Addendum added to respond to OP's comment.
I agree with coffeemath's comments. Your $\displaystyle \frac{7!}{4!}$ computation represents 3 letter words that exclude any "I" or "E" letters. I'm unsure what your $\displaystyle\binom{5}{2}$ computation is then supposed to represent.
Personally, I would break the situation into mutually exclusive cases, letting $T_k$ denote the computation for Case $k$.
$\underline{\text{Case 1:} ~3~ \text{I's are used.}}$
This can only occur with the specific word III.
$T_1 = 1.$
$\underline{\text{Case 2: A double letter was used.}}$
There are $2$ ways of choosing whether to use $2$ I's or $2$ E's.
Assume that $2$ I's are used.
Then, there are 8 ways of selecting one letter from
{ENQUALTS}.
Once the off letter is chosen, there are 3 positions that the off letter may be placed in.
Therefore,
$T_2 = 2 \times 8 \times 3 = 48.$
$\underline{\text{Case 3: Only 1 of each type of letter was used.} }$
Then, there are $\displaystyle\binom{9}{3} = 84$ ways of selecting $3$ distinct letters from
{EINQUALTS}.
Once these three letters are selected, they can be permuted in $3! = 6$ ways.
Therefore,
$T_3 = 84 \times 6 = 504.$
Final computation:
$$T_1 + T_2 + T_3 = 1 + 48 + 504 = 553.$$
Addendum
Based on the OP's comment, Cases 1 and 2 above are disallowed. This implies that, since only Case 3 is allowed, the final computation should be $T_3 = 504$.
Again, I am at a loss as to how to reverse engineer an interpretation that justifies the computation of $(220)$ as the final answer.