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Third-Party Servicers

Session 18. Third-Party Servicers. Scott Filter and Angela Beam | Dec. 2015 U.S. Department of Education 2015 FSA Training Conference for Financial Aid Professionals. Agenda. Definition of a Third-Party Servicer Contracts and Spheres of Responsibility

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Third-Party Servicers

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  1. Session 18 Third-Party Servicers Scott Filter and Angela Beam | Dec. 2015 U.S. Department of Education 2015 FSA Training Conference for Financial Aid Professionals

  2. Agenda • Definition of a Third-Party Servicer • Contracts and Spheres of Responsibility • Third-Party Servicer Program Review Process • Top issues in Third-Party Servicer Reviews

  3. Definition of Third-Party Servicer What is a third-party servicer?

  4. Definition of Third-Party Servicer (continued) A third-party servicer may be an individual, or a state, or a private, profit or non-profit organization that enters into a contract with an eligible institution to administer, through manual or automated processing, any aspect of the institution’s participation in any Title IV, HEA program. Regulations: 34 C.F.R. § 668.2 (definitions)

  5. Definition of Third-Party Servicer (continued) Includes: • Performing any function required by any statutory provision of or applicable to Title IV of the HEA; • Any regulatory provision prescribed under that statutory authority; • Any applicable special arrangement, agreement, or limitation entered into under the authority of statutes applicable to Title IV of the HEA. Regulations: 34 C.F.R. § 668.2 (definitions)

  6. Definition of Third-Party Servicer (continued) Includes (but not restricted to): • Processing student financial aid applications; • Performing need analysis; • Determining student eligibility and related activities; • Certifying loan applications; • Processing output documents for payment to students; • Receiving, disbursing, or delivering Title IV funds, excluding lock-box processing of loan payments and normal bank EFT; • Preparing or disseminating required consumer information disclosures; • Perkins Loan servicing or collection; • Preparing and certifying requests for advance or reimbursement funding; • Preparing, certifying, and submitting institutional eligibility and participation notices and applications; • Preparing a Fiscal Operations Report and Application for Participation (FISAP). Regulations: 34 C.F.R. § 668.2 (definitions)

  7. Definition of Third-Party Servicer (continued) Also includes: • Providing FAFSA or pre-FAFSA completion services; • Collecting, reviewing, and/or maintaining supporting documentation required to process Title IV funds; • Awarding, certifying, originating, and/or disbursing Title IV funds; • Performing financial aid counseling, including operation of call centers; • Performing default prevention/management functions, entrance and exit loan counseling, or developing a default management plan; • Financial aid consulting, including financial aid staffing, interim management, processing support, and/or development and maintenance of written policies and procedures; • Preparing and/or submitting required reports including enrollment reporting to NSLDS, IPEDS, and Campus Crime and Security data. Dear Colleague Letter GEN 15-01

  8. Definition of Third-Party Servicer (continued) Excludes: • Publishing ability-to-benefit tests; • Financial and compliance auditing (including preparation of financial statements); • Mailing of documents prepared by the institution; • Warehousing of records (physical storage of Title IV related records only); • Providing computer services or software as long as the provider is not responsible for using the software for the institution’s student aid processes. • Limited to computer products and/or services that reside at and are under the control of the institution Regulations: 34 C.F.R. § 668.2 (definitions); Dear Colleague Letter GEN 15-01

  9. Definition of Third-Party Servicer (continued) Does not include an employee of the institution, if the individual: • Works on a full-time, part-time, or temporary basis • Performs all duties on-site at the institution or under the supervision of the institution • Is paid directly by the institution • Is not employed by or associated with a third-party servicer • Is not a third-party servicer for any other institution Regulations: 34 C.F.R. § 668.2 (definitions)

  10. Can a school also be considered a third-party servicer? Question: If my school performs verification of student files; or handles the COD reporting, drawdown of funds, reconciliation process; or performs some other Title IV function on behalf of another school, is my school considered a third-party servicer? Answer: Yes, if an institution performs Title IV functions or services on behalf of another institution (separate OPE ID’s not additional locations), your institution is considered a third-party servicer and subject to the applicable servicer regulations.

  11. What if a servicer instructs an institution not to report it as a third-party servicer? If an entity or individual performs a Title IV service or function that is necessary for the institution to remain eligible to participate in the Title IV programs, to determine a student’s Title IV eligibility, to account for Title IV funds, to deliver Title IV funds to students, or to perform any other aspect of the administration of the Title IV programs, the entity is likely considered a third-party servicer and the institution is required to notify the Department that the institution has entered into a contract with that entity. The Department will contact you if additional information is needed. In making a determination as to whether or not an entity or individual is considered a third-party servicer, the Department looks at each case individually and focuses on the service or function that is being performed at that institution as opposed to a title that the entity may be using or a generic description of the types of services provided. Servicers often offer multiple versions of a product or service and frequently customize a product or service based on an institution’s unique needs. Some institutions agree to pilot a new service or function that is being developed before it is made available to the public. New products emerge and/or change every day. It is possible for an entity to be considered a third-party servicer at one institution and not at another.

  12. Is financial aid staffing or management considered a third-party service? Question: If an institution contracts with an entity or individual to provide financial aid staffing or management for the administration of its Title IV programs, is the individual or entity considered a third-party servicer? Answer: If the entity or individual that is performing Title IV services or providing management over the administration of the Title IV programs does not perform all duties on-site at the institution or under the supervision of the institution; is not paid directly by the institution; is employed by or associated with a third-party servicer; or is a third-party for any other institution – the entity or individual is considered a third-party servicer and the institution is required to notify the Department that the institution has entered into a contract.

  13. Is reviewing policies and procedures considered a third-party service? Question: If my institution hires an entity or individual for the sole function of reviewing our policies and procedures to make recommendations for improvement – is the entity or individual considered a third-party servicer? Answer: No

  14. Third-Party Servicer Contracts An institution may enter into a written contract with a third-party servicer for the administration of any aspect of the institution’s participation in any Title IV, HEA program. • Only to the extent that the servicer’s eligibility to contract has not been limited, suspended, or terminated Regulations: 34 C.F.R. § 668.25

  15. Third-Party Servicer Contracts (continued) A third-party servicer must agree to: • Comply with all statutory and regulatory provisions applicable to Title IV of the HEA; • Refer to the OIG any information indicating that there is reasonable cause to believe that the institution may have engaged in fraud or other criminal misconduct in connection with Title IV administration; • False claims for Title IV, HEA program assistance • False claims of independent student status • False claims of citizenship • Use of false identities • Forgery of signatures or certifications • False statements of income • Violation of incentive compensation prohibitions Regulations: 34 C.F.R. § 668.25(c)(1),(2)

  16. Third-Party Servicer Contracts (continued) • Be jointly and severally liable with the institution for any violation by the servicer of any statutory or regulatory provision applicable to Title IV of the HEA. What is joint and several liability? Underjoint and several liability, the Department may pursue an obligation against either the institution or its servicer as if they were jointly liable and it becomes the responsibility of the institution and its servicer to sort out their respective proportions of the liability and payment. Regulations: 34 C.F.R. § 668.25(c)(3)

  17. Third-Party Servicer Contracts (continued) • For a third-party servicer that disburses funds: • Confirm the eligibility of the student before making the disbursement • Calculate and return any unearned Title IV funds • If the servicer stops providing services for the administration of Title IV programs, goes out of business, files for bankruptcy, or the contract is terminated, the servicer will return to the institution all: • Records in the servicer’s possession • Funds received on behalf of the institution Regulations: 34 C.F.R. § 668.25(c)(4)

  18. Third-Party Servicer Contracts (continued) A third-party servicer may not enter into a written contract with an institution if: • The servicer has been limited, suspended, or terminated • The servicer has had, during its two most recent audits, an audit finding that resulted in the servicer being required to repay an amount greater than five percent of the funds that the servicer administered for any award year • The servicer has been cited during the preceding five years for failure to submit audit reports in a timely fashion Regulations: 34 C.F.R. § 668.25(d)

  19. Institutional Responsibility Institutions are required to notify the Department within 10 days of the date it enters into, modifies, or terminates a contract with a servicer to administer any aspect of its participation in the Title IV programs. • An institution’s notification must include the name and address of the servicer • An institution shall provide a copy of the contract and any modifications to the Department, if requested Access at eligcert.ed.gov: Electronic Application for Approval to Participate in the Federal Student Financial Aid Programs (E-App) Regulations: 34 C.F.R. § 668.25(e)

  20. Third-Party Servicer Reporting Requirements Third-party servicers that contract with institutions to perform any aspect of the administration of the Title IV programs are required to report the names of the institutions it contracts with to the Department. February 12, 2015 Electronic Announcement Subject: Third Party Servicer Data Form – Reporting Requirement

  21. Third-Party Servicer Data Form The form also requires the servicer to provide: • The legal name and any other name(s) the servicer uses to conduct business • The address of the servicer (main and any additional locations) • The name the servicer utilizes to file its annual compliance audit • The fiscal year end date utilized by the servicer • The name(s) and contact information for the servicer’s owners • The name and contact information for the primary person responsible for responding to Department inquiries • The types of Title IV services provided to institutions of higher education

  22. Compliance Audits for Third-Party Servicers A third-party servicer does not have to have a compliance audit if • The servicer contracts with only one institution; and • The audit of that institution covers every aspect of the servicer’s administration of that program for that institution A third-party servicer that contracts with more than one institution may submit a compliance audit report that covers all institutions with which the servicer contracts. A third-party servicer must submit annually its compliance audit no later than six months after the last day of the servicer’s fiscal year. Regulations: 34 C.F.R. § 668.23

  23. Program Integrity and Improvement • On October 30, 2015, the Department issued final regulations of the Program Integrity and Improvement regulatory package, which included issues related to cash management • Session 21 at the FSA Conference will go into greater details about the final regulations

  24. Program Integrity and Improvement • The new cash management regulations provide specific protections to students on their options in receiving credit balances, including how options must be presented, what information can be shared with third-party servicers, and what fees can be assessed to the student • Among the provision, the regulations clarify that a third-party servicer is also responsible for confirming student eligibility if the servicer performs activities or transactions that lead to or support disbursement of funds. (§ 668.164(b)(3))

  25. Third-Party Servicer Oversight Group (TPSOG) Established as part of the Kansas City School Participation Division in 2013 Responsibilities include: • Conducting program reviews of third-party servicers • Monitoring annual compliance audits submitted by third-party servicers • Reviewing/analyzing third-party servicer contracts and information submitted by institutions, as well as Third-Party Servicer Data Forms and information submitted by servicers to determine if functions or services performed meet the definition of a Title IV function

  26. Third-Party Servicer Program Review Process

  27. Third-Party Servicer Program Review Process (continued) An institution’s responsibility with regard to its compliance with Title IV, HEA requirements does not terminate with the execution of a servicing contract. Rather, the institution and the servicer become partners with the shared responsibility of ensuring that all aspects of Title IV compliance are met. An institution cannot contract out its fiduciary responsibilities and obligations under the Higher Education Act.

  28. Third-Party Servicer Program Review Process (continued) • When an institution contracts with a servicer to administer any aspect of the Title IV, HEA programs, both the institution and the servicer act in the capacity of a fiduciary and are subject to the highest standard of care and diligence in administering the programs and accounting to the Department for any funds administered.  • Regulations: 34 C.F.R. §§ 668.82(a),(b)(2)

  29. Third-Party Servicer Program Review Process (continued) Review of Third-Party Servicer and Six Client Institutions • Contracts • Policies and Procedures • School Staff Interviews • Servicer Staff Interviews • Student Files • Student Interviews

  30. Third-Party Servicer Program Review Issues • Inadequate Contract / Written Policies and Procedures • Inadequate Record Keeping • Failure to Maintain Adequate Audit Trail • Failure to Perform Proper Reconciliation • Satisfactory Academic Progress Deficiencies • Failure to Resolve Conflicting Information • Verification Violations

  31. Third-Party Servicer Program Review Issues (continued) • Student Credit Balance Deficiencies • Return of Title IV Deficiencies • Leave of Absence Deficiencies • COD – Inaccurate/Untimely Reporting • NSLDS – Inaccurate/Untimely Reporting • Entrance/Exit Counseling Deficiencies • Inadequate Notices and Authorizations (Required Disclosures) • Failure to Report Third-Party Servicer • Standards of Administrative Capability

  32. Inadequate Contract/Written Policies and Procedures • The institution must ensure that its third-party servicers (and its subcontractors) comply with applicable Title IV, HEA regulations and program requirements and must ensure that all third-party service contracts contain the required language outlined under 34 C.F.R. § 668.25(c) • The institution must ensure that there are written procedures in place that clearly outline the responsibilities of the institution versus the responsibilities of the Servicer • Absent comprehensive policies and procedures and/or a detailed contract, the institution cannot ensure that the Servicer is properly administering all aspects of the Title IV, HEA programs that the Servicer is performing on behalf of the institution

  33. Inadequate Contract/Written Policies and Procedures Information Security Requirements: Postsecondary educational institutions participating in the Title IV, HEA programs are subject to the information security requirements established by the Federal Trade Commission (FTC) for financial institutions. Institutions must take reasonable steps to select and retain service providers that are capable of maintaining appropriate safeguards for the customer information at issue and require service providers by contract to implement and maintain such safeguards. See 15 U.S.C. § § 6801(b), 6805(b)(2); 16 C.F.R. §§ 313.3(n), 314.1–5; Gramm-Leach-Bliley Act: Sections 501 and 505(b)(2); see alsoFederal Student Aid Handbook, Volume 2

  34. Inadequate Contract/Written Policies and Procedures (continued) FERPA Requirements : An institution may disclose personally identifiable information from an education record of a student to a third-party servicer, if the servicer: • Performs an institutional service or function for which the agency or institution would otherwise use employees; • Is under the direct control of the agency or institution with respect to the use and maintenance of education records; and • Is subject to the requirements of §99.33(a) governing the use and redisclosure of personally identifiable information from education records. Regulations: 34 C.F.R. § 99.31(a)(1)(i)(B)

  35. Inadequate Contract/Written Policies and Procedures (continued) FERPA Requirements (continued) • The disclosure is in connection with financial aid for which the student has applied or which the student has received, if the information is necessary for such purposes as to: • Determine eligibility for the aid; • Determine the amount of the aid; • Determine the conditions for the aid; or • Enforce the terms and conditions of the aid. Regulations: 34 C.F.R. § 99.31(a)(4)(i)

  36. Inadequate Contract/Written Policies and Procedures (continued) FERPA Requirements (continued) • Institutions are required to include the criteria for who is considered a “school official” and what is considered a “legitimate educational interest” in its annual notification of rights under FERPA. • Institutions must ensure that its third-party servicers use personally identifiable information only for the purpose(s) for which the information was disclosed. For a third-party servicer, that purpose is the Title IV function the servicer has contracted to perform on behalf of the institution. Servicers are prohibited from using personally identifiable information for any other purpose. Regulations: 34 C.F.R. §§ 99.32(a)(2);99.7(a)(3)(iii)

  37. Inadequate Record Keeping Failure to Maintain Required Records An institution must maintain all records needed to properly account for its receipt and expenditure of Title IV, HEA funds including all source documents used to support Title IV, HEA disbursements.  The institution must ensure that it has access to all records provided to or created by its third-party servicers (and subcontractors) and the records are maintained in a systematically organized manner. The institution must be able to make its records readily available to the Department for review. Regulations: See 34 C.F.R. §§ 668.24(b),(c)

  38. Inadequate Record Keeping (continued) The institution must ensure that its third-party servicers have access to all records necessary for the servicer to fulfill its administrative and fiduciary responsibilities under the Title IV regulations. In the case of a third-party servicer that disburses funds (is engaged to perform activities or transactions that lead to or support a disbursement), the institution must provide adequate documentation for the servicer to confirm the eligibility of the student before making that disbursement. This confirmation must include, but is not limited to, applicable records required under 668.24. Regulations: See 34 C.F.R. §§ 668.24; 668.25(c)(4)

  39. Inadequate Record Keeping (continued) Failure to Maintain Required Attendance Records Institutions are required to maintain source documentation (original time cards, attendance logs, etc.) to validate the hours entered into computer systems or other summary formats. Attendance records are required to establish academic payment periods, to determine the timing of subsequent disbursements as well as to establish whether or not a student is meeting an institution’s SAP standards for clock hour programs, to determine a student began attendance during a payment period, and/or to establish the last date of attendance for a student who withdrawals or stops attending.

  40. Inadequate Record Keeping (continued) Credit-Hour Programs Institutions must have adequate procedures for documenting whether or not a student begins attendance in enough hours to support the enrollment status for which Title IV, HEA funds are awarded and disbursed. The institution must maintain the source documents utilized for its determinations (grade books, class attendance rosters, etc.).

  41. Inadequate Record Keeping (continued) Clock-Hour Programs An institution cannot properly calculate a student’s SAP evaluation or accurately calculate Return of Title IV fund calculations, for students who officially or unofficially withdraw from the institution, if the institution does not maintain attendance records that account for both the hours a student is scheduled to attend and the hours the student actually attends.

  42. Inaccurate Record Keeping (continued) Clock-Hour Programs: • When determining a student’s eligibility for Title IV payments and calculating Title IV returns for a student who withdraws, the scheduled clock-hours used for a student must be those established by the school prior to the student beginning attendance for the payment period or period of enrollment. • The hours must have been established in accordance with any requirements of the state or the institution’s accrediting agency. These hours must be consistent with the published materials describing the institution’s programs. • If an institution modifies the scheduled hours in a student’s program, the institution must document the effective date and the reason for the modification in the students file.  Regulations: 34 C.F.R. § 668.22(f)(1)(ii)

  43. Failure to Maintain Adequate Audit Trail • An institution must administer Title IV, HEA programs with adequate checks and balances in its system of internal controls. Consistent with this principle, an institution shall account for the receipt and expenditure of Title IV, HEA funds in accordance with generally accepted accounting principles • An institution shall establish and maintain on a current basis financial records that reflect each Title IV, HEA transaction, and general ledger control accounts and related subsidiary accounts that identify each Title IV, HEA transaction and separate those transactions from all other institutional financial activity Regulations: 34 C.F.R. §§ 668.16(c)(1); 668.24(b)(2).

  44. Failure to Maintain Adequate Audit Trail (continued) In order to comply with this requirement, an institution must maintain, among other documents, the following: • Records of all Title IV, HEA program transactions; • Bank statements for all accounts containing Title IV, HEA funds; • Records of student ledger accounts*, including each student’s institutional charges, cash payments, Title IV, HEA payments, cash disbursements, refunds, returns, and overpayments required for each enrollment period; • General ledger (control accounts) and related subsidiary ledgers that identify each Title IV, HEA transaction (Title IV, HEA transactions must be separate from the institution’s other financial transactions); • Records that support data appearing on required reports, such as Federal Pell Grant Statements of Accounts, G5 cash requests and quarterly or monthly reports, monthly Title IV, HEA program reconciliation reports, Audit reports and institution responses, state grant and scholarship award rosters and reports, as well as Accrediting and licensing agency reports.

  45. Failure to Maintain Adequate Audit Trail (continued) * Student Ledger Account: A record of an individual student’s financial interaction with the institution, including the amounts and dates of institutional charges incurred, the amounts and dates of Title IV, HEA disbursements and returns, the amounts and dates of other financial aid disbursements, personal payments, and/or the creation and payment of credit balances and/or living expense stipends in chronological order with a running account balance.

  46. Failure to Perform Proper Reconciliation Financial Aid Office or Business Office or Third-Party Servicer Third-Party Servicer Reconcile Internally G5 COD

  47. Failure to Perform Proper Reconciliation (continued) Consistent with generally accepted accounting principles, and the various Title IV, HEA program requirements, all records must be reconciled to ensure accuracy. It is impossible for either the institution or servicer to meet its reconciliation responsibilities if all records are not ultimately reconciled with each other even if the initial reconciliation responsibilities are divided between the school and the servicer. See2015-2016 Federal Student Aid Handbook, Volume 2 at 133; Volume 4 including Appendices A & B.

  48. Satisfactory Academic Progress Deficiencies Failure to Develop Adequate SAP Policy - Missing Required Components An institution must establish a reasonable SAP policy for determining whether an otherwise eligible student is making SAP in his or her educational program and may receive assistance under the Title IV, HEA programs. • The policy must include both quantitative and qualitative measurements of a student’s progress and must establish that a student’s progress is evaluated at the end of each payment period if the program length is one year or shorter, or at least annually for all other programs • The policy must also set forth the consequences to a student of not meeting SAP standards Regulations: 34 C.F.R. §§ 668.16(f); 668.34(a)(3)-(11).

  49. Satisfactory Academic Progress Deficiencies (continued) For a clock-hour program: An institution should make its evaluation at one of the following times: • At the point when the student’s scheduled clock-hours for the payment period have elapsed, regardless of whether the student attended them; • At the point when the student has attended the scheduled clock-hours; or • At the point when the student successfully completes the scheduled clock-hours for that payment period. The institution must specify which of the above options it is utilizing in its SAP policy. Seehttp://www.ifap.ed.gov (SAP Review, R-Q7)

  50. Satisfactory Academic Progress Deficiencies (continued) Maximum Timeframe • The policy must specify the pace at which a student must progress through his or her educational program to ensure that the student will complete the program within the maximum timeframe and provide for measurement of the student’s progress at each evaluation. • Can not exceed 150 percent of the published length of the educational program. • For clock-hour programs, the maximum timeframe component must be measured by the cumulative number of clock hours the student is required to complete and expressed in calendar time. Regulations 34 C.F.R. §§ 668.34(a)(5)(i),(b)(2)

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