commercial systems to meet FSA
      requirements for servicing.
      ►


      ►


      ►




►     FSA data appeared to be segregated for all servicers either using separate
      databases for each portfolio (FSA vs. commercial) or through controls that
      allow access only to cleared individuals.
►     Modifications made to TIVAS systems were designed to follow a change
      management process that included systems testing, user testing, and
      business/technical approval for modifications.

    Note: Ernst & Young obtained the above information through review of servicer reports and discussions
          with servicers. Ernst & Young did not independently verify the change management or logical access
          processes.

Page 28                                    TIVAS servicing capacity review
Servicing capacity and per-borrower estimates
Capacity scenarios
►   Three hypothetical scenarios were proposed to each TIVAS to allow for comparison of
    their ability to increase FSA servicing capacity. We proposed scenarios in which the
    servicer was notified on December 31, 2010, of an increase in volume to occur on one
    of these three dates:
    ►     January 1, 2011 – On this day, with no system upgrades or increased capacity on demand,
          what volume of borrowers could be serviced by the current servicing platform with no change in
          full-time employee (FTE) count? This scenario is based on strictly servicing system capacity.
    ►     March 1, 2011 – Given 60 days notice, what volume of borrowers could be serviced? This
          scenario takes into account system capacity as well as need to onboard FTEs.
    ►     June 30, 2011 – Given six months’ notice, what volume of borrowers could be serviced? This
          scenario takes into account system capacity as well as need to onboard FTEs.
►   Main assumptions related to scenarios:
    ►     January 1, 2011 scenario:
          ►   No additional staffing needs were taken into account, resulting in possible decrease in customer
              satisfaction level.
    ►     March 1, 2011 and June 30, 2011 scenarios:
          ►   Servicers were required to keep an equal ratio of borrowers to FTE in each department serving borrowers
              (inbound and outbound call center, and back office operations affected by number of borrowers served),
              as compared to their ratios as of December 31, 2010. Servicers took into account their ability to acquire
              staff and physical space, as well as training.
          ►   Servicers were required to assume an equal ratio of loans “in repayment” to “not in repayment” when
              compared to their current, December 31, 2010, portfolio.
          ►   Servicing system upgrades were allowed that could be completed prior to the specified date.

Page 29                                     TIVAS servicing capacity review
Servicing capacity and per-borrower estimates
Capacity scenario results
►    Summary results of the Ernst & Young proposed scenarios for each TIVAS:
                                                                         TIVAS A          TIVAS B          TIVAS C          TIVAS D
             Borrowers
Current
             Total loans
12/31/2010
             Inbound/outbound call center FTE
[See Finding
#3]          Support FTE
             Total FTE
             Borrowers
One day      Total loans
         2
1/1/2011     FTE (no change from 12/31/10)
             Increase in borrowers over current volume
             Borrowers
60 days      Total loans
3/1/2011     Total FTE
             Increase in borrowers over current volume
             Borrowers in repayment
Six months Total loans
6/30/2011    Total FTE
             Increase in borrowers over current volume
►     Without set FTE ratio constraints, all servicers are able to scale their IT system to meet larger volume increases than
      stated in the table above.



2: Increases in capacity were constrained by: inability to upgrade (one-day), or inability to onboard and train adequate number of
employees (60 days and six months).

Page 30                                             TIVAS servicing capacity review
Contingency planning
Supporting information
TIVAS contingency planning

                                  TIVAS A             TIVAS B                       TIVAS C         TIVAS D
 NIST 800-34 compliance     Yes                Yes                            Yes             Yes
 Business impact analysis   Yes                Yes                            Yes             Yes

 Recovery testing

 Test meets required 72-
                            Yes                Yes                            Yes             Yes
 hour recovery objective



 Backup method



 Primary data center site


 Recovery site



 Additional notes

                                               [See Finding #6]

 Note: Ernst & Young did not perform testing of contingency planning performance. Contingency plans and
       servicer-provided test summaries were used to prepare the information above. Ernst & Young reviewed
       contingency plans to determine if it appeared the servicers had select components of a NIST 800-34
       contingency plan. [See Finding #7]

Page 32                                     TIVAS servicing capacity review
Fulfillment of contract requirements
Supporting information
Contract requirement fulfillment

                                                                                       Q1 2009
►    Timeline showing the key dates
                                                        TIVAS submitting proposals begin systems development
     associated with the TIVAS
     contracts award and fulfillment
                                                                                      June 2009
     of contract terms.
                                                                                  Contracts awarded

                                                                                   August 31, 2009
                                                                      Initial requirements due (phase 1)

                                                                                    March 31, 2010
NOTE: Per the contract requirements, each                 Intermediate requirements target due date (phase 2)
TIVAS is required to be able to service up to 50
million borrowers over the base period of the
contract (five years). Based on existing staffing,                                  April 30, 2010
each TIVAS is not currently able to support 50                            Actual phase 2 completion
million borrowers without sacrificing customer
service level. However, in December 2010, the
TIVAS supported 13.5 million borrowers                                             August 31, 2010
collectively (with another 12 million serviced by
                                                                Full requirements target due date(phase 3)
ACS) and FSA does not anticipate the total
amount of borrower volume to grow to 50
million by 2014, the end of the basic ordering                                    November 30, 2010
period.
                                                                          Actual phase 3 completion

Page 34                                         TIVAS servicing capacity review
Contract requirement fulfillment
Requirement development

►   Phase two and phase three contract requirements were comprised of
    approximately 110 requirements related to general/legal, financial reporting,
    internal controls, reconciliation, other reporting, security (physical, systems,
    etc.), records management and DL.
►   Requirements were documented in attachments to the original TIVAS
    contracts and were ultimately refined with detailed clarifications.
►   Servicers were required to implement the terms of the contract by March 31,
    2010 (phase two) and August 31, 2010 (phase three). Actual implementation
    lagged to April 30, 2010 and November 30, 2010, respectively.
►   Most original requirements had clarifications or further details added,
    therefore, clarifications became de facto requirements.
►   FSA provided all clarifications through a single implementation team to
    TIVAS, and met with all TIVAS regularly on each requirement area to
    determine if additional information was required.



Page 35                         TIVAS servicing capacity review
Contract requirement fulfillment
Requirement implementation
►   The FSA implementation team served as liaisons to distribute clarifications as
    well as obtain artifacts validating that requirements were met.
►   The FSA implementation team often validated that submissions met expected
    standards; for certain requirements, artifacts were validated by appropriate
    stakeholders.
    ►     Documentation identifying requirements stakeholders (e.g. report owner, system
          interface owner, data set owner) was not maintained by FSA. Additionally, sign-off
          and user acceptance of artifacts submitted by TIVAS to FSA were not formally
          documented and maintained by the FSA implementation team.
►   Contracts were awarded in June of 2009, and TIVAS were required to start
    initial servicing in September 2009. Therefore in order to begin servicing and
    meet all requirements by September 2009, some of the system development
    had to be initiated prior to contract award. This resulted in the following:
    ►     Detailed contract requirements (i.e., clarifications) were not available timely for TIVAS,
          therefore, all servicers had to work under accelerated systems development timetables. [See
          Finding #4]
    ►     Clarifications were not ultimately consolidated to create a list of future requirements for potential
          new servicer onboarding. [See Finding #5]


Page 36                                   TIVAS servicing capacity review
Contract requirement fulfillment
Review of artifacts submitted
►   The sample selection for contract requirements was performed as follows:
    ►     A haphazard sample of 10 detailed contract requirements were selected.
    ►     Selection focused on items that required artifact submission rather than confirmations and/or
          acknowledgements provided by the servicer in response to a requirement (e.g., legal requirements). The
          population (approximately 361) was from the full set of phase two and three contract clarifications.
►   For each selected requirement we requested supporting evidence from FSA for each
    servicer’s fulfillment of that requirement.
►   FSA did not maintain a detailed tracking document noting the dates of submission,
    where data was submitted from, and who validated the data.
►   Evidence of stakeholder (e.g., report owner, system interface owner, data set owner)
    acceptance of artifacts was not always maintained by the FSA implementation team,
    only summary level acceptance from the implementation coordinator was maintained.
►   Evidence of artifacts for some requirements was not consistently maintained by FSA.
    ►     For one of the ten requirements selected, no artifacts were provided supporting the requirement
          for any servicer.
          ►    Requirement 631: Requirement for servicers to report each collection activity (e.g., Collection of Principal,
               Collection of Interest, etc.) using unique identifiers in transaction level data.
    ►     For one requirement, artifacts were not maintained for a single servicer.
          ►    Requirement 697: Requirement for servicers to report on Teacher Education Assistance for College and
               Higher Education (TEACH) Grants that have been converted to Direct Unsubsidized TEACH Loans
               separately from other DL.


Page 37                                       TIVAS servicing capacity review
Appendix A
FSA responses to findings and recommendations
FSA responses to findings and
recommendations
#   Area        Recommendation                             FSA response                                 EY/OIG response
1   Borrower    FSA should obtain information related      FSA concurred with the recommendation.       None.
    estimates   to the growth assumptions used by the
                Department Budget Service office for
                deriving borrower volume growth. The
                drivers and assumptions and related
                impact to FSA TIVAS loan allocation
                estimates should be documented in
                order to increase process sustainability
                for FSA and increased transparency to
                stakeholders.

2   Borrower    FSA should work with each TIVAS to         FSA did not specifically disagree with the   Based on discussions with officials at
    estimates   understand the specific impact on loan     recommendation to work with each             FSA, estimates of borrower volumes
                servicing and customer satisfaction        TIVAS to understand the impact caused        were communicated to TIVAS.
                levels caused by unexpected increases      by unexpected increases in servicing         However, based upon discussions
                in servicing volumes. Through the          volumes. FSA noted that it recognizes        with officials at the TIVAS, we found
                normal contract monitoring                 the importance of working closely with the   that not all TIVAS could identify such
                communication channels, FSA should         TIVAS and has established multiple           communication occurring. As a
                use information from its monitoring        channels of communicating with the           result, FSA may not have received
                activities to update estimates as the      TIVAS to share information and concerns      adequate feedback from the TIVAS
                information becomes available. These       related to ongoing or potential issues,      into the impact that unexpected
                estimates and their revisions should be    including unexpected volume growth.          increases in borrower volumes could
                communicated on a regular basis to         FSA concurred with the balance of the        have on each TIVAS’ loan servicing
                allow TIVAS to manage acceptable           recommendations.                             capability and customer service level.
                customer service levels.                                                                While the finding has been revised to
                                                                                                        clarify this information, the
                                                                                                        recommendation remains unchanged.




Page 39                                             TIVAS servicing capacity review
FSA responses to findings and
recommendations
#   Area           Recommendation                        FSA response                               EY/OIG response
3   Capacity       FSA should work closely with each     FSA believes that under the contracts      While each TIVAS is responsible for
    planning       TIVAS to understand their specific    each TIVAS is responsible for ensuring     ensuring adequate servicing capacity
                   constraints and understand the        adequate capacity planning. If an          pursuant to the terms of the contract,
                   required lead time necessary to on-   individual TIVAS fails to have adequate    FSA should proactively work with and
                   board specific loan and borrower      capacity, the Department can shift the     monitor each TIVAS to ensure that no
                   volumes. In addition, FSA should      loan volume to other servicers. In         capacity issues arise and to avoid any
                   implement a process to actively       addition, no concerns have been raised     disruptions in the proper servicing of
                   monitor these constraints at each     regarding the one-month lead time          borrowers’ loans. For example, if a
                   TIVAS and the appropriateness of      contained in the contracts. FSA believes   TIVAS receives a loan that it is
                   the required lead time for on-        that the TIVAS can quickly increase        unprepared to service, a borrower’s
                   boarding of loan and borrower         servicing capacity.                        first payment date may be delayed.
                   volumes.

4   Contract       For future onboarding of servicers,   FSA concurred with the recommendation.     None.
    requirements   FSA should timely communicate
                   the details of system and
                   functionality requirements in order
                   to allow for sufficient planning,
                   development and testing by new
                   servicers prior to the
                   implementation phase.




Page 40                                            TIVAS servicing capacity review
FSA responses to findings and
recommendations
#   Area           Recommendation                                  FSA response                           EY/OIG response
5   Contract       FSA should document the contract                FSA concurred with the                 None.
    requirements   requirements and related clarifications in      recommendation to document the
                   one location. Contract requirements and         contract requirements and related
                   clarifications should then be used by FSA       clarifications in one location. In
                   for oversight and enforcement of contract       addition, FSA noted that it has
                   terms and conditions.                           developed a sustainable onboarding
                                                                   process to be used in the onboarding
                   For future implementations of servicers,        of not-for-profit loan servicers.
                   FSA should develop documentation that
                   supports a sustainable onboarding
                   process. This includes tracking of all
                   clarifications and/or modifications, formal
                   identification of key stakeholders within
                   both TIVAS and FSA, and documented
                   verification of artifact submissions by those
                   business users responsible for various
                   elements of the program. Such
                   documentation could be used in the future
                   to onboard new servicers, as necessary,
                   without incurring similar issues and
                   clarification procedures as in the past.




Page 41                                             TIVAS servicing capacity review
FSA responses to findings and
recommendations
#   Area          Recommendation                                FSA response                             EY/OIG response
6   Contingency   FSA should implement a process to             FSA noted that each TIVAS was            While each TIVAS is responsible for
    planning      monitor the contingency planning of           required to meet back-up and             ensuring adequate contingency
                  each servicer. Monitoring should              disaster recovery requirements, and      planning pursuant to the terms of the
                  include capabilities of back-up servers       that each TIVAS’ contingency plan        contract, FSA should proactively work
                  and facilities in the event the servicer is   was reviewed and approved by FSA.        with each TIVAS to ensure that
                  required to utilize its non-production        The contracts were designed to           adequate plans and capabilities are in
                  environment.                                  eliminate the need for excessive         place or provided for in order to avoid
                                                                monitoring, instead relying on           any disruptions in the proper servicing
                                                                competition across vendors to            of borrowers’ loans. FSA should not
                                                                ensure performance. If a TIVAS is        solely or predominately rely upon
                                                                unable to perform as required, FSA       competition among the servicers as a
                                                                can transfer the borrower volume to      means of ensuring the adequate
                                                                another servicer.                        performance of each TIVAS. For
                                                                                                         example, improper contingency
                                                                                                         planning could result in the loss of
                                                                                                         data concerning a borrower’s
                                                                                                         payment history; the loss of such data
                                                                                                         could make the loan unenforceable.

7   Contingency   FSA should evaluate the processes in          FSA believes that the TIVAS              While each TIVAS is responsible for
    planning      place at each TIVAS to support the on-        maintain both the incentive and          ensuring adequate servicing capacity
                  boarding of excess borrower volumes in        capability to ensure that increases in   pursuant to the terms of the contract,
                  an organized and sustainable manner.          borrower volume can be serviced in       FSA should proactively work with
                  FSA’s process evaluation should               accordance with the contract terms.      each TIVAS to ensure that adequate
                  include details on the coordination of                                                 plans are in place to address
                  specific stakeholders to be notified                                                   unexpected volume increases so as
                  within FSA and TIVAS in the event of a                                                 to avoid any disruptions in the proper
                  TIVAS receiving borrower volume in                                                     servicing of borrowers’ loans.
                  excess of plan and/or capacity.



Page 42                                             TIVAS servicing capacity review
FSA responses to findings and
recommendations
#   Area          Recommendation                          FSA response                             EY/OIG response
8   Allocation    FSA should define minimum and           FSA disagreed with this                  As noted in the report, an individual
    methodology   maximum servicing standards to          recommendation. The performance-         TIVAS could rate poorly in all metrics
                  support the FSA’s goal of improving     based contracts established a            relative to the other TIVAS and still
                  services to provide better customer     performance structure to motivate each   receive a borrower allocation of 10%
                  service levels. Servicers should be     TIVAS to improve customer service,       under the contract structure. The
                  notified of these standards; a          rather than meet a specific minimum      contracts do not contain specific
                  monitoring and probation program        performance level. FSA is satisfied      provisions to mitigate and address a
                  should be considered to resolve         with the TIVAS’ overall performance      contractor’s poor customer service
                  issues before servicers are below the   and its reduced monitoring               and default prevention.
                  defined minimum standards.              responsibilities and costs.




Page 43                                          TIVAS servicing capacity review
FSA responses to findings and
recommendations
#   Area          Recommendation                           FSA response                                EY/OIG response
9   Allocation    FSA should weight evaluation metrics     FSA disagreed with the                      Under the current weighting of
    methodology   for future allocations to give greater   recommendation to weight evaluation         evaluation metrics, 60% of total points
                  emphasis to metrics that reflect the     metrics. FSA believes that the              are based on customer surveys (that
                  long-term goals of the Department        contracts reflect FSA’s Strategic Goals     is, borrower, school, and FSA
                  and FSA. Survey sample sizes             to (1) provide superior service and         personnel surveys are weighted at
                  should be defined to achieve             information to students and borrowers,      20% each) and 40% of total points are
                  representative samples from each         (2) provide efficient processes and         based on default measurements (that
                  distinct population group, which would   effective capabilities that are among       is, dollars in default and borrowers in
                  take into account the varying needs of   the best in the private and public          default are weighted at 20% each).
                  each customer population.                sectors, and (3) ensure program             As such, the allocation methodology
                                                           integrity and safeguard taxpayers’          under weights the input of the ultimate
                                                           interest. In regards to the                 customer, that is the borrower, and
                                                           recommendation concerning sample            the negative financial impact on the
                                                           sizes, the sample sizes used provide a      Department associated with defaulted
                                                           statistically valid representation of the   loans.
                                                           overall population of customers. FSA
                                                           did not explain why all the evaluation
                                                           metrics are of equal importance. FSA
                                                           will consider changes in the sampling
                                                           methodology to obtain the most reliable
                                                           information available given constraints
                                                           related to costs, resources and
                                                           customer response rates.




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Appendix B
FSA original responses to findings and recommendations