Report 2015-107 Recommendation 11 Responses

Report 2015-107: The University of California: Its Admissions and Financial Decisions Have Disadvantaged California Resident Students (Release Date: March 2016)

Recommendation #11 To: University of California

To ensure that the home loan program is the best use of the university's investment funds, it should conduct a cost benefit analysis that factors in the opportunity costs of investing in the home loan program as opposed to other higher-returning assets.

6-Month Agency Response

As previously reported, based on the results of the cost benefit analysis recently conducted, we are not making any changes to the implementation of the University's home loan program.

We reviewed the loans that have been held in portfolio for more than 3 years. There are 43 loans with a total outstanding balance of $21.7 million. 7 of these loans were rejected by investors for various reasons (delinquent property taxes, insufficient value, other credit issues). Four of the loans are interest-only, and currently investors are not purchasing interest-only loans. The remaining 32 loans do not have a floor rate, so they are also not attractive to investors.

Going forward, it is our intent to sell as many of the newly originated loans as possible. In 2010 we implemented a floor rate, which has made our loans more attractive. Additionally, in 2014, we stopped making interest-only MOP loans.

The $21.7 million outstanding balance represents .43% of the $5 billion held in STIP, so the return on these loans has an insignificant impact on the STIP return.

Regarding the State Auditor's comment that the list of loans included in our analysis does not appear to be a comprehensive list of loans, we would need more information about the discrepancies identified to address the reason for each individual discrepancy, but the following factors would result in discrepancies between the list of loans included in our analysis and the loans provided during the audit: (1) The list of sold loans included in our analysis only includes loans sold since 2010. We did not sell any loans between 2006 and 2010. (2) The list of sold loans included in our analysis did not include loans from the Supplemented Home Loan Program, since those loans are not funded from the Short-Term Interest Pool.

California State Auditor's Assessment of 6-Month Status: Resolved

Based on information that the university provided, we consider this recommendation to be resolved. Specifically, after additional follow-up with the university, we were able to reconcile most of the loans between the lists it provided us, which would substantiate the accuracy of the university's assertion that it holds home loans for an average of less than three years. Additionally, the university provided us with two policies that demonstrate its intent to periodically sell its home loans.

60-Day Agency Response

Based on the results of the cost benefit analysis recently conducted (attached), we are not making any changes to the implementation of the University's home loan program.

California State Auditor's Assessment of 60-Day Status: Partially Implemented

The university's cost benefit analysis determined that on average it has held home loans for 2.8 years. Thus, the university asserts that the return rate for its home loan program is comparable to its short term investment pool. As a result, the university concluded, there are no opportunity costs associated with investing in the home loan program as opposed to other higher-returning assets.

We followed up with the university to request documentation to verify this claim, and the university provided excel spreadsheets that indicated that it holds loans for an average of 2.8 years; however, the university continues to hold many other loans, some for over 10 years. Moreover, the list the university provided to us does not appear to be a comprehensive list of the loans it owns because the list does not include a substantial number of loans from a list that the university provided during the audit. Although the university completed this cost benefit analysis in response to our recommendation, it is unclear whether the university will perform this analysis on a regular basis. Further, because the university continues to hold many older loans, it is unclear whether the university has a policy in place to sell home loans after a certain period of time. As a result, we cannot conclude that this recommendation is fully implemented.

All Recommendations in 2015-107

Agency responses received are posted verbatim.