Sallie Mae 2005 Annual Report Download - page 137

SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)
F-15
2. Significant Accounting Policies (Continued)
The Company holds rights that can affect the remarketing of specific bonds in certain Consolidation
Loan securitization structures. These remarketing rights are not significantly limited and therefore these
securitizations did not meet the criteria of being a QSPE and are accounted for on-balance sheet as VIEs.
Retained Interest
The Company securitizes its student loan assets and for transactions qualifying as sales retains
Residual Interests and servicing rights (as the Company retains the servicing responsibilities), all of which
are referred to as the Company’s Retained Interest in off-balance sheet securitized loans. The Residual
Interest is the right to receive cash flows from the student loans and reserve accounts in excess of the
amounts needed to pay servicing, derivative costs (if any), other fees, and the principal and interest on the
bonds backed by the student loans. The investors of the securitization trusts have no recourse to the
Company’s other assets should there be a failure of the student loans to pay when due.
When the Company qualifies for sale treatment on its FFELP Stafford, Private Education, and certain
of the Consolidation Loan securitizations, it recognizes the resulting gain on student loan securitizations
on the consolidated statements of income. This gain is based upon the difference between the allocated
cost basis of the assets sold and the relative fair value of the assets received. The component in
determining the fair value of the assets received that involves the most judgment is the Residual Interest.
The Company estimates the fair value of the Residual Interest, both initially and each subsequent quarter,
based on the present value of future expected cash flows using management’s best estimates of the
following key assumptions—credit losses, prepayment speeds, the forward interest rate curve and discount
rates commensurate with the risks involved. Quoted market prices are not available. The Company
accounts for its Residual Interests as available-for-sale securities. Accordingly, Residual Interests are
reflected at market value with temporary changes in market value reflected as a component of
accumulated other comprehensive income in stockholders’ equity.
The fair value of the Fixed Rate Embedded Floor Income is a component of the Residual Interest and
is determined both initially at the time of the sale of the student loans and each subsequent quarter. This
estimate is based on an option valuation and a discounted cash flow calculation that considers the current
borrower rate, Special Allowance Payment (“SAP”) spreads and the term for which the loan is eligible to
earn Floor Income as well as time value, forward interest rate curve and volatility factors. Variable Rate
Floor Income received is recorded as earned in securitization income.
The Company records interest income and periodically evaluates its Residual Interests for other than
temporary impairment in accordance with the Emerging Issues Task Force (“EITF”) Issue No. 99-20
“Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets.” Under this guidance, each quarter, the Company estimates the cash flows to
be received from its Residual Interests which are used prospectively to calculate a yield for income
recognition. In cases where the Company’s estimate of future cash flows results in a decrease in the yield
used to recognize interest income compared to the prior quarter, the Residual Interest is written down to
fair value, first to the extent of any unrealized gain in accumulated other comprehensive income, then
through earnings as an other than temporary impairment.
The Company also receives income for servicing the loans in its securitization trusts which is
recognized as earned. The Company assesses the amounts received as compensation for these activities at