DEPARTMENT OF EDUCATION
CFDA 84.032 FEDERAL FAMILY EDUCATION LOAN PROGRAM (FFEL) -
GUARANTY AGENCIES
I. PROGRAM OBJECTIVES
Nonprofit and state guaranty agencies are established to guarantee student loans made by lenders
and perform certain administrative and oversight functions under the Federal Family Education
Loan (FFEL) Program, which includes the Federal Stafford Loan, Federal PLUS, Federal SLS
and Federal Consolidation loan programs. The Department of Education (ED) provides
reinsurance to the guaranty agency.
II. PROGRAM PROCEDURES
To participate in the FFEL programs and to receive various payments and benefits incident to that
participation, a guaranty agency enters into agreements with ED. As part of these agreements,
guaranty agencies are required to: provide preclaims assistance to lenders when requested; service
defaulted loans that have been submitted to them; make timely claim payments to lenders; make
timely reinsurance filings with ED; provide accurate and reliable reports to ED; establish and
maintain FFEL program reserve fund in accordance with 34 CAR section 682.410(a), including
the making of proper investments, apply proper charges to defaulted borrowers, and take proper
enforcement measures with respect to lenders, lender services, and defaulted borrowers. The
primary regulations relating to Guaranty Agency requirements are located in 34 CFR 682,
Subparts C, D, F and G.
III. COMPLIANCE REQUIREMENTS
A. Activities Allowed or Unallowed
The compliance requirements and suggested audit procedures for allowed and unallowed services
are presented separately in Compliance Requirement number 11 (Reserve Fund Assets) in Section
E, Special Tests and Provisions.
L. Reporting
1. Financial Reporting - Not applicable
2. Performance Reporting - Not applicable
3. Special Reporting
a. ED Form 1189, Guaranty Agency Monthly Claims and Collections Report (OMB No.
1840-0582)
b. ED Form 1130, Guaranty Agency Quarterly/Annual Report (OMB No. 1840-0003)
c. ED Form 704, Guarantor Projection Model (OMB No. 1840-0704) (34 CFR section 682.414)
In determining which amounts to test, particular attention should be given to the September 30
amounts for current year defaults, current year collections, loans receivable and the sources and
uses of funds for the reserve account. Also, guaranty agencies are required to submit loan level
detail information to the National Student Loan Data System (NSLDS) (OMB 1840-0537).
When reviewing support for the above reports, the auditor should consider whether the relevant
amounts in these reports reconcile with the NSLDS Extract submitted by the guaranty agency.
(NOTE: There may be some differences between ED Form 1130 quarter end reporting and
NSLDS Extracts due to timing factors (e.g., polling of NSLDS Extract in third week vs. month
end). Finally, ED may send edits back to the agency to be entered.
The guaranty agency is required to submit loan level detail data to the NSLDS. The following are
identified as key data elements: social security number, last name (some agencies may use first
name combined with the SSN since last names are subject to change), original school code,
academic level, current school code, enrollment status code, enrollment status date, originating
lender code, loan guarantee date, amount of guarantee, current holder lender code, date entered
repayment, loan status code, loan status date, amount of claim paid to lender (principal and
interest) and for loans with a defaulted status--outstanding principal, interest and fee amounts.
ED sends edits back to the guaranty agency for disposition. Samples should be selected from the
guaranty agency's NSLDS Extracts (Note: Guaranty Agencies may have changed to automated
exchanges of data with schools and lenders, thus, hard copy documents may not exist. In this
instance, auditors may only be able to trace to system information and not to supporting records.)
(34 CFR section 682.414).
(Note: In addition to providing ED with information it needs to maintain its accounting and loan
database records, data in the ED Form 1130 reports are used for various purposes by ED. The
use of this data is the subject of several other compliance requirements cited in Section N., Special
Tests and Provisions, which identify the need to test specific items in these reports. For audit
efficiency, the auditor may want to test those compliance requirements at the same time as this
compliance requirement. These other compliance requirements are "Transition Support,"
"Federal Reinsurance Agreement," and "Reserve Fund Assets.")
N. Special Tests and Provisions
1. Current Records
Compliance Requirement - The guaranty agency shall maintain current complete records for
each loan that it holds. The records must be maintained in a system that allows ready
identification of each loan's current status, updated at least once every 10 business days.
Audit Objective - Determine whether the agency's records are updated for information received
from lenders, schools, borrowers, others, and NSLDS on a timely basis.
Suggested Audit Procedures
a. For a sample of loans, compare dates transactions or information were posted to the guaranty
agency's system to the date the source information was received.
b. Identify whether any backlog exists that is over 10 days old.
2. Transition Support
Compliance Requirement - Beginning on October 1, 1994, section 458 of the Higher
Education Act (HEA) (20 USC 1087(f)) authorized ED to obligate funds for administrative
expenses of guaranty agencies in servicing outstanding loans in their portfolios and in
guaranteeing new loans. This discretionary authority replaced the requirement in Section 428(f)
(20 USC 1078(f))of the HEA that entitled each guaranty agency to an administrative cost
allowance (ACA) equal to one percent of the total principal amount of loans (other than
Consolidation loans) guaranteed by the agency during that fiscal year. For FY 1995 ED
announced that "transition support" would be paid using the formula for ACA. Each year ED will
announce the method for calculating transition support. Past problems found include: (1)
agencies have established an account receivable for transition support allowance based on
estimates and then failed to reconcile the receivable with the actual transition support paid; (2)
agencies have estimated the amounts reported as unconsummated loans (ED will not pay
transition support based on estimates); (3) agencies have reported adjustments that belonged in
prior fiscal years in the current fiscal year instead of submitting corrections to the prior year
reports; and, (4) agencies have included rejected applications two or more times in the loans
guaranteed calculation (HEA Section 458) (20 USC 1087(f)).
Audit Objective - Determine whether data reported to ED that is used to calculate "transition
support" is supported by guaranty agency records.
Suggested Audit Procedures
Ascertain the method for calculating transition support. If ED's calculation uses data contained in
the reports cited in the Section L. "Reports" above, follow the suggested audit procedures for that
requirement. (This is the case if ED uses the ACA formula.) If other data is reported by the
guaranty agency for the purpose of determining the amount of "transition support," trace the data
to supporting books and records.
3. Federal Reinsurance Rate
Compliance Requirement - When the total amount of reinsurance claims paid by the Secretary
to a guaranty agency during any fiscal year is less than five percent of the amount of loans in
repayment at the end of the preceding fiscal year, the reinsurance is paid for 100 percent of the
agency's losses. For loans made on or after October 1, 1993, the rate drops to 98 percent. When
the total reinsurance claims paid by the Secretary to a guaranty agency during any fiscal year
reach five percent of the amount of loans in repayment at the end of the preceding fiscal year, the
reinsurance subsequently paid to the guaranty agency during that fiscal year, for loans made
before October 1, 1993, or transferred under a plan to transfer guarantees from an insolvent
guaranty agency approved by ED, equals 90 percent. For loans made on or after October 1,
1993, the rate drops to 88 percent. When claims reach nine percent, the reinsurance drops to 80
percent for loans made prior to October 1, 1993, or transferred under a plan to transfer
guarantees from an insolvent guaranty agency approved by ED, and 78 percent for loans made on
or after that date.
The Secretary uses the ED Form 1130 quarterly report for the previous September 30 to calculate
the amount of loans in repayment at the end of the preceding fiscal year (34 CFR sections
682.404(b) & (c)).
Past problematic areas have been:
Agencies have:
- not established systems to verify a student's loan status with lender and school data through a reliable audit trail.
- established systems to determine loan status that rely on loan characteristic analysis or assumptions that are not adequately tested or verified.
- not established adequate procedures to ensure that lenders report and that agencies properly record loans paid in full.
- not established adequate procedures to ensure that there is a system to reconcile the agency's
repayment conversion dates to the lender's repayment conversion dates.
Audit Objective - Determine whether the data submitted to ED in the September 30 Form 1130
used to calculate loans in repayment is materially correct and supported by the books and records.
Suggested Audit Procedures
a. Compare the amounts of loans in repayment in the guaranty agency system at September 30 to
the amount of loans in repayment derived from the September 30 ED Form 1130. Determine the
propriety of any difference.
b. Select a sample of loans in in-school and repayment status from the guaranty agency's system.
Verify the loan amount and loan status by contacting the current holder of the loan or schools to
confirm the authenticity and status of the loans.
4. Conditions of Reinsurance Coverage
Compliance Requirement - A guaranty agency is entitled to reinsurance payments on a loan
only if the requirements cited in 34 CFR section 682.406 are met. The lender must provide the
guaranty agency with documentation, as described in 34 CFR sections 682.406 and 414. The
Secretary requires a guaranty agency to repay reinsurance payments received on a loan if the
lender or the agency failed to meet these requirements (34 CFR section 682.406).
Past problematic areas have been:
The lender:
- Did not exercise due diligence in servicing the loan in accordance with 34 CFR section 682.411;
- Did not include adequate documentation, including a collection and payment history, to adequately verify claim eligibility and claim amount;
- Did not file a default claim with the guaranty agency within 90 days of default (Note: The guaranty agency shall reject the claim based on due diligence or timely filing violations, unless it was cured by the lender in accordance with Cure Bulletin 88-G-138.); and
- Was paid interest beyond 30 days after a claim was returned for inadequate documentation for
claims returned on or after July 1, 1996.
The guaranty agency:
- Filed a request for payment of reinsurance later than 45 days following payments of a default claim to the lender;
- Did not pay the lender within 90 days of the date the lender filed the claim? and
- Did not pay the lender prior to filing a request for payment from ED.
Audit Objective - Determine whether loans for which reinsurance was paid met the requirements
for reinsurance.
Suggested Audit Procedures
Select a sample of defaulted loans from the guaranty agency's ED Form 1189 reports. Review
documentation supporting that the loans met the conditions of reinsurance.
5. Death, Disability, and Bankruptcy Claims
Compliance Requirement - If an individual borrower dies, the obligation of the borrower and
any endorser to make any further payments on the loan is canceled, in accordance with 34 CFR
sections 682.402(b)(2-5). If the lender determines that an individual borrower is totally and
permanently disabled, the obligation of any further payments on the loan is canceled in accordance
with 34 CFR sections 682.402(c)(1-4). If a borrower files a petition of relief under the
Bankruptcy Code, the Secretary reimburses the holder of the loan for unpaid principal and interest
on the loan, in accordance with 34 CFR sections 682.402(f), (g), and (h). Exceptions to these
regulations are identified in 34 CFR sections 682.402(a)(2) and (3).
A lender must file a death, disability or bankruptcy claim within the period prescribed in 34 CFR
section 682.402(g)(2). The guaranty agency shall review a death, disability, or bankruptcy claim
promptly and shall pay the lender in accordance with 34 CFR section 682.402(h). Guaranty
agencies are required to take specific actions in bankruptcy proceedings in accordance with 34
CFR section 682.402(i). In accordance with 34 CFR section 682.402(k)(1)(i), the guaranty
agency shall not request payment from ED until the lender's claim has been paid (34 CFR section
682.402).
Audit Objective - Determine whether death, disability and bankruptcy claims met the
requirements for the payment of such claims.
Suggested Audit Procedures
Select a sample of death, disability, and bankruptcy claims from the guaranty agency's ED Form
1189 reports. Review claim documentation that supports the eligibility of the claims for payment.
6. Preclaims and Supplemental Preclaims Assistance
Compliance Requirement - Upon receipt of a request from the lender, a guaranty agency shall
engage in preclaims assistance activities on a delinquent loan prior to the loan entering default
status (NOTE: Effective July 1, 1997 preclaims assistance is to be made available to the lender no
later than the 90th day of delinquency). The assistance must include collection activities that are
at least as forceful as the level of preclaims assistance performed by the guaranty agency as of
October 16, 1990, and involves the initiation by the guaranty agency of at least three collection
activities, one of which is a letter designed to encourage the borrower to begin or resume
repayment.
When the borrower is at least 120 days delinquent and upon receipt of a request from the lender, the guaranty agency shall exercise supplemental preclaims assistance (SPA) activities on the delinquent loan prior to a claim being filed with the guaranty agency. The activities must be clearly supplemental to preclaims assistance. The efforts involve the agency initiating at least two collection efforts designed to encourage the borrower to begin or resume payment. The Secretary pays the guaranty agency one percent of the total of the unpaid principal and the accrued unpaid interest for each loan on which SPA was performed and that was not submitted as a default claim by the lender on or before 150 days after the loan became 120 days delinquent.
A contractor who performs SPA for a guaranty agency may not subsequently collect on the same
loans in the event of default. The contractor may collect only on those loans for which it did not
provide SPA (34 CFR section 682.404).
Audit Objective - Determine whether the guaranty agency performed preclaims and SPA in
accordance with the requirements and to determine whether loans for which the guaranty agency
received payment for performing SPA were not submitted by the lender as default claims within
150 days after the loan became 120 days delinquent.
Suggested Audit Procedures
a. For a sample of loans, review documentation supporting that the agency performed the
required collection activities for preclaims assistance and SPA as described above.
b. For a sample of loans on which SPA was performed and the one percent payment was
requested on the ED Form 1189, review loan records to ensure the loan was not submitted for a
default claim prior to 150 days after the loan became 120 days delinquent.
c. If the guaranty agency contracts with an entity to provide SPA on defaulted loans, review
contract documents and loan records to ascertain if the same entity is not performing collection
services for the same loans.
7. Standard Collection Efforts
Compliance Requirement - Unless the agency uses alternative collection procedures (see next
section for alternative collection procedures), the guaranty agency must engage in certain
collection activities within certain time frames as prescribed by 34 CFR section 682.410(b)(6) on
a loan for which it pays a default claim filed by a lender. These collection activities include
written notices, contacts with borrowers, and wage garnishments, etc (34 CFR section 682.410
(b)(6)).
Audit Objective - Determine whether the agency performed required collection procedures on
defaulted loans.
Suggested Audit Procedures
a. If the guaranty agency uses a collection contractor, review the contract to ascertain if the
contract specified the required collection procedures to be followed for defaulted loans.
b. For a sample of defaulted loan accounts, review documentation that supports that prescribed
collection activities were followed.
8. Alternative Collection Efforts
Compliance Requirement - A guaranty agency may engage in the following collection activities
in lieu of the activities described above in the Standard Collection Efforts section. The regulations
at 34 CFR sections 682.410 (b)(6)(ii)(A) and (B) apply to the periods of time set forth in this
Alternative Collection Efforts section. Upon receipt of a payment from a borrower, the agency is
not required to follow the specific collection efforts described below, but shall diligently attempt
to collect the loan for 60 days following receipt of the payment. If the agency receives no
payments during the 60-day period, the agency shall resume its use of the collection efforts
described below, treating the first day after the end of the 60-day period as the first day of the
period described in the 31-180 day period below (34 CFR section 682.410 (b)(7)).
- 1 - 30 days:
During this period the agency shall send to the borrower the written notice described in 34 CFR
section 682.410 (b)(5)(ii).
- 31 - 180 days:
During this period the guaranty agency shall attempt diligently to collect the loan using such
collection tools and activities as it deems appropriate, provided, however, that the agency must
make at least one diligent effort to contact the borrower by telephone, as defined in 34 CFR
section 682.411(l) (with references to "the lender" understood to mean "the agency"), and send at
least two forceful collection letters to the borrower. By the end of this period, the agency shall
refer the loan to a collection contractor in accordance with 34 CFR section 682.410(b)(7)(iv)(C).
The collection contractor to whom the agency refers a loan under 34 CFR section 682.410
(b)(7)(iv)(B) must: (1) be compensated for its services on all FFEL loans referred by the agency
solely on a contingency fee basis; (2) be one of at least two collection contractors simultaneously
providing collection services to the agency on FFEL loans under a competitive system that the
agency has established and that includes the periodic assessment by the agency of the performance
of the competing contractors and periodic adjustments in the volume of loans referred by the
agency to each competing contractor based on those assessments; and, (3) not receive referral of
more than 70 percent of the agency's referred loans in any calendar year.
Notwithstanding the deadline for instituting a civil suit set forth in 34 CFR section 682.410
(b)(6)(vii), an agency that uses the procedures in 34 CFR section 682.410 (b)(7)(i)-(iv) shall
institute a civil suit required by that paragraph prior to the earliest of the 90th day following the
collection contractor's return of the loan to the agency or the 365th day following the later of the
agency's referral of the loan to the collection contractor, or the contractor's receipt of a payment
on the loan.
Audit Objective - Determine whether the agency that chose to follow alternative collection
procedures complied with the applicable requirements.
Suggested Audit Procedures
a. For a sample of defaulted loan accounts, review documentation that supports that the agency
performed the prescribed collection activities before referring the loans to the collection
contractors.
b. Review collection agency contracts and loan referral records to ascertain if the agency (1) did
not refer more than 70 percent of its referred loans to a single collection contractor, and (2)
compensated the contractors only on a contingency fee basis.
c. Review records demonstrating that the guaranty agency periodically assessed the performance
of the competing contractors, and if necessary, made adjustments in the volume of loans referred
to each competing contractor.
9. Federal Share of Borrower Payments
Compliance Requirement - If the borrower makes payments on a loan after the guaranty
agency has paid a claim on that loan, the agency must pay the Secretary an equitable share of
those payments. The Secretary's equitable share is the portion of payments that remains after
deducting:
(1) The complement of the reinsurance percentage in effect when reinsurance was paid on the
loan (10 percent if defaults exceed five percent, or 20 percent if default exceeds nine percent. For
loans made after October 1, 1993, the complement of the reinsurance rate is two percent, 12
percent when claims reach five percent, and 22 percent when claims reach nine percent), and
(2) 27 percent of borrower payments.
(Loans that have been rehabilitated or paid by FFEL program consolidation loans consolidated are
not covered by this requirement because the payoff amounts are not considered "payments made
by the borrower." For these loans, under separate authority, agencies are allowed to retain
collection costs added to the borrower's balance, not to exceed 18.5 percent of the payoff.)
Unless the Secretary approves otherwise, the guaranty agency must submit the Secretary's
equitable share of borrower payments within 45 days of the receipt of the payments by the agency
or its servicer (34 CFR section 682.404 (g)) (NOTE: For payments received prior to February 1,
1993, the agency shall submit payments within 60 days of receipt. However, see Dear Colleague
Letter 95-G-286.) (Section 428(c)(1)(D) (20 USC 1078(c)(1)(D)) and Section 428(c)(6) (20
USC 1078(c)(6)) of the HEA, March 19, 1994 Dear Guaranty Agency Director Letter).
Audit Objective - Determine whether the Secretary's equitable share of borrower payments on
defaulted loans is properly computed and remitted to the Secretary in a timely manner.
Suggested Audit Procedures
Test a sample of borrower payments on defaulted loans to ascertain if the equitable share due ED
was remitted to ED in a timely manner.
10. Assignment of Defaulted Loans to ED
Compliance Requirement - Unless the Secretary notifies an agency in writing that other loans
must be assigned to the Secretary, an agency must assign any loan that meets all of the following
criteria as of April 15 of each year: (1) the unpaid principal balance is at least $100; (2) the loan,
and any other loans held by the agency for that borrower, have been held by the agency for at
least four years (five years for fiscal years beginning July 1, 1997); (3) a payment has not been
received on the loan in the last year; and, (4) a judgement has not been entered on the loan against
the borrower. The Secretary may also direct a guaranty agency to assign to ED certain categories
of defaulted loans held by the agency as described in 34 CFR section 682.409. In determining
whether mandatory assignment from a guaranty agency is required, the Secretary will review the
adequacy of collection efforts. ED considers the agency's record of success in collecting its
defaulted loans, the age of the loans, and the amount of any recent payments on the loans. This
assignment authority is established by the Higher Education Amendments of 1992 (Section
428(c)(8) of the Higher Education Amendments of 1992 (20 USC 1078(c)(8))) (34 CFR section
682.409).
Audit Objective - Determine whether the agency assigned to ED all loans that meet the criteria.
Suggested Audit Procedures
Review an aging of the guaranty agency's loans to ascertain if it is holding loans that, in
accordance with the criteria or its approved assignment schedule should be assigned to ED.
11. Reserve Fund Assets
Compliance Requirement - The guaranty agency shall establish and maintain a reserve fund to
which it shall credit funds received from a State or any other source for the agency's guaranty
activities, including matching funds under section 422(a) of HEA (20 USC 1072(a)), SPA
payments, reinsurance receipts, collections on defaulted loans, insurance premiums, administrative
cost allowance receipts, earnings on investment of reserve funds, and Federal advances obtained
under sections 422(a) and (c) (20 USC 1072(a) and (c)). The agency is also required to deposit
into the reserve fund a fair percentage of the fair market value of any asset that was converted to
a use unrelated to its guaranty activities, if a portion of the cost of developing and maintaining the
asset was not allocated to other than reserve funds.
The assets of the reserve fund may be used only to pay insurance claims, operating costs of
guaranty activities, lenders for participation on loan referral service, the Secretary's equitable
share of collections, refund of Federal advances/other funds owed to the Secretary, reinsurance
fees, insurance premiums, borrower refunds, repayment of certain amounts received from the
State or other sources, and other necessary payments directly related to guaranty activities.
Repayments to the State of funds previously received are only allowed if (1) the agency provides
the Secretary 30 days prior written notice, (2) the agency demonstrates with appropriate
contemporaneous documentation that the amounts were originally received on a temporary basis
only, (3) the objective for which the amounts were originally received has been fully achieved and
(4) repayment would not cause the agency to fail to comply with the minimum reserve levels.
Effective for contracts negotiated after January 13, 1995, the agency must provide ED with
written notice 30 days before making any capital expenditure of more than five percent of the
agency's reserve fund balance. Effective May 6, 1996 this requirement applies to expenditures for
information systems, whether classified as capital or operating expenditures. The guaranty agency
shall account separately for the sources and uses of funds in the reserve fund (34 CFR sections
682.410(a)(1)&(2)).
Past problematic areas have included:
- Failure to credit funds received into the reserve fund, including lock-box operations.
- Unsupported expenses paid from reserve fund assets.
- ED Form 1130 did not include all credits to the reserve fund.
- Use of funds for other programs (e.g., SSIG and other State programs).
- Commingling of funds.
- Unreasonable allocation of indirect costs to FFEL program.
(Sections 422(a), 422(c), 422(g), 428(c),and 428(e) of the HEA (20 USC 1072(a), (c), and (d)
and 20 USC 1078(c) and (e)), 34 CFR sections 682.410(a)(1)-(2), January 13, 1995 Dear
Guaranty Agency Director Letter)
Audit Objective - Determine whether amounts required to be credited to the reserve fund were
so credited and that reserve funds were only used for authorized purposes.
Suggested Audit Procedures
a. Review revenue records to assure that amounts required to be credited to the reserve fund were so credited. Review revenues and receipts that were not credited to the reserve fund to assure that they were not inappropriately omitted from the reserve fund.
b. Test expenditures to ascertain if they were made for allowable purposes.
c. Examine the general journal for unusual entries that impact reserve funds or cost transfers
between guaranty agency programs. Analyze entries reflecting write-off or transfer of assets and
entries where costs were originally charged to a non-FFEL program or activity.
12. Investments
Compliance Requirement - A guaranty agency may invest the assets of the reserve fund only in
low-risk securities and shall exercise the level of care in that investment required of a fiduciary
charged with the duty of investing the money of others (34 CFR section 682.410(a)(5)).
Audit Objective - Determine whether the agency exercised appropriate care in the investment of
reserve fund assets.
Suggested Audit Procedures
a. Obtain and review the minutes of the guaranty agency's board of directors meetings;
management reports from internal and external sources; and prior studies and audit reports for
indications of investment authorization and activity.
b. Review investment activity during the period to ascertain if:
- The investments are low-risk. (Note: "Investments" in State loan or scholarship programs and
loans to agency officers, other guaranty agency activities or subsidiaries, or vendors are not
considered investments. They are inappropriate uses of reserves.)
- Reserve fund assets have been used in intra-party transactions of the entity where the entity
includes a guaranty agency and non-guaranty agency operations (i.e., a secondary market
participant, a third party servicer etc.).
13. Collection Charges
Compliance Requirement - The guaranty agency must charge a defaulted borrower an amount
equal to reasonable costs incurred by the agency in collecting a loan on which the agency has paid
a default. The amount charged the borrower should equal the lesser of the amount that would be
charged under the formula in 34 CFR section 30.60 or, the amount that would be charged if the
loan was held by ED. Costs may include, but are not limited to, attorney's fees, collection agency
charges, and court costs (34 CFR section 682.410(b)(2)).
Audit Objective - To determine whether the agency charged appropriate collection costs to
borrowers of loans on which the agency has paid a default or bankruptcy claim.
Suggested Audit Procedures
Test a sample of defaulted loan accounts to determine whether the agency charged for reasonable
costs of collection. Determine whether the method used to calculate the amount was appropriate.
14. Enforcement Action
Compliance Requirement - The guaranty agency shall take measures to ensure enforcement of
all Federal, State and guaranty requirements and at a minimum, conduct biennial on-site program
reviews of such lenders and schools that meet criteria specified in 34 CFR section 682.410(c)(1).
The agency is required to use statistically valid techniques to calculate liabilities owed the
Secretary that the review indicates may exist, demand prompt payment from the responsible party
and refer to the Secretary any case in which the payment of funds is not made within 60 days. A
guaranty agency is also required to adopt procedures for identifying fraudulent loan applications
and undertaking or arranging for the prompt and thorough investigation of criminal or other
programmatic misconduct by its program participants. It is responsible also for promptly
reporting all of the allegations and indications having a substantial basis in fact and the scope,
progress and results of the Agency's investigations (34 CFR section 682.410(c)).
Audit Objective - Determine whether the agency is carrying out program reviews and related
enforcement activity in accordance with the above requirements.
Suggested Audit Procedures
a. Review the guaranty agency's procedures for selecting lenders and schools to review to
ascertain if they meet the regulatory criteria.
b. Review program review guidance to ascertain if that it is up-to-date and includes, when
problems are found, a statistically valid method for determining liabilities due the Secretary.
c. Review program review reports to ascertain if amounts due the Secretary were identified and, if
so, whether appropriate demand for payment and follow-up was conducted.
d. Through inquiry and review, determine whether the agency adopted procedures for identifying
fraudulent loan applications and for reporting all allegations of misconduct having a substantial
basis to ED. Review agency records on the follow-up of misconduct to determine whether ED
was notified when appropriate.
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