VA reported that since 1992 it has sold approximately $9 billion of loans in this manner. Objectives, Scope, and Methodology

Our objectives were to assess the level of control and accountability over VA’s HCA direct loan and loan sale activities. The Secretary of Veterans Affairs provided us with written comments, which are discussed in the “Agency Comments” section and are reprinted in appendix I.

	VA Lacked Accountability and Control Over Its Direct Loan Portfolio

VA did not effectively plan or carry out the transfer of its direct loan portfolio to an outside contractor for servicing in fiscal year 1997. In this case, VA was responsible for determining the adequacy of the servicer’s internal control environment, as well as establishing and maintaining its own data or data sources for comparison purposes to allow it to be confident that the activity is being managed in the best interest of the federal government. VA had not yet established adequate controls over cash collected or disbursed on its behalf by the contractor and was unable to properly reconcile the cash flows reported by the contractor to those recorded in VA’s general ledger. Furthermore, VA had transferred incomplete and inconsistent loan data to the contractor. For example, there were delays in allocating payments to some borrowers’ accounts and in paying property taxes on their behalf as well as paying property taxes on VA-owned houses. VA Did Not Retain Records to Account for the Number and Status of Loans

As discussed later, even though the loan data originally submitted to the contractor were not adequate for servicing purposes, VA was able to reconcile contractor and agency records on the 24,000 loans with an outstanding balance of $1.2 billion that were initially transferred. The new procedures require the servicer to (1) hold, without depositing, loan payments that could not be allocated to a specific borrower’s account and (2) return the loan payments to the borrower in cases where two or more payments were unallocated, or part of the loan number was missing, unless either VA had instituted the paperwork for the loan in process or the servicer had received e-mail instructions from one of the regional offices regarding the borrower. As a result, VA lacked assurance that changes were legitimate and that funds were not being misdirected. VA Did Not Properly Account for Loan Sales and Subsequent Financial Activity

In addition, VA did not have processes in place to ensure that relevant reporting from servicers and the trustee/custodian was channeled to appropriate VA offices. Annually, VA should have reestimated the liability and included any reestimate in its budget and financial statements. The $3 billion in loans and VA-owned property and $9 billion in potential liability on loan sales represent guaranteed loans previously serviced by private lenders that went into default and were acquired by VA. VA now bears the primary responsibility for insuring prudent management of these assets, in an effort to recoup losses and to preclude additional losses on the properties for which loans were originally guaranteed. 4. Housing credit assistance program - A function of VA concerned with housing credit activities.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO provided information on: (1) the level of Department of Veterans Affairs' (VA) accountability and control over its Housing Credit Assistance (HCA) program direct loan and loan sale activities: and (2) actions needed to improve VA's internal control environment and financial and budgetary reporting for these activities.

What GAO Found

GAO noted that: (1) VA did not have appropriate management and operational controls in place to maintain accountability over its direct loan and loan sale activities; (2) VA provided little oversight of contractors that were managing billions of dollars of assets on its behalf and did not ensure that revenues and expenses were accurate or that cash receipts were deposited promptly in Treasury accounts; (3) when VA outsourced the servicing of its direct loan portfolio to a contractor in fiscal year 1997, it did not adequately plan or manage the transfer; (4) it concurrently shut down its automated district loan system and surrendered almost all hard copy loan records to the contractor without retaining basic information needed to confirm or reconcile the number and value of loans serviced by the contractor; (5) as a result, VA was unable to appropriately manage its loan portfolio; (6) further, the data transferred to the contract servicer, which up to that point had been maintained by more than 40 VA regional offices, were incomplete and inconsistent; (7) this immediately created loan servicing problems; (8) there were delays in allocating payments to borrowers' accounts and in paying property taxes on behalf of borrowers as well as property taxes on VA-owned houses; (9) VA lacked assurance that receipts from loans were properly collected and allocated to borrowers' accounts, and did not determine the propriety of property tax expenses associated with VA-owned property and, accordingly, could not be confident that appropriate amounts were transmitted to the government; (10) in addition, VA lacked a basis for properly reconciling the financial activity reported by the contractor to the data recorded in VA's general ledger; (11) GAO found that VA's failure to timely monitor the contractors that service the loans, representing roughly $9 billion since 1992, allowed servicing inefficiencies and improper actions by two servicers to cause financial losses to VA; (12) GAO found that VA's financing and accounting for the guarantees associated with the loan sales in effect masked both the existence of the estimated liability for defaulted loans as well as the sources of funds being used to finance those liabilities; and (13) until 1997, VA had not reported or disclosed the loan sales in its financial statements or budget reports or requested funding to cover the cost of these guarantees.