Sallie Mae 2005 Annual Report Download - page 103

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We have issued lending-related financial instruments including lines of credit to meet the financing
needs of our customers. The contractual amount of these financial instruments represents the maximum
possible credit risk should the counterparty draw down the commitment and the counterparty subsequently
fails to perform according to the terms of our contract. The remaining total contractual amount available
to be borrowed under these commitments is $1.5 billion. We do not believe that these instruments are
representative of our actual future credit exposure or funding requirements. To the extent that the lines of
credit are drawn upon, the balance outstanding is collateralized by student loans. At December 31, 2005,
draws on lines of credit were approximately $241 million, which amount is reflected in other loans in the
consolidated balance sheet. For additional information, see Note 13, “Commitments, Contingencies and
Guarantees,” to the consolidated financial statements.
RISKS
Overview
Managing risks is an essential part of successfully operating a financial services company. Our most
prominent risk exposures are operational, market and interest rate, political and regulatory, liquidity,
credit, and Consolidation Loan refinancing risk. We discuss these and other risks in the “Risk Factors”
section (Item 1A) of this document. The discussion that follows enhances that disclosure by discussing the
risk management strategies employed by the Company to mitigate these risks.
Operational Risk
Operational risk can result from regulatory compliance errors, servicing errors (see further discussion
below), technology failures, breaches of the internal control system, and the risk of fraud or unauthorized
transactions by employees or persons outside the Company. This risk of loss also includes the potential
legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with
applicable regulatory standards and contractual commitments, adverse business decisions or their
implementation, and customer attrition due to potential negative publicity.
The federal guarantee on our student loans and our designation as an Exceptional Performer by ED is
conditioned on compliance with origination and servicing standards set by ED and guarantor agencies. A
mitigating factor is our ability to cure servicing deficiencies and historically our losses have been small.
Should we experience a high rate of servicing deficiencies, the cost of remedial servicing or the eventual
losses on the student loans that are not cured could be material. Our servicing and operating processes are
highly dependent on our information system infrastructure, and we face the risk of business disruption
should there be extended failures of our information systems, any number of which could have a material
impact on our business. To mitigate these risks we have a number of back-up and recovery plans in the
event of systems failures, which are tested regularly and monitored constantly.
We manage operational risk through our risk management and internal control processes, which
involve each business line including independent cost centers, such as servicing, as well as executive
management. The business lines have direct and primary responsibility and accountability for identifying,
controlling, and monitoring operational risk, and each business line manager maintains a system of
controls with the objective of providing proper transaction authorization and execution, proper system
operations, safeguarding of assets from misuse or theft, and ensuring the reliability of financial and other
data. We have centralized certain staff functions such as accounting, human resources and legal to further
strengthen our operational controls. While we believe that we have designed effective methods to
minimize operational risks, our operations remain vulnerable to natural disasters, human error, technology
and communication system breakdowns and fraud.