From their 10-K:
Summarized impact on their business of proposed legislation:
- Would no longer originate, fund or hold new FFELP loans to earn net interest margin: "Under both SAFRA and the Community Proposal, the Company would no longer originate, fund or hold new FFELP loans to earn a net interest margin. However, the Company would continue to earn net interest income from our portfolio of existing FFELP loans as the portfolio runs off over a period of time."
- Focus would become fee for service: "The Company would become a fee for service provider in the federal loan business."
- Will continue to offer private education loans: "We will continue to originate, fund and hold Private Education Loans."
- Would lose about $68 million in origination fees paid by guarantors: "In addition, the legislation would eliminate the need for the Guarantors and the services we provide to the sector. The Company earns a fee when it processes a loan guarantee for a Guarantor client for the life of the loan for servicing the Guarantor’s portfolio of loans. If either SAFRA or the Community Proposal become laws, we would no longer earn the origination fee paid by Guarantors. The portfolio that generates the maintenance fee would go into run-off and we would continue to earn the maintenance fee and perform the associated default aversion and prevention work for the remaining life of the loans. In 2009, we earned guarantor servicing fees of $136 million, which was approximately evenly split between origination and maintenance fees."
- Expect their collection business with guarantors to remain stable through 2012 before undergoing steady decline: "Our student loan contingent collection business would also be impacted by the pending legislation. We currently have 12 Guarantors and ED as clients. We earn revenue from Guarantors for collecting defaulted loans as well as for managing their portfolios of defaulted loans. Revenue from Guarantor clients is approximately 66 percent of our contingent collection revenue. We anticipate that revenue from Guarantors will be relatively stable through 2012 and then begin to steadily decline if either SAFRA or the Community Proposal are adopted."
- Sallie Mae was one of six companies selected to move to phase II of a solicitation to replace the Department of Education's current debt management system for defaulted loans
- Expect collections on defaulted student loans from ED to increase in future years: "The Company, through its subsidiary Pioneer Credit, has been collecting defaulted student loans on behalf of ED since 1997. The contract is merit based and accounts are awarded on collection performance. Pioneer Credit has consistently ranked number one or two among the ED collectors. In anticipation of a surge in volume as more loans switch to DSLP, ED recently added five new collection companies bringing the total to 22. This led to a decline in account placements with Pioneer Credit, which we believe is temporary. The Company expects that as the DSLP grows the decline in revenue we would experience from our Guarantor clients would be partially offset by increased revenue under the ED contract in future years."
Company believes that they will have ample liquidity to fund FFEL loans even if ECASLA is not extended but provides a hedge later in the filing: "The Company is exploring available liquidity to fund FFELP loans for our student customers if legislation is not passed and The Ensuring Continued Access to Student Loans Act of 2008 (“ECASLA”) is not extended in time for the academic year (“AY”) 2010 — 2011. We believe that adequate liquidity will be available to fund the anticipated number of loans...There is no assurance that the capital markets will be able to totally support FFELP loan originations beyond the time these programs are presently scheduled to end. Upon termination of the government programs mentioned, if cost effective funding sources were not available, we could be compelled to reduce or suspend the origination of new FFELP loans."
- Consistent what Sallie Mae executives said during recent 4Q conference call in January
- Differs from what Student Loan Corporation disclosed in their recent 10-K
Expect to continue to maintain presence in school channel to market private student loan products in post-FFELP world: "Historically, the majority of our Private Education Loans were made in conjunction with a FFELP Stafford Loan and are marketed to schools through the same marketing channels and by the same sales force as FFELP loans. However, we also originate Private Education Loans at DSLP schools. We expect no interruption in our presence in the school channel if SAFRA were to pass. As a result of the credit market dislocation discussed above, a large number of lenders have exited the Private Education Loan business and only a few of the country’s largest banks continue to offer the product."
- Certainly an advantage they gain from being selected as one of four companies to service direct loans.
Described changes made to their private education loan underwriting process in 2009: "Over the course of 2009, we made improvements in the structure, pricing, underwriting, servicing, collecting and funding of Private Education Loans. These changes were made to increase the profitability and decrease the risk of the product. For example, the average FICO score for loans disbursed in 2009 was up 19 points to 745 and the percentage of co-signed loans increased to 84 percent from 66 percent in the prior year.
These improvements in portfolio quality are being driven primarily by our more selective underwriting criteria. We have instituted higher FICO cut-offs and require cosigners for borrowers with higher credit scores than in the past. Our experience shows that adding a cosigner to a loan reduces the default rate by more than 50 percent. We are capturing more data on our borrowers and cosigners and using this data in the credit decision and pricing process. In 2009, we began using a new Custom Underwriting Scorecard, that we believe will further improve our underwriting. We have also introduced judgmental lending.
In 2009, we introduced the Smart Option Student Loan®, which is offered to undergraduate and graduate students through the financial aid offices of colleges and universities to supplement traditional federal loans. The Smart Option Student Loan® significantly reduces the customer’s total cost and repayment term by requiring interest payments while the student is in school."
- Here are the details that SLA collected on information that lenders requested on their applications in a post last year.
Sallie Mae Bank, source of funds for their private education loans, subject to cease and desist order (dating from August 2008) due to compliance weaknesses: "At the time of this filing, Sallie Mae Bank 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 order has not yet been lifted. Our failure to comply with various laws and regulations or with the terms of the cease and desist order or to have issues raised during an examination 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."
Provided details on how it forecasts loan defaults: "Our default estimates are based on a loss confirmation period of generally two years (i.e., our allowance for loan loss covers the next two years of expected losses). The two-year estimate of the allowance for loan losses is subject to a number of assumptions. If actual future performance in delinquency, charge-offs and recoveries are significantly different than estimated, this could materially affect our estimate of the allowance for loan losses and the related provision for loan losses on our income statement."
Identified economic statistics included in their loss forecasts: "Key economic statistics analyzed as part of the allowance for loan loss are unemployment rates (total and specific to college graduates), consumer confidence and other asset type delinquency rates (credit cards, mortgages)."
Described loan modification program with interest rate concessions which began in 2009: "In 2009, the Company implemented a program which offers loan modifications to borrowers who qualify. Temporary interest rate concessions are granted to borrowers experiencing financial difficulties and who meet other criteria. The allowance on these loans is calculated based on the present value of the expected cash flows (including estimates of future defaults) discounted at the loan’s effective interest rate. This calculation contains estimates which are inherently subjective and are evaluated on a periodic basis."
- Provided additional detail on the modification program later in the filing: "During the second quarter of 2009, the Company instituted an interest rate reduction program to assist customers in repaying their Private Education Loans through reduced payments, while continuing to reduce their outstanding principal balance. This program is offered in situations where the potential for principal recovery, through a modification of the monthly payment amount, is better than other alternatives currently available. Along with the ability and willingness to pay, the customer must make three consecutive monthly payments at the reduced rate in order to qualify for the program. Once the customer has made the initial three payments, the loans status is returned to current and the interest rate is reduced for the successive twelve month period. At December 31, 2009, approximately $181 million face amount had qualified for the program and are currently receiving a reduction in their interest rate."
Described one aspect of their forbearance policy (which SLA Blog had written about here): "Forbearance may also be granted to borrowers who are delinquent in their payments. In these circumstances, the forbearance cures the delinquency and the borrower is returned to a current repayment status. In more limited instances, delinquent borrowers will also be granted additional forbearance time. As we have obtained further experience about the effectiveness of forbearance, we have reduced the amount of time a loan will spend in forbearance, thereby increasing our ongoing contact with the borrower to encourage consistent repayment behavior once the loan is returned to a current repayment status. As a result, the balance of loans in a forbearance status as of month-end has decreased over the course of 2008 and 2009. In addition, the monthly average amount of loans granted forbearance as a percentage of loans in repayment and forbearance declined to 5.6 percent in the fourth quarter of 2009 compared to the year-ago quarter of 6.5 percent. As of December 31, 2009, 1.9 percent of loans in current status were delinquent as of the end of the prior month, but were granted a forbearance that made them current during December."
Making no predictions when ABS market will return: "At present, while the markets
have demonstrated some signs of recovery, we are unable to
predict when market conditions will allow for more regular,
reliable and cost-effective access to the term ABS market."
Described $11 billion credit agreement with Federal Home Loan Bank of Des Moines: " On January 15, 2010, HICA Education Loan Corporation, a subsidiary of the Company, entered into a lending agreement with the Federal Home Loan Bank of Des Moines (the “FHLB”). Under the agreement, the FHLB will provide advances backed by Federal Housing Finance Agency approved collateral which includes federally-guaranteed student loans. The initial borrowing of $25 million at a rate of .23 percent under this facility occurred on January 15, 2010 and matured on January 22, 2010. The amount, price and tenor of future advances will vary and will be determined at the time of each borrowing. The maximum amount that can be borrowed, as of January 15, 2010, subject to available collateral, is approximately $11 billion. The Company has provided a guarantee to the FHLB for the performance and payment of HICA’s obligations.
Company changed life-of-loan default assumptions for private student loans (used to value their Residual Interests): "
Life of loan default rate assumptions for Private Education
Loans were increased from 9.1 percent to 12.2 percent
as a result of the continued weakening of the U.S. economy.
This resulted in a $426 million unrealized
mark-to-market
loss."
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Described impact of SAFRA or Community Proposal on business operations:
1. The Company would no longer originate FFELP loans and therefore would no longer earn revenue on new FFELP loan volume. The Company would make significant reductions in operating expense as the FFELP origination function would no longer be needed.
2. The Company earns collections revenue on delinquent and defaulted FFELP loans as well as guarantor account maintenance fees which are based on the size of the underlying FFELP portfolio. Because there would no longer be any new FFELP loan originations, this collections revenue and guarantor account maintenance fee revenue would decline over time as the underlying FFELP portfolio winds down. These revenues are recorded in contingency fee revenue and guarantor servicing fees.
3. The Company earns guarantor issuance fees on new FFELP guarantees. This revenue would no longer occur. This revenue is recorded in guarantor servicing fees.
4. The Company would service a percentage of the Direct Lending loans originated subsequent to the passage of SAFRA under the Company’s current contract to service ED loans, increasing our servicing revenue.
If the Community Proposal is passed the following would be the impact on the Company’s business:
1. The Company would originate FFELP loans and would subsequently sell those loans to ED for a fee. Because the loans would be sold, the Company would no longer earn net interest margin on new FFELP loan volume.
2. The impact to collections revenue, guarantor account maintenance fees and guarantor issuance fees is the same as if SAFRA passes.
3. The Company would service a percentage of the Direct Lending loans originated subsequent to the passage of the Community Proposal under the Company’s current contract to service ED loans. The Community Proposal would create incentives for enhanced default prevention through servicing risk-sharing.
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Company also provided an exhibit which described their Executive Severance Plan for Senior Officers:
- Executive officers would receive severance benefit equal to a multiple of their base salary + average bonus if terminated for good reason, terminated without cause or upon mutual agreement of officer and company:
- CEO: 2 times multiple
- Title higher than EVP (but not CEO): 1.5 times
- Other eligible officers: 1 times
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