Sallie Mae 2008 Annual Report Download - page 136

2. Significant Accounting Policies (Continued)
The investors of the securitization trusts have no recourse to the Company’s other assets should there be
a failure of the trusts to pay when due. Generally, the only arrangements the Company has to provide financial
support to the trusts are:
• representation and warranty violations requiring the buybacks of loans;
• the reimbursement to the trust of borrower benefits afforded the borrowers of student loans that have
been securitized; or
• funding specific cash accounts within certain trusts related to the remarketing of certain bonds.
Under the terms of the transaction documents of certain trusts, the Company has from time to time, exercised
its options to purchase delinquent loans from Private Education Loan trusts, purchase the remaining loans
from trusts once the loan balance falls below 10 percent of the original amount, or call rate reset notes. The
Company has not provided any financial support to the securitization trusts that it was not contractually
required to provide in the past. 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 the Company’s Residual Interest.
Retained Interest
The Company securitizes its student loan assets, and for transactions qualifying as sales, retains Residual
Interests and servicing rights (as the Company retains the servicing responsibilities), all of which are referred
to as the Company’s Retained Interest in off-balance sheet securitized loans. The Residual Interest is the right
to receive cash flows from the student loans and reserve accounts in excess of the amounts needed to pay
servicing, derivative costs (if any), other fees, and the principal and interest on the bonds backed by the
student loans.
When the Company qualifies for sale treatment on its securitizations, it recognizes the resulting gain on
student loan securitizations in the consolidated statements of income. This gain is 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. The Company estimates the fair value of the Residual Interest, both initially and each
subsequent quarter, based on the present value of future expected cash flows using management’s best
estimates of the following key assumptions — credit losses, prepayment speeds and discount rates commensu-
rate with the risks involved. Quoted market prices are not available. The Company adopted SFAS 159, “The
Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB
Statement 115,” effective January 1, 2008, whereby the Company elected to carry all Residual Interests at fair
value with subsequent changes in fair value recorded in earnings, as further discussed below under “Recently
Issued Accounting Policies — The Fair Value Option for Financial Assets and Financial Liabilities —
Including an Amendment of FASB Statement 115.”
The fair value of the Fixed Rate Embedded Floor Income is a component of the Residual Interest and is
determined both initially at the time of the sale of the student loans and each subsequent quarter. This estimate
is based on an option valuation and a discounted cash flow calculation that considers 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 is recorded as earned in securitization income.
The Company also receives income for servicing the loans in its securitization trusts which is recognized
as earned. The Company assesses the amounts received as compensation for these activities at inception and
F-16
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)