Sallie Mae 2006 Annual Report Download - page 94

Securitization Activities
Securitization Program
Our FFELP Stafford, Private Education Loan and FFELP Consolidation Loan securitizations are
structured such that they are legal sales of assets using a two-step transaction with a special purpose entity that
legally isolates the transferred assets from the Company and its creditors, even in the event of bankruptcy. The
holders of the beneficial interests issued by the special purpose entity are not constrained from pledging or
exchanging their interests. In all of our securitizations, we retain the right to receive cash flows from the
student loans and reserve accounts in excess of the amounts needed to pay servicing costs, derivative costs (if
any), administration and 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 securities backed by student loans to pay when due. Some of our securitizations meet the
requirements for sale treatment under GAAP, according to the criteria of SFAS No. 140. In these transactions
we use a two-step sale to a qualifying special purpose entity (“QSPE”), such that we do not maintain effective
control over the transferred assets. Accordingly, these transactions are accounted for off-balance sheet.
In certain securitization structures, there are terms within the deal structure that result in such
securitizations not qualifying for sale treatment and accordingly, they are accounted for on-balance sheet as
variable interest entities (“VIEs”). Terms that prevent sale treatment include: (1) allowing us to hold certain
rights that can affect the remarketing of certain bonds, (2) allowing the trust to enter into interest rate cap
agreements after the initial settlement of the securitization, which do not relate to the reissuance of third party
beneficial interests or (3) allowing us to hold an unconditional call option related to a certain percentage of
the securitized assets. The securitization structure where we can affect the remarketing of the bonds was
developed to broaden and diversify the investor base for FFELP Consolidation Loan securitizations by
allowing us to issue bonds with shorter expected maturities and with non-amortizing, fixed rate and foreign
currency denominated tranches. As of December 31, 2006, we had $48.6 billion of securitized student loans in
on-balance sheet FFELP Consolidation Loan securitization trusts. These securitizations are included as
financings in the table below.
We recognize a gain on sales related to securitizations that qualify as off-balance sheet transactions. The
gain is calculated as the difference between the allocated cost basis of the assets sold and the relative fair
value of the assets received. The carrying value of the student loan portfolio being securitized includes the
applicable accrued interest, unamortized student loan premiums or discounts, loan loss reserves and Borrower
Benefits reserves. The fair value of the Residual Interest is determined using a discounted cash flow
methodology using assumptions discussed in more detail below. The ongoing earnings from our off-balance
sheet securitizations are recognized in servicing and securitization revenue.
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