Lack of FSA Guidance and Instructions to Servicers Results in Inconsistent and Inefficient Services to Borrowers

Some FSA guidance and instructions to servicers is inadequate, resulting  in inconsistent and inefficient services to borrowers. While FSA has taken  some steps to provide more Direct Loan program guidance and  instructions to servicers, six out of the seven servicers we interviewed  reported various issues resulting from absent, unclear, and inconsistent  guidance and instructions from FSA. For example, in a white paper to FSA, three  servicers suggested ways FSA could improve how it provides instructions  on program changes. This servicer also said that FSA has not communicated with  them on how to standardize application of such payments. However, this protocol does not provide additional  guidance on how servicers should interpret income documentation. FSA is not consistently sharing all clarifications on Direct Loan  program instructions with all servicers. One of FSA’s strategic goals is to “develop efficient processes and  effective capabilities that are among the best in the private and public  sectors,” and federal internal control standards state that information  should be communicated to those who need it, in a form and within a  timeframe that enables them to carry out their responsibilities. FSA’s Monitoring of Calls between Servicers and Borrowers Has Methodological Weaknesses and Is Poorly Documented

Key weaknesses limit FSA’s ability to monitor servicers’ interaction with  borrowers and ensure servicers provide accurate information and good  customer service. However, one servicer told us it participates in over 60  times more outbound calls than inbound calls, and all seven servicers we  spoke to said outbound calls were a primary method of contacting  borrowers in delinquency and approaching default. Furthermore, the results of FSA’s call monitoring are poorly documented,  limiting their usefulness for management purposes. For example, one  month’s summary did not include the total number of calls monitored or  the number of calls that did not pass the review. Because not all errors identified in call monitoring are captured in  FSA’s monthly reports, the reports do not reflect the actual prevalence of  particular problems in the calls the agency monitors, and consequently,  are insufficient for FSA to analyze the results of its call monitoring over  time to inform its management activities. FSA Has Taken Some Steps to Improve Oversight of Loan Rehabilitation

FSA has taken some steps to improve its oversight of loan rehabilitation  in response to our March 2014 report. In March 2014, we found that,  because of limited planning and oversight, FSA was unable to provide  most borrowers who completed loan rehabilitation with timely benefits for  more than a year following the October 2011 upgrade of its defaulted loan  information system. As a result, borrowers who made a good faith effort  to rehabilitate their loans experienced delays in having the defaults  removed from their credit reports and reinstating their federal student aid  eligibility. As a result of the system challenges, no loan rehabilitations were  processed from September 2011 through March 2012, and FSA officials  said they needed until January 2013 to clear the resulting backlog (see  fig. 1). FSA established procedures in  November 2011 to assist eligible borrowers by removing defaults from  their credit reports or reinstating their eligibility for student aid. To strengthen FSA’s oversight of the defaulted student loan information  system contract, in our March 2014 report we recommended that FSA  take steps to ensure that the final monitoring plan for the new contract  identified risks and the oversight activities planned to address them. To address this issue, we recommended that FSA develop  an approach for tracking loan rehabilitation performance. Conclusions

Education’s Office of Federal Student Aid faces challenges in the  management of the Direct Loan program that affect its ability to function  effectively as a performance-based organization. Furthermore, without a robust, systematic  process for monitoring and documenting calls between borrowers and  servicers, FSA may miss opportunities to ensure program integrity and  improve services to borrowers. Recommendations

To strengthen management of the Direct Loan Program and ensure good  customer service for borrowers, we recommend the Secretary of  Education direct the Office of Federal Student Aid’s Chief Operating  Officer to take the following three actions:  1.  Review its methods of providing instructions and guidance to  servicers, identifying areas to improve clarity and sufficiency, and  ensure consistent delivery of instructions and guidance to ensure  program integrity and improve service to borrowers. 2. Implement a more rigorous methodology for selecting recorded calls  between servicers and borrowers to review, including a clearer  definition of the sample servicers should select, a sample that targets  more critical and more frequent types of calls, and a verification  process to ensure integrity of the call selection process.
Why GAO Did This Study

During fiscal year 2014, Education issued more than $99 billion in Direct Loans to 9.4 million borrowers. Education contracts with and monitors the performance of servicers that handle billing and other services for borrowers, and entities that support rehabilitation of defaulted loans. In 1998, federal law established FSA as a performance-based organization, giving it more flexibility to manage operations, including Direct Loans.
GAO's testimony focuses on: (1) how effective FSA's instructions and guidance to servicers are, (2) how well FSA monitors and documents calls between Direct Loan borrowers and servicers, and (3) the status of FSA's oversight of the defaulted loan rehabilitation process. The first two questions address recently completed GAO work on FSA's oversight of servicers and communications with borrowers. The third question reflects results of GAO's previously issued work. GAO reviewed FSA's contracts, policies, procedures, instructions, and guidance; analyzed its monitoring reports and processes; and reviewed relevant federal laws and regulations. GAO also interviewed federal officials, including officials from FSA, servicers, and representatives from higher education associations. We shared our findings with FSA officials and incorporated their comments as appropriate.

What GAO Found

The Department of Education's Office of Federal Student Aid's (FSA) instructions and guidance to loan servicers are sometimes lacking, resulting in inconsistent and inefficient services to borrowers. While FSA has taken some steps to improve program instructions and guidance, six of the seven servicers GAO interviewed reported various issues resulting from absent, unclear and inconsistent guidance and instructions from FSA. For example, one servicer said there are no instructions for how to apply over- or underpayments to borrower accounts. In other cases, guidance is unclear; for example, according to one servicer, there is insufficient guidance on how to handle reporting certain types of adverse credit history to credit bureaus. Furthermore, in certain instances when FSA provided additional guidance or clarifications, it did not consistently share them with all servicers. Federal internal control standards state that information should be communicated in a form that enables entities to carry out responsibilities. Without improved guidance and instructions to servicers, borrower finances or the integrity of the Direct Loan program could be negatively affected. FSA monitors calls between servicers and borrowers, but there are weaknesses in the processes for selecting calls to be monitored and for documenting results. For example, FSA monitors far fewer outbound than inbound calls, even though one servicer said it makes 60 times more outbound calls than it receives inbound calls, and outbound calls are often made to borrowers who are delinquent and at risk of default. Also, the methodology for selecting recorded calls for review is not well-defined and relies on servicers to implement, with no verification from FSA to ensure its integrity. This does not align with the Office of Management and Budget's best practices for developing sample designs. In addition, the overall results of the call monitoring are poorly documented. For example, summaries of monitored calls did not consistently track errors over time. FSA's Strategic Plan calls for enhancing customer-facing processes, but FSA's call monitoring leaves management without complete information it needs to understand how well servicers interact with borrowers.
FSA has taken some steps to improve its oversight of the defaulted loan rehabilitation process in response to GAO's March 2014 report. Loan rehabilitation allows eligible borrowers who make nine on-time monthly payments within 10 months to have the default removed from their credit reports. In March 2014, GAO found that FSA was unable to provide most eligible borrowers who completed loan rehabilitation with timely benefits, such as removing defaults from their credit reports, for more than a year after upgrading the information system it uses to manage defaulted loans. As a result of limited planning and oversight of its system contractor, no rehabilitations were processed from October 2011 until April 2012, and FSA officials said they needed until January 2013 to clear the resulting backlog. GAO recommended that FSA take steps to track loan rehabilitation performance and improve oversight of its system contractor. FSA agreed with the recommendations and has begun taking action to address them.

What GAO Recommends

GAO is recommending that FSA (1) review and improve how it provides instructions and guidance to servicers, (2) improve its methodology for monitoring calls between servicers and borrowers, and (3) improve documentation of its call monitoring.