Sallie Mae 2011 Annual Report Download - page 128

SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
Under the terms of the transaction documents of certain trusts, we have, from time to time, exercised our
options to purchase delinquent loans from Private Education Loan trusts, to purchase the remaining loans from
trusts once the loan balance falls below 10 percent of the original amount, or to call rate reset notes. Certain trusts
maintain financial arrangements with third parties also typical of securitization transactions, such as derivative
contracts (swaps) and bond insurance policies that, in the case of a counterparty failure, could adversely impact
the value of any Residual Interest.
Retained Interest in Off-Balance Sheet Securitized Loans
Prior to the adoption of the new consolidation accounting rules on January 1, 2010, certain of our
securitization transactions qualified as sales and we retained the Residual Interests in the trusts as well as
servicing rights (all of which are referred to as our Retained Interest in off-balance sheet securitized loans). The
following accounting policies were applied prior to the January 1, 2010 adoption of the new consolidation
accounting guidance which required us to consolidate all of our previously off-balance sheet trusts and therefore
eliminated any accounting for Residual Interests.
When our securitization transactions qualified for sale treatment we recognized the resulting gain on student
loan securitizations in the consolidated statements of income. This gain was 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 valuation of the Residual
Interest. We estimated the fair value of the Residual Interest, both initially and each subsequent quarter, based on
the present value of future expected cash flows using our best estimates of the following key assumptions —
credit losses, prepayment speeds and discount rates commensurate with the risks involved. Quoted market prices
were not available. When we adopted the new financial instruments accounting guidance on January 1, 2008, we
elected to carry all Residual Interests at fair value with subsequent changes in fair value recorded in earnings. We
chose this election in order to simplify the accounting for Residual Interests under one accounting model.
The fair value of the Fixed Rate Embedded Floor Income is a component of the Residual Interest and was
determined initially at the time of the sale of the student loans and during each subsequent quarter. This estimate
was based on an option valuation and a discounted cash flow calculation that considered 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 was recorded as earned in securitization servicing and Residual Interest revenue.
We also receive income for servicing the loans in our securitization trusts which was recognized as earned.
We assessed the amounts received as compensation for these activities at inception and on an ongoing basis to
determine if the amounts received are adequate compensation. To the extent such compensation was determined
to be no more or less than adequate compensation, no servicing asset or obligation was recorded at the time of
securitization. Servicing rights are subsequently carried at the lower of cost or market. We do not record
servicing assets or servicing liabilities when our securitization trusts are accounted for as on-balance sheet
secured financings. As of December 31, 2011 and 2010, all of our securitization trusts are on-balance sheet and
as a result we do not have servicing assets or liabilities recorded on the consolidated balance sheet related to our
securitization trusts.
Derivative Accounting
The accounting guidance for our derivative instruments, which includes interest rate swaps, cross-currency
interest rate swaps, interest rate futures contracts, interest rate cap contracts and Floor Income Contracts, requires
that every derivative instrument, including certain derivative instruments embedded in other contracts, be
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