United States oelier&lAcc0un~0iaee w-n, l&c. 20646 Health, Edncation, and Human~~Division EM76629 May 20, 1997 The Honorable Thomas W. Ewing House of Representatives . . Subject: Student Loans: Potentml Effects of Raising Statutorv Au&t Threshold Dear Mr. Ewing: The Higher Education Amendments of 1992required all lenders who participated in the Federal Family Education Loan Program (FFELP) to obtain an annuai audit examining compliance with program rules and regulations. Typically, these lenders are banks and other institutions that make FFELP student loans that are ultimately guaranteed by the government against default or nonpayment. In the approptiations acts for the Department of Education for fiscal years 1996 and 1997,the Congress exempted from the audit requirement those lenders with loan portfolios of $5 million or less (that is, the lender audit threshold was $5 mUlion). The Department has directed that lenders with loan portfolios of between $5 million and $10 million to submit their audit reports to the Department only if they contain findings that require corrective action. For those lenders whose portfolios exceed $10 million, the Department requires submission of all audit reports. You asked us for information about the potential effects of raising the audit threshold to lenders with loan portfolios that exceed $10 million. As agreed with your office, we focused on identifying - the number of lenders with loan portfolios between $5 million and $10 milhon, and the total loan volume in these lenders’ portfolios; and - the number, types, monetary impact, and disposition of audit findings reported to the Department of Education by lenders with loan portfolios in that range. We obtained . . data for our analyses from the Department of Education, which adnnmsters FFELP. Student loan volwnes were as of the end of fiscal year 1995,the most recent year for which data for such an analysis were available. GAOIHEHS-97-111lZ FFELP Lender Audit Threshold /Tf6f;r B-276629 We conducted our work between January and March 1997in accordance with generally accepted government auditing standards. RESULTSIN BRIEF If the loan volume audit exemption was extended to lenders with loan portfolios between $5 nrillion and $10 million, relatively few of the more than 5,700 lenders participating in FFELP would be affected. In fiscal year 1995, 193 FFELB lenders (about 3 percent) had loan portfolios between $5 million and $10 million. These lenders held less than 2 percent of the total outstanding FF’ELB loan volume. If the audit threshold had been $10 million for fiscal year 1995, the audit requirement would have applied to a total of about 9 percent of FF’ELBlenders-lenders that collectively held about 96 percent of outstanding FFELP loan volume in fiscal year 1995. Sixteen of the 193lenders with loan portfolios between $5 million and $10 million submitted audit reports that contained findings requiring corrective action. Lenders with portfolios of this size do not have to submit audit reports to the Department unless they contain these kinds of findings. The 16 audit reports contained 31 findings covering such areas as missing documents in loan files, incorrect billing calculations, and improper classifications of loans. Three reports had findings with a monetary impact-collectively, the Department owed lenders $8,751. As of January 1997,all but 1 of the 16 lenders had taken corrective action. BACKGROUND FFELP is the largest federal student loan program. Under the program, participating lenders make loans to eligible borrowers. The Department, through state-designatedagencies,guaranteesthe loans against default. In fiscal year 1995,lenders made FFELP loans that totaled nearly $22 billion. For some time, the Congress and the Department have considered how audit requirements should apply to FFELI? lenders. The 1992amendmentsrequired every FFELP lender to obtain an annual audit examining compliance with program rules and regulations. However, lenders with smaller student loan portfolios complained that the cost of conducting the audit could exceed their profit on the portfolios. Fiscal years’ 1996and 1997appropriations acts directed the Department not to use federal funds to enforce the audit requirement for lenders with annual loan portfolios of $5 million or less. GAOflBEHS-97-111R FFRLP Lender Audit Threshold B-276629 Two bills introduced in the 104th Congressproposed a more permanent legislative revision than the temporary change contained in the two appropriations acts. Both bills would have amendedthe Bigher Education Act to eliminate audits of lenders with loan portfolios of $10 million or less. The topic remains under congressional consideration as the 105th Congress begins deliberating the reauthorization of the Bigher Education Act. PROPOSEDCHANGE IN THRESHOLD WOULD AFFECT A SMALL PORTION OF FFELP LENDERS AND LOAN VOLUME Lenders with outstanding loan portfolios between $5 million and $10 million constitute a relatively small potion of FFELP lenders. Department of Education records show that as of September30,1995, 5,765lenders were participating in FFELP.l Of these, 193lenders (3.3 percent) had portfolios between $5 million and $10 million. In comparison, about 38 percent of lenders had loan portfolios of less than $5 million (accounting for 2.9 percent of the total amount of outstanding loans), and current appropriations law excludes them from the audit requirement. Lenders with FFELP portfolios between $5 million and $10 million also held a small portion of the total amount of outstanding loans. In aggregate,these lenders’ portfolios had about $1.4 billion in FFELP loans, about 1.5 percent of the $93 billion in FFELP loans held by all lenders at the end of fiscal year 1995. By contrast, the relatively few lenders with loan portfolios of $10 million or more held nearly 96 percent of outstanding FFELP loans. Thus, as figure 1 shows, (1) the current audit requirement extends to relatively few lenders, but covers the vast majority of loan volume, and (2) audit coverage would not be appreciably changed if the audit threshold was raised to $10 million. ‘This figure is based on the number of lender identification numbers contained in “Lender’s Interest and Special Allowance Requestand Reports” (ED form 799) on file with the Department as of September30, 1995. The actual number of lenders may be somewhat lower than 5,765,according to Department officials, because some lenders, especially those with large volumes of loans, may have more than one identification number. 3 GAOIEEHS-97-1llR F’FELP Lender Audit Threshold B-276629 Figure 1: Distribution of Lenders and Their Loan Volume bv Size of Lender Portfolios in Fiscal Year 1995 Number of Lenders Loan Volume (in Billions) 5500 1 Proposed Exemption -. - 100 5000 - 90 4500 - - 80 4000 - - 70 3500 - - 60 3000 - - 50 2500 - - 40 2000 - - 30 1500 - - 20 1000 - 500 - - 10 0 i 0 Less Than $5 Million $5 Million to $10 Million $10 Million or More Size of Outstanding Loan Portfolio m Total Loan Volume LENDERS WlTH PORTFOLIOSUNDER $10 MILLION SUBMITTED FEW AUDIT REPORTSCONTAINING FINDINGS The Department requires lenders that have loan portfolios above $5 million to have audits conducted. And the Department instructed lenders with portfolios between $5 million and $10 million to submit their audit reports to the Department by September30, 1995,only if their reports issued for the previous 2 years contained findings that require corrective action. The Department received audit reports from 16 lenders whose loan portfolios were within the $5 million and $10 ntillion threshold, and that had audits requiring corrective 4 GAOEIEHS-97-1llR FFCELP Lender Audit Threshold B-276629 action in calendar years 1993or 1994.2 The aggregateloan portfolio for these lenders was about $95 million and $117mihion, respectively, in calendar years 1993and 1994. The 16 audit reports contained 31 findings that required corrective action. The number of findings in each report ranged from one (seven lenders) to four (two lenders). The Department classified the 31 findings into 15 categories, as shown in table 1. The most common finding (noted in four reports) was the improper recording of prior-period adjustments of special allowance payments.3 For this finding, the audit reports questioned whether lenders properly recorded billing codes and used the correct loan principal and billing days. Table 1: Audit Reuort Firings, bv Cateaorv, Calendar Years 1993and 1994 Flndixlg Frequency Prior period special allowance adjustments were improperly 4 recorded. Form 799 (Lender’s Interest and Special Allowance Request and Report) information did not agree with information in lender’s summary accounting records. Form 799 contained improperly classified loan types or incorrect loan status. II Lender’s loan files missing documents required to support form 799. 3 II Form 799 showed inaccurate average daily balances of loans in lender’s nortfolio. I 3 department guidance provides that reports from the initial round of compliance audits were to be submitted by September 30, 1995, and were to cover the 2 years ending December 31, 1994. %peeial allowance is a payment of interest on a student loan that the government makes to lenders when borrowers’ interest rates do not meet a certain level of return, as provided by the Higher Education Act of 1965,as amended. 5 GAO/HfZHS-97-11I.R FFELP Lender Audit Threshold B-276629 Form 799 showed lender’s improper recording of prior-period 3 kijustment of interest benefits. Form 799 did not agree with loan disbursement, origination 2 Fee,or loan fee records. Form 799 contained inaccurate information on change in loan 2 principal and analysis of loan portfolio. Form 799 loan information did not agree with billing 2 information provided by third-party loan servicer. Lender improperly calculated loan origination fees. 1 Lender did not stop billing the Department for interest 1 payments on the same date the loan entered repayment. Lender misclassified loan or used improper tune period for 1 special allowance billing on form 799. Lender improperly calculated loan balancesusing a monthly 1 rather than a daily average. Lender failed to exclude from form 799 special allowance 1 billings for loans that had outstanding loan servicing violations. Lender did not adequately segregateduties (for internal control 1 purposes) in its student lending operation. Total findings 31 d The Department’s review of the 16 audit reports identified three lenders whose findings had questioned the dollar amount paid to lenders. The audits showed that two of these lenders owed the Department $5,168and $4,809,respectively. However, the audit of the third lender revealed that the lender understated the interest payment it was due by $18,728. As a result, the net impact of the findings noted in the three reports was that the Department owed lenders an additional $8,751. As of January 1997,the Deparunent had verified that 15 of the 16 lenders had taken corrective action as specified in the audit reports. A Department review showed that the remaining lender had not completed its corrective action plan, which called for five actions to improve the data the lender reported to the Department. The Department’s review also uncovered several other deficiencies that were not noted in the audit report, such as the lender failing to pay about $9,500in required lender fees to the Department. Department 6 GAO/HJZHS-97-1llR FF’ELP Lender Audit Threshold B-276629 off&& have requested the Department’s Office of Inspector General to further review this case and the work of the lender’s independent auditor. To help ensure that lenders with loan portfolios between $6 million and $10 million comply with Department requirements, in February 1997the Department requested copies of audit reports from 25 randomly selected lenders from this group. As of April 30, 1997,the Department had received all but two of the requested reports, and its evaluation of these reports indicated that lenders had complied with the lender audit requirement. AGENCY COMMENTS On April 18, 1997,the Department of Education provided comments on a draft of this correspondence. The Department agreed with our correspondence and provided a number of technical comments, which we incorporated where appropriate. We are sending copies of this correspondenceto appropriate congressional committees, the Secretary of Education, and other interested parties. If you have any questions about this correspondence,please contact me on (202) 6127014. Major contributors included Joseph J. Eglin, Jr., Assistant Director; Robert B. Miller; and Charles M. Novak. Sincerely yours, Carlotta C. Joyner Director, Education and Employment Issues (104881) 7 GAOBIEHS-97.1llB F’FELP Lender Audit Threshold Ordering Information The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and Mastercard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 or visit: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by caI.Iing (202) 5126000 or by using fax number (301) 2584066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. 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Student Loans: Potential Effects of Raising Statutory Audit Threshold
Published by the Government Accountability Office on 1997-05-20.
Below is a raw (and likely hideous) rendition of the original report. (PDF)