Sallie Mae 2007 Annual Report Download - page 31

obligations for a variety of reasons, including job loss and underemployment. In addition, a prolonged
economic downturn could extend the amortization period on APG’s purchased receivables.
Our principal business is comprised of acquiring, originating, holding and servicing education loans made
and guaranteed under the FFELP. Most significant aspects of our principal business are governed by the HEA.
We must also meet various requirements of the guaranty agencies, which are private not-for-profit organiza-
tions or state agencies that have entered into federal reinsurance contracts with ED, to maintain the federal
guarantee on our FFELP loans. These requirements establish origination and servicing requirements, proce-
dural guidelines and school and borrower eligibility criteria. The federal guarantee of FFELP loans is
conditioned on loans being originated, disbursed or serviced in accordance with ED regulations.
If we fail to comply with any of the above requirements, we could incur penalties or lose the federal
guarantee on some or all of our FFELP loans. In addition, our marketing practices are subject to the HEA’s
prohibited inducement provision and our failure to comply with such regulation could subject us to a
limitation, suspension or termination of our eligible lender status. Even if we comply with the above
requirements, a failure to comply by third parties with whom we conduct business could result in us incurring
penalties or losing the federal guarantee on some or all of our FFELP loans. If we experience a high rate of
servicing deficiencies, we could incur costs associated with remedial servicing, and, if we are unsuccessful in
curing such deficiencies, the eventual losses on the loans that are not cured could be material. Failure to
comply with these laws and regulations could result in our liability to borrowers and potential class action
suits, all of which could adversely affect our future growth rates.
Because of the risks, uncertainties and conditions described above, there can be no assurance that we can
maintain our future growth rates at rates consistent with our historic growth rates.
Our GAAP earnings are highly susceptible to changes in interest rates because most of our derivatives do
not qualify for hedge accounting treatment under SFAS No. 133.
Changes in interest rates can cause volatility in our GAAP earnings as a result of changes in the market
value of our derivatives that do not qualify for hedge accounting treatment under SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities.” Under SFAS No. 133, changes in derivative market values
are recognized immediately in earnings. If a derivative instrument does not qualify for hedge accounting
treatment under SFAS No. 133, there is no corresponding change in the fair value of the hedged item
recognized in earnings. As a result, gain or loss recognized on a derivative will not be offset by a
corresponding gain or loss on the underlying hedged item. Because most of our derivatives do not qualify for
hedge accounting treatment, when interest rates change significantly, our GAAP earnings may fluctuate
significantly.
For a discussion of operational, market and interest rate, and liquidity risks, see “MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —
RISKS.”
Item 1B. Unresolved Staff Comments
None.
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