oversight

Wells Fargo Bank, National Association's Management of Collection Account Funds and Oversight Activities under the Ensuring Continued Access to Student Loans

Published by the Department of Education, Office of Inspector General on 2011-02-03.

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

                             UNITED STATES DEPARTMENT OF EDUCATION
                                              OFFICE OF INSPECTOR GENERAL

                                                                                                  Audit Services
                                                                                                  Atlanta Region

                                              February 3, 2011
                                                                                Control Number
                                                                                ED-OIG/A04-J0019

Cheryl Hanson
Risk Assessment Compliance Officer
Wells Fargo Bank, National Association
255 Water Street
Jacksonville, FL 32202

Dear Ms. Hanson:

This Final Audit Report, entitled Wells Fargo Bank, National Association’s (Wells Fargo)
Management of Collection Account Funds and Oversight Activities under the Ensuring
Continued Access to Student Loans Act (ECASLA) Loan Participation Purchase (LPP) Program,
presents the results of our audit. The purpose of the audit was to determine whether Wells
Fargo, as Custodian, (1) had adequate controls to ensure its management of the Collection
Account complied with the terms and conditions of the Master Participation Agreement (MPA)
and applicable U.S. Department of Education (Department) guidance; and (2) provided
reasonable oversight of Sponsors and Servicers to ensure compliance with the terms and
conditions of the MPA and applicable Departmental guidance. Our review covered the LPP
Program for academic year 2008-20091 loans (the 2008-2009 LPP Program).


                                            BACKGROUND 



ECASLA (Pub. Law 110-227) was enacted on May 7, 2008, in part, to address concerns that
there may have been inadequate loan capital to meet the demand for academic year 2008-2009
loans.2 ECASLA added Section 459A to the Higher Education Act of 1965 (HEA) authorizing
the Department to purchase, or to enter into forward commitments to purchase certain 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.3

The 2008-2009 LPP Program was conducted under the terms of the MPA, dated July 25, 2008.
The MPA created a relationship between Sponsors, Eligible Lender Trustees (ELT) (when
applicable), Custodians, and the Department. By executing an adoption agreement, each of these

1
  For purposes of the LPP Program, academic year 2008-2009 means that the loan was for a loan period that 

included, or began on or after, July 1, 2008, and the first disbursement was made on or after May 1, 2008, but not

later than July 1, 2009, and the loan was fully disbursed no later than September 30, 2009. 

2
  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. 

3
  The Health Care and Education Reconciliation Act of 2010 (Pub. Law 111-152), enacted on March 30, 2010, 

ended the origination of new FFEL Program loans after June 30, 2010. Beginning July 1, 2010, all Stafford, PLUS, 

and consolidation loans originate through the William D. Ford Federal Direct Loan Program. 

Final Report
ED-OIG/A04J0019                                                                                       Page 2 of 31
entities agreed to the terms and conditions of the MPA. Brief descriptions of the entities that
operated under the LPP Program and their roles are discussed below.
    •	 Sponsor – An eligible FFEL Program lender or holder of eligible FFEL Program loans.
       The Sponsor could be a secondary market or beneficial holder under an ELT agreement.4
       The Sponsor sold participation interests in loans to the Department through a Custodian.
    •	 Custodian – An eligible FFEL Program lender that was a national or State chartered
       bank. A Custodian could not be affiliated with Sponsors or ELTs with which it had
       entered into adoption agreements. The Custodian was granted the legal title to the loans
       for which a participation interest was sold to the Department.
    •	 Department – The Department purchased participation interests in FFEL Program loans
       from Sponsors through Custodians.
    •	 Servicer – The Sponsor, in its capacity as Servicer, or another Servicer of FFEL Program
       loans, serviced the LPP Program loans under an Eligible Servicing Agreement (ESA)
       with a Custodian.

In order to sell a participation interest to the Department, a Sponsor would first transfer title of
the loans to a Custodian. The Custodian would then sell the participation interest in the loans to
the Department and distribute the proceeds of the transaction back to the Sponsor. Under the
2008-2009 LPP Program, Sponsors were required to redeem the Department's participation
interests in one of two ways. First, by remitting a redemption payment by September 30, 2009,
for each participation interest to the Department; or second, by selling the underlying loans by
October 15, 2009, to the Department under the ECASLA Loan Purchase Commitment Program
(LPC). Under the LPC Program5, the Department purchased fully disbursed, eligible FFEL
Program loans.

Wells Fargo was one of five Department-approved Custodians under the 2008-2009 LPP
Program that provided trust and custody services for loans in which the Department purchased a
participation interest. Headquartered in San Francisco, California, Wells Fargo is a financial
services company that provides banking, insurance, investment, mortgage, and consumer finance
services. Wells Fargo’s Corporate Trust Services Division, located in Jacksonville, Florida, was
responsible for managing the sale and purchase of participation interests between eight Sponsors
and the Department under the 2008-2009 LPP Program. Wells Fargo had five Relationship
Managers who were responsible for administering the participation interests associated with the
eight Sponsors. Two Relationship Managers were located in Jacksonville, Florida; two in
Minneapolis, Minnesota; and one in Des Moines, Iowa. In addition to being an approved
Custodian for the 2008-2009 LLP Program, Wells Fargo was an approved Custodian for the
2009-2010 LPP Program.



4
  A beneficial holder did not meet the HEA criteria to participate in the FFEL Program. However, a beneficial holder
may have participated in the FFEL Program through an agreement with an eligible lender to serve as its trustee. In
order for a beneficial holder, that was not an eligible lender under § 435(d) of the HEA, to participate in the LPP
Program, its ELT must have also executed the adoption agreement.
5
  Under the LPC Program, the Department purchased certain FFEL Program loans made for the 2008-2009
academic year. Under the provisions of the Master Loan Sales Agreement, the Department purchased a loan at a
price that was equal to the outstanding principal balance of the loan, plus the total accrued but unpaid interest owed
on the loan by the borrower, plus a reimbursement of the one percent lender fee, plus $75 per loan.
Final Report
ED-OIG/A04J0019                                                                                         Page 3 of 31
In total, the Department purchased about $33.3 billion of participation interests in FFEL Program
loans under the 2008-2009 LPP Program. Wells Fargo was the Custodian for about $21 billion, or
63 percent, of the total participation interests purchased by the Department under the 2008-2009
LPP Program. Loans for which Wells Fargo operated as Custodian under the 2008-2009 LPP
Program were serviced by seven entities: ACS, Great Lakes Educational Services (Great Lakes),
Nelnet, Pennsylvania Higher Education Assistance Agency (PHEAA), Education Services
Foundation, South Carolina Student Loan Corporation (SCSLC), and Sallie Mae. Table 1 provides
information on participation interests the Department purchased during the 2008-2009 LPP
Program for which Wells Fargo operated as the Custodian.

         Table 1 – Participation Interests for which Wells Fargo Served as Custodian

                                           2008-2009 LPP Program
                                                                                  Cumulative
                                                                             Participation Interest
                      Sponsor                       Servicer(s)
                                                                                  Purchased

                                                ACS, Great Lakes,
                Graduate Leverage                                                   $30,797,626
                                                     Nelnet
               Iowa Student Loan
             Liquidity Corporation                    PHEAA                        $144,846,241
                    (ISLLC)
               Mississippi Higher               Education Services
              Education Assistance              Foundation, ACS,                   $244,195,136
             Corporation (MHEAC)                    PHEAA
               National Education
                                                 ACS, Great Lakes                   $13,859,358
                  Financing II
              NorthStar Education
                                                    Great Lakes                    $217,233,641
                    Finance
                      SCSLC                            SCSLC                       $245,117,834
             Sallie Mae Education
                                             Sallie Mae, Great Lakes,
           Credit Finance Corporation                                          $20,212,971,803
                                                     Nelnet
                  (SLM ECFC)
             Student Lending Works                      ACS                         $26,431,075
                                                               TOTAL           $21,135,452,714


Appendix B to this report provides a summary of the Custodian’s duties and obligations under
the MPA. Among the duties required under the MPA, Wells Fargo created and maintained a
Collection Account on behalf of each Sponsor, verified the calculations of the participant’s yield
owed to the Department,6 executed and submitted the Participation Purchase Requests (PPR),
executed each Bill of Sale, created and maintained the participation interests and certificates, and
submitted the Monthly Aggregate Settlement Date Report (MASDR) to the Department. Wells
Fargo’s five Relationship Managers handled deposits into the Collection Account, invested the

6
  Wells Fargo delegated the calculations of the participant’s yield to the Sponsors. The Relationship Managers
stated that they recalculated the participant’s yield to determine if the Sponsor’s yield calculations were correct and
added the amount of the Collection Account’s investment income to the Monthly Aggregate Settlement Date Report
(MASDR).
Final Report
ED-OIG/A04J0019                                                                        Page 4 of 31
Collection Account’s balances, and made the monthly payments from the Collection Account to
the Department and the Sponsor in accordance with the MPA. The MPA also allowed the
Custodian to delegate functions to a third party. As such, Wells Fargo delegated permitted duties
and responsibilities to the Sponsors and Servicers including (1) calculating the participant’s yield
due to the Department; (2) creating the MASDR; (3) holding loan documents; and (4) preparing
and submitting both the Weekly Loan Schedule and Custodial Certification (Weekly Loan
Schedule) and Monthly Loan Schedule and Custodial Certification (Monthly Loan Schedule).
Because Wells Fargo delegated these duties to the Servicers and/or Sponsors, it was responsible
for ensuring that its delegees were properly performing the delegated obligations in accordance
with the terms and requirements of the MPA and applicable Departmental guidance.



                                      AUDIT RESULTS



Except for the deficiencies in monitoring and oversight detailed in this report, Wells Fargo had
controls to reasonably ensure that its management of Collection Account funds complied with
the terms and conditions of the MPA and applicable Departmental guidance. We found that
Wells Fargo (1) established a Collection Account for each Sponsor to hold all collections related
to the loans subject to the 2008-2009 LPP Program for the Department as holder of participation
interests; (2) invested Collection Account funds in Permitted Investments; and (3) distributed the
funds on deposit in the Collection Accounts in compliance with Sections 11(b) and 11(d) of the
MPA. However, we found that Wells Fargo did not sufficiently monitor and provide oversight
of its Sponsors and Servicers as required by Section 18 of the MPA. Specifically, Wells Fargo
did not have sufficient policies and procedures to ensure consistent monitoring and oversight of
its Sponsors and Servicers. As a result, Wells Fargo had not consistently managed and
documented its monitoring efforts and had not demonstrated sufficient oversight related to the
performance of its Sponsors and Servicers. Without consistent management, including sufficient
monitoring and oversight, Wells Fargo cannot assure that it adequately performed its duties as
Custodian in accordance with the terms and conditions of the MPA and other Departmental
guidance.

In its comments to the draft report, Wells Fargo did not concur with our finding and
recommendation. Although Wells Fargo provided additional documentation with its comments,
the documentation included no new information and, as such, did not warrant any change to the
report finding or recommendation. Wells Fargo also provided us with independent audit reports of
the Servicers; however, those reports were not specific to the requirements of the 2008-2009 LPP
Program. Wells Fargo’s comments are summarized at the end of the finding along with our
response. The full text of its comments to the draft report is included as Appendix C to the report.

Wells Fargo stated that the additional documentation provided included proprietary information
that would cause economic harm if released and requested that it not be included as part of the
public release of this report. Since the additional documentation is voluminous, we have not
included it as part of this report. For any request for this additional documentation, we will make a
determination of the documentation’s qualification to be considered as confidential commercial
information, pursuant to Exemption (b)(4) of the Freedom of Information Act, 5 U.S.C. § 552(b)(4),
and act appropriately.
Final Report
ED-OIG/A04J0019                                                                              Page 5 of 31

FINDING – Wells Fargo Did Not Sufficiently Monitor and Provide Oversight of its
          Sponsors and Servicers

Wells Fargo delegated certain duties under the MPA to its Sponsors and Servicers. We found
that Wells Fargo did not sufficiently monitor and provide oversight of its Sponsors and Servicers
to determine that they properly performed the delegated obligations as required by the MPA.
Specifically, Wells Fargo did not (1) have sufficient policies and procedures to ensure consistent
monitoring and oversight of the 2008-2009 LPP Program; (2) maintain sufficient documentation
of its monitoring and oversight; (3) ensure that a Servicer accurately identified loans subject to a
pre-existing security interest on the Weekly Loan Schedule; and (4) verify that Servicers
remitted borrower payments within 2 business days of receipt.

Wells Fargo Did Not Have Sufficient Policies and Procedures to Ensure Consistent
Monitoring and Oversight of the 2008-2009 LPP Program

Wells Fargo did not have sufficient written policies and procedures for monitoring its eight
Sponsors and seven Servicers. With five Relationship Managers located in three separate
locations, it was critical to have policies and procedures to ensure consistency in monitoring and
oversight. In addition, monitoring and oversight were necessary to ensure that its Sponsors and
Servicers properly performed the delegated obligations. Specifically, Section 18 of the MPA
stated –
       The Custodian may delegate to another Eligible Lender (including the Sponsor) or to the
       related Servicer certain of its obligations. . . . If the Custodian delegates any of its
       obligations to a delegee as permitted in this Section 18: (i) the Custodian shall exercise
       due care in its appointment of such delegee. . . (iii) the Custodian shall take those steps
       that are reasonable under the circumstances to ascertain whether such delegee is properly
       performing the delegated obligations, and (iv) if such delegee has failed to perform any
       of its delegated obligations, the Custodian shall either assume the delegated obligations
       or promptly appoint a successor delegee to perform such obligations

Wells Fargo delegated many of the Custodian’s functions to its Sponsors and Servicers; as such,
it relied heavily on the information provided by its Sponsors and Servicers. According to the
Wells Fargo Vice President, Student Loan Product Manager (Student Loan Product Manager),
the Servicers and Sponsors agreed to accept responsibility for the information provided as well
as hold the Custodian harmless in the Adoption, Custodian, and Servicer Agreements. Although
Wells Fargo delegated certain responsibilities, Section 14(b) of the MPA stated that –
       The Custodian shall be liable in accordance herewith only to the extent of the
       obligations specifically undertaken by the Custodian under this Agreement, and with
       respect to those obligations delegated by it pursuant to the terms hereof, only to the
       extent the Custodian shall not have complied with Section 18. . . . Except to the extent
       of losses, claims, damages and liabilities that arise out of the Custodian’s willful
       misfeasance, bad faith or negligence in the performance of its duties under this
       Agreement, the amount of Custodian’s liabilities to the Department and its officials,
       employees and agents under this Section 14(b) shall be limited to the amount of the
       aggregate fees paid to it for its services hereunder.
Final Report
ED-OIG/A04J0019                                                                                         Page 6 of 31
Wells Fargo officials stated that it had adequate controls in place to provide oversight to ensure
compliance with the MPA. According to Wells Fargo officials, its Tickler System7 matched the
requirements contained in the MPA. Wells Fargo provided the Account Control Tickler
Standards, dated May 20108 along with a listing of all ticklers associated with the 2008-2009
LPP Program. We reviewed the documents provided and concluded that the Tickler System is a
general use system that allows Relationship Managers to establish one-time or recurring
reminders that appear on a specific date. Examples of the ticklers contained in the Tickler
System for the 2008-2009 LPP Program included a reminder (1) for one of the Relationship
Managers to prepare and mail the Schedule K-1 (Form 1065) and any other information needed
to the Department and the Sponsor for income tax preparation; (2) to deliver the Monthly Rolling
Forecast Report and MASDR via email to the Department by the 7th business day of the month;
(3) to enter the investment income amount and the pay.gov confirmation number on the
MASDR; and (4) to verify the participant’s yield on the MASDR. After reviewing the ticklers
related to the 2008-2009 LPP Program, we found that the established ticklers did not address
many of the Custodian’s responsibilities contained in the MPA such as (1) ensuring that legal
title of the loans was held in the Custodian’s name; (2) calculating redemption payments;
(3) issuing and authenticating participation certificates; and (4) creating and delivering the
Weekly and Monthly Loan Schedules. In addition, the ticklers related to the 2008-2009 LPP
Program did not include adequate steps or reminders to ensure that the obligations delegated to
the Sponsors and Servicers were performed as required.

Wells Fargo had not consistently managed and documented its monitoring efforts and had not
provided sufficient oversight of Servicer activities and delegated duties. Without sufficient
policies and procedures to ensure consistent monitoring and oversight of its Servicers and
delegees, Wells Fargo cannot demonstrate that it consistently performed its duties as Custodian
in accordance with the terms and conditions of the MPA and other Departmental guidance.

Wells Fargo Did Not Maintain Sufficient Documentation of Monitoring and Oversight

According to Wells Fargo’s Student Loan Product Manager and Relationship Managers, Wells
Fargo’s monitoring and oversight activities over delegated functions included verifying the
participant’s yield rates9 and the rates reflected in the MASDR, recalculating the participant’s
yield, and verifying the average daily principal balance and number of days in the period.
However, none of the five Relationship Managers were able to provide evidence of their
monitoring and oversight efforts over the delegated functions. Such evidence would include
monitoring reports or average daily balance calculations to support their verification of the
participant’s yield calculations for the 2008-2009 LPP Program. Without documentation of
monitoring activities, Wells Fargo could not demonstrate that it took reasonable steps to
ascertain that the Sponsors and Servicers properly performed the delegated responsibilities.

If a Custodian delegated one or more of its responsibilities, Section 18 of the MPA required the
Custodian to take reasonable steps to determine whether the delegee was properly performing the
delegated obligations. Examples of reasonable steps would include developing formal policies
and procedures, maintaining sufficient documentation of monitoring, and documenting the
7
  The Tickler System is an electronic system that Relationship Managers use to establish reminders for future trust 

account activities. 

8
  Account Controls Tickler Standards are Wells Fargo’s written procedures for its Tickler System.

9
  The participant’s yield rates consisted of the commercial paper rate plus 0.5 percent (or 3 percent, if an event of

default occurred).

Final Report
ED-OIG/A04J0019                                                                                       Page 7 of 31
verification of yield calculations and timeliness of borrower payment deposits into the Collection
Account.

The Student Loan Product Manager stated that the Relationship Managers calculated the
participant’s yield. In support of the Student Loan Product Manager’s statement, Wells Fargo
provided a listing of all its ticklers related to the 2008-2009 LPP Program. However, the tickler
listing included reminders instructing the Relationship Managers to verify the yield calculations,
not to calculate them. In performing our audit, we reviewed and compared Sponsors’
participant’s yield calculations and payments made from the Collection Accounts to the
Department’s yield calculations. Although we found calculation variances for 17 of 46 months
reviewed for four Sponsors, all of the differences occurred at the beginning of the 2008-2009
LPP Program and most were minimal.10 For 3 of the 17 months for which variances existed, we
noted variances of between 16.3 and 23.5 percent. However, these variances reflected larger
participant’s yields calculated by the Sponsor in comparison to the Department’s calculation.
Department officials stated that the Department changed its yield calculation methodology and
shared it with the Custodians, including Wells Fargo. Department officials also stated that if
discrepancies occurred, the Department’s yield calculation took precedence and was used to
determine the payment amount.

Wells Fargo Did Not Ensure That a Servicer Accurately Identified Loans Subject to a Pre-
existing Security Interest on the Weekly Loan Schedule

Wells Fargo did not effectively monitor and provide oversight of one of its Servicers, MHEAC,
to ensure that loans were accurately identified on the Weekly Loan Schedule as being subject to
a preexisting security interest as required by the Loan Schedule and Custodial Certification Data
File Fields – Definitions and Submission Procedures, updated September 2, 2009, attached to
Electronic Announcement (EA) No. 62, Loan Purchase Participation Program - Revised Loan
Schedule and Eligibility Edits Announcement, dated May 14, 2009, (updated September 2, 2009).
The MPA’s Section 3 “Definitions” specified that an “Eligible Loan” was one where “the
Sponsor, together with the Eligible Lender Trustee (if applicable) had good and marketable title
to, and was the sole owner of, the Loan, free and clear of all security interests . . . (other than an
interest or lien that will be released simultaneously with the purchase of the related Class A
Participation Interest pursuant to a Security Release Certification) . . .”

We found that the Servicer for one Sponsor did not identify 22,536 loans totaling $1.9 million
that were subject to a pre-existing security interest in the Weekly Loan Schedule’s “Lienholder”
field,11 even though Wells Fargo submitted a Security Release Certification to the Department
for the loans. In comparing the Security Release Certifications Forms provided by Wells Fargo
and a Financial Management System (FMS) report provided by the Department, we found that
one Servicer did not accurately identify the loans subject to the preexisting security interest.
Although the Servicer submitted the Weekly Loan Schedule for the July 14, 2009, PPR, Wells



10
   Calculation variances of 14 of 46 months reviewed were less than 10 percent and there were no variances for the
remaining 29 of 46 months.
11
   The “Lienholder” (Field 42) was a required data field on the loan schedule. The field indicated if the loan was
subject to a preexisting security interest that was to be released upon the Department’s purchase of a participation
interest in the loan.
Final Report
ED-OIG/A04J0019                                                                               Page 8 of 31
Fargo did not effectively monitor and provide oversight of its Servicer to ensure that the loans
were accurately identified to the Department as subject to a pre-existing security interest as
required by the instructions accompanying EA No. 62.

Wells Fargo’s Student Loan Product Manager explained that the Sponsor decided to use its own
funds, instead of the proceeds from the July 14, 2009, sale of the participation interest in the
loans to the Department, to obtain the release of the security interest in the loans that served as
collateral for a Bond Indenture; thus these loans were not subject to a pre-existing security
interest at the time of the sale and were not identified as such in the Weekly Loan Schedule.
However, the Student Loan Product Manager stated that this decision may not have been
communicated by the Sponsor to the Relationship Manager. In addition, the Student Loan
Product Manager acknowledged that Wells Fargo did not inform the Department of the
Sponsor’s change in plans. Wells Fargo provided supporting correspondence from the Servicer,
dated July 21, 2010, which stated that on July 14, 2009, the Sponsor used funds from its General
Fund (rather than the proceeds of the sale of a participation interest to the Department) to obtain
the release of the security interest in the loans that served as collateral for a Bond Indenture. As
a result, the Bond Indenture’s trustee released its security interest in the loans. Therefore, at the
time the participation interest was sold to the Department on July 14, 2009, the loans were no
longer subject to a pre-existing security interest.

The timing of events indicates that the security interests were released on the same date as the
PPR. However, since Wells Fargo submitted a Security Release Certifications Form, it should
have ensured that the Servicer identified the loans subject to a pre-existing security interest on
the Weekly Loan Schedule; or Wells Fargo should have informed the Department of the correct
status of the security interests by notifying the Department that the Security Release Certification
was no longer applicable.

Wells Fargo Did Not Verify That Servicers Remitted Borrower Payments Within 2
Business Days of Receipt

Wells Fargo did not monitor to ensure that Servicers deposited borrower payment collections for
two Sponsors, MHEAC and SCSLC, within the timeframe required by the MPA. Wells Fargo
officials agreed that its staff did not monitor the Servicers’ deposits into the Collection Accounts.
As Custodian, Wells Fargo was responsible for ensuring that Servicers complied with the deposit
requirements in the MPA.

Section 12(a) of the MPA required each loan subject to the LPP Program to be serviced by a
Servicer (which may have been a Sponsor) at the direction of the Custodian under the terms of
an ESA. Section 12(c)(v) of the MPA required Servicers to “deposit all collections into the
Collection Account not later than two (2) Business Days after receipt[.]” The work performed
by a Servicer usually included account management, collecting loan payments, and other
customary services. In addition, Section 12(d) of the MPA stated—

       The Custodian shall take all reasonable steps, actions and proceedings necessary

       to ensure that each Servicer will manage, service, administer, make collections 

       and calculate any amounts owed to the Department with respect to the Eligible 

       Loans . . . The Custodian shall ensure that each Servicer shall be responsible for 

       segregating, marking each Eligible Loan as owned by the Custodian and 

Final Report
ED-OIG/A04J0019                                                                                       Page 9 of 31
         remitting to the Custodian all payments received on the Eligible Loans for the 

         benefit of the Department as the holder of the Class A Participation Certificate. . . 


Section 13(d) of the MPA required the Custodian to “notify the Department in writing promptly
upon becoming aware of any default or failure to perform any obligations on the part of the
Servicer under the Servicing Agreement.” Section 13(e) of the MPA added that “[t]he Custodian
shall not waive any default by the Servicer under the Servicing Agreement without the written
consent of the Department.” Untimely deposit of collections into the Collection Account may
have been deemed a Servicer Event of Default under Section 3 of the MPA. Servicer Event of
Default was defined, in part, as:

         (i)       any failure by the Servicer to remit to the Custodian any Collections 

         within two (2) Business Days following receipt, or any failure by the Servicer to 

         pay any other amounts required to be paid by the Servicer hereunder or under any 

         related Eligible Servicing Agreement, which failure continues unremedied for a 

         period of one (1) Business Day following the Servicer becoming aware of such 

         failure . . . 


In EA No. 34, Interpretative Guidance Regarding Loan Purchase Programs, dated
October 31, 2008, the Department provided guidance on the 2 business-day requirement in its
response to Question No. 4:

         Q4       Section 11 of the MPA requires that all collections – including refunds
         and cancellations – be deposited in the collections account of the custodian
         within two business days of receipt by the sponsor or servicer. Failure by the
         sponsor to remit to the custodian payments received on loans is an event of
         default under Section 3 of the MPA. Is there a grace period within which the
         collection may be remitted to the custodian after two business days that would
         not result in a default?

         A4       Although the Department expects that most payments will be remitted to
         the custodian within the two-day period, it expects that even with the exercise of
         due diligence by the sponsor, it may take longer than two days to properly identify
         whether a payment pertains to a participated loan. The Department may terminate
         the participation or increase the spread if a sponsor event of default occurs.
         However, in determining an appropriate response to untimely remittances, the
         Department will consider the frequency with which these instances occur, the
         explanation provided for the occurrence, and any prior notification concerning such
         remittances.

We reviewed 6 months of borrower payment collections along with the respective Collection
Account statements for two of the eight Sponsors. The six monthly Collection Account
statements showed collections totaling $5.4 million.12 However, Wells Fargo officials agreed
that staff did not monitor Servicer deposits into the Collection Accounts. Wells Fargo did not
appear to have verified that the Servicers deposited borrower payments in the Collection
Accounts within the 2-day timeframe for any of its eight Sponsors.


12
  Under Section 11(a) of the MPA, collections include all payments and other proceeds of any kind received on or
with respect to the loans subject to a participation interest. As such, collections included payments received from
borrowers.
Final Report
ED-OIG/A04J0019                                                                                   Page 10 of 31
Wells Fargo officials explained that Collection Account deposits were received daily from the
Servicers. The Servicers notified Wells Fargo’s Relationship Managers, via email, that
collections consisting of borrower payments would be transmitted electronically for deposit into
the Collection Account. In reviewing the email transmittals from each Servicer, we found that
the deposits of borrower payments were segregated by principal and interest amounts; however,
the Servicer did not identify the number of borrower payments being transmitted or the dates the
individual loan payments were received by the Servicer. As a result, Wells Fargo did not have
sufficient information on the deposits it received from the Servicers to determine if the Servicers
made timely deposits to the Collection Accounts.

Wells Fargo’s Student Loan Product Manager acknowledged that she did not verify or sample
the Servicers’ payment information and did not require Servicers to submit borrower payment
history.13 In the exit conference, Wells Fargo officials stated that it was not reasonable to expect
staff to review the details associated with borrower payments since the Servicers made daily
deposits. The Student Loan Product Manager stated that adequate steps were taken to ensure
deposits were made within the required timeframe in that the Servicers notified Wells Fargo of
the amounts transmitted and that follow-up procedures were in place with the Servicers and
Sponsors if the amounts were not received by Wells Fargo. The Student Loan Product Manager
also stated that under the ESAs, Servicers were required to remit payments to the Custodian, and
under the Custodian Agreements, Sponsors were required to monitor the servicing activities. In
addition, according to the Student Loan Product Manager, the Sponsors and Servicers had
controls in place to process borrower payments, which were independently reviewed by external
auditors.

Wells Fargo provided external audit reports of the Servicers. However, the audit reports were
not for the period of the 2008-2009 LPP Program and were not specific to the requirements of
the LPP Program. As a result, we were unable to determine if external auditors reviewed, and
found no issues with, the Servicers’ processes for remitting borrower payments in accordance
with the requirements contained in Section 12(c)(v) of the MPA. Since the Custodian
Agreement required the Sponsor to monitor servicing activities, Wells Fargo, as Custodian, was
required to provide sufficient oversight to ensure the Sponsors were properly performing the
delegated functions and Servicers were performing the required functions in accordance with the
terms and conditions of the MPA and other Departmental guidance. In addition, without
sufficient monitoring, Wells Fargo may not have been in a position to promptly notify the
Department of any default or failure to perform on the part of a Servicer, as required under
Section 13(d) of the MPA.

Recommendation

1.1	    We recommend that the Chief Operating Officer for Federal Student Aid (FSA) hold
        Wells Fargo responsible, to the extent permitted under Section 14(b) of the MPA, for any
        liabilities associated with the finding.




13
  An example of borrower payment history is loan-level information detailing the date and amounts of collections
received by the Servicer.
Final Report
ED-OIG/A04J0019                                                                                          Page 11 of 31
Wells Fargo’s Comments

In its comments to the draft report, Wells Fargo did not concur with the finding and
recommendation. According to Wells Fargo, its policies and procedures were reasonable under
the circumstances, documentation of oversight was not required, and its oversight of Servicers
was sufficient.

Wells Fargo stated that its policies and procedures were commercially reasonable, consistent
with the LPP Program agreements, and ensured consistent monitoring and oversight.
Specifically, Wells Fargo stated that –
       	 Under Section 18 of the MPA, Well Fargo’s oversight of the delegated functions needed
          to be reasonable under the circumstances. According to Wells Fargo, it had performed in
          a manner consistent with its oversight of commercial student loan trusts.14
       	 We misunderstood the nature of the procedures that were in place and how Wells Fargo
          ensured oversight. Wells Fargo had policies and procedures in place related to the
          acceptance and administration of custodial accounts, and these policies and procedures
          were in compliance with other oversight agencies, such as the U.S. Department of the
          Treasury, the Federal Reserve Bank, and the Office of the Comptroller of Currency.
       	 Its Tickler System served as an effective tool in maintaining compliance, and Wells
          Fargo exercised oversight and control on an as-needed basis for those duties under the
          MPA that did not have specific deadlines.
       	 It used standard forms (for example, Security Release Certification) drafted by the 

          Department. 

       	 It was not necessary to develop new policies and procedures beyond the dictates of the
          MPA and the Department’s guidance.

Wells Fargo stated that it was not required to maintain documentation of its oversight.
Specifically, Wells Fargo stated that –

       	 Its Tickler System served as written evidence of its monitoring activity.

       	 It maintained, on a short-term basis, documentation relating to yield calculations and
          other compliance issues, but once the Department accepted a report and remitted funds,
          there was no need to retain the documentation.

Wells Fargo maintained that it aptly oversaw the activities of its Servicers. Specifically, Wells
Fargo stated that –
       	 The issues pertaining to the mistakenly identified security interests and the timely deposit
          of collections did not support our conclusions presented in the finding.
       	 The policies and procedures Wells Fargo used to oversee servicer compliance in the LPP
          Programs were largely the same as those used in commercial student loan securitizations.
          The Department had not set up any procedure to rescind a submitted Security Release

14
     A student loan trust generally refers to asset-backed securities collateralized by student loans.
Final Report
ED-OIG/A04J0019                                                                      Page 12 of 31
       Certificate; as such, there was little Wells Fargo could have done to rescind the Security
       Release Certificate it submitted.
   	 Regarding the timeliness of Servicer deposits, Wells Fargo cited the use of lockboxes and
      noted that only the Department and Sponsor had access to the lockboxes. Wells Fargo
      monitored Servicer deposits by reviewing deposit reports submitted by Servicers. At no
      time was there an adverse effect on the Department’s position.

OIG Response

Wells Fargo provided no additional information that would require a change to the report finding
or recommendation. As Custodian, Wells Fargo delegated the majority of its custodial
responsibilities to its Servicers and Sponsors. Wells Fargo relied on its Servicers and Sponsors
to perform its delegated obligations.

In response to Wells Fargo’s assertion that its policies and procedures were commercially
reasonable, consistent with the LPP Program agreements, and ensured consistent monitoring and
oversight –

   	 Section 18 of the MPA required the Custodian to “take those steps that are 

      reasonable under the circumstances to ascertain whether such delegee is 

      properly performing the delegated obligations. . . .” 

   	 In addition to being a new program in 2008-2009, the LPP Program operated under
      unique circumstances, including that the participation interests were assets purchased
      with Federal funds and the Department had financial interest in the participation interests.
      We agree that commercial student loan trust procedures could be utilized, however, we
      found that Wells Fargo’s procedures were not sufficient, without further modification, to
      meet its obligations under the MPA. Acceptance of such policies and procedures by
      other oversight agencies would not indicate that the policies and procedures were
      sufficient and acceptable to meet its obligations under the unique terms of the LPP
      Program.
   	 As we noted in the finding, although Wells Fargo officials stated that the Tickler System
      matched the requirements contained in the MPA, we found that the established ticklers
      did not address many of the Custodian’s responsibilities contained in the MPA and did
      not include adequate steps or reminders to ensure that the obligations delegated to
      Sponsors or Servicers were performed as required.

With five Relationship Managers in three separate locations, it was critical to have policies and
procedures to ensure consistency in monitoring and oversight of Sponsors and Servicers.

In response to Wells Fargo’s comment that it was not required to maintain documentation of its
oversight –

   	 The Tickler System provided Relationship Managers with reminders of the activities that
      were reoccurring or had specific due dates. However, the Tickler System did not serve as
      sufficient evidence of the actual monitoring performed by Wells Fargo.
Final Report
ED-OIG/A04J0019                                                                        Page 13 of 31
   	 Wells Fargo’s practice of maintaining documentation on a “short-term basis” was not
      reasonable under the circumstances, and not consistent with the record retention
      requirements contained in 34 C.F.R. § 682.414(a)(4)(ii)(L), which require FFEL Program
      lenders to keep “[a]ny additional records that are necessary to document the validity of …
      reports submitted under this part” for not less than 3 years following the date the loan is
      repaid by the borrower or not less than 5 years following the date the lender receives
      payment in full from any other source.

Wells Fargo should have maintained documentation of its oversight until the respective LPP
Program had ended and all required reports, including the attestation engagement report of the
Custodian’s compliance with the MPA, had been submitted to, and accepted by the Department.
In addition, the MASDR’s include data fields that contained carry-over information (for
example, the participation interest’s beginning balances, opening participation yield balance,
opening participation certificate balance) from the prior month’s MASDR. As such, Wells Fargo
should have maintained documentation regarding such information should it have been needed in
subsequent months.

In response to Wells Fargo’s assertion that it aptly oversaw the activities of its Servicers, our
conclusions were adequately supported. Specifically –
   	 Regarding the mistakenly identified security interest, our conclusion was based on a
      sample of 24 purchases of participation interests, which disclosed 1 error, and discussions
      with Wells Fargo officials. Had we reviewed all 199 purchases, for which Well Fargo
      served as Custodian, additional matters may have come to our attention. In addition,
      while the Department may not have had a formal procedure to rescind a Security Release
      Certificate, Wells Fargo could have easily rescinded the submitted Security Release
      Certificate through a phone call or email to the Department.
   	 Regarding the timeliness of deposits made by Servicers, our conclusion was based on a
      review of 6 months of collections for two of the eight Sponsors and discussions with
      Wells Fargo officials. Wells Fargo stated that it used lockboxes to collect borrower
      payments. However, Wells Fargo should have reviewed reports prepared by Servicers
      detailing the dates a borrower payment was received by the Servicer and the date the
      Servicer remitted the payment to the Collection Account. As we noted in the finding, the
      information received by Wells Fargo from Servicers did not contain sufficient
      information for Wells Fargo to determine if the Servicers made timely deposits to the
      Collection Accounts.

While our audit did not identify any harm to the Federal interest, Wells Fargo’s lack of sufficient
monitoring and oversight could have subjected Federal funds to unnecessary risks.
Final Report
ED-OIG/A04J0019                                                                  Page 14 of 31


                 OBJECTIVES, SCOPE, AND METHODOLOGY 



The objectives of the audit were to determine whether Wells Fargo, as Custodian, (1) had adequate
controls to ensure its management of the Collection Account complied with the terms and
conditions of the MPA and applicable Department guidance; and (2) provided reasonable oversight
of Sponsors and Servicers to ensure compliance with the terms and conditions of the MPA and
applicable Departmental guidance. The scope of our review covered Wells Fargo’s controls and
oversight activities during the 2008-2009 LPP Program for the period August 15, 2008, through
October 31, 2009. We also reviewed 20 loans from the 2009-2010 LPP Program to confirm that
legal title to the loans was held in Wells Fargo’s name. Our audit was limited to reviewing Wells
Fargo’s management of Collection Account funds, Wells Fargo’s oversight and monitoring of
Servicer activities, and Wells Fargo’s monitoring and oversight of delegated duties.

To accomplish our objectives, we —
   	 Met with various Department officials from the Office of General Counsel and FSA to
      obtain background information about the LPP Program and the Custodian’s role in the
      program.
   	 Reviewed the Wells Fargo and Company’s Annual Report dated December 31, 2008; the
      FFEL Program Compliance Audit Report for Wells Fargo for the year ended December
      31, 2008; the Independent Auditor’s Report for ISLLC for the year ended December 31,
      2008; MHEAC’s, for the years ended December 31, 2008, 2007, and 2006; SCSLC’s, for
      the year ended June 30, 2008; SLM ECFC’s, for the years ended December 31, 2008 and
      2007; Student Lending Works’, for the years ended June 30, 2008 and 2007; and previous
      audit findings reported for two Servicers, Education Services Foundation for the year
      ended December 31, 2008, and PHEAA/American Education Services (July 1, 2004,
      through June 20, 2007, with updates through August 12, 2008).

   	 Reviewed the agreed-upon procedures audit reports for the eight Sponsors for the 

      2008-2009 LLP Program. 

   	 Reviewed the Sallie Mae Loan Origination and Servicing Report on Controls Placed in
      Operation and Tests of Operating Effectiveness – October 1, 2007, through
      September 30, 2008; and the American Education Services Report on Controls Placed in
      Operations and Test of Operating Effectiveness for COMPASS and one Link System
      (October 1, 2007, through September 30, 2008).

To evaluate Wells Fargo’s controls for managing Collection Account funds, we —
   	 Reviewed and gained an understanding of relevant laws, regulations, guidance, and
      agreements, which included (1) ECASLA; (2) “Notice of terms and conditions of
      purchase of loans under the ECASLA,” published in the Federal Register on July 1, 2008
      (73 Federal Register 37422); (3) the Department’s Electronic Announcements; (4) the
      Department’s LPP Program Frequently Asked Questions; (5) the MPA and applicable
      adoption agreements; (6) ESAs; and (7) Custodian Agreements.
Final Report
ED-OIG/A04J0019                                                                          Page 15 of 31
       	 Interviewed officials at Wells Fargo’s Corporate Trust Division, including the Student
          Loan Product Manager and the five Relationship Managers responsible for routine
          Collection Account management activities.
       	 Reviewed Wells Fargo’s procedures for managing Collection Account funds, including
          procedures for managing the flow of funds for a PPR, loan redemption, loan sale,
          Servicer deposits, and investment of Collection Account funds.
       	 Gained an understanding of how funds flowed through the Collection Account and
          evaluated Wells Fargo’s compliance with applicable guidance and agreements by
          reviewing 2 months of Collection Account entries for each of the two Sponsors, MHEAC
          and SCSLC. From a total of 22 monthly Collection Account statements, we
          judgmentally selected 4 Collection Account statements. We reviewed the January 2009
          and September 2009 Collection Account statements for both SCSLC and MHEAC to
          evaluate account activity during the beginning and ending months of the program year.
       	 Compared all 24 PPRs submitted for two Sponsors (16 PPRs for MHEAC and 8 PPRs for
          SCSLC) obtained from both Wells Fargo and the Department to verify the accuracy of
          the purchase price with each PPR.
       	 Compared the information in the Collection Account statements to the information in the
          MASDRs for two Sponsors, MHEAC and SCSLC, for all months during the 2008-2009
          LPP Program.
       	 Compared the participant’s yield calculations, which were verified by Wells Fargo, with
          the Department’s yield calculations and verified the yield payments made from the
          Collection Account for four of eight Sponsors. We judgmentally selected MHEAC,
          SCSLC, ISLLC, and SLM ECFC to review because those Sponsors had the highest
          volume of cumulative participation interest purchased during the 2008-2009 LLP
          Program.
       	 Reviewed the Semiannual Reports for the money market funds used to invest Collection
          Account funds for all eight Sponsors to determine whether Collection Account funds
          were invested in Permitted Investments.
       	 Verified that for all four put option transactions (that is, sales of the underlying loans to
          the Department) for MHEAC,15 the Department’s Bill of Sale amounts, and the total loan
          counts matched information contained in weekly status reports issued by the Department
          and deposit amounts to the Collection Account.

To evaluate whether Wells Fargo provided reasonable oversight and monitoring of its Sponsor
and Servicer activities and delegated duties, we —
       	 Gained an understanding of the terms and conditions of the MPA and Department
          guidance applicable to the Custodian’s oversight of Servicer activities and delegated
          duties.
       	 Obtained an understanding of Wells Fargo’s process for monitoring its Sponsors and
          Servicers.
       	 Interviewed the Student Loan Product Manager and five Relationship Managers
          regarding monitoring and oversight of the Sponsors and Servicers.
15
     SCSLC did not execute any put option transactions. SCSLC redeemed its loans.
Final Report
ED-OIG/A04J0019                                                                                   Page 16 of 31

     	 Reviewed Wells Fargo’s Corporate Trust new business acceptance meeting agendas,
        corporate trust account tickler reports, and ESAs for its seven Servicers.
     	 Reviewed emails, Collection Account statements, and other supporting documentation
        relating to 6 months of borrower payment deposits for two Sponsors, MHEAC and
        SCSLC, to verify that funds were deposited into the Collection Account within 2 business
        days.

To determine whether loans were subject to a security lien, we interviewed Department officials
to determine how loans subject to a security lien are identified in the FMS, and reviewed FSA’s
Lender’s Request for Payment of Interest and Special Allowance Participation Interest Lien
Holder Statistics16 report for the 2008-2009 LPP Program.

To evaluate whether Wells Fargo held title to the loans17 while they were subject to the LPP
Program, we obtained the October 2009 Monthly Loan Schedules for the 2009-2010 LPP
Program for two Sponsors, MHEAC and SCSLC, which contained 12,166 loans and 154,800
loans, respectively. From this population of loans, we randomly sampled 50 loans. Of those 50
loans, we selected a judgmental sample of the first 20 loans (10 MHEAC loans and 10 SCSLC
loans), and reviewed the National Student Loan Database System to verify that the loans were
held in the Custodian’s name.

Sampling Methodology for Sponsor Relationships

Wells Fargo’s eight Sponsor Collection Accounts were managed by five Relationship Managers
in three separate geographical locations. In reviewing the eight Sponsor relationships, we
judgmentally selected two Sponsors for testing, MHEAC and SCSLC, because both the
Relationship Managers and supporting documentation were located in Jacksonville, Florida.

Data Reliability Assessment

During the audit, we relied in part on computer-processed data contained in Wells Fargo’s SEI
system, an asset management and investment accounting system, which Wells Fargo uses to
maintain Collection Account activity for its eight Sponsors. We tested the accuracy and
completeness of the data by comparing Wells Fargo’s records to source documents maintained
by the Department along with documents transmitted by two Sponsors, one of which was also a
Servicer. Based on these tests and assessments, we concluded that the data were sufficiently
reliable for use in meeting our audit objectives.

Our audit work was completed in Jacksonville, Florida and Atlanta, Georgia. We conducted our
fieldwork in Jacksonville, Florida, from November 2009 through January 2010. An exit
conference was held with Wells Fargo officials and staff on July 22, 2010.



16
   A Department report, generated as needed, to determine whether any participation requests had any loans
identified with liens.
17
   We reviewed 20 loans for the 2009-2010 academic year that participated in the 2009-2010 LPP Program to
determine whether Wells Fargo held legal title of the loans. Because all of the loans in the 2008-2009 LPP Program
were either redeemed by the Sponsors or sold to the Department under the ECASLA LPC Program at the time of the
audit, we were unable to evaluate academic year 2008-2009 loans for this purpose.
Final Report
ED-OIG/A04J0019                                                                       Page 17 of 31
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 objectives. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objectives.



                             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 actions 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 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 12E1
                               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/
                                               Denise M. Wempe
                                               Regional Inspector General for Audit

Appendices

Electronic cc:
Tricia Heintz, Vice President, Student Loan Products, Wells Fargo
Tim Carlin, Managing Counsel, Wells Fargo
Tom Levandowski, Wells Fargo
William J. Taggert, Chief Operating Officer, FSA
Eduardo Ochoa, Assistant Secretary for Postsecondary Education
Final Report
ED-OIG/A04J0019                                                               Page 18 of 31

        Appendix A - Acronyms and Abbreviations Used in this Report

Department              U.S. Department of Education

EA                      Electronic Announcement

ECASLA                  Ensuring Continued Access to Student Loans Act of 2008

ELT                     Eligible Lender Trustee

ESA                     Eligible Servicing Agreement

FAQ                     Frequently Asked Questions

FFEL Program            Federal Family Education Loan Program

FMS                     Financial Management System

FSA                     Federal Student Aid

Great Lakes             Great Lakes Education Services

HEA                     Higher Education Act of 1965, as amended

ISLLC                   Iowa Student Loan Liquidity Corporation

LPC                     Loan Purchase Commitment Program

LPP Program             Loan Participation Purchase Program

MASDR                   Monthly Aggregate Settlement Date Report

MHEAC                   Mississippi Higher Education Assistance Corporation

Monthly Loan Schedule   Monthly Loan Schedule and Custodial Certification

MPA                     Master Participation Agreement, dated July 25, 2008

PHEAA                   Pennsylvania Higher Education Assistance Agency

PPR                     Participation Purchase Request

SCSLC                   South Carolina Student Loan Corporation

SLM ECFC                Sallie Mae Education Credit Finance Corporation

Student Loan Product    Vice President, Wells Fargo Student Loan Product Manager
Manager

Weekly Loan Schedule    Weekly Loan Schedule and Custodial Certification

Wells Fargo             Wells Fargo Bank, National Association
Final Report
ED-OIG/A04J0019                                                                                  Page 19 of 31

           Appendix B: Custodian Duties and Obligations under the MPA
MPA
            Duties and Obligations of Custodian
Section
§4          Delivery of Loans to Custodian; Purchase and Sale of Participation Interests
§4(b)       The Custodian shall hold all rights, title, and interests in the loans until the redemption date.
            The Custodian (or its designee) shall hold loan documents in trust.
            The Custodian shall not release loan documents, except: (i) to the Sponsor upon receipt of the
            redemption payment, (ii) to the Department upon exercise of the put option, (iii) for servicing
            purposes, and (iv) when permitted by Department in writing.
§4(c)       On the purchase date, (i) the Custodian receives the purchase price from the Department and remits
            it to the Sponsor, and (ii) the Custodian provides the Department with a Class A Participation
            Interest and Loan Schedule and Custodial Certificate.
§4(e)       The Custodian holds the promissory notes in its name. If a master promissory note is for both
            eligible and ineligible loans, book entry is used by the Custodian.
§5          Participation Certificates; Loan Schedule and Custodian Certificates
§5(a)       On or prior to the purchase date, the Custodian issues a Class A certificate to the Department and a
thru (e)    Class B certificate to the Sponsor. Loan Schedules and Custodial Certificates are included with the
            Class A and B certificates.
§7          Subsequent Disbursements
§7          The Custodian shall make scheduled disbursements (with the Sponsor providing the necessary
            funds) on loans and shall issue participation interests in such disbursements.
§8          Reporting; Due Diligence
§8(b)(1)    The Custodian provides to the Department a MASDR showing loan activity, aggregation of
            Participant’s Yield, and principal paid to the Department on its Class A interest.
§8(b)(2)    The Custodian submits to the Department an audit of the Custodian’s activities, conducted by an
            independent public accountant and performed in accordance with guidance issued by the
            Department.
§10         Representations and Warranties
§10(c)      The Custodian is required to make various representations and warranties.
§11         Collections; Distributions
§11(a)      The Sponsor establishes a Collection Account at the Custodian for all payments and proceeds and
            invests only in Permitted Investments.
§11(b)      Upon the first business day of each month, the Custodian distributes funds in the Collection
            Account in the following order: (i) to the Department to pay its yield, (ii) to the Department to
            reduce Class A principal, and (iii) to the Sponsor, any remaining amounts.
§11(d)      At the termination date, the Custodian distributes funds in the Collection Account in the following
            order: (i) to the Department to pay its yield, (ii) to the Department to reduce Class A principal, and
            (iii) to the Sponsor, any remaining amounts.
§12         Servicing
§12(a)      The Custodian enters into an Eligible Servicing Agreement with a Servicer.
§12(c)      In addition to customary terms and conditions, the Eligible Servicing Agreement shall include (but
            is not limited to):
             An acknowledgement that the Department is a third party beneficiary under the agreement and
                  is entitled to instruct the Servicer and exercise remedies in the event of a Servicer default.
             A provision that the Servicer will deposit all collections into the Collection Account within 2
                  business days after receipt.
             A provision that the agreement is terminable by the Department with 30 days notice and the
                  loans deconverted and transferred without any costs, penalties, or fees paid by the Department.
             A provision that the Servicer shall provide documents and information to the Custodian to
                  enable the Custodian to oversee the Servicer.
§12(d)      The Custodian shall ensure that the Servicer shall be responsible for segregating, marking each loan
            as owned by the Custodian, and remitting all loan payments to the Custodian.
Final Report
ED-OIG/A04J0019                                                                                     Page 20 of 31
MPA
            Duties and Obligations of Custodian
Section
§13         Enforcement of the Servicing Agreements
§13(a)      The Custodian shall enforce the servicing agreements and cause the Servicer to specify whether
            deposits to the Collection Account are principal or interest.
§13(d)      The Custodian shall notify the Department if the Servicer is in default.
§13(e)      The Custodian shall not waive default by the Servicer without the Department’s consent.
§15         Redemption; Put Option; Termination
§15(a)      The Custodian calculates the redemption payment for Class A interests to be paid by the Sponsor to
            the Department.
§15(b)      Upon receipt of redemption payment, the Custodian shall (i) remit the payment to the Department,
            (ii) transfer title in loans to the Sponsor and release all interests, (iii) deliver all loan documents to
            Sponsor, and (iv) cancel Class A and B participation interests.
§15(c)      If the Sponsor requests to put loans to the Department, the Custodian shall (i) transfer title in loans
            to the Department and release all interests, (ii) deliver all loan documents to the Department, and
            (iii) cancel Class A and B participation interests. In addition, at the Department’s discretion, the
            Custodian will (i) receive payment from the Department for the net amount due the Sponsor, (ii)
            deposit funds into the Collection Account, and (iii) distribute funds in the Collection Account per
            §11.
§15(e)      At the termination date, all loans not redeemed by the Sponsor become property of the Department.
            The Custodian remits to the Sponsor any excess redemption payments (if any) over liabilities due
            to the Department.
§15(f)      The Custodian shall not release any loans from a Class A interest if, after the release, the principal
            balance of the loans would be less than the principal balance of Class A participation interests and
            yield due to the Department.
§17         Custodian Events of Default; Removal of Custodian
§17         The Custodian may be removed upon an event of default and a successor Custodian named.
§18         Delegation of Duties by Custodian
§18         The Custodian may delegate certain obligations to another eligible lender (including the Sponsor)
            or a Servicer. However, the Custodian may not delegate:
            (i) holding legal title in its own name in the purchased loans;
            (ii) issuing and authenticating participation certificates;
            (iii) issuing the participation interests;
            (iv) creating and delivering the loan schedules and custodial certificates and reports required under
            §818; and
            (v) holding and disbursing all collections and redemption payments.
            If the Custodian delegates its obligations, it shall take steps to ascertain that the delegee is properly
            performing the obligations.
§23         Tax Matters
§23(a)      The agreement is a partnership.
§23(b)      The partnership’s Fiscal Year End is December 31. The Custodian shall prepare Schedule K-1
            (Form 1065) for the Department and the Sponsor.
§23(c)      The Custodian shall establish and maintain a separate capital account for each partner. The
            partnerships income, gains, losses and expenses shall be allocated among the capital accounts.
§23(d)      If the partnership pays any taxes directly, subsequent distributions to the partners shall be adjusted
            so that the burden of taxes is borne by the partner(s) to which such tax obligation is attributable.



18
  Section 18 of the MPA prohibits Custodians from delegating the preparation and submission of the Weekly and
Monthly Loan Schedules. However, based on discussions with Department officials, the Department allows
Custodians to delegate this responsibility. In addition, guidance issued by the Department in the Revised Funding
Request Submission Instructions attached to EA No. 53 states that the Sponsor can delegate the submission of the
Weekly and Monthly Loan Schedules to the Servicer.
Final Report
ED-OIG/A04J0019                                                                   Page 21 of 31

             Appendix C: Wells Fargo’s Comment to the Draft Report

                                             November 19, 2010


VIA EMAIL AT Denise.Wempe@ed.gov

Denise M. Wempe
Regional Inspector General for Audit Services
U.S. Department of Education, Office of the Inspector General
61 Forsyth Street SW, Suite 18T71
Atlanta, Georgia 30303

       Re:    ED-OIG/A04-J0019

Dear Ms. Wempe:

       Thank you for affording Wells Fargo Bank, N.A. (“Wells Fargo”) the opportunity to
respond to the September 21, 2010 Draft Audit Report (“Draft Report”) produced by the
Department of Education’s (“Department”) Office of the Inspector General (“OIG”) concerning
Wells Fargo’s “Management of Collection Account Funds and Oversight Activities under the
Ensuring Continued Access to Student Loans Act (“ECASLA”) Loan Participation Purchase
(“LPP”) Program.” As discussed more fully herein, Wells Fargo respectfully submits that the
OIG should revise the Draft Report as set forth below.

       Although Wells Fargo understands that this response will be made public as an
attachment to the final report issued by the OIG, we ask that any exhibits to this response be
withheld from release. The information is proprietary and could do economic harm to Wells
Fargo and is merely provided for the sole purpose of addressing the issues in the Draft Report.

Background

        Wells Fargo is pleased with the OIG’s overall finding that “Wells Fargo had controls to
reasonably ensure that its management of Collection Account funds complied with the terms and
conditions of the MPA and applicable Department guidance.” Draft Report, at 4. We believe
this conclusion is an accurate reflection of the impressive work that Wells Fargo staff did in
managing the accounts consistent with ECASLA requirements. As the OIG no doubt recalls, the
Department established the ECASLA programs under trying circumstances. ECASLA became
law on May 8, 2008 and the Department first announced the parameters of the LPP Program in a
May 21, 2008 Dear Colleague Letter. After publishing the general program terms in the Federal
Register on July 1, 2008, the Department published the governing contract – the Master
Participation Agreement (“MPA”) – on July 25, 2008. This timeline provided program
participants (including custodians such as Wells Fargo and student lenders) with roughly two
weeks to digest and implement the LPP terms before student lenders were required to begin
originating loans for the 2008-2009 academic year. As history bears out, the LPP Program was
highly successful and, thanks to the cooperation and concerted efforts of the Department and the
Final Report
ED-OIG/A04J0019                                                                                   Page 22 of 31
program participants, students received their loans in a timely manner and the federal interest
was protected.

        Due to this expedited schedule, the Department modeled the LPP Program and the
requirements placed on Custodians on commercial student loan securitizations. Although the
Department made numerous interpretive and procedural revisions to the LPP Program, these
revisions were also consistent with typical student loan securitizations.1 While these changes
came in many forms – whether through official guidance, webinar presentations or emails sent
directly to program participants – the Department and every participant in the program used their
best efforts to work through issues and ensure that students received their loans in a timely
fashion.

The OIG Draft Report

        Given the trying circumstances in which Wells Fargo operated we take issue with the
OIG’s Draft Report that states Wells Fargo “did not (1) have sufficient policies and procedures
to ensure consistent monitoring and oversight of the 2008-2009 LPP Program; (2) maintain
sufficient documentation of its monitoring and oversight; (3) ensure that a Servicer accurately
identified loans subject to a preexisting security interest on the Weekly Loan Schedule; and (4)
verify that Servicers remitted borrower payments within 2 business days of receipt.” Draft
Report, at 4-5. The Draft Report also “recommend[s] that the Chief Operating Officer for
Federal Student Aid (FSA) hold Wells Fargo responsible, to the extent permitted under Section
14(b) of the MPA, for any liabilities associated with the [OIG’s] finding.” Draft Report, at 10.2

        The OIG’s conclusions are, unfortunately, based on misunderstandings of what is
commercially reasonable in student loan trust practice, and of what the MPA actually requires.
Indeed, while there may be merit to the OIG’s suggestions for monitoring service compliance,
there is nothing in the MPA that mandates that those methods be used or suggests that the
methods employed by Wells Fargo are insufficient to the task. To the contrary, the tools used by
Wells Fargo to measure the performance of delegated functions in the LPP Program are the same
tools commonly used by Wells Fargo in commercial student loan financings. The procedures
Wells Fargo employed, such as the use of a tickler system and various account maintenance
tools, are used throughout the industry. Our more general trust-related procedures have been
reviewed by the Office of the Comptroller of Currency for their sufficiency. This is clear
evidence that Wells Fargo utilized policies and procedures that were reasonable under the
circumstances. As such, Wells Fargo respectfully requests that the OIG revise the Draft Report
as discussed herein.

1
  For example, the Department offered at least two rounds of interpretive guidance associated with the MPA
subsequent to the program start date (the last round of guidance was issued on November 1, 2008 – roughly three
months after the program began). The Department also revised the required data fields for the Loan Schedule and
Custodial Certification on numerous occasions - each time changing the loan-level data necessary to report to the
Department. In addition, the OIG issued the audit guide for the 2008-2009 MPA on April 26, 2010 (“Audit Guide”),
roughly twenty months after the MPA was issued and seven months after the 2008-2009 LPP ended.
2
  The Draft Report also erroneously states that “Wells Fargo did not provide the external audit reports documenting
independent reviews.” Draft Report, at 10. During the OIG investigation period, Wells Fargo provided the OIG
with SAS 70 and applicable servicer audits to demonstrate the independent review of each servicer’s processes for
borrower payments. In addition, On October [18], 2010, after receiving the Draft Audit, Wells Fargo sent the SAS
70 and applicable servicer audits to the OIG again. If the OIG revises the Draft Report related to a review of this
documentation, Wells Fargo hereby requests the right to respond to any OIG revisions.
Final Report
ED-OIG/A04J0019                                                                                       Page 23 of 31
         A. 	     Wells Fargo’s Policies and Procedures Were Commercially Reasonable,
                  Consistent with the LPP Program Agreements and
                  Ensured Consistent Monitoring and Oversight

        The Draft Report rightly notes that it is “critical to have policies and procedures to ensure
consistency in monitoring and oversight.” Wells Fargo agrees. As a trust department with a
longstanding involvement as a trustee in the student loan industry, Wells Fargo knows of the
importance of policies and procedures and relies on them every day. In stating that the
procedures are insufficient, the Draft Report exhibits a misunderstanding of the nature of the
procedures in place and how valuable they are to ensuring oversight. In addition, the OIG’s
conclusion misstates the standard required of Wells Fargo’s oversight duties which, in fact, was
merely that Wells Fargo “shall take those steps that are reasonable under the circumstances to
ascertain whether such delegee is properly performing the delegated obligations.” MPA at 39.
As such, this finding should be revised.

        First, Wells Fargo has a significant number of policies and procedures related to
acceptance and administration of trust accounts, such as the custodial accounts at issue here.
They are oriented as to trust generally and have been used in connection with student loan trusts
for well over a decade. These policies cover client account acceptance, establishing required
trust accounts, general account management, and procedures to identify and address defaults and
are in compliance with regulations issued by other agencies that oversee Wells Fargo, such as the
U.S. Department of the Treasury, the Federal Reserve Bank and the Office of the Comptroller of
Currency. Wells Fargo provided copies of these procedures to the OIG audit team.3

        In addition, while the Draft Report correctly notes that Wells Fargo uses a “Tickler
System,” (as set forth in the written Account Control Tickler Standards) to ensure that key
account activities occur, the Draft Report incorrectly concludes that the Tickler System “related
to the 2008-2009 LPP Program did not include adequate steps or reminders to ensure that the
obligations delegated to the Sponsors and Servicers were performed as required.” Draft Report at
6. While it is true that the Tickler System only addresses duties that are reoccurring or have
specific date/timelines, it is still an effective tool in maintaining compliance. In fact, many of the
duties cited as not being addressed by Ticklers were, in fact, addressed. For example, while the
Draft Report suggests that the Ticklers “did not address” “creating and delivering the Weekly
and Monthly Loan Schedules,”4 Draft Report, at 6, these were responsibilities largely related to
creating the Monthly Aggregate Settlement Date Report (“MASDR”),5 for which the OIG
acknowledges there was a Tickler, Draft Report, at 6. Wells Fargo delegated to the lender
(“Sponsor”) the requirement to file partnership tax forms for the custodial facility. As the OIG
notes, there is a Tickler associated with preparing and mailing the Schedule K-1 and other
information associated with tax preparation. Draft Report, at 6. In addition, the Tickler

3
  Annexed as Exhibit A to this response is a copy of those procedures that were previously provided to the OIG. 

4
  Specifically, the Draft Report cites as examples the non-delegable duties of a custodian; “(1) ensuring legal title of

the loans are held in the Custodian’s name; (2) calculating redemption payments; (3) issuing and authenticating

participation certificates; and (4) creating and delivering the Weekly and Monthly Loan Schedules.” Draft Report, 

at 6. Importantly, although these duties are non-delegable, a custodian, such as Wells Fargo, may reasonably rely on

a delegee’s performance of delegable duties to perform a custodial duty. MPA, at 39 (Section 18).

5
  As set forth in the EA 53 – March 13, 2009 “Loan Schedule And Custodial Certification Data File Fields –

Definitions And Submission Procedures Loan Information” – the MASDR included information for each loan in the

custodial facility including, but not limited to, data related to the borrower identity, disbursed amount, past and 

future disbursement dates, guarantor, loan type and number of loans in the custodial facility.

Final Report
ED-OIG/A04J0019                                                                                 Page 24 of 31
associated with filing the Monthly Rolling Forecast Report required Wells Fargo to calculate
actual originations and disbursements (as well as forecast anticipated originations and
disbursements). This served as an independent check on Sponsors that were delegated the
responsibility to originate and make all disbursements on student loans. Also, Wells Fargo’s
work on verifying the participant’s yield – for which the OIG has acknowledged there was a
Tickler, Draft Report, at 6 – could not have been conducted without knowing the value of loans
in the custodial facility.

        Furthermore, for those duties defined by the MPA which do not have specific deadlines
(such as redemptions or issuing participation certificates), Wells Fargo exercised oversight and
control on an as needed basis by referring to the MPA and performing duties in accordance
therewith. Thus, for example, Wells Fargo issued participation certificates when participating
lenders (“Sponsors”) sold participations to the Department. Similarly, the Weekly Loan
Schedule was part of the Participation Purchase Funding Requests and was developed when
Sponsors requested a purchase of loan participations.6 This activity happened at indeterminate
times as dictated by Sponsors. On those occasions, Wells Fargo, in accordance with the MPA,
utilized the required participation certificate forms (Exhibits C and D of the MPA) and included
a schedule of the loans subject to the participation. Similarly, when Sponsors redeemed the
Department’s participation interests, in accordance with the MPA, Wells Fargo would collect
any redemption payments and remit such payments to the Department as required.

       It is unclear why the Draft Report suggests that Wells Fargo should have developed new
procedures beyond the clear dictates of the MPA (as modified by Department guidance) for these
as needed functions. Wells Fargo personnel were trained about the requirements of the MPA and
attended each of the Department’s numerous webinars related to the LPP Program. Wells Fargo
also disseminated all Department program guidance, including each of the electronic
announcements. In sum, Wells Fargo acted in accordance with the MPA, as supplemented by
Department guidance, electronic announcements, webinars and other Departmental
communications.

        It is also not clear why additional Wells Fargo-procedures were desirable. Indeed, given
the short time frame associated with program implementation, and the then-anticipated one-year
program duration, Wells Fargo reinterpretations of the MPA would likely have been an
inaccurate reflection of the actual language of the MPA. Further, although it is completely
understandable that the Department had to revise the LPP Program throughout the 2008-2009
year – including in multiple round of official interpretive guidance and in informal emails to
program participants – any policies Wells Fargo enacted would have needed multiple revisions
as well. Such lack of consistency could have created problems far greater than relying on the
specific dictates of the MPA.

       Most importantly, however, is that Wells Fargo’s oversight of delegated functions need
only be “reasonable under the circumstances.” MPA at 39. In this regard, Wells Fargo
performed in a manner consistent with its oversight of other student loan trusts. For example,

6
  See EA 53 “Loan Schedule And Custodial Certification Data File Fields – Definitions And Submission Procedures
Loan Information,” at 1 (March 13, 2009) (“The format of Loan Schedule and Custodial Certification will be used
for two reporting purposes: 1) as a part of the Participation Purchase Funding Requests (the “Weekly Loan
Schedule”), and 2) to report the total pool of loans supporting the Class A Participation Certificate held by the
Department as of month end (the “Month-End Loan Schedule”).
Final Report
ED-OIG/A04J0019                                                                        Page 25 of 31
while loan servicers were delegated the responsibility of servicing the student loans, Wells Fargo
did not serve as a shadow servicer. It is not reasonable to expect that it would. As is the case
with all student loan trusts, Wells Fargo reviewed servicer audits to gauge regulatory compliance
before the engagement – to assess the quality of the servicer – and as such audits were conducted
during and after the engagement – to assess performance. Many of the servicers associated with
the loans in the custodial accounts, including Great Lakes, PHEEA/AES, Sallie Mae, and Iowa
Student Loan Liquidity Corp., were previously deemed “Exceptional Performers” by the
Department – until October 1, 2007 when that program was eliminated pursuant to the College
Cost Reduction Act of 2007 – and were some of the largest student loan servicers in the country.
Indeed, three of the four servicers have subsequently been chosen to be student loan servicers for
the Department.

       The Draft Report mentions that the Tickler System did not “ensure[ ] legal title of the
loans held in the Custodian’s name.” While it is true that the Tickler System did not address this
issue, Wells Fargo addressed it through other means that were consistent with the MPA. Thus,
as was consistent with typical bank trust procedures, the bank relied on the legal documents
evincing transfer of title – the standard forms that (i) transferred legal title to the Wells Fargo as
custodian, (ii) released any liens, and (iii) included Sponsor certification that there were no
remaining security interests on the loans that would impair the transfer of legal title. All of these
forms were drafted by the Department and were not subject to change.

        Additionally, beyond the process of collecting security releases, it should be recalled that
Sponsors made numerous representations to the Department that Wells Fargo had clear legal title
to the loans that the Department purchased. The Participation Purchase Request form, Exhibit B
to the MPA, specifically incorporates the lender’s representation (located in Section 10(a) (viii)
of the MPA) that the lender:

       has, or, for Loans already transferred to the Custodian, had at the time of such
       transfer, all requisite power and authority to hold each Loan, to transfer each
       Loan, and to execute, deliver and perform, and to enter into and consummate, all
       transactions contemplated by this Agreement, (2) has duly authorized the
       execution, delivery and performance of this Agreement, and (3) has duly executed
       and delivered this Agreement.

MPA, at 25 and B-1. Further, pursuant to section 10(b)(1) of the MPA, Sponsors “represent and
warrant to the Department as to the Eligible Loans subject to any Class A Participation Interest”
that

       [a]t the time of transfer of title to the Custodian, the Sponsor or the Eligible
       Lender Trustee (as applicable) has good and marketable title to, and the Sponsor
       and Eligible Lender Trustee together are the sole owners of, the Loans, free and
       clear of any security interest or lien (other than an interest or lien that will be
       released simultaneously with the purchase of the related Class A Participation
       Interest pursuant to a Security Release Certification).

MPA, at 27. Lastly, as required by the Department, servicers were required to note on NSLDS
that loans held in a custodial facility overseen by Wells Fargo were owned by Wells Fargo.
Final Report
ED-OIG/A04J0019                                                                                       Page 26 of 31
Thus, on all subsequent loan schedules received from the servicer, Wells Fargo was noted as the
title holder of the loan.

       The process Wells Fargo engaged in cannot be said to be unreasonable. Indeed, Wells
Fargo obtained security releases and lender certifications of clear title using Department-drafted
forms, and loan servicers independently recorded the loans as owned by Wells Fargo in the
Department’s NSLDS system. In fact, this process is both reasonable under the circumstances
and consistent with the process for transferring legal title to newly originated loans in general
student loan practice.7

       In short, Wells Fargo’s procedures and oversight were reasonable under the
circumstances and adequately ensured the Department’s interests were protected. Indeed, the
procedures were consistent with Wells Fargo’s oversight of other student loan trusts. As such,
Wells Fargo’s exercise of oversight was consistent with the MPA.

         Recommendations

        Wells Fargo does not agree that its policies and procedures were inadequate to effectively
monitor servicers and Sponsors. We recommend that the OIG revise the Report to reflect that
the standard for oversight under the MPA was “reasonable under the circumstances.” We also
recommend that the OIG revise this finding to reflect:

        more clearly the procedures and policies that were in place;
        the industry standards for oversight of student loan trusts;
        that Wells Fargo’s procedures were consistent with industry practice and that Wells
         Fargo followed such procedures;
        the risks associated with developing new policies for the LPP Program, which was
         originally designed to be for one year only and for which, the Department made
         numerous interpretive and procedural revisions; and
        that Wells Fargo’s policies and procedures were adequate and reasonable for overseeing
         the activities of the servicers and Sponsors.

         B.       Wells Fargo Was Not Required to Maintain Documentation of its Oversight

        The Draft Report argues that “without documentation of monitoring activities, Wells
Fargo could not demonstrate that it took reasonable steps to ascertain that the Sponsors and
Servicers properly performed the delegated responsibilities.” Draft Report, at 6. As discussed,
Wells Fargo has a reasonable process for ensuring compliance, which included reliance on well-
established policies, and the Tickler System – like a calendar entry – serves as written evidence
of monitoring activity. In addition to the Ticklers, as stated to OIG personnel during the audit
investigation, Wells Fargo did maintain, on a short-term basis, documentation related to yield
calculations and other compliance issues. However, once the Department accepted a report and
remitted funds to the account, there was no need to retain, for example, previously calculated
yields. Indeed, account reconciliation was performed prior to transfer of funds and, given the

7
  For the avoidance of doubt, it should be noted that there is no title search mechanism for student loans.
Additionally, UCC statements do not specifically list each loan that is subject to a security interest. It is common to
use forms such as those provided by the Department, as the means for releasing security interests in pools of loans.
Final Report
ED-OIG/A04J0019                                                                                     Page 27 of 31
monthly changes in account volume, the information contained on previous schedules was
superfluous and not needed for future consultation.

       Moreover, there is nothing in the MPA that requires, or even suggests, that Wells Fargo
was expected to document its monitoring activities. Indeed, the MPA merely requires that “the
Custodian shall take those steps that are reasonable under the circumstances to ascertain whether
such delegee is properly performing the delegated obligations.” MPA, at 39. Here, Wells Fargo
followed its established student loan trust procedures to ensure proper oversight, and augmented
those procedures with the exact language of the MPA. Staff involved with monitoring the LPP
Program was trained in the requirements of the MPA, attended Department webinars and
reviewed all Department program updates and guidance. As such, Wells Fargo’s activities
should certainly be described as reasonable.

        Also, Wells Fargo would like to correct a point of confusion. The Draft Report states that
“the tickler listing included reminders instructing the Relationship Managers to verify the yield
calculations, not calculate them.” Draft Report, at 6. In fact, Wells Fargo Relationship
Managers explained to the OIG audit team that they calculated the participant’s yield and
average daily principal balance and did not delegate such duties to the Sponsors or servicers.
The Tickler, in referencing the need to verify the amounts, also serves as its own reminder to
calculate the yields.8

        Recommendations

       Wells Fargo does not agree that the documentation of its oversight activities was
inadequate or even required under the MPA. We recommend that the OIG revise the finding to:

    	 reflect that the Department did not place a specific requirement on Wells Fargo or any
       other custodian to maintain records of its compliance activities, exception reports or
       reconciliations of yield calculations, average daily principal balance, or documentation of
       account balances made obsolete by subsequent balance modifications;
    	 note that Wells Fargo did, in fact, document its compliance activities by retaining
       evidence from its Tickler System;
    	 note that requiring maintenance of such records is not consistent with common industry
       practice and is, therefore, not “reasonable under the circumstances” of the program,
       which is the relevant standard under the MPA; and
    	 reflect that, since the Department’s calculation of balances and yield was used in all
       cases, the Department was not harmed in light of Wells Fargo not maintaining obsolete
       accounting documentation related to the calculation of yields and balances.

        C.        Wells Fargo Aptly Oversaw the Activities of its Servicers

        The OIG Draft report cites two reasons for calling into question Wells Fargo’s oversight
of servicers in the LPP Program: (1) in one instance, Wells Fargo mistakenly identified a security
interest in a pool of loans for which the lender, after informing Wells Fargo of the security
interest, extinguished the security interest immediately prior to selling the loans into the custodial
8
  It should be noted though, that notwithstanding Wells Fargo’s efforts to calculate and verify the yield and average
daily balance, the Department independently calculated yield and any discrepancies in the calculations were
resolved by using the Department’s calculations.
Final Report
ED-OIG/A04J0019                                                                      Page 28 of 31
facility and (2) Wells Fargo did not adequately verify that loan servicers remitted borrower
payments to the custodial account within two days of receipt. Draft Report, at 5, 7, 8-10. It is
respectfully submitted that, putting aside the accuracy of these representations, even if true, they
do not support so broad a conclusion. The representations, however, do not fully capture the
facts.

       Wells Fargo monitored servicer compliance in a manner that was reasonable under the
circumstances. The policies and procedures used to oversee servicer compliance in the LPP
Program are largely the same as those used in any student loan securitization. Indeed, this makes
sense considering the similarity between the requirements placed on custodian in the LLP
Program and trustees in a student loan securitization. These requirements include:

      confirming the proper servicing of loans – which Wells Fargo assesses by reviewing
       servicer audits and SAS70 reports, and ensuring that payments are received and deposited
       through daily monitoring of deposit reports from each servicer;
      providing reports and account statements;
      obtaining documentation concerning encumbrances on loans in the trust/custodial
       accounts; and
      having a record on loans within a given trust/custodial account – which Wells Fargo does
       by working with Sponsors and the servicers, obtaining initial lists of loans associated
       with an account and monitoring transfers of loans in and out of the account (by reviewing
       information provided by Sponsors and servicers and reconciling the information).

These activities ensured that funds deposited in the collection account were accurately captured
and recorded and that the assets themselves – the student loans – were not compromised.

        Out of the 199 participation purchase requests made by Wells Fargo-managed custodial
accounts, the Draft Report references one request, representing .0089% of the total volume in
Wells Fargo custodial accounts, as evidence of inadequate supervision of servicers. In the cited
case, a lender was attempting to sell participation interests to the Department. This required the
submission of information from Wells Fargo and the loan servicer to the Department to
effectuate the sale. Wells Fargo confirmed with the lender that the loans were encumbered and,
as such, prepared a Security Release Certification Form to notify the Department of this
encumbrance. This would, among other things, notify the Department that the proceeds of the
sale – which typically arrived in the custodial account between two and seven days after
submitting the purchase request – would be transmitted to the party with the lien on the loan
portfolio. Subsequent to confirming the encumbrance with the lender, and contemporaneous
with Wells Fargo’s disclosure to the Department of the existence of the encumbrance, the
Sponsor extinguished the encumbrance using its own funds. The Sponsor then notified the
servicer of the change, and the weekly loan schedule submitted by the servicer to the Department
was corrected to show that there was no encumbrance on the loans to be sold to the Department.
These events all took place within a matter of hours on July 14, 2009. At no time, however, was
the Department’s position harmed. The Department essentially received extraneous information
about a prior, extinguished encumbrance. The Department received correct information from the
servicer, through the weekly loan schedule, that no encumbrances existed on the loan portfolio
and no financial impact resulted to the Department.
Final Report
ED-OIG/A04J0019                                                                                   Page 29 of 31
        It is respectfully submitted that this isolated situation cannot justify the OIG’s conclusion.
In fact, the servicer was correct in not noting there was an encumbrance and the issue is not one
of servicer oversight. Because the servicer notified the Department of the proper status of the
loans, Wells Fargo believed that the Department was properly notified. Further, because the
servicer’s notice came after Wells Fargo’s original notice, Wells Fargo believed that the
Department would accept the servicer’s information, which was submitted later in time, as
updated and correct. Indeed, the Department has not set up any procedure to rescind a submitted
Security Release Certificate (Exhibit G to the MPA). As such, there was little Wells Fargo could
have done. Moreover, this is not an issue of servicer oversight but rather of the Department not
establishing rules on what to do in this, admittedly rare, circumstance.

        Equally problematic are the OIG’s conclusions concerning Wells Fargo’s oversight of the
requirement that the servicer deposited loan payments within two days of receipt of such
payment. First, the OIG should consider the nature of the lockbox. A lockbox – which is used in
nearly every securitization known to Wells Fargo – is a dedicated account at a large commercial
bank that is designed to receive payments from borrowers. Payments are not accepted for
deposit if there is an issue with the method of payment – the check is non-negotiable, for
example. In all other instances, however, the funds are accepted for deposit into the custodial
facility as soon as they are received. This is the same process that is used in all other
securitizations and is highly automated. Considering the high quality of the loan servicers and
the routinized nature of the process, there is a high confidence level that payments will be timely
deposited.

         In addition, Wells Fargo placed the Sponsor in charge of monitoring this requirement.
This was proper because, unlike Wells Fargo and other Custodians, only the Sponsor and the
Department,9 had access to the lockboxes in which deposits were made by the servicer. By
requiring Sponsors to monitor this requirement, Wells Fargo reasonably placed risk control in the
hands of those in a position to most effectively exercise that responsibility. In addition, because
untimely deposits only adversely impact the Sponsor, the Sponsor has a financial incentive to
ensure funds are deposited quickly. This is because deposited payments – and any investment
income such payments yielded – reduced the outstanding participation account balance and, as a
result, lowers the yield owed to the Department.

        In addition to reasonably assigning to the Sponsor a duty to oversee immediate
remittance of borrower payments into the collection account, Wells Fargo engaged in oversight
on this issue. For example, as is the case in commercial student loan trust accounts, which
routinely have the same two-day deposit requirement, Wells Fargo monitored the flow of
deposits to ensure that deposits were generally being made timely. Each day, Wells Fargo
personnel received and reviewed deposit reports sent by the servicers. These reports, which were
received one day prior to the anticipated receipt of funds in the custodial account, would set
forth, among other items, the date the funds were received from the borrowers, the aggregate
amount to be deposited and the anticipated date of the deposit into the custodial account.
Reviewing these deposit reports was a crucial daily activity, as Wells Fargo personnel would
utilize these reports to verify that the deposit arrived in the amount stated. Of course, if the
deposit was lower than anticipated or nonexistent, Wells Fargo would have inquired further as to
the reason for the change in deposit flow. In the course of reviewing these deposit reports, Wells
9
  See MPA, Sec. 9(b)(viii), at 23 (“List of Lockboxes. The Sponsor shall have delivered to the Department a list of
lockboxes and copies of lockbox servicing instructions, to the extent not already provided.”).
Final Report
ED-OIG/A04J0019                                                                           Page 30 of 31
Fargo was able to verify the timeliness of incoming remittances. Annexed hereto as Exhibit B is
a copy of one such deposit report. In addition, Wells Fargo personnel would utilize these deposit
reports in the course of verifying data in the Monthly Aggregate Settlement Date Report.

        Of course, as discussed, the Sponsor is the party that stands to lose if payments are not
timely deposited. Indeed, “[b]ecause the Department earns the yield regardless of when
collections are deposited to the collection account, there is no adverse effect on the Department
as a result of untimely deposits.”10 Even still, the process Wells Fargo established was
completely reasonable under the circumstances and adequately ensured the timeliness of the
payments. In fact, the process described is quite similar to Wells Fargo’s process with other
student loan trusts for which there is also a two-day deposit requirement.

         Recommendations

       Wells Fargo does not concur with the finding that Wells Fargo did not adequately oversee
the delegated functions of the Sponsor or servicers. We recommend that the OIG revise the
findings to reflect:

       that the appropriate standard for monitoring delegees is “reasonable under the
        circumstances” as set forth in the MPA;
      the activity Wells Fargo undertook with regard to monitoring servicers and Sponsors in
        general and specifically with regard to ensuring timeliness of deposits;
     	 that, even though Wells Fargo acted properly in its oversight of the remittance of
        borrower payments, the Department was not and could not have suffered harm if a
        deposit was made beyond the two-day window; and
     	 that only one of the 199 purchase requests suffered from a miscommunication
        concerning security releases and that, in light of the correctly filed loan schedule, the
        Department was not harmed due to the miscommunication, and that in either case Wells
        Fargo acted reasonably under the circumstances.

         Conclusion

       Wells Fargo has participated as an ELT in the FFEL program for many years.
Throughout, Wells Fargo has attempted to set the standard for providing ethical client services
and maintaining compliance with published government standards and regulations. Indeed,
Wells Fargo has been a leader within the American Banker’s Association subcommittee on
Corporate Trust in promoting such compliance standards. Recently, Wells Fargo assisted the
subcommittee in helping develop procedures designed to implement the standards proscribed in
the Department’s October 2, 2009 letter on the “Responsibilities of Lenders Serving as Eligible
Lender Trustees under FFELP.” Wells Fargo was also proud to participate in the ECASLA
program. During the period of financial turmoil over the past few years, Wells Fargo worked
with the Department, and changed course as needed, to make sure that students received loans to
continue their education. It is with this background that Wells Fargo has approached this
response.


10
   U.S. Department of Education Office of the Inspector General, Final Report, Zions First National Bank’s
Management of Collection Account Funds and Oversight under the ECASLA Loan Participation Purchase Program,
dated October 18, 2010, at 14.
Final Report
ED-OIG/A04J0019                                                                    Page 31 of 31
        In sum, the Draft Report seeks to impose a standard that is not specified in the MPA. The
MPA requires that Custodians such as Wells Fargo oversee delegees “reasonably under the
circumstances.” It is respectfully submitted that Wells Fargo’s oversight activity was reasonable
under the circumstances because it was consistent with standard commercial practices for student
loan trust accounts (practices that the Department embraced in constructing the ECASLA
Program). The flux in which Sponsors, Custodians, servicers and the Department operated
further underscores that the oversight activities described were certainly “reasonable under the
circumstances.” The standard to which the OIG seeks to hold Custodians at this late date is
beyond that described in the MPA or in any of the many webinars and electronic announcements
promulgated by the Department.

       Thank you again for the opportunity to respond to the Draft Report. We would be happy
to schedule a meeting with you to discuss these issues. If you have any questions or would like
to speak with us for any reason, feel free to contact Tom Levandowski at 612-667-0628 or via
email at Tom.Levandowski@wellsfargo.com.


Sincerely,


/s/
Timothy J. Carlin
Managing Counsel, Wells Fargo & Company


cc: Tricia Heintz, Wells Fargo
cc: Tom Levandowski, Wells Fargo
cc: Andrew Eskin, DLA Piper