A Failure of Leadership

By now it’s hardly news that the U.S Department of Education has failed, over the last eight years, to provide adequate oversight over the lenders and guaranty agencies that participate in the Federal Family Education Loan (FFEL) program. Perhaps that explains why a new report on this subject from the Department’s Inspector General (IG) received little attention, getting only the briefest of mentions in the trade publications that follow the agency’s every move.

But that’s unfortunate because the report provides the most vivid picture to date of how little the previous leaders of the agency’s Federal Student Aid (FSA) office cared about oversight, and how they put their allegiances to the student loan industry over their responsibility to safeguard the integrity of the federal student loan programs.

The report provides numerous examples of how the Financial Partners division of FSA, which is in charge of monitoring lenders and guarantors, fell down on the job. Take, for example, the fact that the division’s leaders:

• Assigned only one person to review the hundreds of compliance audit reports that lenders and guarantors submit to the Department each year.
• Regularly allowed program participants that were subject to review “to determine the liability” they owed the Department, and had “no formal procedure” to verify the results of the loan companies’ calculations.
• Did not consult with the Department’s Office of Postsecondary Education or Office of General Counsel before issuing program review reports that dealt with “sensitive” and “political” issues to ensure that the findings in these reports were consistent with the Higher Education Act and the Department’s regulations.

The IG particularly takes issue with FSA’s failure to target its program reviews on those lenders and guarantors that posed the greatest risk to the FFEL program. While FSA conducted risk assessments on lenders and guarantors, it did not use the results to decide which FFEL participants to investigate, the report states. Several program reviewers told the IG that these decisions were “political not programmatic.” [According to the “review specialists,” these determinations were made at the highest levels of FSA without their input. Over the last few years, they said they have been shut out of the decision-making process.]

In fact, the IG found that the Financial Partners division has focused its program reviews “on small lenders that pose limited risks” to the government instead of the biggest players that dominate the program. Noting that the top 10 lenders hold 72 percent of the outstanding guaranteed loan volume, the IG questions why these loan providers do not “merit more focus,” considering “their overall financial impact on the FFEL program.”

Perhaps the most damning part of the report deals with an exchange that the IG had with a program reviewer:

“The review specialist questioned why there are not more frequent program reviews of a particular large lender. According to the review specialist, “they (FSA managers) do not want us to do the work. All our bosses are from [the lender] and that is why we do not go to [the lender] very often.”

At Higher Ed Watch, we’re pretty sure we know which giant loan company they’re talking about.

The report also includes several examples in which FSA leaders overrode decisions made by review specialists or limited their ability to effectively carry out their investigations. In one such case, a reviewer wrote a draft program review report about how a loan servicing company was “taking adverse actions against borrowers without issuing a final determination letter and/or allowing borrowers to respond to the determination letter,” as required by law. While that specialist was on vacation, the report was released in his name, but “all of the findings and observations in the draft report had been removed.”

In another case, FSA managers refused to allow a review team to seek additional documents — primarily marketing materials — from a lender even though it felt they were vital to determining whether the company had violated the law by offering illegal inducements to colleges to win their student loan business.

These cases are similar to ones that the IG exposed in a 2006 publication that blasted the Financial Partners division for taking its “partnership approach” with lenders and guarantors too far. For example, in that report, the IG found that a program reviewer had suggested to a guaranty agency different accounting methods it could use to reduce its liability to the government. It was also revealed that a Financial Partners Regional Director had leaked “internal pre-decisional documents” to a non-profit lender (the New Mexico Educational Assistance Foundation). That lender then tried to use the documents “in an unsuccessful attempt to obtain a federal court order to block the issuance of” an Inspector General’s audit report on the agency.

The IG’s latest report also includes a glaring example of how FSA has allowed its close ties to the loan industry to put the FFEL program at risk. According to the report, guaranty agencies were upset about the methodology the Department was using to assess their financial strength. These calculations showed that many guarantors had allowed their reserve funds (the federal money they use to reimburse lenders for defaulted loans and to prevent borrowers from going into default) to drop to dangerously low levels, putting them in danger of collapse. The agencies were apparently particularly unhappy that this information was available to the public.

Officials at FSA caved to these concerns. Instead of requiring the struggling guarantors to take steps to improve their financial viability as one would expect, Department officials agreed to change the methodology to one that put the guarantors in a more positive light. As a result, the IG states, “the financial conditions of guaranty agencies” are now “overstated” and those that may be in danger of becoming insolvent are not being monitored closely enough.

As the report illustrates, the revolving door between the Department of Education and the student loan industry has allowed widespread abuses to occur in the FFEL program. At Higher Ed Watch, we have called on the Obama administration to close that door once and for all. To date, some of the same former loan industry officials who made the decisions that the IG faults appear to still be in place.

If the Obama administration really wants to bring change the culture at the Department of Education, FSA is certainly a good place to start.