Statement from U.S. Department of Education Regarding GAO Report on Federal Family Education Loan Program

U.S. Department of Education Press Secretary Katherine McLane today made the following statement regarding the General Accountability Office report “Federal Family Education Loan Program: Increased Department of Education Oversight of Lender and School Activities Needed to Help Ensure Program Compliance”:

"Secretary of Education Margaret Spellings takes very seriously the Department’s oversight of schools and lenders and has taken aggressive action on improper inducements and the limitations on borrower choice of lender in the Federal Family Education Loan (FFEL) program.

"This administration recognized that legislation on inducements needed to be strengthened and, absent action by Congress, the Department began in October 2006 the negotiated rulemaking process that it must follow by law to address preferred lender lists and prohibited inducements. The Department has very limited statutory authority and a high threshold it is required to meet in order to bring enforcement action to a school, lender, guaranty agency, or other third party. 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. As a result of negotiated rulemaking, in June the Department published in the Federal Register proposed regulations to significantly strengthen the rules regarding improper inducements and regulate the use of preferred lender lists.

“As highlighted in the Department’s response letter in the report, we have taken a number of steps to tighten our oversight responsibilities of federal student financial aid programs in these areas under existing regulations and in keeping with GAO’S recommendations.”

Below is Acting Chief Operating Officer of Federal Student Aid Lawrence Warder’s response to the GAO report.

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,



Lawrence A. Warder