Office of Management and Budget

Federal Family Education Loan Program

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.