Faulty EDS Processes Contributed to Loan Verification Problems and Inaccurate Payments; Direct Loan Servicing Information Also Flawed

Lenders’ representatives said that the primary problems they had with FDLP consolidations were (1) loan verification certificates EDS them sent that contained errors and (2) inaccurate payments EDS sent to pay off loans. EDS Errors Caused Lenders Problems in Verifying Loan Data

The process EDS used to verify the loan amounts that borrowers wanted to consolidate was prone to error. The third problem lenders mentioned was that they sometimes received more than one certificate for a particular borrower. Most of the underpayments that we analyzed resulted from data that lenders provided to EDS not being entered into EDS’ data system, while others resulted from a control EDS put in place to try to reduce duplicate payments or other system problems: In several examples, EDS did not enter data into its system for one of a borrower’s loans when a lender certified a number of loans. All four lenders we talked with agreed that their problems with the FDLP loan consolidation process had affected their operations. Education and EDS Are Making Changes to Improve the Consolidation Process

Since the shutdown of the FDLP loan consolidation program between August 27 and December 1, 1997, both Education and EDS have taken steps to improve the process and reduce the problems that contributed to the buildup of the backlog. Among other tasks, the consolidation team is working directly with lenders to try to resolve consolidation problems. Education officials also said that changes are under way that are intended to improve the transfer of such transactions in the future. Since the reopening of the consolidation process in December 1997, EDS has been tracking the first 1,000 consolidation applications, and it hopes its evaluation of these applications will provide information on how well the new changes to the process are working. Conclusions

EDS’ errors in processing FDLP consolidation applications led to a number of problems; lenders had to spend additional time resolving the problems, and borrowers’ applications were not always processed correctly. Scope and Methodology

We interviewed officials from four judgmentally selected Federal Family Education Loan Program (FFELP) lenders. We selected the lenders to obtain variety in size, as measured by FFELP loan volume, and different perspectives on lenders’ experiences with William D. Ford Federal Direct Loan Program (FDLP) consolidations. We discussed with Electronic Data Systems (EDS) and the Department of Education the problems the lenders raised. For this reason, we cannot make judgments regarding the overall frequency or extent of these problems in the program as a whole. So at times, if EDS received a certificate, paid off a borrower’s loan account, and subsequently discovered that it had received another completed certificate it had sent to a lender, it would make a second payment to the lender. In some of these cases, a borrower signed two very similar promissory notes, sometimes within several weeks of each other, and EDS paid lenders for the same loan twice. In most examples we analyzed in which borrowers had not been credited for refunds made on their behalf, we verified that EDS received a refund, but we could not determine whether the refund transaction had been forwarded to the direct loan servicer, CDSI/AFSA, for posting in the FDLP servicing system. Lenders also said that EDS’ customer service to lenders had been uneven.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed problems lenders had with William D. Ford Federal Direct Loan Program (FDLP) consolidation loans, focusing on: (1) the nature and source of problems Federal Family Education Loan Program (FFELP) lenders have encountered in the direct loan consolidation program; (2) whether these problems affected lenders; and (3) steps the Department of Education and its contractor, Electronic Data Systems (EDS) are taking to correct these problems.

What GAO Found

GAO noted that: (1) lenders said their problems came primarily at two stages in the consolidation process--verifying loan data EDS provided and receiving payments for the loans being consolidated; (2) these problems occurred, in part, because borrowers provided poor information or EDS used inaccurate Education-provided data to identify lenders' addresses for loan verification requests; (3) regarding the payments lenders received, in some examples EDS sent inaccurate payments to lenders for loans being consolidated; (4) some lenders received overpayments because EDS paid for the same loan more than once; (5) other examples GAO analyzed had more serious problems, such as several instances in which EDS charged one borrower for a second borrower's loans; (6) however, lenders also received underpayments on occasion, which occurred because not all loans a borrower owed and wanted to consolidate were paid off; (7) in addition to the two problems lenders raised about the process, GAO found a flaw in the transfer of data from EDS to the FDLP servicing system; (8) GAO found that refunds that lenders made for overpayments were not always credited to a borrower's new consolidation loan account; (9) lenders' representatives said that problems associated with FDLP consolidations adversely affected their operations; (10) lenders said that their staffs had to repeatedly complete verification requests or call EDS to explain that a completed certificate had previously been returned; (11) lenders' officials also said that it took time for their staffs to resolve inaccurate payments; (12) in general, however, lenders could not quantify their costs of resolving FDLP consolidation problems; (13) both Education and EDS recognized that the consolidation process had problems prior to a 3-month shutdown during which new applications were not accepted; (14) officials from both Education and EDS said that they have taken new steps to improve FDLP consolidation processing; (15) some of the changes were made during the shutdown, others went into effect as GAO was conducting its study, when EDS again began accepting new applications, and others are still being implemented; (16) EDS has devoted more resources and made system changes to improve data quality throughout the process, it has started a pilot program for electronic loan data exchange with lenders, and it has begun a review of the first 1,000 post startup applications with the goal of detecting remaining problems; and (17) lenders' representatives GAO talked with had mixed opinions about the effectiveness of these changes and said it was too early to evaluate them.