SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported):
February 2, 2000
USA GROUP SECONDARY MARKET SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 333-77301 35-1872185
--------------------------- ---------------------- ------------
State or other jurisdiction Commission File Number IRS Employer
of incorporation Identification Number
30 South Meridian Street, Indianapolis, Indiana 46204-3503
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Address of principal executive offices
Registrant's telephone number, including area code (317) 951-5526
--------------
<PAGE>
Item 1. Not Applicable
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. The Registrant hereby submits the following documents in relation to the
SMS Student Loan Trusts with respect to risk weight letters:
1. 20% Risk Weight Final Press Release dated February 2, 2000
2. 20% Risk Weight Letter - Federal Reserve System
3. 20% Risk Weight Letter - FDIC
4. 20% Risk Weight Letter - Comptroller of the Currency
5. 20% Risk Weight Letter - Office of Thrift Supervision
6. 20% Risk Weight Letter - Financial Services Authority, UK
7. 20% Risk Weight Letter - Bundesaufsichtsamt Fur Das Kredit
8. 20% Risk Weight Letter - De Nederlandsche Bank, Amsterdam
Item 6. Not Applicable
Item 7. Not Applicable
Item 8. Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
USA GROUP SECONDARY MARKET SERVICES, INC.
as originator of the Trust (Registrant)
By: /S/ Cheryl E. Watson
----------------------------------
Cheryl E. Watson
Senior Vice President and
Chief Financial Officer
Date: February 2, 2000
<PAGE>
EXHIBIT INDEX
Exhibit No.
- -----------
EX - 99.1 Final Press Release dated February 2, 2000 with respect to risk weight
letters
EX - 99.2 20% Risk Weight Letter - Federal Reserve System
EX - 99.3 20% Risk Weight Letter - FDIC
EX - 99.4 20% Risk Weight Letter - Comptroller of the Currency
EX - 99.5 20% Risk Weight Letter - Office of Thrift Supervision
EX - 99.6 20% Risk Weight Letter - Financial Services Authority, UK
EX - 99.7 20% Risk Weight Letter - Bundesaufsichtsamt Fur Das Kreditwesen
EX - 99.8 20% Risk Weight Letter - De Nederlandsche Bank, Amsterdam
FOR IMMEDIATE RELEASE CONTACT:
February 2, 2000 Robert P. Murray
Director, Public Affairs
(317) 951-5492
[email protected]
Banking Authorities Assign USA Group Secondary Market Services
Student-Loan-Backed Securities to Favorable Risk-Weight Category
INDIANAPOLIS- Several banking authorities in the United States and Europe have
advised USA Group Secondary Market Services (SMS) that senior securities backed
by federally insured student loans in its portfolio are eligible for the 20
percent risk category. This level is the same risk weight assigned to securities
issued by U.S. government-sponsored agencies.
The Federal Reserve Board, the Office of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, and the Office of Thrift Supervision have
each issued separate letters advising SMS that its senior notes are eligible for
20 percent risk-based capital treatment. Consistent with the 2 percent lender
risk-sharing provisions of the federal Higher Education Act for federal
education loans disbursed since Oct. 1, 1993, the U.S. banking regulators have
further advised SMS that only 98 percent of each senior note would be eligible
for the 20 percent risk category.
Certain banking regulators in Germany, the Netherlands, and the United Kingdom
have similarly advised SMS that its senior notes may be eligible for the 20
percent risk category. In the case of the Netherlands, assignment to the lower
risk-weight category is subject to additional conditions. The banking regulators
have issued advice similar to that received by SMS from U.S. banking authorities
that only 98 percent of each senior note would be eligible for the 20 percent
risk category.
In establishing minimum capital requirements for commercial banking operations,
national bank regulators assign risk weights of zero, 20, 50, or 100 percent to
broad categories of assets, based on their relative credit risks.
"This favorable risk-weight assignment should make our student-loan-backed
securities more attractive to lenders and to other investors. Their investment,
in turn, enables us to carry out our mission of ensuring a reliable supply of
private capital to finance student loans," said Stephen W. Clinton, chairman,
president, and chief executive officer of SMS.
USA Group Secondary Market Services is one of the most active student loan
secondary markets in the United States and currently manages a portfolio of
approximately $6 billion in federal education loans. A pioneer in student loan
securitization, SMS has completed a series of 11 student-loan-backed securities
sales, raising approximately $5.7 billion since 1992.
SMS is an affiliate of Indianapolis, Ind.-based USA Group, the largest student
loan guarantor and administrator in the U.S. Other USA Group affiliates
annually guarantee or process for student loan guarantors more than $10 billion
in new education loans for students and their parents, and service on behalf of
130 lenders and secondary markets a portfolio of more than $15 billion in
education loans.
[Board of Governors of the Federal Reserve System Letterhead]
September 11, 1999
Mr. Paul Vambutas
Credit Suisse First Boston
Eleven Madison Avenue
New York, NY 10010
Ms. Cheryl Watson
USA Group
30 South Meridian Avenue
Indianapolis, IN 46204
Dear Mr. Vambutas and Ms. Watson:
In a letter of July 22, 1999, Messrs. Kravitt and Karp of Mayer, Brown & Platt
inquired on behalf of USA Group, Inc. and Credit Suisse First Boston Corporation
about the appropriate risk weight of senior asset-backed securities that are
issued by a securitization trust and secured by student loans conditionally
guaranteed by a U.S. government agency. Specifically, they wanted to know
whether investors could treat the existing and proposed asset-backed securities
described in the letter as indirect holdings of student loans that are
conditionally guaranteed by the U.S. Department of Education and, thus, eligible
for the 20 percent risk category.
The issuer is a limited purpose, bankruptcy remote entity that issues senior
asset-backed securities. Our understanding is that the underlying assets
collateralizing the asset-backed securities are student loans originated under
the Federal Family Education Loan Program. These loans are conditionally
guaranteed by the U.S. Department of Education through a program that reinsures
the guarantees of the loans by state or nonprofit agencies. If the state or
nonprofit agency guarantors are unable to fulfill their contractual obligations,
then holders of the student loans may submit insurance claims directly to the
Department of Education.
The guarantee is considered conditional because it is only valid as long as the
student loans are originated and serviced in accordance with the criteria set
forth under the Higher Education Act of 1965, as amended. Under the conditional
guarantee, if a borrower defaults on a student loan, e.g., has payments that are
270 days past due for loans repayable in monthly installments, then the state or
nonprofit agency that guaranteed the loan would reimburse the holder of the loan
for 100 percent of the unpaid principal balance, as well as accrued unpaid
interest. For guaranteed student loans disbursed on or after October 1, 1993, in
which the lender must retain a 2 percent share in the risk of the loan, the
state or nonprofit agency would reimburse 98 percent of the unpaid principal.
As noted above, you seek a determination that senior asset-backed securities
secured by student loans conditionally guaranteed by the U.S. Department of
Education qualify for the 20 percent risk category. Such a treatment would
require the Federal Reserve to "look through" to the guaranteed portion of the
underlying student loans in order to apply the lower risk weight since the
securities are issued by a private sector obligor that is otherwise assigned to
the 100 percent risk category. As you know, the Federal Reserve's risk-based
capital guidelines provide for such a look-through approach for privately-issued
mortgage-backed securities.
In order to be treated as an indirect holding of the underlying assets and
eligible for a preferential risk weight, privately-issued mortgage-backed
securities must meet the following criteria: 1) The underlying assets are held
by an independent trustee and the trustee has a first priority, perfected
security interest in the underlying assets on behalf of the holders of the
security; 2) Either the holder of the security has an undivided pro rata
ownership interest in the underlying mortgage assets or the trust or single
purpose entity (or conduit) that issues the security has no liabilities
unrelated to the issued securities; 3) The security is structured such that the
cash flow from the underlying assets in all cases fully meets the cash flow
requirements of the security without undue reliance on any reinvestment income;
and 4) There is no material reinvestment risk associated with any funds awaiting
distribution to the holders of the security.
At the time these "look through" criteria were adopted for privately-issued
mortgage-backed securities, which are generally supported by lower risk-weighted
mortgage assets, few if any non-mortgage assets were being securitized that
would have warranted a lower risk weight. You have represented that the senior
student loan-backed securities meet all of the above mentioned criteria that
enable privately-issued mortgage-backed securities to obtain the lower
preferential capital treatment.
<PAGE>
From the information contained in your letter, Federal Reserve staff believes
that the above described senior student loan-backed securities may be assigned
to the 20 percent risk category to the extent the underlying student loans are
conditionally guaranteed by the U.S. Department of Education. As a result, only
98 percent of senior securities that are backed by student loans that have been
disbursed on or after October 1, 1993, in accordance with the 2 percent lender
risk sharing provisions, would be eligible for assignment to the 20 percent risk
category. This 98 percent treatment would apply to senior securities that are
entirely backed by 98 percent guaranteed student loans, as well as those that
are partially backed by such loans and partially backed by 100 percent
guaranteed student loans. This determination is based on the information
presented in the letter of July 22, 1999. If the situation is, in fact,
different or if it changes, then this treatment may not apply.
If you have any questions, please contact Tom Boemio at (202) 452-2982.
Sincerely,
/s/ Roger Cole
Roger Cole, Associate Director
Federal Reserve Board
cc: Jason H.P. Kravitt
Andrew T. Karp
Mayer, Brown & Platt
[FDIC - Federal Deposit Insurance Corporation Letterhead]
January 6, 2000
Mr. Paul Vambutas
Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, New York 10010
Ms. Cheryl Watson
USA Group, Inc.
30 South Meridian Avenue
Indianapolis, Indiana 46204
Dear Mr. Vambutas and Ms. Watson:
In a letter written on your behalf, Messrs. Kravitt and Karp of Mayer, Brown &
Platt requested the FDIC staff to confirm their findings with regard to the
appropriate risk weight for senior asset-backed securities that are issued by a
securitization trust and secured by student loans conditionally guaranteed by a
U.S. government agency. We understand that from time to time USA Group, Inc.
(USA Group), indirectly through its subsidiary, USA Group Secondary Market
Services, Inc. (SMS), securitizes guaranteed student loans and transfers
guaranteed loans to special purpose entities to effect securitizations. Credit
Suisse First Boston Corporation (CSFB) is the adviser to SMS and lead
underwriter of the securities. USA Group and CSFB request the FDIC's concurrence
that the existing and proposed senior asset-backed securities described in Mayer
Brown & Platt's letter may be treated by investors as indirect holdings of
student loans that are conditionally guaranteed by the U.S. Department of
Education (DOE) and, thus, eligible for the 20 percent risk category under the
FDIC's risk-based capital standards.
We understand that SMS forms a special purpose vehicle (the Issuer) for the
purpose of issuing senior asset-backed securities to the public and the Issuer
is a limited purpose, bankruptcy remote entity. The underlying assets
collateralizing the asset-backed securities are student loans originated under
the Federal Family Education Loan Program. These loans are conditionally
guaranteed by the DOE through a program that reinsures the guarantees of the
loans by state or nonprofit agencies. If the state or nonprofit agency
guarantors are unable to fulfill their contractual obligations, then holders of
the student loans may submit insurance claims directly to the DOE.
The guarantee is considered conditional because it is only valid as long as the
student loans are originated and serviced in accordance with the criteria set
forth under the Higher Education Act of 1965, as amended. Under the conditional
guarantee, if a borrower defaults on a student loan, e.g., has payments that
are 270 days past due for loans repayable in monthly installments, then the
state or nonprofit agency that guaranteed the loan would reimburse the holder of
the loan for 100 percent of the unpaid principal balance, as well as accrued
unpaid interest. For guaranteed student loans disbursed on or after October 1,
1993, in which the lender must retain a 2 percent share in the risk of the loan,
the state or nonprofit agency would reimburse 98 percent of the unpaid
principal.
Analysis
In order to determine the risk weight category to which an asset held by a state
nonmember bank should be assigned, the FDIC's Statement of Policy on Risk-Based
Capital (Appendix A to 12 C.F.R. Part 325) generally looks to the borrower,
Issuer, or counterparty. Where the asset is subject to a guarantee, the
risk-based capital guidelines will, in certain cases, assign a risk weight to
the asset based on the nature of the issuer of that guarantee. Section II.C.--
Category 2 of Appendix A to Part 325 provides that portions of assets
conditionally guaranteed by the United States Government or its agencies are
assigned to the 20 percent risk weight category. Since the underlying student
loans in this case are conditionally guaranteed by the DOE, that portion of the
student loans that is conditionally guaranteed by the DOE would be assigned to
the 20 percent risk weight category if the loans were held directly by a bank.
However, as Mayer, Brown & Platt's letter indicates, the underlying student
loans are not held directly by a bank but rather are held indirectly in the form
of asset-backed securities. As a private sector obligor, the SMS senior
asset-backed securities would normally be assigned to the 100 percent risk
weight category as a privately issued asset-backed security. To obtain a
determination that senior asset-backed securities secured by student loans
conditionally guaranteed by the DOE qualify for the 20 percent risk category
would require the FDIC to "look through" to the guaranteed portion of the
underlying student loans in order to apply the lower risk weight. Section
II.B.5. of the FDIC's risk-based capital standards provide that a privately
issued mortgage-backed security is treated as essentially an indirect holding of
the underlying assets, and assigned to the same risk category as the underlying
assets, in accordance with the provisions and criteria spelled out in detail in
the accompanying footnote;
<PAGE>
In this regard, Footnote 14 to this section states that
A privately issued mortgage-backed security may be treated as an indirect
holding of the underlying assets provided that
(1) the underlying assets are held by an independent trustee and the trustee has
a first priority, perfected security interest in the underlying assets on behalf
of the holders of the security,
(2) either the holder of the security has an undivided pro rate ownership
interest in the underlying mortgage assets or the trust or single purpose entity
(or conduit) that issues the security has no liabilities unrelated to the issued
securities,
(3) the security is structured such that the cash flow from the underlying
assets in all cases fully meets the cash flow requirements of the security
without undue reliance on any reinvestment income, and
(4) there is no material reinvestment risk associated with any funds awaiting
distribution to the holders of the of the security.
The FDIC has reviewed the SMS securitization program described in Mayer, Brown &
Platt's letter and the representations therein that the senior student
loan-backed securities meet all of the above mentioned criteria. Based on this
review, the staff of the Division of Supervision of the FDIC believes that the
SMS senior asset-backed securities are eligible for the 20 percent risk weight
category as an indirect holding of federally guaranteed student loans to the
extent that the underlying student loans are conditionally guaranteed by the
U.S. Department of Education. However, please note that the 20 percent risk
weight is only applicable with respect to that portion of the underlying student
loans that is conditionally guaranteed by the DOE. As a result, only 98 percent
of each senior security backed by student loans that have been disbursed on or
after October 1, 1993, in accordance with the 2 percent lender risk sharing
provisions, would be eligible for assignment to the 20 percent risk category.
This determination is based on the information and representations contained in
Mayer, Brown & Platt's letter. If there are any material changes in the facts or
circumstances relating to the SMS securitization program, our conclusion may
differ.
If you have further questions, please contact Examination Specialist Stephen
Pfeifer of the Accounting Section (202/898-8904).
Sincerely,
/s/ Mark Schmidt
Mark Schmidt
Associate Director
[Comptroller of the Currency Letterhead]
Administrator of National Banks
Washington, DC 20219
December 13, 1999
Jason Kravitt
Andrew Karp
Mayer, Brown & Platt
190 South La Salle Street
Chicago, Illinois 60603-3441
Dear Sirs:
In your letter of July 22, 1999, you inquired about the appropriate risk weight
for senior asset-backed securities issued by a trust and secured by student
loans conditionally guaranteed by a United States government agency.
Specifically, you sought our opinion as to whether USA Group Secondary Market
Services, Inc. (SMS) [1] senior asset-backed securities qualify as an indirect
holding of loans conditionally guaranteed by the United States government,
thereby qualifying for the 20 percent risk weight category under the risk-based
capital guidelines. For the reasons discussed below, the Office of the
Comptroller of the Currency (OCC) determines that senior asset-backed securities
purchased by a national bank are eligible for the 20 percent risk weight
category to the extent that the underlying student loans are conditionally
guaranteed by the Department of Education. Therefore, because 98 percent of the
unpaid principal and interest on student loans made on or after October 1, 1993,
is covered by the conditional guarantee, 98 percent of these student loans may
be risk weighted at 20 percent; the remaining 2 percent would continue to be
risk weighted at 100 percent.
Our understanding is that SMS sponsors various student loan trusts where the
underlying assets securing the senior asset-backed securities are student loans
originated under the Federal Family Education Loan Program. These loans are
conditionally guaranteed by the Department of Education through a program that
reinsures the guarantees of the loans by state or nonprofit agencies. [2] If the
state or nonprofit agency guarantors are unable to fulfill their contractual
obligations, then holders of the student loans may submit insurance claims
directly to the Department of Education.
____________
[1] Mayer, Brown & Platt has requested an interpretation on behalf of USA Group,
the parent company of SMS, and Credit Suisse First Boston, an advisor to SMS and
lead underwriter of the securities.
[2] Under this program, student loans are initially guaranteed by the state or
nonprofit agency and then reinsured by the Department of Education.
<PAGE>
The guarantee is considered conditional because it is only valid as long as the
student loans are originated and serviced in accordance with the criteria set
forth under the Higher Education Act of 1965. Under the conditional guarantee,
if a borrower defaults on a student loan- for example, if the borrower is 270
days past due for loans repayable in monthly installments- then the state or
nonprofit agency that guaranteed the loan would reimburse the holder of the loan
for 100 percent of the unpaid principal balance, as well as accrued unpaid
interest. For guaranteed student loans disbursed on or after October 1, 1993, in
which the lender must retain a 2 percent share in the risk of the loan, the
state or nonprofit agency would reimburse 98 percent of the unpaid principal and
interest.
Under OCC regulations, an asset held by a bank is generally risk weighted
according to the risk weight category assigned to the borrower, issuer, or
counterparty. See generally 12 C.F.R. Part 3, Appendix A. In certain cases,
however, where the asset is subject to a guarantee, the risk-based capital
guidelines will assign a risk weight to the asset based on the nature of the
issuer of that guarantee. Specifically, Section 3(a)(2)(v) of the risk-based
capital guidelines provides that the "portion of assets conditionally guaranteed
by the United States Government or its agencies..." is assigned to the 20
percent risk weight category. 12 C.F.R. Part 3, Appendix A, Section 3(a)(2)(v).
In this instance, the underlying student loans are conditionally guaranteed by
the United States Department of Education. Therefore, if the underlying student
loans were held directly by a national bank, that portion of the student loans
that is conditionally guaranteed by the Department of Education would be
assigned to the 20 percent risk weight category.
As you indicated, the underlying student loans are not held directly by a bank
but rather are held indirectly in the form of asset-backed securities. Because
private sector obligors are assigned to the 100 percent risk weight category,
the SMS senior asset-backed securities would normally be assigned to the 100
percent risk weight category as a privately issued asset-backed security.
However, in pertinent part, the risk-based capital guidelines state:
Some of the assets on a bank's balance sheet may represent an indirect holding
of a pool of assets, e.g., mutual funds, that encompasses more than one risk
weight within the pool. In those situations, the bank may assign the asset to
the risk category applicable to the highest risk-weighted asset that pool is
permitted to hold pursuant to its stated investment objectives in the fund's
prospectus. Alternatively, the bank may assign the asset on a pro rata basis to
different risk categories according to the investment limits in the fund's
prospectus. In either case, the minimum risk weight that may be assigned to such
a pool is 20 [percent]. If a bank assigns the asset on a pro rata basis, and the
sum of the investment limits in the fund's prospectus exceeds 100 [percent], the
bank must assign the highest pro rata amounts in its total investment to the
higher risk category.
12 C.F.R. Part 3, Appendix A Section 3. Under this provision, the OCC, has the
authority to "look through" any indirect holding of a pool of assets and apply a
risk weight based on the risk weights of the underlying assets. This section, as
recently amended, also makes clear that the proportional risk weighting of a
security must be based on the investment limits specified in the fund's
prospectus. See 64 Fed. Reg. 10194, 10196-10197 (March 2, 1999).
For the reasons and based on the representations contained in your letter,[3]
the OCC determines that pursuant to 12 C.F.R. Part 3, Appendix A Section 3 the
SMS senior asset-backed securities are eligible for the 20 percent risk weight
category as an indirect holding of federally guaranteed student loans to the
extent that the underlying student loans are conditionally guaranteed by the
Department of Education. As provided in Section 3, the bank may assign the SMS
senior asset-backed securities either to the highest risk-weighted asset that
pool is permitted to hold, or alternatively, pro rate the risk weight based on
the risk categories and investment limits specified in the prospectus. However,
in no case should the aggregate [4] risk weight be lower than 20 percent. Also,
please note that the 20 percent risk weight is only applicable with respect to
that portion of the underlying student loans that is conditionally guaranteed by
the Department of Education. As a result, only 98 percent of each senior
<PAGE>
security backed by student loans that have been disbursed on or after October 1,
1993, in accordance with the 2 percent lender risk sharing provisions, would be
eligible for assignment to the 20 percent risk category. In addition, please be
advised that this conclusion is based on the information and representations
contained in your letter. Any material changes in the facts or circumstances may
result in different conclusion.
____________
[3] You have indicated that if the SMS senior asset-backed securities were
backed by mortgage loans, they would satisfy the requirements in 12 C.F.R. Part
3, Appendix A Section 3(a)(3)(vi) for privately issued mortgage-backed
securities. Under Section 3(a)(3)(vi), privately issued mortgage-backed
securities, where the underlying pool is comprised solely of mortgage-related
securities issued by the Government National Mortgage Association (Ginnie Mae),
Federal National Mortgage Association (Fannie Mae), and Federal Home Loan
Mortgage Corporation (Freddie Mac), are treated as an indirect holding of the
underlying assets and assigned to the 20 percent risk weight category if they
satisfy the following requirements:
1. The underlying assets are held by an independent trustee and the trustee has
a first priority, perfected security interest in the underlying assets for the
benefit of the holders of the security;
2. Either the holder of the security has an undivided pro rata ownership
interest in the underlying mortgage assets or the trust that issues the security
has no liabilities unrelated to the issued securities;
3. The security is structured such that the cash flow from the underlying assets
in all cases fully meets the cash flow requirements of the security without
undue reliance on any reinvestment income; and
4. There is not material reinvestment risk associated with any funds awaiting
distribution to the holder of the security.
Although these requirements, by their terms, apply only to mortgage related
securities, the OCC believes that taken together these requirements serve as
useful standards for evaluation similarly structured non-mortgage
securitizations. Accordingly, in providing its opinion on the appropriate
risk-weight for non-mortgage securities, the OCC considers, as a prudential
matter, whether the standards in Section 3(a)(3)(vi) are satisfied.
[4] The aggregate 20 percent capital floor is an overall limit on the bank's
investment in an indirect holding in a pool of assets. When calculating capital
on a pro rata basis the 20 percent capital floor should be applied after
calculating the weighted average.
If you have any questions, please contact Amrit Sekhon, Risk Specialist, Capital
Policy, at (202) 874-5211, or Ron Shimabukuro, Senior Attorney, Legislative and
Regulatory Activities Division, at (202) 874-5090.
Sincerely,
/s/ Tommy Snow
Tommy Snow
Director
Capital Policy
[Office of Thrift Supervision
Department of the Treasury Letterhead]
October 26, 1999
Cheryl Watson
USA Group
30 South Meridian
Indianapolis, Indiana 46204
Paul Vambutas
Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, New York 10010
Dear Ms. Watson and Mr. Vambutas:
Your attorneys, Jason H.P. Kravitt and Andrew T. Karp, wrote identical letters
to each of the federal banking agencies on July 22, 1999, inquiring about the
appropriate risk weight for senior asset-backed securities that are issued
through a securitization structure and secured by student loans conditionally
guaranteed by a U.S. government agency (the "Securities"). Specifically, you
request a determination that the Securities, conditionally guaranteed by the
U.S. Department of Education, qualify for the 20 percent risk category.
As we understand it, USA Group, Inc. ("USA Group") directly or through
affiliates, guarantees and services student loans and provides a secondary
market for student loans, including the purchase, sale and securitization of
student loans through the sale or transfer of such loans to special purpose
vehicles that issue securities to the public. USA Group Secondary Market
Services, Inc. ("SMS") is a subsidiary of USA Group that, from time to time,
securitizes guaranteed student loans, including transfers of such loans to the
Issuer to effect securitizations. SMS also acquires and originates guaranteed
student loans through an eligible lender under the Higher Education Act of 1965,
as amended (the "HEA"). Finally, Credit Suisse First Boston ("CSFB") acts as an
adviser to SMS in structuring the issue of the Securities and as underwriter in
the offering by the Issuer.
The Issuer is a limited purpose and bankruptcy remote entity. Our understanding
is that the underlying assets collateralizing the Securities are student loans
originated under the Federal Family Education Loan Program. Through this
program, the U.S. Department of Education reinsures the guarantees of qualifying
loans by state or nonprofit agencies. If the state or nonprofit agency
guarantors are unable to fulfill their contractual obligations, then holders of
the student loans may submit insurance claims directly to the Department of
Education.
The guarantee is considered conditional because it is only valid as long as the
student loans are originated and serviced in accordance with the criteria set
forth under the HEA. Under the conditional guarantee, if a borrower defaults on
a student loan, the state or nonprofit agency that guarantees the loan would
reimburse the holder of the loan for 100 percent of the unpaid balance, as well
as accrued unpaid interest. For guaranteed student loans disbursed on or after
October 1, 1993, in which the lender must retain a 2 percent share in the risk
of the loan, the state or nonprofit agency would reimburse 98 percent of the
unpaid principal.
In your request, you make reference to previous letters issued by the staffs of
the federal banking agencies to SLM Funding Corp., specifically citing the
letter issued by staff of the Federal Reserve, dated February 11, 1999 (the "SLM
Letter"). While slightly different in form, each of the agencies reached the
same conclusion through a similar analytical framework. In your letter, you
submit that the Securities will meet those same conditions.
<PAGE>
The Office of Thrift Supervision issued its own SML staff letter on February 24,
19999, and applied conditions identical to those set forth by Federal Reserve
staff in their SML Letter. The OTS staff noted that although the OTS risk-based
capital regulations do not expressly provide for a "look-xthrough" analysis to
the guaranteed portion of underlying loans, the OTS takes such an approach where
appropriate, especially where the agency looks through to lower risk-weighted
assets and/or guaranties. For this reason, we take the same look-through
approach in responding to your request.
In our February 24 SML letter, OTS staff listed criteria that privately-issued
mortgage backed securities must meet in order to be treated as indirect holdings
of the underlying assets, and be eligible for a preferential risk weight. These
criteria are:
o The underlying assets are held by an independent trustee and the
trustee has a first priority, perfected security interest in the
underlying assets on behalf of the holders of the security;
o Either the holder of the security has an undivided pro rata
ownership interest in the underlying mortgage assets, or the trust or
single purpose entity (or conduit) that issues the security has no
liabilities unrelated to the issued securities;
o The security is structured such that the cash flow from the
underlying assets in all cases fully meets the cash flow requirements
of the security without undue reliance on any reinvestment income; and
o There is no material reinvestment risk associated with any funds
awaiting distribution to the holders of the security.
Based upon your representations (that the Securities satisfy the requirements
set forth in the SLM Letter(s)) it appears that your securitization structure
would satisfy the requirements of this letter. Accordingly, the OTS staff
believes that the Securities may be assigned to the 20 percent risk category to
the extent the underlying student loans are conditionally guaranteed by the U.S.
Department of Education. As a result, 98 percent of senior securities that are
backed by student loans that have been disbursed on or after October 1, 1993,
would be eligible for assignment to the 20 percent risk category. This 98
percent treatment would apply to senior securities that are entirely backed by
98 percent guaranteed student loans, as well as those that are partially backed
by such loans and partially backed by 100 percent guaranteed student loans.
The determinations communicated by this letter are based on the information
presented in your letter of July 22, 1999. If the situation is, in fact,
different, or if it changes, then this treatment may not apply.
If you have any questions, please contact Michael Solomon, Senior Program
Manager, Capital Policy (202/906-5654).
Sincerely,
/s/ John C. Price
John C. Price
Director, Supervision Policy
[The Financial Services Authority Letterhead]
25 The North Colonnade
Canary Wharf
London E14 SH5 United Kingdom
3 December 1999
Ms. C.E. Watson
Senior Vice President & Chief Financial Officer
USA Group Secondary Market Services, Inc.
PO Box 703
Indianapolis, IN 46204-3503
Dear Ms. Watson,
CAPITAL TREATMENT OF U.S. GUARANTEED STUDENT LOAN-BACKED SECURITIES
Thank you for your letter dated 16 November 1999 in which you enquired about the
capital treatment of US Guaranteed Student Loan-backed Securities. Specifically,
you wanted to know whether investors could treat the asset-backed securities
described in the letter as indirect holdings of student loans that are
conditionally guaranteed by the US Department of Education and therefore
eligible for the 20% risk category.
We understand that the issuer is a limited purpose, bankruptcy remote entity
that issues senior asset-backed securities and that the underlying assets are
student loans originated and serviced under the Federal Family Education Loan
Program (FFELP). These loans are conditionally guaranteed by the Department of
Education through a program that reinsures the guarantees of the loans by the
state or non-profit agencies.
The information you provided indicates that the FFELP program guarantees only
98% of the loans that are originate after 1 October 1993, with the lender
bearing the risk on the remaining 2%. The information also states that the
guarantee is considered conditional because it is only valid as long as the
student loans are originated and serviced in accordance with the criteria set
forth under the Higher Education Act of 1965, as amended.
The letter you sent also provides i) that the underlying assets are held by an
independent trustee and that the trustee must have first priority, perfected
security interest; ii) that the issuer of the security has no liabilities
unrelated to the issued security; iii) that the cash flow from the underlying
assets in all cases full meets the cash flow requirement of the security without
any undue reliance on reinvestment income; and iv) that there is no material
reinvestment risk.
From the information contained in your letter, the FSA staff believes that 98%
of the senior securities that are backed by student loans that have been
disbursed on or after 1 October 1993 (that are guaranteed by under the FFELP
program) can attract a 20% risk weighting for capital purposes in the UK. The
98% treatment would apply to senior securities that are entirely backed by 98%
guaranteed student loans, as well as those that are partially backed such loans
and partially backed by 100% guaranteed student loans. The percentage of the
senior securities that is not covered under the guarantee would of course
attract 100% risk weighting.
This decision has been made based on the information you provided in the letter
of 16 November 1999. If the situation is, in fact, different or changes in any
way then this treatment may not apply.
I hope this information is useful to you. If you need further clarification of
our comments then please contact me.
Yours sincerely,
/s/ Helen Ward
Helen Ward
[BUNDESAUFSICHTSAMT FUR DAS KREDITWESEN Letterhead]
(Federal Banking Supervisory Office)
BAKred, Gardeschutzenweg 71 - 101, 12203 Berlin
Ms. Cheryl E. Watson
Senior Vice President & Chief Financial Officer
USA Group Secondary market Services, Inc.
P.O. Box 7039
Indianapolis, IN 46207-7039
USA
26 November 1999
Re: Capital Treatment of U.S. Guaranteed Student Loan-Backed Securities
Dear Ms. Watson:
In your letter dated November 16, 1999 you seek information of the
"Bundesaufsichtsamt fur das Kreditwesen" that senior U.S. Guaranteed Student
Loan-Backed Securities as described in your letter receive a 20 percent
risk-weighting under the solvency rule for German banks.
First, let me point to the fact that as a general principle the
"Bundesaufsichtsamt fur das Kreditwesen" gives information about the appropriate
weighting of risk-assets under the German solvency rule for banks which is laid
down in the so-called Principle I pursuant to Sections 10 and 10a of the German
Banking Act only in case that a bank which has to obey to the stipulations of
Principle I is uncertain about the amount of the capital charge to be applied to
the risk-asset in question. Generally it is expected that banks can make correct
decisions following the instruction of Principle I. Prior to making an inquiry
to the banking supervisory authority regarding the relevant risk weighting banks
are requested to make efforts to examine and make a decision on their own
responsibility. However, in cases of doubt banks should approach the
"Bundesaufsichtsamt fur das Kreditwesen".
Referring to your inquiry I understand that banking supervisors in the G
10-countries take the view that senior asset-backed securities secured by loans
conditionally guaranteed by the U.S. central government should be assigned to
the 20 percent risk category provided that the look through criteria established
by the U.S. bank regulatory agencies are fulfilled. Therefore the decision on
the capital treatment of U.S. Guaranteed Student Loan-Backed Securities taken by
the Board of Governors of the Federal Reserve System (September 11, 1999) and
the Office of Thrift Supervision (October 26, 1999) could be adopted when
applying the solvency rule for German banks.
Yours very truly,
/s/ Conert
Conert
[De Nederlandsche Bank Letterhead]
P.O. Box 98
1000 AB Amsterdam
23 December 1999
USA Group Secondary Market Services
Ms. Cheryl Watson
PO Box 7039
Indianapolis, IN 46207-7039
United States
Re: Capital treatment of U.S. Guaranteed Student Loan-Backed Securities
Dear Ms. Watson,
With reference to the letter dated November 16, 1999, we inform you as follows.
In principle, the risk weighting of an asset-backed securities program is
assessed by De Nederlandsche Bank only upon request by Dutch credit
institutions, subject to banking supervision by De Nederlandsche Bank, which
have the intention to invest in the bonds involved.
In general, bonds may attract the risk weighting of the underlying assets
if, at least, a number of conditions are met. We enclose these conditions for
your information. Based on a preliminary assessment of the information you
provided us with, we are inclined to assign a 20% risk weighting to the 'senior
student loan-backed securities' under the Federal Family Education Loan Program
(FFELP), in conformity with the US regulatory bodies Fed and OTS. We would like
to stress, however, that this is a preliminary assessment. A definitive
assignment of a risk weighting will take place only upon request by a Dutch
credit institution.
If you should have any further questions, please do not hesitate to contact
our Mr. Bas Rooijmans (telephone (31) 20 524 1937) or Mr. Eric Elvers (telephone
(31) 20 524 3573).
Yours faithfully,
De Nederlandsche Bank NV
/s/ A.A. van 't Spijker
Drs. A.A. van 't Spijker
Deputy Departmental Director
Enc.: Interpretation of prudential directives - Asset-backed securities
(Tz-Sbv/1999/06866/elv)
<PAGE>
[Enclosure]
Subject: Interpretation of prudential directives - Asset-backed securities
Asset-backed securities
Asset-backed securities are securities issued for the purpose of financing an
asset portfolio. The asset portfolio serves as collateral for the investors. The
asset-backed securities are weighted in conformity with the weighting of the
underlying assets, if the Bank is of the opinion that, with regard to risk, the
securities are equivalent to the underlying assets. Such arrangements must be
submitted to the Bank in advance for approval.
For the Bank's approval of a weighting in conformity with the weighting of the
underlying assets, at least the following conditions must be met:
1. the securities are fully and directly covered by a homogeneous asset
portfolio;
2. the asset portfolio must be of good quality at the time of issue of the
securities concerned. That is to say that no assets of inferior quality may be
transferred to the SPV as collateral.
3. the investors have direct or indirect rights to the underlying assets, at
least proportionate to their share in the assets;
4. the rights mentioned under 3 may not be of a subordinated nature.
5. the investors are not exposed to risk ensuing from mismatches in maturity,
interest type or currency between the securities and the related assets;
6. the funds, earmarked for the investors but not yet disbursed, do not carry a
material reinvestment risk.
If the aforementioned conditions are not met, the asset-backed securities must
be included in the calculation of the solvency requirement with a 100% weighting
factor.
The pronouncement of 17 January 1996 on 'Repackaging of (central government)
bonds' is hereby revoked.
