Sallie Mae 2013 Annual Report Download - page 114

is more likely to result in a credit loss than an up-to-date loan. Additionally, loans in a deferred payment status
have different credit risk profiles compared with those in current pay status. Loan seasoning affects credit risk
because a loan with a history of making payments generally has a lower incidence of default than a loan with a
history of making infrequent or no payments. The existence of a cosigner lowers the likelihood of default. We
monitor and update these credit quality indicators in the analysis of the adequacy of our allowance for loan losses
on a quarterly basis.
To estimate the probable credit losses incurred in the loan portfolio at the reporting date, we use historical
experience of customer payment behavior in connection with the key credit quality indicators and incorporate
management expectations regarding macroeconomic and collection procedure factors. Our model is based upon
the most recent 12 months of actual collection experience, adjusted for seasonality, as the starting point and
applies expected macroeconomic changes and collection procedure changes to estimate expected losses caused
by loss events incurred as of the balance sheet date. Our model places a greater emphasis on the more recent
default experience rather than the default experience for older historical periods, as we believe the recent default
experience is more indicative of the probable losses incurred in the loan portfolio today. Similar to estimating
defaults, we use historical customer payment behavior to estimate the timing and amount of future recoveries on
charged-off loans. We use judgment in determining whether historical performance is representative of what we
expect to collect in the future. We then apply the default and collection rate projections to each category of loans.
Once the quantitative calculation is performed, we review the adequacy of the allowance for loan losses and
determine if qualitative adjustments need to be considered. Additionally, we consider changes in laws and
regulations that could potentially impact the allowance for loan losses. More judgment has been required over the
last several years, compared with years prior, in light of the U.S. economy and its effect on our customers’ ability
to pay their obligations. We believe that our model reflects recent customer behavior, loan performance, and
collection performance, as well as expectations about economic factors.
Similar to the rules governing FFELP payment requirements, our collection policies allow for periods of
nonpayment for customers requesting additional payment grace periods upon leaving school or experiencing
temporary difficulty meeting payment obligations. This is referred to as forbearance status and is considered
separately in our allowance for loan losses. The loss confirmation period is in alignment with our typical
collection cycle and takes into account these periods of nonpayment.
Our allowance for Private Education Loan losses also provides for possible additional future charge-offs
related to the receivable for partially charged-off Private Education Loans. At the end of each month, for loans
that are 212 days past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are
applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as
the “receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference
is immediately charged off through the allowance for loan losses with an offsetting reduction in the receivable
for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they
will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative
recovery amount exceeds the cumulative amount originally expected to be recovered. Private Education Loans
which defaulted between 2008 and 2013 for which we have previously charged off estimated losses have, to
varying degrees, not met our post-default recovery expectations to date and may continue not to do so. According
to our policy, we have been charging off these periodic shortfalls in expected recoveries against our allowance
for Private Education Loan losses and the related receivable for partially charged-off Private Education Loans
and we will continue to do so.
On July 1, 2011, we adopted new guidance that clarified when a loan restructuring constitutes a TDR. In
applying the new guidance we determined that certain Private Education Loans for which we grant forbearance
of greater than three months should be classified as troubled debt restructurings. If a loan meets the criteria for
troubled debt accounting then an allowance for loan losses is established which represents the present value of
the losses that are expected to occur over the remaining life of the loan. This accounting results in a higher
allowance for loan losses than our previously established allowance for these loans as our previous allowance for
these loans represented an estimate of charge-offs expected to occur over the next two years (two years being our
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