Know What to Expect in School-as-Lender Reviews

USA Funds^®’ policy experts remind schools operating as lenders in the Federal Family Education Loan Program that federal regulations require guarantors to conduct reviews of certain schools that act as lenders.

According to federal regulations 34CFR 682.401(c), guarantors must conduct program reviews of lenders that meet at least one of the following criteria:

• The volume of FFELP loans made or held by the lender and guaranteed by the guarantor equaled at least 2 percent of the total loans guaranteed by that guarantor in the preceding year.
• The lender is one of the 10-largest lenders of loans guaranteed by that guarantor in that year.
• The lender’s FFELP volume was at least $10 million in the most-recent fiscal year.

This requirement applies to all lenders, including schools that act as lenders and meet any of the criteria noted above. Some schools that act as lenders — particularly those that are new to the school-as-lender scenario — previously have not been subject to lender program reviews, however. USA Funds provides the following information regarding the scope of these reviews and what to expect.

Key regulations
Guarantors must verify a school-as-lender’s compliance with federal regulations outlined in 34 CFR 682.601, including the following:

• Loans were made only to graduate students.
• Loans were made only to borrowers enrolled at that school.
• The school made only Stafford loans.
• The school employs at least one person whose full-time responsibilities are limited to the administration of financial-aid programs.
• The school’s official cohort-default rate for the review period is 10 percent or less.
• The school awards any contract for financing, servicing or administering FFELP loans on a competitive basis.
• The school offers loans that carry an origination fee or an interest rate, or both, that are less than the fee or rate authorized under the provisions of the Higher Education Act of 1965, as amended.
• Other than for reasonable administrative expenses, proceeds from interest-subsidy or special-allowance payments, interest payments from borrowers, and any proceeds from the sale or other disposition of loans go toward need-based grants.

Important documentation
USA Funds runs its own reports to verify compliance with some administrative requirements. As with any lender, however, the school-as-lender is responsible for providing much of the documentation necessary for the guarantor to verify compliance and complete the review. Examples of documentation that USA Funds may ask the school-as-lender to produce include the following:

• Student-enrollment records.
• Information about procedures for the awarding of contracts.
• Agreements or other documentation that demonstrate compliance with the requirement regarding the reduced origination fee or interest rate.
• A copy of the annual compliance audit for each year being reviewed.
• A copy of each fiscal year’s audited financial statements, with detail from the general ledger that itemizes the following information:
  • Revenue generated from any loan sales.
  • Expenses for the administration of the school-as-lender program.
  • Expenditures for need-based grants made from the proceeds of the school-as-lender program.
• A copy of the relevant Lender’s Interest and Special Allowance Request and Reports showing interest-subsidy and special-allowance payments received from the U.S. Department of Education.

You will need Adobe Reader to access 34 CFR Part 682 on the USA Funds Web site. If you have questions about USA Funds’ policies and procedures regarding school-as-lender reviews, please contact Bruce Bement, USA Funds manager, compliance and investigations, at (317) 806-1256, or via e-mail.