Sallie Mae 2008 Annual Report Download - page 16

lending, investment and derivative counterparties. If any of the Company’s counterparties is unable to perform
its obligations, the Company would, depending on the type of counterparty arrangement, experience a loss of
liquidity or an economic loss. In addition, related to derivative exposure, the Company may not be able to cost
effectively replace the derivative position depending on the type of derivative and the current economic
environment. If the Company was not able to replace the derivative position, the Company may be exposed to
a greater level of interest rate and/or foreign currency exchange rate risk which could lead to additional losses.
The Company’s counterparty exposure is more fully discussed herein in “LIQUIDITY AND CAPITAL
RESOURCES — Counterparty Exposure.”
Our businesses are regulated by state and federal laws and regulations and our failure to comply with these
laws and regulations may result in significant costs or business sanctions.
The Company is subject to numerous state and federal laws and regulations. Loans originated and
serviced under the FFELP are subject to legislative and regulatory changes. A summary of the program, which
indicates its complexity and frequent changes, may be found in APPENDIX A, “FEDERAL FAMILY
EDUCATION LOAN PROGRAM” of this Form 10-K. We continually update our FFELP loan originations
and servicing policies and procedures and our systems technologies, provide training to our staff and maintain
quality control over processes through compliance reviews and internal and external audits. We are at risk,
however, for misinterpretation of ED guidance and incorrect application of ED regulations and policies, which
could result in fines, the loss of the federal guarantee on FFELP loans, or limits on our participation in the
FFELP.
Our private credit lending and debt collection business are subject to regulation and oversight by various
state and federal agencies, particularly in the area of consumer protection regulation. Various state attorneys
general have been active in this area of consumer protection. We are subject, and may be subject in the future,
to inquiries and audits from state and federal regulators. Sallie Mae Bank is subject to state and FDIC
regulation and at the time of this filing, was the subject of a cease and desist order for weaknesses in its
compliance function. While the issues addressed in the order have largely been remediated, the action has not
yet been lifted. We have committed resources to enhance our compliance function. Our failure to comply with
various laws and regulations or with the terms of the cease and desist order could result in litigation expenses,
fines, business sanctions, limitations on our ability to fund our Private Education Loans, which are currently
funded by term deposits issued by Sallie Mae Bank, or restrictions on the operations of Sallie Mae Bank.
A failure of our operational systems or infrastructure, or those of our third-party vendors, could disrupt our
business, result in disclosure of confidential customer information, damage our reputation and cause losses.
Our business is dependent on our ability to process and monitor, on a daily basis, a large number of
transactions. These transactions must be processed in compliance with legal and regulatory standards and our
product specifications, which we change to reflect our business needs. As processing demands change and
grow, developing and maintaining our operational systems and infrastructure becomes increasingly challenging.
Our reduction in operating expenses and off-shoring of certain processes has also increased challenges in
maintaining accurate and efficient operations.
Our loan originations and servicing, financial, accounting, data processing or other operating systems and
facilities may fail to operate properly or become disabled as a result of events that are beyond our control,
adversely affecting our ability to process these transactions. Any such failure could adversely affect our ability
to service our clients, result in financial loss or liability to our clients, disrupt our business, result in regulatory
action or cause reputational damage.
Despite the plans and facilities we have in place, our ability to conduct business may be adversely
impacted by a disruption in the infrastructure that supports our businesses. This may include a disruption
involving electrical, communications, internet, transportation or other services used by us or third parties with
which we conduct business. Notwithstanding our efforts to maintain business continuity, a disruptive event
impacting our processing locations could negatively affect our business.
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