Sallie Mae 2005 Annual Report Download - page 27

17
one-to-four family residential real estate. The acquisition of AFS provided us with a servicing platform and
a disciplined portfolio pricing approach from years of experience in the purchase of delinquent and
defaulted receivables. The addition of AFS also enables us to offer the purchase of distressed or defaulted
debt to our partner schools as an additional method of enhancing their receivables management strategies.
These acquisitions also diversified our revenue from purely contingency fee collections to purchased paper
collections. As a result, student loan contingency fees contributed 49 percent of total DMO revenue in
2005, versus 75 percent in 2004.
Sallie Mae Timeline—DMO
1999 2000 2001 2002 2003 2004 2005 2006
07/00
USA Group-SLM
combination
01/02
GRC
01/02
PCR
08/05
GRP
09/04
AFS
In the purchased receivables business, we focus on a variety of consumer debt types with emphasis on
charged off credit card receivables and distressed mortgage receivables. We purchase these portfolios at a
discount to their face value, and then use both our internal collections operations and third party collection
agencies to maximize the recovery on these receivables. A major success factor in the purchased
receivables business is the ability to effectively price the portfolios. We conduct both quantitative and
qualitative analysis to appropriately price each portfolio to yield a return consistent with our DMO
financial targets.
The private sector collections industry is highly fragmented with few large public companies and a
large number of small scale privately-held companies. The collections industry is highly competitive with
credit card collections being the most competitive in both contingency collections and purchased paper
activities. We are responding to these competitive challenges through enhanced servicing efficiencies and
by continuing to build on customer relationships through value added services.
In 2005, our DMO business earned revenues totaling $527 million and net income of $149 million,
which represented increases of 55 percent and 31 percent over 2004, respectively. Our largest customer,
USA Funds, accounted for 34 percent of our revenue in 2005.
Products and Services
Student Loan Default Aversion Services
We provide default aversion services for five guarantors, including the nation’s largest, USA Funds.
These services are designed to prevent a default once a borrower’s loan has been placed in delinquency
status.
Defaulted Student Loan Portfolio Management Services
Our DMO business segment manages the defaulted student loan portfolios for six guarantors under
long-term contracts. DMO’s largest customer, USA Funds, represents approximately 19 percent of