oversight

Sallie Mae, Inc.'s Compliance with Selected Requirements of the Loan Participation Purchase Program Authorized by the Ensuring Continued Access to Student Loans Act of 2008.

Published by the Department of Education, Office of Inspector General on 2011-05-13.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                 UNITED STATES DEPARTMENT OF EDUCATION
                                      OFFICE OF INSPECTOR GENERAL

                                                                                                                    Audit Services
                                                                                                            New York Audit Region


                                                               May 13, 2011

                                                                                                       Control Number
                                                                                                       ED-OIG/A02K0002
Troy Standish
Senior Vice President
Servicing Operations
Sallie Mae, Inc.
220 Lasley Avenue
Wilkes-Barre, PA 18706

Dear Mr. Standish:

This final audit report, titled “Sallie Mae, Inc.’s Compliance with Selected Requirements of the
Loan Participation Purchase Program Authorized by the Ensuring Continued Access to Student
Loans Act of 2008,” presents the results of our audit. Our audit objective was to determine
whether Sallie Mae, Inc. (Sallie Mae), as a Servicer under the Ensuring Continued Access to
Student Loans Act of 2008 (ECASLA) Loan Participation Purchase (LPP) Program, was in
compliance with its Eligible Servicing Agreements (ESAs). Specifically, our audit was limited
to determining whether Sallie Mae (as Servicer) (1) had an ESA with each Custodian;
(2) prepared and submitted Weekly Loan Schedules, Month-End Loan Schedules, Exception
Reports, and Lender’s Interest and Special Allowance Request and Reports; (3) coded loans as
owned by the Custodian; and (4) remitted collections on LPP Program loans to the Custodian.
Our audit covered Sallie Mae’s servicing of LPP Program loans for academic year 2008-2009
(the 2008-2009 LPP Program)1 and selected aspects of its servicing of LPP Program loans for
academic year 2009-2010 (the 2009-2010 LPP Program).

We determined that Sallie Mae (as Servicer) complied with its ESAs, except for its
noncompliance with a specific section in one of the agreements. We found that Sallie Mae (as
Servicer) serviced about $96 million of ineligible loans as if they were eligible loans during the
2009-2010 LPP Program. The U.S. Department of Education (Department) had purchased a
100 percent ownership interest in the principal portion of the loans from a subsidiary of Sallie
Mae’s parent corporation.




1
  For purposes of the LPP Program, an academic year 2008-2009 loan is one that (1) has a loan period that includes,
or begins on or after, July 1, 2008, (2) has a first disbursement made on or after May 1, 2008, but no later than
July 1, 2009, and (3) was fully disbursed no later than September 30, 2009.
    The Department of Education's mission is to promote student achievement and preparation for global competitiveness by fostering educational
                                                      excellence and ensuring equal access.
Final Report
ED-OIG/A02K0002                                                                                    Page 2 of 23


                                            BACKGROUND 



ECASLA (Public Law 110-227) was enacted on May 7, 2008. ECASLA added a new
Section 459A to the Higher Education Act of 1965, as amended, giving the Department the
authority to purchase or enter into forward commitments to purchase Federal Family Education
Loan (FFEL) Program loans. The purpose of the LPP Program, in part, was to ensure that
lenders had a reliable source of funds to originate new FFEL Program loans. Furthermore,
Public Law 110-350 was enacted on October 7, 2008, in part, to extend the Department’s loan
purchase authority to academic year 2009-2010 loans. The Department offered a separate LPP
Program for academic year 2009-2010 loans.

Under the 2008-2009 LPP Program, Sallie Mae serviced FFEL Program loans in which the
Department purchased participation interests from eligible FFEL program lenders or holders of
eligible FFEL Program loans (herein referred to as “Sponsors”). The Department’s participation
interest represented a 100 percent ownership in the principal portion of such loans. The loans in
which the Department purchased a participation interest under the LPP Program were held in a
trust by a Custodian.2 The 2008-2009 LPP Program expired on October 15, 2009. Upon
expiration, Sponsors redeemed the Department’s participation interest either by (1) remitting to
the Department an amount equal to the Department’s purchase price of the participation interest
plus a yield on the purchase price, or (2) selling permanently the underlying loans to the
Department under the ECASLA Loan Purchase Commitment Program. Under the ECASLA
Loan Purchase Commitment Program, the Department purchased outright fully disbursed,
eligible FFEL Program loans.

The 2008-2009 LPP Program was conducted according to the terms of a Master Participation
Agreement (MPA) dated July 25, 2008. According to Section 12(a) of the MPA, each Custodian
shall enter into an ESA with a Servicer (which may also be the Sponsor) to service each loan
subject to the LPP Program. Section 12(c) of the MPA specifies the terms that must be included
in an ESA.

SLM Corporation is the parent company of Sallie Mae (a Servicer) and SLM Education Credit
Finance Corporation (SLM ECFC) (an eligible lender and Sponsor).3 As of September 2010,
SLM Corporation, through its subsidiaries, managed $182 billion in education loans and served
10 million student and parent customers. SLM Corporation was originally created in 1972 as a
government-sponsored entity. In 2004, the company terminated its ties to the Federal
government. SLM Corporation is a publicly held, private sector company that offers services to
a range of institutional clients, including colleges and universities, student loan guarantors, and
State and Federal agencies.



2
  A Custodian was an eligible lender that was a national or State-chartered bank that was not affiliated with the 

Sponsor.

3
  SLM Corporation is the official name of the company commonly known as Sallie Mae to the public. For purposes 

of this audit, Sallie Mae refers to the Servicer and SLM ECFC refers to the Sponsor. 

Final Report
ED-OIG/A02K0002                                                                                   Page 3 of 23
The 2008-2009 and 2009-2010 LPP Program loans, for which Sallie Mae was the Servicer, were
serviced at Sallie Mae's loan servicing center located in Wilkes-Barre, Pennsylvania. This center
performs services such as correspondence processing, payment processing, claims processing,
and records research. According to Sallie Mae, the facility processes 2.5 million student loan
payments per month and handles more than 14.5 million pieces of correspondence and record
updates annually.

During the 2008-2009 LPP Program, Sallie Mae serviced loans for three Sponsors and two
Custodians (see the Table below).

        Table – 2008-2009 LPP Program Sponsors and Custodians Serviced by Sallie Mae
                                                                             Original Loan
           Sponsor                   Custodian       LPP Program Loans
                                                                                 Amount4
                               Wells Fargo Bank,
SLM ECFC                       National Association             4,587,246 $21,442,043,351
                               (Wells Fargo)
                               Manufacturers and
USC Credit Union (USC)         Traders Trust Company               11,893         103,894,945
                               (M&T Bank)
Access to Loans for Learning
                               M&T Bank                             1,471          10,379,118
Student Loan Corporation (ALL)
Total                                                                          4,600,610     $21,556,317,414




                                          AUDIT RESULTS



Except for its noncompliance with Section 3.1 of its ESA5 with Wells Fargo (as Custodian) and
SLM ECFC (as Sponsor), Sallie Mae (as Servicer) complied with its ESAs. Our audit was
limited to determining whether Sallie Mae (as Servicer) (1) had an ESA with each Custodian;
(2) prepared and submitted Weekly Loan Schedules, Month-End Loan Schedules, Exception
Reports, and Lender’s Interest and Special Allowance Request and Reports; (3) coded loans as
owned by the Custodian; and (4) remitted collections on LPP Program loans to the Custodian.

We found that Sallie Mae (as Servicer) was not in compliance with Section 3.1 of its ESA with
Wells Fargo (as Custodian) and SLM ECFC (as Sponsor) for the 2009-2010 LPP Program
because it serviced ineligible loans as if they were eligible loans. Under the 2009-2010 MPA,
loans are ineligible if the Department had previously purchased a participation interest in the
loans. We identified 28,913 loans, with a total outstanding principal balance of $96,185,703 as
of August 3, 2010, that were participated in both the 2008-2009 and 2009-2010 LPP Programs.

4
  The LPP Program Loans and Original Loan Amounts for SLM ECFC are based on the Month-End Loan Schedule
for the month ended October 31, 2009, and for USC and ALL are based on the Month-End Loan Schedule for the
month ended September 30, 2009.
5
  Section 3.1 of the ESA between Sallie Mae, Wells Fargo, and SLM ECFC states that reasonable care shall be used
when managing, servicing, administering, making collections on and calculating any amounts owed to the
Department on Purchased Eligible Loans.
Final Report
ED-OIG/A02K0002                                                                               Page 4 of 23
We provided a draft of this report to Sallie Mae for review and comment. In its comments to the
draft report, Sallie Mae did not concur with our finding and recommendation. Based upon Sallie
Mae’s response, we modified the finding and revised the recommendation. Sallie Mae also
commented on the Other Matters section of the draft report. We revised the Other Matters
section in response to Sallie Mae’s comments.

Except for personal identifiable information (that is, information protected under the Privacy Act
of 1974 (5 U.S.C. § 552a)), the entire narrative of Sallie Mae’s comments is included as an
Attachment to this report. Because of the personally identifiable information contained in the
Excel Spreadsheet attachment to Sallie Mae’s comments, we have not included it in the
Attachment.

FINDING – Sallie Mae Serviced Ineligible Loans During the
          2009-2010 LPP Program

Sallie Mae did not comply with the terms of its ESA with Wells Fargo (as Custodian) and SLM
ECFC (as Sponsor), because it serviced 28,913 ineligible loans under the ESA. The 28,913
loans had a total outstanding loan principal balance of $96,185,703 as of August 3, 2010. The
ineligible loans did not meet the definition of a Purchased Eligible Loan under the 2009-2010
MPA, because the Department had purchased participation interests in the loans in both the
2008-2009 and 2009-2010 LPP Programs. In addition, Sallie Mae did not comply with its
Custodian Agreement with Wells Fargo and SLM ECFC, because the Loan Schedules prepared
by Sallie Mae contained the 28,913 loans that were not Purchased Eligible Loans under the
2009-2010 MPA.

Sallie Mae Serviced Ineligible Loans Participated by SLM ECFC

Under Section 3 of the 2009-2010 MPA, loans are ineligible for the 2009-2010 LPP Program if
the Department had previously purchased a participation interest in the loans. Section 3 of the
2009-2010 MPA defines “Purchased Eligible Loan” as “an Eligible Loan in which a
Participation Interest has been purchased by the Department.” In addition, Section 3 of the
2009-2010 MPA defines an “Eligible Loan” as:

       [A] Loan that meets the following criteria as of the applicable Purchase Date . . .
       [w]ithout limitation, the following loans shall not be eligible for sale to the Department
       pursuant to the terms of this Agreement . . . (v) loans in which the Department has
       previously purchased a Participation Interest, whether or not that interest has been
       redeemed.

Under the terms of the MPA and ESA, only Purchased Eligible Loans were to be serviced under
the ESA. Section 12(a) of the 2009-2010 MPA, states:

       Each Eligible Loan which is subject to a Participation Interest shall be serviced by a Servicer
       (which may be the Sponsor) at the direction of the Custodian pursuant to the terms of an Eligible
       Servicing Agreement . . . .
Final Report
ED-OIG/A02K0002                                                                                   Page 5 of 23
Section 3.1 of the ESA between Sallie Mae, Wells Fargo, and SLM ECFC states:

        The Servicer, for the benefit of the Custodian, as trustee for the benefit of the Department and the
        Sponsor, . . . shall manage, service, administer, make collections on and calculate any amounts
        owed to the Department with respect to the Purchased Eligible Loans with reasonable care, using
        that degree of skill and attention that the Servicer exercises with respect to similar student loans
        that it services on behalf of SLM Corporation or any of its affiliates . . . .

In servicing ineligible loans under the ESA with Wells Fargo (as Custodian) and SLM ECFC (as
Sponsor), Sallie Mae did not comply with Section 3.1 of the ESA.

We analyzed the ownership history and the Month-End Loan Schedules for 65 loans participated
in the 2008-2009 LPP Program and found that 4 of 65 loans sampled were participated in both
the 2008-2009 and 2009-2010 LPP Programs.6 According to the Month-End Loan Schedules, all
four loans had first disbursement dates on or after May 1, 2009, and on or before July 1, 2009,
and anticipated final disbursement dates on September 30, 2009, which indicated the loans were
initially eligible for the 2008-2009 LPP Program. The Month-End Loan Schedules showed that
these four loans were redeemed from the 2008-2009 LPP Program on October 16, 2009, and that
the most recent disbursement dates were after September 30, 2009. The disbursement dates after
September 30, 2009, made the loans ineligible to be included in the 2008-2009 LPP Program.
Furthermore, the ownership history in the National Student Loan Data System (NSLDS) and in
Sallie Mae's CLASS loan servicing system (CLASS) showed that these four loans were also
participated in the 2009-2010 LPP Program.

Based upon the results of our sample, we queried NSLDS to identify all SLM ECFC LPP
Program loans that had the lender identification number (LID) associated with Wells Fargo as
Custodian for SLM ECFC for the 2009-2010 LLP Program (LID 834487) and for the 2008-2009
LLP Program (LID 834422). Of the 4,587,246 loans participated by SLM ECFC in the
2008-2009 LPP Program, we identified 28,913 loans (approximately 0.63 percent) that had both
the 2008-2009 and 2009-2010 Wells Fargo Custodian LIDs. These 28,913 loans had a total
outstanding loan principal balance of $96,185,703 as of August 3, 2010. Included in these
28,913 loans were the four loans from our sample that were participated in both programs.

We notified Sallie Mae of the ineligible loans on August 2, 2010. Sallie Mae’s Audit
Coordinator stated that a possible explanation for the loans being participated in both programs
was that the loans were originally participated in the 2008-2009 LPP Program and the borrower’s
school subsequently changed a portion of the loans (such as the scheduled final disbursement
date occurring after September 30, 2009).7 The Audit Coordinator also stated that SLM ECFC
redeemed the loans out of the 2008-2009 LPP Program and then participated those same loans in
the 2009-2010 LPP Program. Sallie Mae’s Senior Vice President and Deputy General Counsel
stated that loans participated in the 2008-2009 LPP Program could be participated in
the 2009-2010 LPP Program because the programs were independent of each other. In

6
  For our sample of loans, we randomly selected 60 loans which Sallie Mae serviced from the 2008-2009 LPP
Program and 5 judgmentally selected loans which Sallie Mae serviced that were not sold to the Department from the
2008-2009 LPP Program. See the Objective, Scope, and Methodology section of this report for further details on
the selection of our sample of 2008-2009 LPP Program loans serviced by Sallie Mae.
7
  In performing our audit, we did not verify the reasons loans were participated in both the 2008-2009 and
2009-2010 LPP Programs.
Final Report
ED-OIG/A02K0002                                                                                     Page 6 of 23
September 2010, Federal Student Aid (FSA) instructed Sallie Mae to redeem the participation
interests in the ineligible loans by selling the underlying loans to the Department under the
ECASLA Loan Purchase Commitment Program. On October 12, 2010, the 28,913 loans were
sold to the Department.

Sallie Mae Prepared Month-End Loan Schedules That Included Ineligible Loans
Participated by SLM ECFC

Sallie Mae did not comply with Section 11(c) of its Custodian Agreement with Wells Fargo (as
Custodian) and SLM ECFC (as Sponsor), because it did not exercise due care in preparing the
Loan Schedules that would be relied upon by the Custodian, as trustee for the benefit of the
Department. The Loan Schedules prepared by Sallie Mae contained loans that were not
Purchased Eligible Loans under the 2009-2010 MPA. In preparing the data for the Loan
Schedules, Sallie Mae should have reviewed its CLASS loan servicing system, which contained
the loans’ ownership histories that showed the loans were participated in both the 2008-2009 and
2009-2010 LPP Programs. In exercising due care, Sallie Mae should have notified the Custodian
that the loans were not Purchased Eligible Loans under the 2009-2010 MPA.

Section 11 of the Custodian Agreement states:

        Servicing Acknowledgements and Agreements. The parties hereto [that is, Sponsor,
        Custodian, and Servicer] acknowledge and agree that:

                                              . . . . . . .

                 (c) As and when the Custodian is required by the [MPA] to provide the
                 following, the Sponsor . . . shall provide or cause the Servicer or other
                 entities to provide to the Custodian on a timely basis information,
                 including the electronic data file(s) which list all of the Purchased
                 Eligible Loans for each Participation Purchase Request, necessary for
                 inclusion in:
                          (i) Loan Schedules and Custodial Certifications; . . .

        The Sponsor and the Servicer expressly acknowledge that the Custodian intends to rely
        on such information in preparing the Loan Schedules, Custodial Certifications, Exception
        Reports and Settlement Date Reports in delivering documentation required of the
        Custodian under the [MPA].

SLM ECFC’s Noncompliance with the MPA

When SLM ECFC identified the loans in which to sell Participation Interests to the Department,
SLM ECFC did not comply with the MPA Section 10(b)(ii); it represented to the Department
that each loan subject to any Participation Interest was an Eligible Loan.8 Section 10(b) of the
2009-2010 MPA, states:


8
 Although Sallie Mae (as Servicer) was our auditee, we are reporting SLM ECFC’s noncompliance with the MPA,
because (1) SLM ECFC identified the loans in which it sold a Participation Interest to the Department, and (2) SLM
ECFC is a subsidiary of the same corporate parent as Sallie Mae.
Final Report
ED-OIG/A02K0002                                                                                  Page 7 of 23
         Loan Level Representations. The Sponsor . . . represents and warrants to the Department as to
         the Eligible Loans subject to any Class A Participation Interest as of each related Purchase Date
         and as of each date such Loans are subject to a Class A Participation Interest . . . (ii) Each Loan is
         an Eligible Loan and the description of and information regarding the Loans set forth in the
         Participation Purchase Request and the Loan Schedule is true, complete and correct.

Based on our audit work at Sallie Mae (as Servicer), we found that SLM ECFC (as Sponsor) did
not comply with the terms of the 2009-2010 MPA, because it sold participation interests in
28,913 ineligible loans under the 2009-2010 LPP Program. Sallie Mae did not comply with the
terms of its ESA and Custodian Agreement with Wells Fargo (as Custodian) and SLM ECFC (as
Sponsor), because Sallie Mae serviced the ineligible loans and included the ineligible loans in
the Month-End Loan Schedules submitted to the Department. As a result of selling participation
interests in the 28,913 ineligible loans to the Department in the 2009-2010 LPP Program, SLM
ECFC received the financial benefit of having a reliable source of funds, which it was not
entitled, to make these loan commitments twice: first under the 2008-2009 LPP Program and
then again under the 2009-2010 LPP Program.

Under the terms of the MPA, a Sponsor can be held liable for its actions. Section 14(a) of the
2009-2010 MPA, states, “The Sponsor shall be liable in accordance herewith only to the extent
of the obligations specifically undertaken by the Sponsor under [the MPA] . . . .”

RECOMMENDATIONS

We recommend that the Chief Operating Officer for FSA—

   1.	       Hold SLM ECFC (as Sponsor) responsible, to the extent permitted under Section
             14(a) of the MPA, for any liabilities arising from the participation of 28,913 ineligible
             loans (with a total outstanding loan principal balance of $96,185,703 as of
             August 3, 2010) under the 2009-2010 LPP Program.

   2.	       Ensure that Sallie Mae complies with the terms and conditions of its agreements with
             the Department and related instructions.

Sallie Mae Comments

Sallie Mae did not concur with our draft finding and recommendation. Sallie Mae argued that
SLM ECFC did not violate the 2009-2010 MPA when it participated loans in both the 2008-2009
LPP Program and the 2009-2010 LPP Program, because the language in the 2009-2010 MPA
was not as broad as stated in the audit report. The 2009-2010 MPA specifically excluded only
loans in which the Department has previously purchased a “Participation Interest,” which is a
defined and capitalized term under the 2009-2010 MPA, and, therefore, specific to only those
loans participated in the 2009-2010 LPP Program. Consequently, the prohibition does not
extend to loans that were participated in the 2008-2009 LPP Program. The audit report used the
lower case, undefined term “participation interest” and interpreted the phrase as meaning any
participation interest, whether created under the 2008-2009 LPP Program or the 2009-2010 LPP
Program.
Final Report
ED-OIG/A02K0002                                                                                Page 8 of 23
Sallie Mae stated that the 2008-2009 LPP Program and the 2009-2010 LPP Program were two
separate and distinct programs with separate documents and that the two programs were not
linked. In the 2009-2010 MPA, a “Participation Interest” can only refer to participation interests
created under the 2009-2010 MPA, and not to participation interests created under the 2008-2009
MPA.

Sallie Mae disagreed that it violated its ESA or Custodian Agreement with Wells Fargo (as
Custodian) and SLM ECFC (as Sponsor). According to Sallie Mae, the ESA provides for the
Servicer to “act with reasonable care, using that degree of skill and attention that the Servicer
exercises with respect to the student loan files relating to similar student loans that the Servicer
services on behalf of SLM Corporation or any of its affiliates . . . .” Sallie Mae stated that the
proper selection of loans to be participated was a requirement of the 2009-2010 MPA. Sallie
Mae (as Servicer) was not a party to the 2009-2010 MPA; SLM ECFC was the Sponsor under
the 2009-2010 MPA and was the party responsible for interpreting the 2009-2010 MPA. Sallie
Mae (as Servicer) acted at the direction of the Sponsor in placing loans for participation with the
Department. Sallie Mae (as Servicer) believes that it acted with reasonable care, and, therefore,
cannot be held responsible for the asserted violations with the 2009-2010 MPA.

Finally, Sallie Mae disagreed that a “Sponsor Event of Default” may have occurred. Sallie Mae
stated that it responded promptly in communicating with the Department when notified of the
finding.

OIG Response

We considered Sallie Mae’s comments and have modified the finding and revised our
recommendation. However, we did not modify our conclusion regarding Sallie Mae’s
noncompliance with its ESA and Custodian Agreement with Wells Fargo (as Custodian) and
SLM ECFC (as Sponsor) and SLM ECFC’s noncompliance with the 2009-2010 MPA.

Sallie Mae’s argument that the capitalization of the term “Participation Interest” in the
2009-2010 MPA limits the ineligibility provision only to loans that were participated twice
during that same program year is contradicted by express instructions and guidance to the
contrary from the Department.

Throughout the course of both the 2008-2009 and 2009-2010 LPP Programs, FSA conducted
multiple webinar sessions to provide guidance to Sponsors, Custodians, and Servicers. FSA
provided notice of the live webinars on its public Web site, and after the webinars were
completed, FSA posted the presentation slides and, in most instances, the transcript of the
webinars on its public Web site, as a resource and guidance for program participants. The
presentation slides for three separate webinars state that loans may be participated only once in
the LPP Program.

During FSA’s webinar on June 17, 2009,9 one of the FSA presenters provided these instructions
and guidance:


9
 FSA provided public notice of the webinar in Electronic Announcement Number 65, “Live Internet Webinar on the
Department of Education’s 2009-2010 Loan Purchase Programs,” dated June 15, 2009.
Final Report
ED-OIG/A02K0002                                                                                 Page 9 of 23
       [Director of Policy Liaison & Implementation, FSA]: . . . if a loan is put into our
       participation and then it is taken out by the lender, redeemed and taken out by paying the
       amounts and [the Chief Financial Officer, FSA] will talk about that later, you cannot put
       the loan back into the participation. You may not put the loan back into the participation.
       And too, if I may to anticipate a question, a loan that was put into the 2008-2009
       participation and then is taken out by the lender, to the extent that that loan might also be
       eligible for 09/10 because there is a little bit of crossover, that loan cannot be put into the
       09/10 participation. Once it is in a participation and it comes back to the lender, it never
       goes into participation again, either from the other year or from the same year.

The same point was made again, later in the webinar, by another presenter:

       [Chief Financial Officer, FSA]: And to follow up I think I saw part of that question was,
       for example, if the disbursement date got pushed out. So if it was eligible for 08/09 but
       the final disbursement date got pushed into October, it is no longer eligible to have to be
       redeemed and it cannot be re-participated in the 09/10 program.

Because Sallie Mae (as Servicer) serviced ineligible loans, it did not comply with the terms of
the ESA with Wells Fargo (as Custodian) and SLM ECFC (as Sponsor), as described in the
finding. In addition, because Sallie Mae (as Servicer) prepared Loan Schedules that contained
ineligible loans, it did not comply with Section 11(c) of the Custodian Agreement with Wells
Fargo (as Custodian) and SLM ECFC (as Sponsor). In preparing the data for the Loan
Schedules, Sallie Mae (as Servicer) should have exercised due care and reviewed its CLASS
loan servicing system, which contained the loans’ information that showed the loans were
participated in both the 2008-2009 and 2009-2010 LPP Programs. Sallie Mae (as Servicer) had
access to the same data as SLM ECFC (as Sponsor) because the data resided on the same
CLASS loan servicing system that was used by both parties.

We concurred with Sallie Mae’s comments concerning a Servicer and/or Sponsor Event of
Default. As a result, we removed the language in the finding and the associated recommendation
regarding a Servicer and/or Sponsor Event of Default. We have modified our finding and
revised our recommendations.



                                       OTHER MATTERS 



Lack of Cross-Training in the Monetary Processing Department

During our walk-through of Sallie Mae’s mail facility at its Wilkes-Barre, Pennsylvania,
location, we discovered that there was only one employee, a Monetary Suspense Research
Analyst (Analyst), who was trained to perform extensive research on collections that had not
been posted to a borrower’s account in a timely fashion. The Analyst performed the last research
step on payments prior to payments being filed as unclaimed property. The Analyst reviewed
payments that could not be processed (for example, a check without a normal payment amount
and borrower’s name, or a cashier’s check without borrower information). Although Sallie
Mae’s Director of Monetary Processing stated that staff members were cross-trained throughout
the collection and claims process, the Analyst was the only employee trained to perform this
Final Report
ED-OIG/A02K0002                                                                                   Page 10 of 23
function. Employees who are cross-trained at different job functions can help ensure the
effectiveness and efficiency of daily operations through understanding processes and performing
consistently.

Incorrect Loan Status Codes Reported

Sallie Mae reported incorrect loan status codes on the Month-End Loan Schedules. According to
the “Loan Schedule and Custodial Certification Data File Fields – Definition and Submission
Procedures,” attached to the Department’s Electronic Announcement Number 62, updated
September 2, 2009, the loan status codes contained in Appendix B of the NSLDS Guaranty
Agency Data Provider Instructions (GA Data Provider Instructions) were to be reported under
the Loan Status field on the Month-End Loan Schedule. Sallie Mae provided the Department
with Month-End Loan Schedules for SLM ECFC, ALL, and USC. Of the 65 loans we reviewed,
36 loans had loan status codes that were reported as “PF” (Paid in Full) on the Month-End Loan
Schedules. For the 36 loans, we compared the loan status codes contained in NSLDS and Sallie
Mae's CLASS system to the Month-End Loan Schedules. For 27 of the 36 loans, NSLDS and
CLASS both showed that the loans were not paid in full as reported on the Month-End Loan
Schedules.10 As a result, Sallie Mae did not report the loan status codes as shown in NSLDS, but
instead reported incorrect loan status codes on the Month-End Loan Schedules. The incorrect
loan status codes on the Month-End Loan Schedules did not result in any negative financial
impact on the Department or borrowers.

LIDs Not Properly Updated in NSLDS

We identified 20 of the 60 randomly sampled loans for which the Original LID or the Custodian
LID was not properly updated in NSLDS. The guaranty agencies are responsible for updating
NSLDS. Although Sallie Mae was not responsible for the incorrect data in NSLDS, the
discrepancies found represented a data reliability problem concerning the loans’ ownership
histories contained in NSLDS. Specifically, we found:

          For 15 loans, the loans’ lender histories in NSLDS showed that the Original LID was
           reported in both the Original LID field and Custodian LID field, even though the loans
           were participated and held by the Custodian. We identified 14 SLM ECFC loans and 1
           ALL loan in this category.
          For one ALL loan, the loan’s lender history in NSLDS showed that the Custodian LID
           was reported in both the Original LID field and Custodian LID field.
          For four SLM ECFC loans, the loan’s lender histories in NSLDS only reported the
           Original LID. A Custodian LID was never reported in NSLDS.

For all 20 loans described above, the loans’ lender histories were correct in the CLASS system.




10
     We did not verify nine loans because Sallie Mae was no longer the Servicer of these loans.
Final Report
ED-OIG/A02K0002                                                                      Page 11 of 23
Sallie Mae Comments

In its comments, Sallie Mae stated that—

   	 Its employees were cross-trained and that there have been 10 individuals since January
      2010 that have performed the Suspense/Unclaimed property process. Sallie Mae
      provided a spreadsheet detailing the time spent by each individual on the
      Suspense/Unclaimed property process.

   	 When participated loans are Put to the Department, they are transferred from CLASS to
      Sallie Mae’s Department of Education Loan Servicing System (CLASS-ED). The loans
      are identified in the CLASS system and subsequent Month-End Loan Schedules as paid
      in full, but the CLASS-ED system reflects the loans’ proper status.

   	 In regards to LIDs not properly updated in NSLDS, for the third bullet, the loans were
      part of a direct Put sale, and there is no requirement to sell a loan to a Custodian before a
      direct Put sale. (Sallie Mae provided explanations for the other discrepancies we noted,
      but did not dispute them.)

OIG Response

Our responses to Sallie Mae’s comments are provided below:

   	 Sallie Mae did not provide adequate documentation to support that cross-training was
      performed in the Monetary Processing Department. The spreadsheet Sallie Mae provided
      indicated that only 8 individuals performed the Suspense/Unclaimed property function
      (not 10), and did not provide the dates that these 8 individuals performed the function.

   	 According to the “Loan Schedule and Custodial Certification Data File Fields –
      Definition and Submission Procedures,” the NSLDS loan status codes contained in
      Appendix B of the GA Data Provider Instructions were required to be reported under the
      Loan Status field on the Month-End Loan Schedule. For 27 of the 65 loans we reviewed,
      Sallie Mae did not report the correct loan status codes as required. Sallie Mae reported a
      “PF” loan status code for these loans, which was not the proper status of the loans at the
      time, because the loans were not Paid in Full. Rather, Sallie Mae used the “PF” code to
      indicate that loans were transferred from the CLASS to the CLASS-ED servicing system.
      As a result, Sallie Mae reported incorrect loan information to the Department through the
      Month-End Loan Schedules.

   	 Under the LPP Program, a Custodian held title to a loan in which a participation interest
      was sold to the Department. As such, the loan’s lender history in NSLDS should have
      reflected the Custodian LID for the period of time the loan was subject to a participation
      interest, regardless whether the Sponsor redeemed the loan or sold the loan to the
      Department under the MPA’s Put Option.
Final Report
ED-OIG/A02K0002                                                                  Page 12 of 23


                 OBJECTIVE, SCOPE, AND METHODOLOGY 



Our audit objective was to determine whether Sallie Mae, as a Servicer under the ECASLA LPP
Program, was in compliance with its ESAs. Specifically, our audit was limited to determining
whether Sallie Mae (as Servicer) (1) had an ESA with each Custodian; (2) prepared and
submitted Weekly Loan Schedules, Month-End Loan Schedules, Exception Reports, and
Lender’s Interest and Special Allowance Request and Reports; (3) coded loans as owned by the
Custodian; and (4) remitted collections on LPP Program loans to the Custodian. Our audit
covered Sallie Mae’s servicing of 2008-2009 LPP Program loans and selected aspects of its
servicing of 2009-2010 LPP Program loans.

To achieve our objective, we performed the following procedures:

1.	    Reviewed relevant laws, regulations, guidance, and agreements, including applicable
       portions of (a) ECASLA and Public Law 110-350; (b) Federal Register notices dated
       July 1 and July 17, 2008 (73 FR 37422 and 73 FR 41048, respectively); (c) the
       Department's electronic announcements; (d) the Department's “Loan Participation
       Purchase Program Frequently Asked Questions”; (e) the 2008-2009 and 2009-2010
       MPAs issued by the Department; and (f) Sallie Mae’s ESAs.

2.	    Interviewed Sallie Mae officials from the following departments: Claim, Lender
       Relations, Compliance and Audit Support, Financial Reconciliation, Risk Management
       and Internal Audit Management, General Counsel (Legal), Monetary Processing,
       Training, and Mail Center and Customer Service.

3.	    Reviewed the MPA Adoption Agreements and Custodian Agreements for SLM ECFC,
       ALL, and USC.

4.	    Compared all three of Sallie Mae’s ESAs (for SLM ECFC, ALL, and USC) with the
       requirements of Sections 12(c) and 18 of the MPA.

5.	    Verified that Sallie Mae performed the duties required under the ESAs by obtaining and
       reviewing reports generated by Sallie Mae.

6.	    Verified that Sallie Mae prepared the Lender’s Interest and Special Allowance Reports
       under the Custodian LIDs for 2008-2009 LPP Program loans.

7.	    Obtained and analyzed the January 2009 through September 2009 Month-End Loan
       Schedules for the 2008-2009 LPP Program submitted by Sallie Mae for ALL and USC.
       Obtained and analyzed all Month-End Loan Schedules for the 2008-2009 LPP Program
       (combined in one file) for SLM ECFC.

8.	    Reviewed 60 randomly sampled loans of the 4,600,610 total loans from the 2008-2009
       LPP Program and 5 judgmentally sampled loans of the 112,624 total loans from SLM
       ECFC that were not sold to the Department under the 2008-2009 Loan Purchase
Final Report
ED-OIG/A02K0002                                                                                      Page 13 of 23
         Commitment Program (see 2008-2009 LPP Program Loans Sample Selections section
         below for complete information on the selection of our samples). For all 65 loans
         sampled, we reviewed the Notice of Intent approval dates, loan type eligibility, loan
         lender history, loan disbursement dates, Master Promissory Notes, and general loan
         information from the NSLDS and CLASS systems.

9.	      Reviewed collections made on the 60 randomly sampled loans to determine whether
         Sallie Mae remitted all collections to the Custodians within 2 business days of receipt.

We obtained an understanding of the system of internal controls, policies, procedures, and
practices applicable to Sallie Mae’s servicing of LPP Program loans through interviews, walk-
through of processes, and a review of prior audit reports and reviews.11 We identified an internal
control weakness in Sallie Mae’s lack of cross-training in the monetary processing department.
This weakness is fully discussed in the Other Matters section of this report.

We relied, in part, on computer-processed data on the Month-End Loan Schedule data Sallie Mae
provided to us that consisted of a total of 4,600,610 LPP Program loans for SLM ECFC, USC,
and ALL. Of the 4,600,610 LPP Program loans: 4,587,246 were from the October 31, 2009,
Month-End Loan Schedule for SLM ECFC; 11,893 were from the September 30, 2009,
Month-End Loan Schedule for USC; and 1,471 were from the September 30, 2009, Month-End
Loan Schedule for ALL. We used data analysis software to combine and summarize all the data
Sallie Mae provided by loan number and loan type. To determine whether the data provided by
Sallie Mae was complete and accurate, we performed tests of the data. We compared data from
the NSLDS loan participation tables to the Month-End Loan Schedule data.12 We found that
Sallie Mae’s record count either matched the NSLDS totals or Sallie Mae’s record count was
greater; however, the difference was insignificant. We reviewed the loan information contained
in the Month-End Loan Schedules, the CLASS system, and NSLDS. Based on our tests, we
concluded that the Month-End Loan Schedule data Sallie Mae provided were sufficiently reliable
for the purpose of our audit.

2008-2009 LPP Program Loans Sample Selections

Sallie Mae serviced 4,600,610 loans during the 2008-2009 LLP Program for three Sponsors:
SLM ECFC, USC, and ALL. To obtain an unbiased cross section of the 2008-2009 LLP
Program loans Sallie Mae serviced, we selected a random sample from each of the three
Sponsors. We used data analysis software to randomly select a total of 60 loans from the
2008-2009 LPP Program. For SLM ECFC, we randomly selected 40 of the total 4,587,246 LPP
Program loans to test. For USC, we randomly sampled 10 of the total 11,893 LPP Program loans
to test, and for ALL, we randomly sampled 10 of the total 1,471 LPP Program loans to test.




11
   The prior audit reports and reviews we analyzed were Sallie Mae’s Annual 10-K filings for 2007 and 2008, Sallie
Mae’s Quarterly 10-Q filing for 2009, Sallie Mae’s Internal Audit reports, Sallie Mae’s Attestation Compliance
reports, Sallie Mae’s Agreed Upon Procedures Attestation Engagement Reporting Package for the 2008-2009 LPP
Program, and Sallie Mae’s Common Review Initiative reports conducted by guaranty agencies.
12
   Loan Participation Tables are tables found in NSLDS that contain loan-level detail data and loan-level history for
loans participated in the 2008-2009 and 2009-2010 LPP Programs.
Final Report
ED-OIG/A02K0002                                                                                Page 14 of 23


We judgmentally selected 5 of 112,624 loans from SLM ECFC that were not sold to the
Department from the 2008-2009 LPP Program.13 We selected the judgmental sample based on
the five loans with the most recent disbursement dates to determine whether Sallie Mae correctly
serviced the loans that were not sold to the Department from the 2008-2009 LPP Program.

To identify loans in which a participation interest was sold to the Department in both the
2008-2009 and 2009-2010 LPP Programs, we compared the LIDs of all SLM ECFC LPP
Program loans by using an NSLDS query. This query selected only the loans that had the LID
associated with Wells Fargo as Custodian for SLM ECFC for the 2009-2010 LLP Program (LID
834487), which also contained the LID associated with Wells Fargo as Custodian for SLM
ECFC for the 2008-2009 LLP Program (LID 834422). Loans with both these LIDs were
participated in both the 2008-2009 and 2009-2010 LPP Programs.

We performed our fieldwork at Sallie Mae’s loan servicing center located in Wilkes-Barre,
Pennsylvania, from January 19, 2010, to July 8, 2010. We discussed the results of our audit with
Sallie Mae on October 20, 2010.

We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
based on our audit objective. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objective.




13
  In order to select our judgmental sample, we first randomly sampled 25 of the 112,624 loans from SLM ECFC
that were not sold to the Department. We then judgmentally sampled 5 loans from the 25 randomly sampled loans.
Final Report
ED-OIG/A02K0002                                                                      Page 15 of 23



                            ADMINISTRATIVE MATTERS



Statements that managerial practices need improvements, as well as other conclusions and
recommendations in this report, represent the opinions of the Office of Inspector General.
Determinations of corrective action to be taken will be made by the appropriate Department of
Education officials.

This report incorporates the comments you provided in response to the draft report. If you have
any additional comments or information that you believe may have a bearing on the resolution of
this audit, you should send them directly to the following Department of Education official, who
will consider them before taking final Departmental action on this audit:

                              William J. Taggart
                              Chief Operating Officer, Federal Student Aid
                              U.S. Department of Education
                              Union Center Plaza, Room 122G1
                              830 First Street, N.E.
                              Washington, DC 20202

It is the policy of the U. S. Department of Education to expedite the resolution of audits by
initiating timely action on the findings and recommendations contained therein. Therefore,
receipt of your comments within 30 days would be appreciated.

In accordance with the Freedom of Information Act (5 U.S.C. § 552), reports issued by the
Office of Inspector General are available to members of the press and general public to the extent
information contained therein is not subject to exemptions in the Act.

                                             Sincerely,

                                                 /s/

                                             Daniel P. Schultz
                                             Regional Inspector General for Audit


Electronic cc: 

Laurent Lutz, Executive Vice President and General Counsel, SLM ECFC 



Attachment

Final Report
ED-OIG/A02K0002                                                                    Page 16 of 23


           Abbreviations, Acronyms, and Short Forms Used in this Report
ALL                  Access to Loans for Learning Student Loan Corporation

Analyst              Monetary Suspense Research Analyst

CLASS                Sallie Mae's Loan Servicing System

Custodian            A national or state-chartered bank that is also an eligible lender under the
                     Higher Education Act of 1965, as amended, that holds, in a trust, the loans
                     in which the Department purchases a participation interest.

ECASLA               Ensuring Continued Access to Student Loans Act of 2008

Department           U.S. Department of Education

ESA                  Eligible Servicing Agreement

FFEL                 Federal Family Education Loan

FSA                  Federal Student Aid

GA Data Provider     NSLDS Guaranty Agency Data Provider Instructions
 Instructions

LID                  Lender Identification Number

LPP Program          Loan Participation Purchase Program

M&T Bank             Manufacturers and Traders Trust Company

MPA                  Master Participation Agreement

NSLDS                National Student Loan Data System

PF                   Paid in Full

Sallie Mae           Sallie Mae, Inc.

Servicer             An organization (which may be the Sponsor) that services loans pursuant
                     to an ESA.

SLM ECFC             SLM Education Credit Finance Corporation

Sponsor              Eligible lender or beneficial holder of loans in which the Department
                     purchases a participation interest.
Final Report
ED-OIG/A02K0002                                            Page 17 of 23

USC               USC Credit Union

Wells Fargo       Wells Fargo Bank, National Association
Final Report
ED-OIG/A02K0002                                                                        Page 18 of 23
                                                   Attachment



SALLIE MAE, INC.
12061 Bluemont Way – V3306
Reston, VA 20190
Telephone: 703-984-5544
Facsimile: 703-984-5979
E-mail: andrew.g.wachtel@slma.com

ANDREW G. WACHTEL
Senior Vice President and Deputy General Counsel


                                                                March 24, 2011

BY E-MAIL AND U.S. POSTAL SERVICE
U.S. Department of Education
Office of Inspector General
32 Old Slip, 26th Floor
New York, NY 10005
Attention:      Daniel Schultz
                Regional Inspector General for Audit

Re: 	    Draft Audit Report Dated February 17, 2011 re Sallie Mae’s ECASLA Loan Participation
         Program (the “Draft Audit Report”)
         Control No. ED-OIG/A02K0002

Dear Mr. Schultz:

        This letter responds to the Finding in the above-referenced Draft Audit Report prepared by
the United States Department of Education Office of Inspector General (“OIG”), as well as the Other
Matters cited toward the end of the Draft Audit Report.

FINDING: SALLIE MAE SERVICED INELIGIBLE LOANS DURING THE 2009-2010 LPP
PROGRAM

        This Finding relates to the fact that certain loans were participated in the 2008-2009 Loan
Participation Program (the “08-09 Program”), redeemed, and then subsequently participated in the
2009-2010 Loan Participation Program (the “09-10 Program”).

        The Finding asserts that under section 3 of the 2009-2010 Master Participation Agreement
(the “09-10 MPA”), loans are ineligible for the 09-10 Program “if the Department had previously
purchased a participation interest in the loans.” We disagree with that fundamental premise, as it
ignores the language actually used in the 09-10 MPA. The language in the 09-10 MPA is not as
broad as the OIG contends. The language in the 09-10 MPA specifically excludes only loans in
which the Department has previously purchased a “Participation Interest,” which is a defined term
under the 09-10 MPA. That defined term can only refer to participation interests created under the
09-10 MPA, and not to participation interests created under the 08-09 MPA. Consequently, the
prohibition does not extend to loans that were participated in the 08-09 Program, and the re-
participation of those loans is permitted.

         As quoted in the Draft Audit Report, Section 3 of the 09-10 MPA defines an “Eligible Loan”
as:
Final Report
ED-OIG/A02K0002                                                                           Page 19 of 23

Office of Inspector General
March 24, 2011
Page 2

        [A] Loan that meets the following criteria as of the applicable Purchase Date…[w]ithout
        limitation, the following loans shall not be eligible for sale to the Department pursuant to the
        terms of this Agreement…(v) loans in which the Department has previously purchased a
        Participation Interest (emphasis added), whether or not that interest has been redeemed.

The OIG paraphrased the prohibition in its opening argument, and, significantly, used the lower case,
undefined term “participation interest,” interpreting that phrase as meaning any participation interest,
whether it was created under either the 08-09 Program (through the 2008-2009 Master Participation
Agreement (the “08-09 MPA”)) or a participation interest created under the 09-10 MPA.

        However, the prohibition in the 09-10 MPA is clear: it excludes from the definition of an
Eligible Loan for purposes of the 09-10 Program only those loans in which the Department had
previously purchased a “Participation Interest,” which itself is a defined term under the 09-10 MPA.
It does not in any manner reference the earlier 08-09 MPA, the 08-09 Program, or participation
interests created under the 08-09 MPA. It does not use the lower case term “participation interests”
as a generic term that might refer to participation interests created under either the 08-09 Program or
under the 09-10 Program. It specifically uses the upper case, defined term “Participation Interest.”

        As you know, the 08-09 Program and the 09-10 Program are two separate and distinct
programs; the two programs were not linked. The Department specifically chose not to create the 09-
10 Program through an extension or renewal of the 08-09 MPAs; it instead chose to create the 09-10
Program through completely separate documents – that is, entirely new documents were required to
be executed to participate in the 09-10 Program. These documents, and the 09-10 Program itself, are
separate and distinct from, and not linked with, the 08-09 Program.

        Under the terms of the 09-10 MPA, which governs the 09-10 Program, the capitalized term
“Participation Interest” is a defined term:

        “Participation Interest” means a Class A Participation Interest or a Class B Participation
        Interest.

        “Class A Participation Interest” means a participation interest in one or more Eligible Loans,
        which consists of (A) a 100% beneficial ownership interest in the principal portion of such
        Eligible Loans, and (B) the right to receive the Participant’s Yield in respect of such Eligible
        Loans.”

        “Class B Participation Interest” means a participation interest in one or more Eligible Loans
        which consists of (A) the right to either redeem such Eligible Loans or to exercise the Put
        Option pursuant to Section 15 hereof and (B) the right to receive all Collections on such
        Eligible Loans other than (1) the Participant’s Yield, and (2) principal collections on such
        Eligible Loans.”

Both a Class A Participation Interest and a Class B Participation Interest, as those terms are used in
the 09-10 MPA, can only come into existence after both (i) the 09-10 MPA is fully executed and (ii)
the Adoption Agreement that is attached to the 09-10 MPA as Exhibit A is fully executed. As stated
in the 5th “WHEREAS” clause of the Recitals to the 09-10 MPA:
Final Report
ED-OIG/A02K0002                                                                          Page 20 of 23

Office of Inspector General
March 24, 2011
Page 3


        WHEREAS, upon the execution of the Adoption Agreement, the Custodian shall be
        appointed by the Sponsor and the Department to hold legal title to each such loan and … to
        issue the Participation Interests in such loans as provided herein [emphasis added].

It is clear that “Participation Interests,” a defined term under the 09-10 MPA, cannot be created or
issued until after the occurrence of all of the following: (i) the execution of the 09-10 MPA, (ii) the
execution of the Custodian Agreement, and (iii) the subsequent issuance of Participation Interests as
provided in those two documents. Therefore, because the capitalized, defined term “Participation
Interests,” as used in the exclusion from the Eligible Loan definition in the 09-10 MPA, required
in its very definition that they could only be issued after the execution of both the 09-10 MPA and
the Custodian Agreement that was attached to the 09-10 MPA, the term could not have referred to
the lower case “participation interests” that may have been issued under the earlier, separate 08-
09 Program. Had the Department intended to exclude from the Eligible Loan definition those loans
in which participation interests in the 08-09 Program had been previously purchased by the
Department, it should have done one of the following in the Eligible Loan definition exclusion
language in the 09-10 MPA: (a) used the lower case, uncapitalized term “participation interests,” or
(b) specifically referred to “participation interests sold in either the 08-09 or 09-10 Programs.”

         In conclusion, the language of the definition of “Eligible Loan” in the 09-10 MPA that
specifically excludes “loans in which the Department has previously purchased a Participation
Interest, whether or not that interest has been redeemed” can therefore only exclude loans in which
the Department previously purchased a Participation Interest under the 09-10 Program. That is, all
that is impermissible with respect to the 09-10 Program is selling Participation Interests in loans that
were already participated in the 09-10 Program itself, because of the use of the defined term
“Participation Interests.” Participating loans that had been participated in the earlier 08-09 Program
is not prohibited. Therefore, we respectfully submit that Sallie Mae, Inc. (“SMI”) did not violate
either the 09-10 MPA or any applicable Servicing Agreement by reason of the re-participation
of such loans.

         The remaining OIG statements in this Finding follow from what we believe is this erroneous
interpretation of the language of the MPA. OIG asserts that SMI violated its Custodian Agreements
and Servicing Agreements because it prepared loan schedules that contained loans that had been
participated in both the 08-09 Program into the 09-10 Program. Again, we disagree with the
fundamental premise that the loans were not eligible for participation in both the 08-09 Program and
again in the 09-10 Program. Further, we disagree that this could be construed as a servicing error by
SMI and thus a violation by SMI of its Servicing Agreements or Custodian Agreements. The
Servicing Agreements provide for the Servicer to “act with reasonable care, using that degree of skill
and attention that the Servicer exercises with respect to the student loan files relating to similar
student loans that the Servicer services on behalf of SLM Corporation or any of its affiliates….” The
proper selection of loans to be participated is a requirement of the 09-10 MPA. SMI, as the Servicer,
is not a party to the MPA; SLM Education Credit Finance Corporation is the Sponsor under the Sallie
Mae MPA and is the party responsible for interpreting the MPA. The Servicer acts at the direction of
the Sponsor in placing loans for participation with the Department. We believe that SMI satisfied its
requirements under the Servicing Agreement and acted with reasonable care, and therefore cannot be
held responsible for asserted violations of the applicable MPA.
Final Report
ED-OIG/A02K0002                                                                         Page 21 of 23

Office of Inspector General
March 24, 2011
Page 4


        Second, we disagree with OIG’s assertion that this re-participation of loans may constitute a
“Sponsor Event of Default.” When Sallie Mae was notified of OIG’s position, we responded
promptly with communications among Sallie Mae, OIG, and the Department of Education’s Office
of Federal Student Aid (“FSA”). Given the ongoing communications among the parties, the fact that
Sallie Mae was acting in good faith in interpreting the provisions of the 09-10 MPA when it
participated the loans, and, as OIG itself determined, there was likely no harm to ED as a result of
Sallie Mae participating these loans in both the 08-09 and 09-10 Programs, we do not believe the
Department should be imposing the default interest rate. We therefore respectfully submit that FSA
should determine that no violation occurred and should close the matter.

OTHER MATTERS RAISED IN THE DRAFT AUDIT REPORT

        At the end of the Draft Audit Report, OIG raised three additional matters (although no
Findings were issued with respect to these Other Matters). Set forth below are these Other Matters,
together with Sallie Mae’s response:

1.      Lack of Cross-Training in the Monetary Processing Department

OIG Observation:

During our walk-through of Sallie Mae’s mail facility at its Wilkes-Barre, Pennsylvania, location, we
discovered that there was only one employee, a Monetary Suspense Research Analyst (Analyst), who
was trained to perform extensive research on collections that had not been posted to a borrower’s
account in a timely fashion. The Analyst performed the last research step on payments prior to
payments being filed as unclaimed property. The Analyst reviewed payments that could not be
processed (for example, a check without a normal payment amount and borrower’s name, or a
cashier’s check without borrower information). Although Sallie Mae’s Director of Monetary
Processing stated that staff members were cross-trained throughout the collection and claims process,
the Analyst was the only employee trained to perform this function. Employees who are cross-trained
at different job functions can help ensure the effectiveness and efficiency of daily operations through
understanding processes and performing consistently.

Sallie Mae Response:

As stated by the Director of Monetary Processing during the OIG’s walk-through of Sallie Mae’s
mail facility, employees at Sallie Mae are cross-trained. Sallie Mae’s Quality Metric System (or
QMS, a system that monitors employees’ production, quality, and time spent performing a task)
shows that from January, 2010, there have been 10 individuals who have performed this
Suspense/Unclaimed property process, rather than the one individual as claimed by the OIG.
(Attached under separate cover is a copy of the QMS report, which provides evidence of the
existence of cross-training for this function.)
Final Report
ED-OIG/A02K0002                                                                      Page 22 of 23

Office of Inspector General
March 24, 2011
Page 5


2.      Incorrect Loan Status Codes Reported

OIG Observation:

Sallie Mae reported incorrect loan status codes on the Month-End Loan Schedules. Sallie Mae
provided the Department with Month-End Loan Schedules for SLM ECFC, ALL, and USC. The
Month-End Loan Schedules contained loan status codes in the Loan Status field, which is the loan
status code reported to NSLDS. Of the 65 loans we reviewed, 36 loans had loan status codes that
were reported as “PF” (Paid in Full) on the Month-End Loan Schedules. For the 36 loans, we
compared the loan status codes contained in NSLDS and Sallie Mae’s CLASS system to the Month-
End Loan Schedules. For 27 of the 36 loans, NSLDS and CLASS both showed that the loans were
not paid in full as reported on the Month-End Loan Schedules. As a result, Sallie Mae reported
incorrect loan status codes on the Month-End Loan Schedules. The incorrect loan status codes on the
Month-End Loan Schedules did not result in any negative financial impact on the Department or
borrowers.

Sallie Mae Response:

When participated loans are PUT to the Department, those PUT loans are transferred from Sallie
Mae’s CLASS Commercial Servicing System to Sallie Mae’s Department of Education Loan
Servicing System (CLASS-ED) for continued servicing. Once a loan is PUT to the Department, the
status on CLASS Commercial is updated to reflect a paid in full status (PF). The Month End Loan
Schedules are created from Sallie Mae’s CLASS Commercial System. Therefore, any loans that were
PUT to the Department would appear on these Month End Loan Schedules as reflecting a PF status.
However, these loans would reflect the proper loan statuses/balances on the CLASS-ED system.
Loans that are participated that have not been PUT would show the correct loan statuses/balances on
the CLASS Commercial system. Sallie Mae completed a scan of all 65 loans sampled as part of this
review. It was determined that the statuses in the Month End Loan Schedule (month end September,
2009; report created October 1, 2009) matched the loan status on CLASS Commercial.

3.      LIDs Not Properly Updated in NSLDS

OIG Observation:

We identified 20 of the 60 randomly sampled loans for which the Original LID or the Custodian
LID was not properly updated in NSLDS. The guaranty agencies are responsible for updating
NSLDS. While Sallie Mae was not responsible for the incorrect data in NSLDS, the
discrepancies found represented a data reliability problem concerning the loans’ ownership
histories contained in NSLDS. Specifically, we found:

        1) For 15 loans, the loans’ lender histories in NSLDS showed that the Original LID was
           reported in both the Original LID field and Custodian LID field, even though the loans
           were participated and held by the Custodian. We identified 14 SLM ECFC loans and 1
           ALL loan in this category.
Final Report
ED-OIG/A02K0002                                                                           Page 23 of 23

Office of Inspector General
March 24, 2011
Page 6


        2)	 For one ALL loan, the loan’s lender history in NSLDS showed the Custodian LID was
            reported in both the Original LID field and Custodian LID field.

        3)	 For four SLM ECFC loans, the loan’s lender histories in NSLDS only reported the
            Original LID. A Custodian LID was never reported in NSLDS.

For all 20 loans described above, the loans’ lender histories were correct in the CLASS system.


Sallie Mae Response:

        1) Sallie Mae identified an issue with CAM RT 16 programming that prevented the
           reporting of loan sales on specific loans between 1/1/08-2/6/10. This reporting issue was
           corrected in February, 2010 and impacted only a limited number of guarantor agencies.
           Restoration files were created to include all active loans impacted by this issue and were
           sent to the appropriate guarantors between April and August 2010.

        2)	 ACS was the original ED Servicer of this ALL loan when the loan was originally PUT by
            Sallie Mae and the loan is now being serviced by Department of ED/Great Lakes. Great
            Lakes confirmed that ACS listed the original lender code as the Custodian LID and the
            Original LID as the Custodian LID when the loan transferred from ACS to Great Lakes.

        3)	 The identified loans were a part of a direct PUT sale. There is no requirement to sell a
            loan to a Custodian prior to a PUT sale. Loans can be PUT under the original lender
            code.

      If you have any questions or need further information, feel free to call me at the above
number or email me at the above email address.

       At your request, I am also attaching a Word version of this letter to satisfy the accessibility
requirements of Section 508 of the Rehabilitation Act of 1973, as amended.


                                                                Sincerely,




                                                                Andrew G. Wachtel

ATTACHMENTS:
Excel Spreadsheet
Word version