Sallie Mae 2015 Annual Report Download - page 24

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Our short-term success depends on our ability to structure Private Education Loan securitizations or execute other secured
funding transactions. Several factors may have a material adverse effect on both our ability to obtain such funding and the time
it takes us to structure and execute these transactions, including the following:
• Persistent and prolonged disruption or volatility in the capital markets or in the education loan ABS sector specifically;
• Our inability to generate sufficient Private Education Loan volume;
• Degradation of the credit quality or performance of the Private Education Loans we sell or finance through
securitization trusts, or adverse rating agency assumptions, ratings or conclusions with respect to those trusts or the
education loan-backed securitization trusts sponsored by other issuers;
• Material breach of our obligations to purchasers of our Private Education Loans, including securitization trusts;
• The timing, pricing and size of education loan asset-backed securitizations other parties issue, or the adverse
performance of, or other problems with, such securitizations;
• Challenges to the enforceability of Private Education Loans based on violations of, or changes to, federal or state
consumer protection or licensing laws and related regulations, or imposition of penalties or liabilities on assignees of
Private Education Loans for violation of such laws and regulations; or
• Our inability to structure and gain market acceptance for new products or services to meet new demands of ABS
investors, rating agencies or credit facility providers.
In structuring and facilitating securitizations of Private Education Loans, administering securitization trusts or providing
portfolio management, we may incur liabilities to transaction parties.
Under applicable state and federal securities laws, if investors incur losses as a result of purchasing ABS issued in
connection with our securitization transactions, we could be deemed responsible and could be liable to investors for damages.
We could also be liable to investors or other parties for certain updated information that we may provide subsequent to the
original issuances. If we fail to cause the securitization trusts or other transaction parties to disclose adequately all material
information regarding an investment in any securities, if we or the trusts make statements that are misleading in any material
respect in information delivered to investors in any securities, if we breach any representations or warranties made in
connection with securitization of the loans, or if we breach any other duties as the administrator or servicer of the securitization
trusts, it is possible we could be sued and ultimately held liable to an investor or other transaction party. This risk includes
failure to properly administer or oversee servicing or collections and may increase if the performance of the securitization
trusts’ loan portfolios degrades. In addition, under various agreements, we may be contractually bound to indemnify
transaction parties if an investor is successful in seeking to recover any loss from those parties and the securitization trusts are
found to have made a materially misleading statement or to have omitted material information.
If we are liable to an investor or other transaction party for a loss incurred in any securitization we facilitate or structured
and any insurance that we may have does not cover this liability or proves to be insufficient, our business, financial position,
results of operations and cash flows could be materially adversely affected.
The interest rate and maturity characteristics of our earning assets do not always match the interest rate and maturity
characteristics of our funding arrangements, which may increase the price of, or decrease our ability to obtain, necessary
liquidity. We are also subject to repayment and prepayment risks, which can adversely affect our financial condition.
Net interest income is the primary source of cash flow generated by our portfolios of Private Education Loans and FFELP
Loans. Interest earned on Private Education Loans and FFELP Loans is primarily indexed to one-month LIBOR rates, but our
cost of funds is primarily related to deposit rates. Certain of our Private Education Loans bear fixed interest rates. These loans
are not specifically match funded with fixed-rate deposits or fixed rate funding obtained through asset-backed securitization.
Likewise, the average term of our deposits is shorter than the expected term of our Private Education Loans and FFELP Loans.
The different interest rate and maturity characteristics of our loan portfolio and the liabilities funding that portfolio result
in interest rate risk, basis risk and re-pricing risk. In certain interest rate environments, this mismatch may compress our net
interest margin (the net interest yield earned on our portfolio less the rate paid on our interest bearing liabilities). It is not
possible to hedge all of our exposure to such risks. While the assets, liabilities and related hedging derivative contract repricing
indices are typically highly correlated, there can be no assurance that the historically high correlation will not be disrupted by