Internal Controls:

VA Lacked Accountability Over Its Direct Loan and Loan Sale Activities

AIMD-99-24: Published: Mar 24, 1999. Publicly Released: Mar 24, 1999.

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

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

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: VA developed the data necessary to disclose the cash flows related to loan sales and related guarantees in VA's budget records, calculate and report the cost of direct loans and loan guarantees, and budget for the subsidy and administrative cost of the loans and guarantees in accordance with the Federal Credit Reform Act of 1990, and Office of Management and Budget Circular A-11. GAO monitored the status of the above recommendation as part of its review of the fiscal year 1999 Department of Veterans Affairs Financial Audit.

    Recommendation: The Secretary of Veterans Affairs should direct the Under Secretary for Benefits to disclose cash flows related to loan sales and related guarantees in VA's budget records, calculate and report the cost of direct loans and loan guarantees, and budget for the subsidy and administrative cost of the loans and guarantees in accordance with the Federal Credit Reform Act of 1990 and Office of Management and Budget (OMB) Circular A-11.

    Agency Affected: Department of Veterans Affairs

  2. Status: Closed - Implemented

    Comments: VA established the Portfolio Loan Oversight Unit (PLOU) to monitor servicing of direct loans and tax payments for VA-owned properties. To ensure that portfolio loans are actively serviced, that seriously defaulted loans are referred for foreclosure timely, and that bankruptcy cases are routinely monitored to ensure timely request for relief from stay, Loan Management (LM) is establishing an Oversight Review Team (ORT). This team is comprised of LM, PLOU, VA Central Office Finance, and Financial & Systems Quality Assurance Service (FSQAS) personnel. Input was also solicited from the Inspector General. The ORT met in May 2001, to determine how many specialized onsite reviews and performance audits to conduct during the remainder of this calendar year, as well as the scope of, and organization responsible for, performing each review/audit (i.e., outside contractor, PLOU, FSQAS, LM, etc.). These reviews and audits will enable Loan Guaranty Service to effect corrective change to ensure that the portfolio loan servicing contractor (PLSC) complies with the performance requirements of the contract. As for the loan sale program, Loan Guaranty Service (LGS) has audited three of the four Master Servicers of sold vendee loans. An audit of a loan sale trustee (Bankers Trust) has also been completed. It is LGS' intention to conduct annual or biennial audits of the portfolio loan servicing and loan sale programs. Additionally, a Financial Analyst position was filled in January 2001, which allowed VA to increase loan sale oversight activities. The framework for ORT has been established and the group met during fiscal year 2001, and will continue to meet on an annual basis. Loan sale oversight activities will be ongoing.

    Recommendation: The Secretary of Veterans Affairs should direct the Under Secretary for Benefits to establish and implement adequate monitoring activities of outsourced activities to include both direct loans and VA property servicing as well as activities associated with the loan sales. These efforts should be designed to comply with OMB Circular-129 and be stringent, given the risks inherent in the existing servicing environment.

    Agency Affected: Department of Veterans Affairs

  3. Status: Closed - Implemented

    Comments: A new loan portfolio services contract requires that the contractor provide the necessary monitoring and tracking support, including maintenance of the VA loan database.

    Recommendation: In order to effectively manage loan assets and the cash flows associated with VA's direct loans, the Secretary of Veterans Affairs should direct the Under Secretary for Benefits to provide a basis for monitoring and controlling loan and property assets and any related cash flows managed by contractors by establishing a database for direct loans, through the development of a complete inventory of all loans originated. The database should be similar to the information systems in place at major owners of housing loan portfolios. Benchmarking with major owners of housing loan portfolios should offer perspective in the data requirements and capabilities offered by such systems for creating an adequate control environment for overseeing both in-house activities as well as outsourced functions.

    Agency Affected: Department of Veterans Affairs

  4. Status: Closed - Implemented

    Comments: VA did not concur with this recommendation as written, but it has taken extensive actions to improve VA's monitoring of contractors that will mitigate prior internal control weaknesses. Specifically, VA's Portfolio Loan Oversight Unit (PLOU) routinely audits the portfolio loan servicing contractor to ensure that taxes on loans are paid timely. In addition, the PLOU audits bills from the contractor for tax payments on VA-owned properties. VA has also established an Oversight Review Team (ORT) comprised of the PLOU, VA Loan Guaranty Service Loan Management staff, VBA Financial Service, VA's Financial Quality Assurance Service, and VA's Office of the Inspector General. The ORT team conducts quarterly on-site visits to review contractor operations. In addition, Loan Guaranty Service, in recent years, has contracted for annual audits of the portfolio servicing contractor by an independent auditor. Finally, as part of the OIG's annual audit of the agency's financial statements, the independent auditor has reviewed most processes, including disbursements related to VA properties, at the portfolio servicing contractor.

    Recommendation: In order to effectively manage loan assets and the cash flows associated with VA's direct loans, the Secretary of Veterans Affairs should direct the Under Secretary for Benefits to implement processes to allow immediate improvements in VA's capability to monitor contractor servicing of direct loans and disbursements related to VA-owned properties. These improvements would include periodically obtaining tax bills for VA-owned properties from independent sources and comparing this information to that in its Property Management System to validate servicer requests for reimbursement of expenses.

    Agency Affected: Department of Veterans Affairs

  5. Status: Closed - Implemented

    Comments: VA's Loan Administration business process re-engineering effort will include a new system to track defaults all the way through claim payment, including acquisition of loans through refunding. This system is intended to capture data and provide it immediately to the portfolio contract servicer when VA acquires the loans. According to VA, this new system - the VA Loan Electronic Reporting Interface (VALERI) - began rolling out in February 2008. In 2012, VA reported that VALERI supports an extensive regulatory revision (see http://www.benefits.va.gov/homeloans/docs/VALERI_Reg_Original.pdf). The regulations require at least monthly electronic reporting on all VA-guaranteed loans, with additional events reported on delinquent loans, including those being considered for refunding. VA's web site provides more information on VALERI at http://www.benefits.va.gov/homeloans/valeri.asp.

    Recommendation: In order to effectively manage loan assets and the cash flows associated with VA's direct loans, the Secretary of Veterans Affairs should direct the Under Secretary for Benefits to develop a centralized database to immediately record loans in the process of being assumed by VA in order to establish timely and thorough visibility over those assets and to facilitate transferring such information to the contract servicer expeditiously.

    Agency Affected: Department of Veterans Affairs

  6. Status: Closed - Implemented

    Comments: In August 1999, VA reorganized its office structure to include a supervisory position to oversee staff handling loan sale operations and administrative activities. The reorganization included procedures to include segregation of duties.

    Recommendation: Regarding gaining operational and accounting control over loan sale activities, the Secretary of Veterans Affairs should direct the Under Secretary for Benefits to establish adequate separation of duties and supervision over VA staff involved in all loan sale operational and administrative activities.

    Agency Affected: Department of Veterans Affairs

  7. Status: Closed - Implemented

    Comments: The Loan Guaranty Service and its contract accountants now receive information on a monthly basis from the Trustee, Deutsche Bank (formerly Bankers Trust) and Countrywide, the servicer, to provide the data. Likewise, the finance staff handles all coordination between Deutsche Bank and the servicer (per September 25, 2000, VA Memo to the Deputy Assistant Secretary for Congressional Operations from the Deputy Under Secretary for Management, Nora E. Egan and other documentation).

    Recommendation: Regarding gaining operational and accounting control over loan sale activities, the Secretary of Veterans Affairs should direct the Under Secretary for Benefits to develop and implement procedures to ensure that relevant data from servicers and the trustee/custodian are provided promptly to VA offices responsible for managing or recording trust activities and transactions.

    Agency Affected: Department of Veterans Affairs

  8. Status: Closed - Implemented

    Comments: VA has developed procedures to ensure loan sale transactions and all subsequent activity associated with the trust are recorded in accordance with federal accounting standards and related guidance. VA hired a contractor who completed the accounting adjustments needed to reflect the results of prior years' transactions, recorded financial transactions relating to trust activities, including those associated with the original sale, and establishments of reserves, drawdowns to satisfy the federal guarantee, subsidy reestimates to satisfy trust agreement provisions, as well as record the revenue from trust investments and assets. This action was completed by September 30, 1999, and reflected in VA's fiscal year 1999 financial statements.

    Recommendation: Regarding gaining operational and accounting control over loan sale activities, the Secretary of Veterans Affairs should direct the Under Secretary for Benefits to record loan sale transactions and all subsequent activity associated with the trusts consistent with federal accounting standards and any related guidance. This would include: (1) making appropriate accounting adjustments to accurately reflect the results of prior years' transactions; and (2) recording all financial transactions relating to trust activities, including those associated with the original sale, the establishment of the reserves, drawdowns to satisfy the federal guarantee, subsidy reestimates, and replenishments to satisfy trust agreement provisions as well as revenue from trust investments and assets.

    Agency Affected: Department of Veterans Affairs

  9. Status: Closed - Implemented

    Comments: Automated uploads to establish vendee loans are made as of the 25th of each month from VA's Property Management System. These loans are reconciled the day following the upload (per June 30, 2000, and September 25, 2000, VA Memos to the Deputy Assistant Secretary for Congressional Operations from the Deputy Under Secretary for Management, Nora E. Egan).

    Recommendation: In order to effectively manage loan assets and the cash flows associated with VA's direct loans, the Secretary of Veterans Affairs should direct the Under Secretary for Benefits to reconcile all loan records in the contractor's database to VA's general ledger on a monthly basis, by the end of the following month.

    Agency Affected: Department of Veterans Affairs

  10. Status: Closed - Implemented

    Comments: VA's portfolio loan servicing contract was converted to a performance-based contract with a new servicer. This contract was developed by reviewing past and proposed policies and procedures intended to ensure completeness, consistency, and accuracy of data obtained and recorded concerning individual loans and properties. It also involved development of quality assurance steps to ensure the accuracy of the data. A private contractor was engaged to assist in the development of the new portfolio servicing contract. The contractor guided a team of subject matter experts, interested parties, and supervisors in identifying past policies and procedures, and then learning about industry best practices through market research. VA's Office of the Inspector General was represented on the contractor selection panel to ensure that quality assurance provisions were adequate.

    Recommendation: In order to effectively manage loan assets and the cash flows associated with VA's direct loans, the Secretary of Veterans Affairs should direct the Under Secretary for Benefits to continue to develop standardized policies and procedures intended to ensure completeness, consistency, and accuracy of data obtained and recorded concerning individual loans and properties. Implement quality assurance steps to ensure the accuracy of this data.

    Agency Affected: Department of Veterans Affairs

  11. Status: Closed - Implemented

    Comments: VA has developed procedures to adhere to federal legislation and guidance related to cash management. VA's loan servicer is remitting cash to Treasury not later than the third day after receipt, which conforms with 31 U.S.C. 3302. VA is establishing a lockbox with Treasury, whereby cash will go directly to Treasury and escrow funds and fees will be transmitted to the servicer. VA did not concur with the recommendation that VA should recoup the total interest earned on Seasons Mortgage Group's account balances from the inception of VA's contract with Computer Data Systems, Incorporated. VA is awaiting legal review on this issue.

    Recommendation: In order to effectively manage loan assets and the cash flows associated with VA's direct loans, the Secretary of Veterans Affairs should direct the Under Secretary for Benefits to adhere to federal legislation and guidance regarding cash management. Servicers should be instructed to remit all proceeds to VA's Treasury accounts daily upon receipt. Further, VA should recoup the total interest earned on Seasons Mortgage Group's (SMG) account balances from the inception of VA's contract with Computer Data Systems, Incorporated/SMG.

    Agency Affected: Department of Veterans Affairs

  12. Status: Closed - Implemented

    Comments: Suspense accounts are part of the lockbox activities which were activated March 1, 2000, and are part of the daily accounting system updates. VA added suspense items to its financial statements for fiscal year 1999 (per June 30, 2000, and September 25, 2000, memos to the Deputy Assistant Secretary for Congressional Operations from the Deputy Under Secretary for Management, Nora E. Egan, and supporting documentation).

    Recommendation: In order to effectively manage loan assets and the cash flows associated with VA's direct loans, the Secretary of Veterans Affairs should direct the Under Secretary for Benefits to establish suspense accounts, and a control account in VA's general ledger, to record all collections that cannot be allocated to specific loan accounts.

    Agency Affected: Department of Veterans Affairs

  13. Status: Closed - Implemented

    Comments: VA worked with a contractor to complete the reconstruction of the historical data for the loan sales, the resulting trusts, and financing for the required reserve accounts for each trust. This was accomplished during the fiscal year 1999 financial statement audit, which was completed March 2000.

    Recommendation: Regarding gaining operational and accounting control over loan sale activities, the Secretary of Veterans Affairs should direct the Under Secretary for Benefits to complete the reconstruction of the historical data for the loan sales, the resulting trusts, and financing for the required reserve accounts for each trust.

    Agency Affected: Department of Veterans Affairs

 

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