Loan Purchase and Participation Programs Overview U.S. Department of

Loan Purchase and Participation Programs Overview U.S. Department of Education July 1, 2008

Agenda Introduction – Sara Martinez Tucker, Under Secretary, U.S. Department of Education Program Overview - Dennis Cariello, Office of the General Counsel, U.S. Department of Education 2

Webinar Objectives Purpose: To provide high level overview of proposed FFEL loan purchase programs. Target Audience: FFEL lenders, secondary markets, loan holders, and guaranty agencies. Limitations: Will not include details on contract formats, process flows, data elements, cash flows, reconciliations, and compliance. This information will be provided in other formats, including in subsequent webinars. 3

Introduction Sara Martinez Tucker Under Secretary U.S. Department of Education

Problem Lack of required liquidity in financial markets impacting ability of FFEL Program lenders and secondary markets to find cost effective financing. 5

Response President’s call for statutory authorities to address problem Congressional action Secretary Spellings’ May 21 letter to FFEL lenders Secretary Spellings’ June 17 letter to colleges and universities 6

Legal Authorities 7 Ensuring Continuing Access to Student Loans Act of 2008 (P.L. 110-227) HR 5715 Signed by the President on May 7, 2008 Strengthened GA Lender of Last Resort Program Provided Secretary authority to purchase FFEL loans. Cannot provide advanced funding to lenders Federal Register Notice Required by statute Draft Posted to IFAP on June 24, 2008 Official Publication July 1, 2008

Program Objectives Ensure that eligible students and parents receive federal student loans for the 20082009 academic year Support the FFEL Program as a successful private/public partnership Ensure no net cost to the federal government 8

Two Programmatic Components Loan Purchase Commitment Program Commitment by ED to purchase eligible 2008-2009 FFEL loans through September 30, 2009 Called “put” Any FFEL lender/holder Loans must be fully disbursed to be purchased 45 day advance notice of loans to be sold ED’s commitment has value in financial markets 9

Two Programmatic Components Loan Participation Purchase Program Commitment by ED to purchase “participation interests” in eligible 20082009 FFEL loans through September 30, 2009 ED’s purchase will provide immediate liquidity To terminate ED’s participation interest lender repays ED with defined yield. Loans can be redeemed by lender Loans can be sold to ED 10

Program Overview Dennis Cariello Office of the General Counsel U.S. Department of Education

Eligible Lenders and Eligible Loans (Both Programs)

Eligible Lenders and Eligible Loans Eligible Lender – Any entity that holds eligible loans as an eligible lender as defined by section 435(d)(1) of the HEA. Includes – Secondary Markets Eligible lender trustees School lenders 13

Eligible Lenders and Eligible Loans Eligible Loans – FFEL subsidized and unsubsidized Stafford and PLUS loans (parent and grad student): Made for loan periods that include, or begin on or after July 1, 2008 First disbursed on or after May 1, 2008 but no later than July 1, 2009 Will be fully disbursed by September 30, 2009 14

Eligible Lenders and Eligible Loans Eligible Loans – The following are not Eligible Loans Consolidation loans LLR Loans Loans with a default claim filed with the guarantor Loans with borrower benefits, other than – Upfront borrower fee payments Offer of .25% interest rate reduction for automatic repayment See IFAP Electronic Announcement dated June 18, 2008 15

Loan Purchase Commitment Program

Loan Purchase Commitment Program ED will commit to purchase, through September 30, 2009, fully disbursed 20082009 eligible loans that are held by eligible lenders No minimum number of loans or dollar amount Purchase Price: Current Outstanding Principal Balance Accrued interest owed by borrower Reimbursement of 1% lender fee 75 per loan 17

Loan Purchase Commitment Program Purchase Price: Interest on subsidized loans paid by ED to lender for the period the lender held the loan. Special Allowance Payments (SAP) paid as normal. Subsidized and unsubsidized eligible loans for the same borrower must be sold together (does not apply to PLUS). For 75.00 per loan fee, subsidized, unsubsidized, and PLUS are separate loans even if for same borrower for same period. 18

Loan Purchase Commitment Program To participate, each eligible lender must Submit Notice of Intent to Participate Submit a Master Loan Sale Agreement with supporting documentation Receive ED approval 19

Loan Purchase Commitment Program Notice of Intent to Participate – Submission by lender creates option but does not obligate lender to sell loans to ED. ED’s receipt of Notice of Intent to Participate establishes eligibility of loans. Only loans where the first disbursement is made on or after ED’s receipt of the Notice of Intent to Participate may be sold to ED, except – If Notice of Intent to Participate received by ED within 15 days of Federal Register Notice (July 16, 2008), eligible loans made on or after May 1, 2008 may be sold to ED. 20

Loan Purchase Commitment Program Master Loan Sales Agreement– Contract between eligible lender and ED. May be submitted at any time after Notice of Intent to Participate. ED’s OGC will review Agreement and supporting documents. Lender will be notified with fully executed agreement. Lender must provide ED with 45-day notice of intent to sell a loan(s). Servicing of loans after sale will be determined by ED. 21

Loan Purchase Commitment Program Each eligible loan to be sold must – Have a signed promissory note. Have been first disbursed no later than July 1, 2009. Be fully disbursed. Have been originated and serviced in compliance with all requirements of applicable law. Bear interest at the stated statutory rate under the HEA. Satisfy the terms, conditions and representations and warranties of the Master Loan Sale Agreement. 22

Loan Purchase Commitment Program Dates and Deadlines: May 7, 2008 - Law Enacted July 1, 2008 - Federal Register Notice Published July 16, 2008 - If Notice of Intent to Participate received, loans eligible back to May 1, 2008 March 31, 2009 - Last date to submit Master Sales Agreement July 1, 2009 - Last date for first disbursement August 14, 2009 - Last date to provide 45day notice September 30, 2009 - Last date to sell loans 23

Loan Participation Purchase Program

Loan Participation Purchase Program Concept – ED provides lender liquidity by purchasing “participation interests” in eligible FFEL loans that the lender has placed in a “participation” facility controlled by a Custodian. Lender reduces ED’s participation interest by repaying ED amount ED paid plus ED’s yield with cash or by completing sale of loan(s) to ED. 25

Loan Participation Purchase Program Players: ED: U.S. Department of Education (Participant) Sponsor: Eligible FFEL lender or holder of FFEL loans Custodian: Holds legal title to the Purchased Eligible Loans Must be an eligible lender Must be a National or State-chartered bank Must not be affiliated with the Sponsor 26

Loan Participation Purchase Program Minimum Participation Amount – Sponsor must commit to participation of at least 50 million. Smaller lenders may aggregate with each other or with larger lender by transferring title. 27

Loan Participation Purchase Program Steps – Eligible lender, after making first disbursement of eligible loans, using its own or short-term borrowed funds, places loans into a “participation” facility that is under the control of a Custodian who takes title of the loans. Lender (now Sponsor) responsible for servicing of loans. 28

Loan Participation Purchase Program Steps – In exchange for title to loans, Custodian provides Sponsor with two participation interest certificates. The ‘A’ Certificate (a Participation Interest in the loans that were transferred) is purchased by ED. ‘A’ Certificate is the senior certificate. Sponsor holds ‘B’ Certificate, which entitles them to: Redeem eligible loans, or To exercise the purchase option to sell loans to ED Entitled to residual amounts 29

Loan Participation Purchase Program ED buys a Class A Participation Interest from Sponsor, which entitles ED to: 100% beneficial ownership interest in the principal portion of eligible loans ED’s Yield: Commercial paper rate plus 50 basis points 30

Loan Participation Purchase Program Steps – After subsequent disbursements are made on the loans ED provides additional funds to Sponsor (through the Custodian) by purchasing increased participation in the loans. 31

Loan Participation Purchase Program Reducing ED’s Participation Interest ED’s participation interests are reduced by Sponsor repaying ED its principal payments plus ED’s yield (CP 50bp). To reduce ED’s participation, loans may be – Redeemed by the Sponsor Sold to ED through Loan Purchase Program Same loan value Sponsor must have Loan Purchase Agreement on file with ED Must provide ED with 45-day notice of sale 32

Loan Participation Purchase Program Each loan included in participation must: Have a signed promissory note Have had at least one disbursement Have been originated and serviced in compliance with all requirements of applicable law Bear interest at the stated statutory rate under the HEA Satisfy the terms, conditions and representations and warranties of the Master Participation Agreement 33

Loan Participation Purchase Program To participate, each eligible lender must Submit Notice of Intent to Participate Submit a Master Participation Agreement with supporting documentation Receive ED approval Submit a monthly rolling forecast report Submit Participation Purchase Request with Loan Schedule (Custodian) 34

Loan Participation Purchase Program Minimum Participation Amount – Sponsor must commit to participation of a total of at least 50 million by end of program. Smaller lenders may “aggregate” with each other or with larger lender. The same SAP rate must apply to all loans being aggregated. 35

Loan Participation Purchase Program When Sponsor sells eligible loans to ED: Sponsor and ED net all amounts due Sponsor owes ED principal and ED’s yield ED owes Sponsor value of purchased loans as determined in Loan Purchase Program, (principal balance, accrued interest, lender fee rebate and 75 per loan) 36

Loan Participation Purchase Program Dates and Deadlines: May 7, 2008 - Law Enacted July 1, 2008 - Federal Register Notice Published July 16, 2008 - If Notice of Intent to Participate received, loans eligible back to May 1, 2008 March 31, 2009 – Last Date to Master Loan Sales Agreement July 1, 2009 - Last date for first disbursement August 14, 2009 – Last date to provide 45- day notice September 30, 2009 – Last date to sell loans 37

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