Federal Family Education Loan Program
Increased Department of Education Oversight of Lender and School Activities Needed to Help Ensure Program Compliance Gao ID: GAO-07-750 July 31, 2007Concerns have been raised about the Department of Education's (Education) role in overseeing the lenders and schools that participate in the largest of the federal government's student loan programs, the Federal Family Education Loan Program (FFELP). GAO was asked to analyze Education's use of its oversight, guidance, and enforcement authorities under FFELP. To do this, GAO reviewed departmental documents and federal laws, regulations, and cases and interviewed officials from Education and the student loan industry.
While Education has some processes to oversee general compliance in FFELP, it has no oversight tools in place designed to proactively detect potential instances of lenders providing improper inducements--such as gifts to schools in exchange for preferred status on a school's suggested lender list--or schools limiting borrower choice of lender, two activities that are prohibited by law. Instead, the department primarily depends on external complaints to identify potential instances of non-compliance with these prohibitions. Historically, Education did not process these complaints in a systematic manner because complaint processing was not overseen by any one group. However, Education does have plans to conduct lender and school reviews to gather information on inducements, and it is considering updating its audit guides to begin detecting potential instances of improper inducements. Education has not implemented formal comprehensive guidance on inducements since 1989, although it has repeated some of the information contained in that guidance in subsequent financial aid handbooks and other department publications. Instead, the department has responded informally to individual queries from the student loan community regarding allowable inducement practices. Education's Office of Inspector General recommended in 2003--and members of the student loan community have previously requested--that Education issue more guidance on these issues. In June 2007, Education issued proposed regulations that address improper inducements and limitations on borrower choice, and these regulations could become effective in July 2008 at the earliest. Education has only attempted to use its sanctioning authority twice in the past 20 years to enforce prohibitions on improper inducements or limitations on borrower choice. In particular, Education disqualified one lender from FFELP for using misleading advertising and providing improper inducements to borrowers, and it initiated proceedings to limit the participation of another lender in light of what it had determined to be an improper inducement. When Education responds to non-compliance, the department instead has commonly sent letters to offending parties noting the prohibited activity and requesting they cease the activity. In addition, Education has not established a protocol for how to best respond to non-compliance--whether to write a letter requesting the activity to cease or to sanction a lender or school--nor has it routinely assessed the effectiveness of these actions in stopping prohibited activities.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-07-750, Federal Family Education Loan Program: Increased Department of Education Oversight of Lender and School Activities Needed to Help Ensure Program Compliance
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
July 2007:
Federal Family Education Loan Program:
Increased Department of Education Oversight of Lender and School
Activities Needed to Help Ensure Program Compliance:
GAO-07-750:
GAO Highlights:
Highlights of GAO–07–750, a report to Congressional Requesters
Why GAO Did This Study:
Concerns have been raised about the Department of Education‘s
(Education) role in overseeing the lenders and schools that participate
in the largest of the federal government‘s student loan programs, the
Federal Family Education Loan Program (FFELP). GAO was asked to analyze
Education‘s use of its oversight, guidance, and enforcement authorities
under FFELP. To do this, GAO reviewed departmental documents and
federal laws, regulations, and cases and interviewed officials from
Education and the student loan industry.
What GAO Found:
While Education has some processes to oversee general compliance in
FFELP, it has no oversight tools in place designed to proactively
detect potential instances of lenders providing improper
inducements”such as gifts to schools in exchange for preferred status
on a school‘s suggested lender list”or schools limiting borrower choice
of lender, two activities that are prohibited by law. Instead, the
department primarily depends on external complaints to identify
potential instances of non-compliance with these prohibitions.
Historically, Education did not process these complaints in a
systematic manner because complaint processing was not overseen by any
one group. However, Education does have plans to conduct lender and
school reviews to gather information on inducements, and it is
considering updating its audit guides to begin detecting potential
instances of improper inducements.
Education has not implemented formal comprehensive guidance on
inducements since 1989, although it has repeated some of the
information contained in that guidance in subsequent financial aid
handbooks and other department publications. Instead, the department
has responded informally to individual queries from the student loan
community regarding allowable inducement practices. Education‘s Office
of Inspector General recommended in 2003”and members of the student
loan community have previously requested”that Education issue more
guidance on these issues. In June 2007, Education issued proposed
regulations that address improper inducements and limitations on
borrower choice, and these regulations could become effective in July
2008 at the earliest.
Education has only attempted to use its sanctioning authority twice in
the past 20 years to enforce prohibitions on improper inducements or
limitations on borrower choice. In particular, Education disqualified
one lender from FFELP for using misleading advertising and providing
improper inducements to borrowers, and it initiated proceedings to
limit the participation of another lender in light of what it had
determined to be an improper inducement. When Education responds to non-
compliance, the department instead has commonly sent letters to
offending parties noting the prohibited activity and requesting they
cease the activity. In addition, Education has not established a
protocol for how to best respond to non-compliance”whether to write a
letter requesting the activity to cease or to sanction a lender or
school”nor has it routinely assessed the effectiveness of these actions
in stopping prohibited activities.
What GAO Recommends:
GAO recommends that the Secretary of Education (1) update the
department‘s oversight mechanisms to proactively identify possible
instances of improper inducements and limitations on borrower choice,
(2) be more proactive in investigating situations involving possible
instances of these prohibited activities, (3) issue new guidance
regarding inducements to guide the student loan industry until the
relevant proposed regulations are finalized and become effective, and
(4) develop a protocol to determine the appropriate level of response
for cases of non-compliance and assess the effectiveness of these
actions to inform and improve this protocol. Education agreed with the
first two recommendations but did not explicitly agree or disagree with
the other two.
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO–07–750].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact George A. Scott at (202)
512–7215 or ScottG@gao.gov.
[End of section]
Contents:
Letter:
Appendix I: Briefing Slides:
Appendix II: Scope and Methodology:
Appendix III: Comments from the Department of Education:
Appendix IV: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Abbreviations:
DCL: Dear Colleague Letter:
Education: Department of Education:
FFELP: Federal Family Education Loan Program:
FSA: Federal Student Aid:
United States Government Accountability Office:
Washington, DC 20548:
July 31, 2007:
The Honorable Edward M. Kennedy:
Chairman:
Committee on Health, Education, Labor, and Pensions:
United States Senate:
The Honorable George Miller:
Chairman:
Committee on Education and Labor:
House of Representatives:
The Honorable Richard J. Durbin:
United States Senate:
The Honorable Dale Kildee:
House of Representatives:
Concerns have been raised about the Department of Education's
(Education) role in overseeing lenders and schools that participate in
the largest of the federal government's student loan programs, the
Federal Family Education Loan Program (FFELP), through which over $46
billion in new student loans was disbursed in fiscal year 2006.
Education is responsible for overseeing whether FFELP participants
comply with federal laws and regulations that prohibit lenders from
using inducements to increase loan volume[Footnote 1] and that prohibit
schools from limiting a borrower's choice of lender.[Footnote 2]
To respond to your interest in this subject, we answered the following
questions:
To what extent has Education conducted oversight to help ensure
compliance with prohibitions on improper inducements and limitations on
borrower choice within FFELP?
To what extent has Education provided guidance to address concerns
about improper inducements and limitations on borrower choice within
FFELP?
To what extent has Education used its enforcement authority to help
ensure compliance with prohibitions on improper inducements and
limitations on borrower choice within FFELP?
On June 29, 2007, we briefed interested congressional staff on the
results of our study, and this report formally conveys the information
provided during this briefing. In general, we found that Education has
no tools for proactively detecting potential instances of prohibited
inducements and the limiting of borrower choice, although the
department is considering revising some of its processes used to
oversee general compliance with FFELP to begin detecting potential
instances of these activities. Also, Education has been limited in its
guidance and enforcement activity but has recently issued proposed
regulations on inducements and borrower choice. More specifically, we
found that:
While Education has some processes in place to oversee general
compliance with FFELP requirements, it has no oversight tools designed
to proactively identify potential instances of prohibited inducements
or limitations on borrower choice of lender. Instead, Education
primarily depends on complaints to identify potential non-compliance.
However, Education has begun to conduct lender and school reviews to
gather information on inducements and is considering updating audit
guides to begin detecting these prohibited lending activities.
The department has not updated comprehensive guidance on inducements
since 1989--despite requests for more guidance from the student loan
community--but it has responded to individual queries regarding
allowable practices. In June 2007, Education issued proposed
regulations that could become effective in July 2008 at the earliest.
As of June 2007, Education had either sanctioned or attempted to
sanction a total of two lenders in the past 20 years. In particular,
Education disqualified one lender from FFELP in 1988 and attempted to
limit the participation of a second lender starting in 1995, both for
offering prohibited inducements. More frequently, Education has written
letters to offending parties when it responds to instances of non-
compliance instead of imposing sanctions, but it has not routinely
assessed the effectiveness of these letters.
In order to protect students and parents from paying unnecessarily high
interest rates and fees because of improper lending activities among
FFELP participants, we are recommending that the Secretary of Education
update the department's oversight tools, more proactively investigate
possible cases of program non-compliance, issue guidance on
inducements, and develop a protocol to determine the appropriate level
of response for cases of non-compliance and assess the effectiveness of
its responses. In particular, we recommend that Education should:
Update its oversight tools--such as financial audit and program review
guidance--to identify possible instances of improper inducements and
limitations on borrower choice.
Be more proactive in examining situations involving possible improper
inducements and limitations on borrower choice, such as exploring how
schools generate preferred lender lists to determine if improper
inducements have occurred.
Issue new guidance--for example, through a Dear Colleague Letter (DCL)-
-regarding inducements to guide the industry until the relevant
proposed regulations become effective in 2008 at the earliest.
Establish a protocol for determining the level of response appropriate
for different cases of non-compliance involving improper inducements or
limitations on borrower choice--from writing letters to imposing fines
to terminating participation--and assess the effectiveness of these
actions to inform and improve this protocol.
We used the following methodology to develop our findings. To
understand the framework of Education's oversight, guidance, and
enforcement authorities, we reviewed relevant laws, regulations, and
cases pertaining to prohibited inducements and limitations on borrower
choice. To assess the extent of Education's oversight activities, we
interviewed Education officials and reviewed departmental documents.
Specifically, we reviewed and catalogued complaints received by
Education and the department's responses to those complaints. We also
reviewed the department's audit guides and its evaluations of program
performance. To determine the extent to which Education provided
guidance to the student loan community, we interviewed Education
officials and student loan industry representatives. We also reviewed
the department's various forms of guidance, including DCLs and
individual letters to FFELP participants in response to their requests
for guidance. To assess the extent of Education's enforcement
activities, we interviewed Education officials, reviewed departmental
documents, and reviewed the case between Education and a lender
pertaining to prohibited inducements. For additional information on our
scope and methodology, please see appendix II. We conducted our work in
accordance with generally accepted government auditing standards from
February 2007 through June 2007.
We provided a draft copy of this report to the Department of Education
for review and comment and also for technical review. In written
comments on our draft report, Education concurred with our
recommendations that the department update its oversight tools and that
the department more proactively investigate possible cases of program
non-compliance. Education also provided updates on its activities in
these areas that we incorporated into this report, where appropriate.
With regard to our third recommendation that Education issue new
guidance regarding inducements to guide the industry until the relevant
proposed regulations are finalized and become effective, Education did
not explicitly agree or disagree with the recommendation. Instead,
Education noted that, as circumstances dictate, it may determine that
specific guidance regarding inducements is appropriate. Education also
stated that it will encourage schools and lenders to voluntarily
implement the new regulations before they go into effect. Given that
the proposed regulations will not become effective until July 1, 2008,
at the earliest, we believe that Education should issue interim
guidance on inducements to help ensure that schools and lenders comply
with program requirements.
With regard to our fourth recommendation that Education develop a
protocol to determine the appropriate level of response for incidents
of non-compliance involving improper inducements or limitations of
borrower choice and that Education routinely assess the effectiveness
of its responses, Education again did not explicitly agree or disagree
with the recommendation. Instead, Education discussed its review
procedures to assess compliance with general FFELP regulations and
noted its recent and ongoing updates to those procedures, points that
were included in the draft copy of our report. Education added that
these procedures include an explanation of which responses are
appropriate for varying degrees of general non-compliance and stated
that the procedures require FFELP participants to provide evidence of
corrective action, and it noted that it will continue to review and
enhance its existing protocols in these areas. Because routine and
consistent follow-up in incidents of non-compliance involving improper
inducements or limitations on borrower choice has not occurred, even
with the updated review procedures, we continue to believe that
Education should develop a response protocol specific to improper
inducements and limitations on borrower choice and to routinely assess
the effectiveness of its responses.
Education's written comments appear in appendix III. We also
incorporated Education's technical comments and other updates that the
department provided on its activities, where appropriate.
We are sending copies of this report to relevant congressional
committees, the Secretary of Education, and other interested parties.
We will also make copies available to others upon request. In addition,
this report will be available at no charge on GAO's Web site at
[hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-7215 or ScottG@gao.gov. Contact points for our
Congressional Relations and Public Affairs offices may be found on the
last page of this report. Other major contributors to this report are
listed in appendix IV.
Signed by:
George A. Scott:
Director, Education, Workforce,:
and Income Security Issues:
Appendix I: Briefing Slides
Briefing to Congressional Staff:
June 29, 2007:
Federal Family Education Loan Program:
Increased Department of Education Oversight of Lender and School
Activities Needed to Help Ensure Program Compliance
Overview:
Introduction:
Research Questions:
Scope and Methodology:
Summary of Key Findings:
Background:
Findings:
Conclusions:
Recommendations:
Introduction:
Investigations have revealed that some student loan lenders were paying
schools to promote their loans, and some schools were limiting
students‘ choice of lenders.
Recent state, congressional, and other investigations have highlighted
several improper lending practices with regard to student loans:
* Lenders paying inducements or gifts to schools and financial aid
officials in exchange for being placed on schools‘ ’preferred lender“
lists, which suggest particular financial institutions from which to
borrow.
* Schools otherwise limiting borrower choice of lender, such as by
refusing to process loan applications.
Inducements and limited borrower choice can hinder a borrower‘s ability
to benefit from the competition among lenders that can result in such
outcomes as lower interest rates and fee reimbursements.
Introduction:
Concern has been raised about the Department of Education‘s oversight,
guidance, and enforcement of the largest federal student loan program.
The primary source of student loans for postsecondary education is the
Federal Family Education Loan Program (FFELP).
* In FY2006, $46.2 billion in new student loans were disbursed for
postsecondary education under FFELP.
Under FFELP, lending institutions”such as banks and state or nonprofit
agencies”provide loans to students, which are then guaranteed and, in
some cases, subsidized by the federal government.
Concern has been raised about the degree to which the Department of
Education (Education) investigates questionable lending practices and
enforces current federal prohibitions for federal student loans in
FFELP.
* In an effort to address concerns about the operation of the program,
both the House and Senate are considering legislation that would
address rules for lender and school participation in the program, as
well as other program requirements.*
* Student Loan Sunshine Act, H.R. 890, and Higher Education Amendments
of 2007, S. 1642. The House _ passed H.R. 890 on May 9, 2007, and the
Senate passed S. 1642 on July 24, 2007.
Introduction:
Existing federal laws prohibit lenders from providing inducements to
increase loan volume and schools from limiting borrower choice within
FFELP.
Education is required to monitor FFELP participants to assess program
compliance with federal laws that prohibit lenders from using
inducements to increase loan volume and schools from limiting borrower
choice of lender.
* The Higher Education Act of 1965, as amended (HEA), prohibits lenders
from offering ’points, premiums, payments, or other inducements“ to
individuals or institutions ’in order to secure applicants“ for FFELP
loans.* For example, Education has determined an inducement to be
prohibited in a case where a lender provided a gift to a potential
borrower contingent on the successful processing of that person‘s loan.
* Schools are prohibited from engaging ’in any pattern or practice that
results in a denial of the borrower‘s access to FFEL loans because of
the borrower‘s—selection of a particular lender—.“**
* ~,. 20 U.S.C. §1085(d)(5)(A). This prohibition was added to the HEA
in 1986.
** 34 C.F.R. §682.603(e)(3).
Research Questions:
In response to a congressional request, GAO developed three research
questions on Education‘s use of its authority under FFELP.
1. To what extent has Education conducted oversight to help ensure
compliance with prohibitions on improper inducements and limitations on
borrower choice within FFELP?
2. To what extent has Education provided guidance to address concerns
about improper inducements and limitations on borrower choice within
FFELP?
3. To what extent has Education used its enforcement authority to help
ensure compliance with prohibitions on improper inducements and
limitations on borrower choice within FFELP?
Scope and Methodology:
To answer these questions, we interviewed Education and industry group
staff and reviewed applicable federal laws and department documents.*
To assess Education‘s oversight, guidance, and enforcement activities,
we interviewed Education officials and student loan industry
representatives, and we reviewed applicable federal laws and department
documents, including:
* Complaints and requests for guidance submitted by FFELP participants
and Education‘s responses to them.
* Education‘s audit guides and guidance.
We conducted our work in accordance with generally accepted government
auditing standards from February 2007 to June 2007.
* A detailed scope and methodology section is contained in appendix II.
Summary of Key Findings:
While Education has been limited in its oversight, guidance, and
enforcement activities related to inducements and borrower choice, it
is working to improve its oversight and offer guidance.
While Education has some processes in place to oversee general
compliance within FFELP, the department has not developed any oversight
tools designed to proactively identify potential instances of improper
inducements or limitations on borrower choice.
* However, Education recently began reviewing schools and lenders
identified by external investigators for potential use of inducements
to assess the range of inducements offered.
* Education is also considering updating its audit guides to better
detect these prohibited lending activities.
The department has not established comprehensive guidance on
inducements since 1989, despite requests for more guidance.
* In June 2007, the department issued proposed regulations
regarding”among other things”prohibited inducements and preferred
lender lists.
The department has either sanctioned or attempted to sanction only two
FFELP participants in the past 20 years for offering prohibited
inducements.
Background – FFELP:
Under FFELP, after a student selects a lender, the lender provides
funds to the school, and the school disburses the loan.
[See PDF for image.]
Source: GAO analysis of FFELP structure and operation; icons provided
by Art Explosion.
Note: Guaranty agencies provide insurance to lenders for at least 97%
of the unpaid principal of defaulted loans disbursed on or after July
1, 2006. The federal government then reinsures the guaranty agencies.
[End of figure]
Background – Private Educational Loans:
Students may also use private educational loans, which Education is not
responsible for overseeing.
Loan Source: Federal Program*;
Borrower eligibility: Determined by financial need;
Interest Rates: Fixed**: Limited by statute***;
Federal oversight responsibility for student lending activities:
Education;
Loan Source: Private Lenders;
Borrower eligibility: Determined, in part, by credit history;
Interest Rates: Variable: Market-based: Frequently higher than FFELP
interest rates;
Federal oversight responsibility for student lending activities:
Various Banking Regulatory Agencies: Federal Trade Commission;
* Federal student loans can be provided by lending institutions under
FFELP or directly from the federal government through the William D.
Ford Federal Direct Loan Program (FDLP). Schools can individually
decide whether to participate in FFELP or FDLP, or both. The loan terms
provided through the two programs are, by law, very similar.
** Interest rates are fixed for all FFELP loans disbursed on or after
July 1, 2006. FFELP loans disbursed before July 1, 2006, have variable
interest rates.
*** FFELP lenders can offer loans with interest rates and fees equal to
or lower than what is specified by law.
Background - Oversight Authority:
Education is required to monitor FFELP participants to assess program
compliance.
Education must ensure that FFELP lenders and schools undergo required
financial and compliance audits.
* The audits are performed to determine the extent to which lenders and
schools comply with federal statutes and rules and regulations
prescribed by the Secretary.
Education is also required to perform program reviews of schools on a
systematic basis.
* These are used to assess schools‘ compliance with FFELP requirements
and to assess school financial statements.
Background - Guidance Authority:
Education can issue regulations and provide guidance.
Education can issue regulations that prescribe rules with which program
participants must comply.
Education can also publish departmental guidance”for example, through
Dear Colleague Letters (DCL)”that provide further information to
program participants. DCLs can:
* Provide operational guidance to participants in programs operated by
Education.
* Provide advice and insight into how Education will enforce statutory
and regulatory provisions.
* Serve as Education‘s interim interpretation of law when a law has
gone into effect but the associated regulations have not yet been
finalized.
Background - Enforcement Authority:
In cases of program non-compliance, Education can employ sanctions.
Education can impose civil penalties of up to $27,500 for each
prohibited practice by a lender and each instance of non-compliance by
a school.
* To impose such penalties against a lender, Education must
demonstrate, among other things, that the lender knew or should have
known that its actions violated relevant federal laws or regulations
regarding the program.
* However, Education is not required to establish that a school knew or
should have known that its actions violated federal laws or regulations
in order to assess civil penalties against it.
Education can limit, suspend, or terminate the participation of lenders
and schools in FFELP.**
Finding One (Oversight) – Overview Education primarily uses complaints
to identify non-compliance with prohibitions on inducements and
limiting borrower choice.
*For actions a lender has taken before being notified of its improper
activities, Education can fine $27,500 for its cumulative violations
that occurred until the notification of non-compliance. However, if the
lender takes corrective action before Education notifies the lender of
non-compliance, Education cannot impose sanctions on the lender. See 20
U.S.C. § 1082(g) and 20 U.S.C. § 1094(c)(3)(B).
**See 20 U.S.C. § 1082(h).
Background - Enforcement Authority:
Education can also, in certain situations, take immediate emergency
action to limit, suspend, or terminate the participation of lenders in
FFELP.
Education may also take emergency action against a lender when all of
the following are met:
* Reliable information is received regarding violations of applicable
laws or regulations;
* Education determines that immediate action is necessary to prevent
the misuse of federal funds or substantial losses by borrowers; and:
* Education determines that the likelihood of financial loss by
borrowers or the federal government exceeds the importance of following
the procedures otherwise required to limit, suspend, or terminate the
participation of a lender in FFELP.
*20 U.S.C. § 1082(j) and 34 C.F.R. § 682.704.
Finding One (Oversight) - Overview:
primarily uses complaints to identify non-compliance with prohibitions
on inducements and limiting borrower choice.
While Education has processes to oversee general compliance in FFELP,
it has no oversight tools in place designed to proactively detect
potential instances of improper inducements or limitations on borrower
choice.
Education primarily depends on external complaints to identify
potential non-compliance. Until recently, Education did not process
complaints in a systematic manner.
Education is conducting lender and school reviews to gather information
on inducements, and it is considering updating its audit guides to
begin detecting potential instances of improper inducements. 16
Finding One (Oversight) – Processes in Place Education conducts various
oversight activities to monitor the general program compliance of FFELP
participants.
Finding One (Oversight) - Processes in Place:
Education conducts various oversight activities to monitor the general
program compliance of FFELP participants.
Education reviews annual financial and compliance audits of lenders and
schools.
* Lenders and schools hire independent contractors to conduct these
audits.
* Audits include assessing whether lenders charged the correct interest
rate to borrowers and whether lenders maintain accurate and complete
records of loans.
Education is required to perform program reviews of schools on a
systematic basis to assess their compliance with FFELP and other
requirements.
* For example, Education staff analyze school data to identify outliers
or potential weaknesses in a school‘s administration of Education funds.
17
Education‘s oversight tools cannot proactively detect potential
instances of improper inducements or limitations on borrower choice.
Education‘s process for reviewing lender and school financial and
compliance audits and conducting program reviews of schools does not
include measures to detect potential instances of improper inducements
or limitations on borrower choice.
Education searches audit and program review data for anomalies, but can
only verify improper inducements or limitations on borrower choice with
further investigation.
* For example, Education plans to write letters to schools where
evidence suggests that borrower choice may be limited. However, further
examination of these schools is not currently planned.*
In addition, Education‘s Inspector General identified weaknesses in
some of the tools to oversee lenders in September 2006.
* For example, Education did not have processes for reviewing the
quality or effectiveness of program reviews.
* On June 29, 2007, Education sent letters and e-mails to 921 schools
that had at least 80 percent of their FFELP loan volume for the 2006-
2007 academic year disbursed by a single lender. The correspondences
,reminded the schools of a borrower‘s right to choose any eligible
lender and included a copy of the March 2007 DCL on this subject.
Education also plans to send letters to associated lenders to remind
them of applicable rules and regulations.
Finding One (Oversight) – Complaints:
Before October 2006, Education primarily detected inducements and
limitations of borrower choice from external complaints processed
through multiple offices.
[See PDF for image]
Source: GAO analysis of Department of Education structures and
processes.
[End of figure]
Acronyms:
FSA: Federal Student Aid: (processes federal student aid and enforces
rules and regulations):
OIG: Office of Inspector General (conducts independent audits of
Education‘s programs):
OPE: Office of Postsecondary Education (develops federal policy and
legislative proposals)
Complaints to Education have primarily focused on practices used by
lenders and schools.
Lender inducements to potential borrowers.
* For example, $300 gift cards to borrowers for taking out a loan from
a particular lender.
Lender inducements to schools.
* For example, gifts received by a financial aid administrator.
School restrictions of borrower choice of lender.
* For example, a school preventing a student from borrowing from the
lender of their choice by refusing to process the loan.
Education‘s process for documenting complaints has not been systematic
until recently.
The number and nature of all complaints made before October 2006 are
unknown, since complaint processing was not overseen by any one group,
and Education did not record all complaints and document its responses.
Education reviewed 26 complaints between 2001 and 2006.
* Twenty-two were submitted by a lender that originally submitted 600
complaints. Education narrowed the number of complaints to review by
performing data analysis on the schools named.
We found that Education‘s documentation demonstrates:
* Determinations of compliance for 10 parties.
* Determinations of non-compliance for 2 parties – Education issued a
letter to each party asking them to cease prohibited activities.
* No determination on compliance for the remaining 14 parties.
Education officials stated that many complaints do not contain enough
information”such as the names of the accused parties”to initiate a
review.
Education‘s complaint-driven approach does not identify all cases of
improper inducements and limitations on borrower choice.
State and congressional investigations identified improper arrangements
between lenders and schools that Education had not yet investigated.
* For example, a financial aid administrator at one university was
found to have a financial interest in one of the school‘s preferred
lenders. The administrator owned stock in the FFELP lender‘s parent
company and profited more than $100,000 from the sale of the stock.
* For example, a director of student financial aid at another
university was found to have negotiated with a FFELP lender to place
the lender on the school‘s preferred lender list in return for benefits
to the director and his staff, such as events and meals paid for by the
lender.
* For example, one FFELP lender paid more than $70,000 for a cruise for
select financial aid officers attending a financial aid conference.
Education recently formed an inducement workgroup to review complaints.
A Prohibited Inducement Workgroup comprised of multiple Education
offices was formed in October 2006 to review complaints and inquiries
related to improper inducements and to track the nature of concerns
systematically.
The Workgroup meets twice a month, logs new complaints, directs them to
the relevant office, and monitors follow-up activity.
The Workgroup had reviewed 21 cases and issued 2 letters to lenders
reminding them of the prohibitions on improper inducements and
limitation of borrower choice, as of June 18, 2007.* The other cases
either have been closed or are still currently under review.
* These cases do not overlap with the complaints discussed on slide 20.
Finding One (Oversight) – New Processes:
As of June 1, 2007, Education had conducted 2 reviews and had plans to
conduct at least another 68 reviews to gather information on
inducements.
In April 2007, Education selected 44 schools and 26 lenders for
reviews.* They include:
* All schools and lenders named in the media as being under suspicion
by the New York Attorney General‘s Office.
* Schools with a large proportion of their students borrowing from the
same lender.
As of June 1, 2007, site visits for 2 reviews had been performed and
will serve as pilots for future reviews.** Education will later
determine how many of its remaining reviews will involve site visits.
According to Education officials, the reviews contain two stages:
* Staff collect information to learn more about the use of inducements.
* If non-compliance is found, staff may issue sanctions in some of
these cases. However, it is unclear what criteria Education will use to
determine the need for sanctions.
* As of July 23, 2007, Education had selected another 4 schools and
lenders to review.
** s of July 23, 2007, Education had conducted site visits for another
3 reviews, yielding a total of 5 completed site visits.
Education is considering updating its audit guides to begin detecting
potential inducements.
Education staff are considering updating the department‘s current audit
review processes to include measures to detect possible improper
inducements.
* For example, Education staff are considering including reviews of
agreements between schools and lenders in the audit guides. However, no
timeline has been set for revising these audit guides.
Finding Two (Guidance) – Overview:
Despite requests, Education has not implemented comprehensive guidance
on inducements in almost 20 years.
The department has not updated formal comprehensive guidance on
inducements since 1989, but it issued proposed regulations in June 2007
that could be effective in July 2008 at the earliest.
Education has responded informally to individual queries from the
student loan community regarding allowable practices.
The department‘s Inspector General recommended in 2003”and members of
the student loan community we interviewed have previously
requested”that Education issue more guidance.
Finding Two (Guidance) – Formal Guidance:
The most recent comprehensive guidance on inducements was implemented
in 1989, but updated guidance on borrower choice was published in 2007.
Inducements – A 1989 DCL described allowable and improper activities
and included examples of improper lending activities.
* However, the letter is not available on Education‘s Web site.
* A 1995 DCL and Education‘s annual Student Financial Aid Handbooks do
not provide examples of improper activities and restate much of the
same information as the 1989 letter.
Borrower Choice – Education published DCLs in 1990, 1991, and 2007
related to school responsibilities regarding loan processing and a
student‘s choice to borrow from any eligible lender.
* This information was also presented at fall 2006 Federal Student Aid
Conferences.
Education has issued proposed regulations on inducements and issues
related to limitations on borrower choice.
The Secretary of Education issued proposed regulations on prohibited
inducements and preferred lender lists in June 2007, and these
regulations will become effective July 1, 2008, at the earliest.*
* The proposed regulations include a list of examples of prohibited
inducements and activities and a list of all permissible activities.
* They also specify the requirements schools must meet if they choose
to provide preferred lender lists.
* Education officials told us that they plan to issue the final
regulations by November 1, 2007. If the department meets this goal, the
final rule would take effect on July 1, 2008.**
* I. 72 Fed. Reg. 32, 410 (June 12, 2007) (to be codified at pt. 682).
** 20 U.S.C. § 1089(c)(1).
Finding Two (Guidance) – Inquiries:
Since 1990, Education has received at least 58 inquiries from schools,
lenders, industry groups, and others about whether certain activities
are permissible.
Queries asked whether proposed inducements were permitted and included
such things as the advertising and provision of benefits to potential
borrowers and schools. Of 58 inquiries, Education identified improper
activities more than 1/3 of the time.
* The department primarily responded in writing to the inquiring party,
but did not make its response publicly available.
* Education‘s documentation does not demonstrate that a determination
was made for at least 9 inquiries.
* These 58 do not include other requests to Education that were not
submitted in writing or that Education did not document.
Some issues were raised in multiple queries, such as the prohibited
provision of a gift to a potential borrower in return for a completed
loan application.
Two industry group representatives said their members‘ inquiries to
Education sometimes go unanswered.
Finding Two (Guidance) – More Requested:
Education‘s Inspector General recommended”and industry groups have
requested”that Education issue more guidance on inducements.
Education‘s Inspector General interviewed lenders and industry groups
as part of a 2003 investigation and concluded that the department
should be more proactive in issuing guidance.
Despite industry‘s attempt to self-regulate by issuing guidance and
voluntary codes of conduct, student loan industry group officials we
interviewed said that more guidance is needed from Education.
* Members of the student loan industry repeatedly seek advice from
industry groups, their own lawyers, and Education on allowable
activities.
Finding Three (Enforcement) – Overview:
Education has rarely used sanctions to enforce prohibitions on improper
inducements or limitations on borrower choice.
The department has sanctioned one FFELP participant and has attempted
to use its authority to sanction one other FFELP participant in the
past 20 years.
* Besides these two instances, Education has not imposed any sanctions
against any FFELP participant based on improper inducements or limited
borrower choice of lender.
When it responds to instances of non-compliance, the department more
commonly sends a letter to the offending party requesting that the
activity cease.
* Education has not routinely assessed the effectiveness of these
letters.
Finding Three (Enforcement) – Sanction Attempts:
Education has sanctioned one lender and attempted to limit the
participation of another lender as a result of non-compliance.
In 1988, Education disqualified one student loan lender from FFELP.
That lender was found to be using misleading advertising and providing
inducements to borrowers.
In 1995, the department initiated proceedings to limit the
participation of student loan lender Sallie Mae in light of what it had
determined to be an improper inducement involving the Dr. William M.
Scholl College of Medicine.
* On appeal, the U.S. District Court for the District of Columbia held
that there was no violation, in part, because the school rather than
Sallie Mae was the originating lender.*
* Student Loan Marketing Assoc. v. Riley, 112 F. Supp. 2d 38 (D.D.C.
2000).
Finding Three (Enforcement) – Responses:
Education has primarily used letters to respond to cases of non-
compliance.
When Education does respond to instances of non-compliance, the
department has commonly sent letters to offending parties noting the
prohibited activity and requesting they cease the activity, but has not
imposed sanctions. * For example:
* For two lenders that were found offering rebates to loan applicants,
Education sent letters asking them to cease the activity and to return
pending applications to applicants.
* For one school that was denying its students the ability to take
loans from a particular lender, Education sent a letter requesting that
the school cease the activity.
* Education plans to send a letter to lenders offering gift cards or
music players to borrowers who complete loans with them.
Education has not established a protocol for how to best respond to non-
compliance”whether in a letter or with a sanction”nor has it routinely
assessed the effectiveness of these actions in stopping prohibited
activities.
* An official from Education's Office of General Counsel stated that
the department does not consider the of letters to lenders and schools
an enforcement action.
Conclusions:
Although Education has recently taken steps to improve its coordination
across offices, it has continued to be reactive in its examination of
questionable lending practices.
Education‘s recent development of the Prohibited Inducement Workgroup
could result in increased coordination across department offices in
addressing improper inducements and limited borrower choice.
However, to date, Education has been reactive in its oversight and
examination of these prohibited lending practices. This has limited the
ability of the department to identify and verify occurrences of program
non-compliance.
* For example, Education only pursues examination of possible instances
of non-compliance after complaints are received.
* It is unknown when audit guides will be updated to address these
prohibited activities.
Education provided limited guidance updates until recently and does not
have a formalized process for determining the need for sanctions.
Education has taken limited actions to update its guidance on
inducements, despite requests to Education for more guidance.
* This has resulted in the student loan industry being the main
contributor to defining industry best practices.
* Until the new regulations are finalized and go into effect, the
industry will continue to operate under outdated guidance.
Education‘s limited enforcement efforts regarding prohibited
inducements and limitations on borrower choice may have resulted in
some students taking loans with higher interest rates or fewer borrower
benefits.
* The department has not established a process to determine the level
of response appropriate for a given case of non-compliance.
* The department has also not reviewed the effectiveness of its letters
and sanctions to inform future enforcement decisions.
Recommendations:
Education should be more proactive in its oversight activity to help
ensure FFELP program compliance and to protect borrowers.
Education should:
* Update its oversight tools”such as audit and program review
guidance”to identify possible instances of improper inducements and
limitations on borrower choice.
* Be more proactive in examining situations involving possible improper
inducements and limitations on borrower choice, such as exploring how
schools generate preferred lender lists to determine if improper
inducements have occurred.
Education should be more proactive in its guidance and enforcement
activity to help ensure FFELP program compliance and to protect
borrowers.
Education should:
* Issue new guidance”for example, through a DCL”regarding inducements
to guide the industry until the relevant proposed regulations become
effective in 2008 at the earliest.
* Establish a protocol for determining the level of response
appropriate for different cases of non-compliance involving improper
inducements or limitations on borrower choice”from writing letters to
imposing fines to terminating participation”and assess the
effectiveness of these actions to inform and improve this protocol.
[End of section]
Appendix II: Scope and Methodology:
To understand the framework of Education‘s oversight, guidance, and
enforcement authorities, we reviewed relevant laws, regulations, and
cases pertaining to prohibited inducements and limitations on borrower
choice of lender.
To assess the extent of Education‘s oversight activities, we
interviewed Education officials and reviewed departmental documents. In
particular, we interviewed officials from the Office of Postsecondary
Education, Federal Student Aid, Ombudsman Office, and Office of the
Inspector General. With regard to documentation, we reviewed and
catalogued complaints received by Education and documentation of the
department‘s responses to those complaints. However, the complaints we
received from Education may not represent all complaints submitted to
the department because, prior to October 2006, Education did not record
all the complaints received or document its responses. We also reviewed
the department‘s audit guides and its evaluations of program
performance.
To determine the extent to which Education provided guidance to the
student loan community, we interviewed Education officials and student
loan industry representatives, and we reviewed departmental guidance.
Within Education, we interviewed staff from the Office of Postsecondary
Education, Federal Student Aid, Ombudsman Office, and Office of the
Inspector General. Within the student loan industry, we interviewed
representatives from the Consumer Bankers Association, Education
Finance Council, National Council of Higher Education Loan Programs,
and National Association of Student Financial Aid Administrators. We
reviewed the department‘s various forms of guidance”including DCLs and
individual letters to FFELP participants in response to their requests
for guidance. We also documented Education‘s practices for making
determinations concerning the alleged activity and catalogued the
department‘s written responses to these concerns and inquiries.
Education provided us all the requests for guidance made in writing
since 1990 that it had on file. However, the requests we received from
the department may not represent all requests submitted to the
department for clarification since some could have been submitted by
phone or not documented.
To assess the extent of Education‘s enforcement activities, we
interviewed Education officials and reviewed departmental documents and
applicable federal laws. Specifically, within Education, we interviewed
staff from the Office of Postsecondary Education, Federal Student Aid,
Ombudsman Office, and Office of the Inspector General to examine
actions taken to address inducement and borrower choice issues.
Furthermore, we reviewed information used by Education to make
determinations regarding alleged improper lending activities (e.g.,
lender marketing materials containing alleged inducements and lender
inducements resulting in preferred placement on preferred lender
lists). We also examined several Education offices‘ protocols for
performing reviews in the context of program compliance. We conducted
our work in accordance with generally accepted government auditing
standards from February 2007 through June 2007.
[End of section]
Appendix III: Comments from the Department of Education:
Chief Operating Officer:
July 20, 2007:
Honorable David M. Walker:
Comptroller General:
Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Walker:
In accordance with 31 U.S.C. 720, I am writing to respond to
recommendations made in the Government Accountability Office (GAO)
report, "Federal Family Education Loan Program: Increased Department of
Education Oversight of Lender and School Activities Needed to Help
Ensure Program Compliance" (GAO-07-750). This report focused on two
specific areas of lender and school oversight - improper inducements
and the limitations on borrower choice of lender in the Federal Family
Education Loan (FFEL) program.
We appreciate this opportunity to respond to the GAO report. We are
aware of the current concerns regarding lenders providing improper
inducements and schools limiting borrower choice of lender. However,
under existing law, the Department's authority to take action regarding
some of these practices is limited. For example, the law includes a
quid pro quo requirement for lender inducement violations, and current
regulations do not include any specific limitations on the use of the
preferred lender lists by schools. Given these limitations, while the
activity is suspect, it may or may not violate the law.
Background:
In March 2006, the Department initiated a strategy to enhance its
oversight of Title IV participants. To provide more efficient and
effective oversight of Title IV participants, the Department's Federal
Student Aid office consolidated all program compliance functions under
one senior executive who reports directly to the Chief Operating
Officer of Federal Student Aid. In August 2006, the Department began a
negotiated rulemaking process to develop regulations to clarify and
strengthen the regulations governing preferred lender list practices
and improper inducements. After extensive negotiations with the student
aid community, including representatives of lenders, guaranty agencies,
and schools, a Notice of Proposed Rulemaking (NPRM) was published in
the Federal Register on June 12, 2007. That NPRM included proposals
that would significantly strengthen the rules regarding prohibited
inducements and would specifically regulate the use of preferred lender
lists. While final regulations resulting from the June 12, 2007, NPRM
will not become effective until July 1, 2008, the Department has been
conducting, and will continue to conduct, reviews of schools, lenders,
and guaranty agencies to ensure compliance with current requirements.
In October 2006, the Department established a workgroup to review
compliance issues with the prohibited inducement provisions of the
Higher Education Act (HEA). The purpose of the workgroup is to provide
a centralized process for the review of inducement and borrower choice
issues ensuring consistent and appropriate review and follow-up. In
April 2007, the Secretary convened an intra-departmental taskforce to
review the proposals that came out of the negotiated rulemaking process
discussed earlier and to make recommendations for the NPRM. Finally, in
June 2007, Federal Student Aid created a workgroup to review and update
school and lender review procedures regarding compliance with the
borrower choice and improper inducements provisions. We believe that
this multi-faceted strategy should strengthen program integrity,
improve Departmental oversight, and ensure participant compliance.
Response to Recommendations:
The following addresses the recommendations in the report:
Recommendation 1: Update the Department's oversight mechanisms to
proactively identify possible instances of improper inducements and
limitations on borrower choice.
Action: We concur. In fact the Department has taken a number of steps
to improve its processes and procedures for providing effective
oversight of schools and lenders, including in the areas of improper
inducements and limitations on borrower choice.
On a strategic level, as noted earlier, in March 2006, our Federal
Student Aid office consolidated all business areas with functional
responsibility for oversight and monitoring under one senior executive
reporting directly to Federal Student Aid's Chief Operating Officer. In
October 2006, Federal Student Aid established a workgroup to review
compliance with the prohibited inducement provisions of the HEA. In
April 2007, the Secretary's intra- departmental taskforce began to
review and recommend proposed regulations that were ultimately included
in the June 12, 2007, NPRM. Those regulations, when finalized and
effective, will require more disclosures of the arrangements between
schools and lenders and schools and guaranty agencies. Finally, in June
2007, Federal Student Aid created a workgroup to review and update
school and lender compliance procedures around borrower choice and
improper inducements.
On a tactical level, in April 2007, we developed procedures to support
reviews of both lender inducement and limitations on borrower choice
and will incorporate those procedures into our general review process.
We also made recommendations to the Department's Office of the
Inspector General to include in the audit guides procedures for
examining whether improper inducements or limitations on borrower
choice exist. Finally, we notified guaranty agencies to incorporate
improper inducement procedures in their lender reviews.
Recommendation 2: Be more proactive in investigating situations
involving possible instances of these prohibited activities.
Action: We concur and as such are implementing new processes and
procedures. In October 2006, as a result of complaints about
restrictions on borrower choice, Federal Student Aid initiated borrower
choice reviews at targeted schools. For example, we initiated program
reviews at 11 institutions that allegedly were refusing to process loan
applications submitted by students for a specific lender. Those reviews
concluded with the one institution where evidence of such a denial was
obtained being cited for the violation. The presidents of the remaining
ten institutions received a letter reminding them of the regulatory
requirements. Additionally, in April 2007, we initiated focused
inducement and borrower choice reviews at targeted schools and lenders.
These reviews are ongoing.
In June 2007, we identified 921 schools that had at least 80% of their
FFEL loan volume for the 2006-2007 academic year with a single lender.
Although the fact that these schools had at least 80% of their loans
with one lender does not necessarily mean there is a violation, we sent
a letter to these schools reminding them of a borrower's right to use a
lender of his or her choice. This letter was a follow-up to a March 29,
2007, "Dear Colleague" letter on this subject. This was part of our
ongoing efforts to ensure strict compliance and oversight of all our
programs. We reminded these schools that the Department will impose
fines or take other administrative actions for violating any statutory
and regulatory requirements. Recently, we posted another letter to our
Web site reminding all schools of the requirements.
We will contact lenders to ensure their compliance with applicable
rules and regulations.
Recommendation 3: Issue new guidance regarding inducements to guide the
student loan industry until the relevant proposed regulations are
finalized and become effective.
Action: As noted earlier, the NPRM published on June 12, 2007 would
significantly strengthen and clarify the rules related to prohibited
inducements and would, for the first time, regulate the use of
preferred lender lists by schools. As circumstances dictate, we may
determine that specific guidance regarding inducements is appropriate.
As soon as the new regulations are finalized, we will continue our
efforts to ensure that all parties (lenders, guaranty agencies,
schools) are aware of the new requirements and how they are to be
implemented and enforced. Also, when we publish (no later than November
1, 2007) the final rules on prohibited inducements and preferred lender
lists, we will strongly recommend that schools and lenders voluntarily
implement the new rules prior to their official effective date of July
1, 2008, as is provided in section 482(c)(2) of the HEA.
Recommendation 4: Develop a protocol to determine the appropriate level
of response for cases of non-compliance and assess the effectiveness of
these actions to inform and improve this protocol.
Action: The Department is currently updating procedures for lender and
guaranty agency oversight. In September 2006, we updated our school
review procedures. These procedures are comprehensive and ensure
standardization and consistency in school oversight. The procedures
include appropriate actions for various compliance findings, including
possible administrative actions, i.e., fines, limitations, suspensions
and terminations.
As part of our current review procedures, schools, lenders, and
guaranty agencies are required to submit evidence that any non-
compliance was corrected or to establish a corrective action plan,
which we then verify. For example, the school cited for non- compliance
in the October 2006 targeted review submitted a corrective action plan
to the Department. We then verified the corrective action by reviewing
the school's revisions to its Web site clarifying "borrower choice."
The Department will continue to review and enhance our existing
protocols for determining the appropriate level of response for cases
of non-compliance.
In addition to these responses to the report's recommendations, we are
including, as an attachment to this letter, clarifications we propose
to the briefing slides contained in Appendix I of the report.
I appreciate the opportunity to respond to the GAO report. If you or
your staff have any questions regarding our responses, please contact
me or Marge White of my staff at (202) 377-3022.
Sincerely,
Signed by:
Lawrence A. Warder:
[End of Section]
Appendix IV: GAO Contact and Staff Acknowlegments:
GAO Contact: George Scott, Director, at (202) 512-7215 or Scott@gov.gov:
Staff Acknowledgements: Melissa Emrey-Arras, Assistant Director, and
Jeffrey W. Weinstein, Analyst-in-Charge, managed this assignment. Other
staff members who made key contributions to the assignment include
Summer Pachman, Kenrick Isaac, Debra Prescott, Charlie Willson, Ramona
Burton, and Lorin Obler. Sheila McCoy, Doreen S. Feldman, and Richard
Burkard provided legal assistance. Luann Moy assisted with methodology.
Karen Burke provided assistance with graphics and layout.
Related GAO Products:
Federal Family Education Loan Program: More Oversight Is Needed for
Schools That Are Lenders. GAO–05–184. Washington, D.C.: January 2005.
Financial Regulation: Industry Changes Prompt Need to Reconsider U.S.
Regulatory Structure. GAO–05–61. Washington, D.C.: October 2004.
Better Information Sharing among Financial Services Regulators Could
Improve Protections for Consumers. GAO–04–882R. Washington, D.C.: June
2004.
Department of Education: Guaranteed Student Loan Program
Vulnerabilities. GAO–03–268R. Washington, D.C.: November 2002.
Federal Student Aid: Additional Management Improvements Would Clarify
Strategic Direction and Enhance Accountability. GAO–02–255. Washington,
D.C.: April 2002.
Federal Student Loans: Flexible Agreements with Guaranty Agencies
Warrant Careful Evaluation. GAO–02–254. Washington, D.C.: January 2002.
Financial Management: Financial Management Challenges Remain at the
Department of Education. T–AIMD–00–323. Washington, D.C.: September
2000.
Benefit and Loan Programs: Improved Data Sharing Could Enhance Program
Integrity. HEHS–00–119. Washington, D.C.: September 2000. Financial
Management: Education‘s Financial Management Problems Persist.
T–AIMD–00–180. Washington, D.C.: May 2000.
Financial Management: Education Faces Challenges in Achieving Financial
Management Reform. T–AIMD–00–106. Washington, D.C.: March 2000.
Department of Education: Information Needs Are at the Core of
Management Challenges Facing the Department. T–HEHS–98–124. Washington,
D.C.: March 1998.
Department of Education: Multiple, Nonintegrated Systems Hamper
Management of Student Financial Aid Programs. T–HEHS/AIMD–97–132.
Washington, D.C.: May 1997.
Department of Education: Status of Actions to Improve the Management of
Student Financial Aid. HEHS–96–143. Washington, D.C.: July 1996.
Financial Regulation: Modernization of the Financial Services
Regulatory System. T–GGD–95–121. Washington, D.C.: March 1995.
Financial Management: Education‘s Student Loan Program Controls over
Lenders Need Improvement. AIMD–93–33. Washington, D.C.: September 1993.
Financial Audit: Guaranteed Student Loan Program‘s Internal Controls
and Structure Need Improvement. AFMD–93–20. Washington, D.C.: March
1993.
Footnotes:
[1] 20 U.S.C. § 1085(d)(5)(A).
[2] 34 C.F.R. § 682.603(e)(3).
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