FFEL Loan Participation Purchase Program

1. MASTER PARTICIPATION AGREEMENT JULY 22, 2008 FFEL Loan Participation Purchase Program

2. Presenters • Jeff Baker Federal Student Aid U.S. Department of Education • Dennis Cariello Office of the General Counsel U.S. Department of Education

3. Loan Participation Purchase Program Introduction Jeff Baker Federal Student Aid U.S. Department of Education

4. Logistics • Title: Loan Participation Purchase Program • Master Participation Agreement • Date: July 22, 2008 • To Participate You Must – • Logon at URL provided in registration confirmation email; and • Dial in to 1-888-324-6476 Confirmation number:  MGERHARD • Additional information on the Loan Purchase Programs at: www.federalstudentaid.ed.gov/ffelp

5. Webinar Objectives Target Audience: FFEL lenders/holders, secondary markets, servicers, and guaranty agencies. Purpose: To provide an overview of the terms and conditions of the Master Participation Agreement for the Loan Participation Purchase Program. Limitations: Will not cover the Loan Purchase Commitment Program and will not include details on process flows, data elements, cash flows, reconciliations, and compliance. This information will be provided in subsequent webinars.

6. Problem & Goals Problem: Lack of liquidity in financial markets impacting ability of FFEL Program lenders and secondary markets to find cost effective financing. Goals: Ensure that eligible students and parents receive federal student loans for the 2008-2009 academic year. Support the FFEL Program as a successful private/public partnership. Ensure no net cost to the government.

7. Legal Authorities Ensuring Continuing Access to Student Loans Act of 2008 (P.L. 110-227) H.R. 5715 Signed by the President on May 7, 2008 Federal Register Notices Required by statute Draft Posted to IFAP on June 24, 2008 Official Publication July 1, 2008 Corrections Notice Published July 17, 2008

8. Response Two Loan Purchase Programs – Loan Purchase Commitment Program (the “Put” Program); and Loan Participation Purchase Program. The law does not authorize the Department to make advances or to otherwise “lend” money to FFEL lenders.

9. Loan Participation Purchase Program ED provides liquidity to lenders by purchasing “participation interests” in eligible FFEL loans that the lender has placed in a “participation” facility controlled by a Custodian. Lender redeems loans from the facility by repaying ED plus yield (CP + 50bp) with cash or by completing sale of loans to ED, using the Put Program.

10. Loan Participation Purchase Program Players: Sponsor: Eligible FFEL lender or holder of eligible FFEL loans – may be secondary market or beneficial holder under an ELT agreement. Custodian: Is granted legal title to the eligible loans, sells participation interest on behalf of Sponsor. Must be an eligible lender Must be a National or State-chartered bank. Must not be affiliated with the Sponsor Participant: U.S. Department of Education (ED)

11. Loan Participation Purchase Program Master Participation Agreement (Posted July 10, 2008) Dennis Cariello Office of the General Counsel U.S. Department of Education

12. Section 1: Terms • If ED receives the NOI by July 31, 2008, interests in loans first disbursed on or after May 1, 2008 may be included. Notice of Intent to Participate Lender may not sell a participation interest in a loan that was first disbursed before the date ED received the lender’s ‘notice of intent to participate’ (NOI), except –

13. Section 1: Terms Notice of Intent to Participate Originating lender’s NOI ED receipt date determines a loan’s eligibility, not a subsequent holder’s NOI ED receipt date. Submission of NOI does not commit lender/holder to participate. It only establishes the option to participate and the eligibility of loans.

14. Section 1: Terms Notice of Intent to Participate Lender intends to sell Participation Interests to ED of at least $50 million over the course of the program; A not-for-profit lender/holder that arranges aggregation of its loans with another holder must ensure that its loans are included only with other loans that qualify for SAP at the eligible not-for-profit holder rate.

15. Section 1: Terms • By July 1, 2009, ED receives the lender’s ‘Notice of Intent to Participate’, • By July 1, 2009, the Sponsor, Custodian, and ED execute the Agreement through the “Adoption Agreement”, and • By August 1, 2009, the Sponsor exercises its option to sell Participation Interests through the “Participation Purchase Request; except – ED will buy Participation Interests in Eligible Loans if –

16. Section 1: Terms • Sponsor may, for a loan in which ED has previously purchased a participation interest, sell additional interests after August 1, 2009 only if – • Sponsor made the first disbursement on the loan by July 1, 2009; • The final disbursement on the loan is made by September 30, 2009; • Sponsor notifies ED that it intends to redeem the Participation Interest in the fully disbursed loan by selling the loan to ED • Participation Interest sale within 30 days of the final disbursement.

17. Section 2: Commitment to Lend Lender must intend to continue to participate in the FFEL Program and intend to make or acquire FFEL loans with funds from private sources when they become reasonably available (statutory requirement).

18. Section 3: Definitions • Eligible Borrower Benefits – • An unconditional upfront borrower fee reduction(s) that is accrued and paid or made prior to the date on which a Participation Interest is sold to ED; and • Reductions in interest rates of not more than 0.25 percent, contingent on the borrower’s use of automatic payment process. • Eligible Lender – an entity that meets requirements of HEA §435(d), including an ELT.

19. Section 3: Definitions • Eligible Loan – • Only FFEL subsidized and unsubsidized Stafford Loans and Federal PLUS Loans (parent and grad/student). Sub and unsub must be included together. • For payment period that includes or begins on or after July 1, 2008. • First disbursement on or after May 1, 2008 and no later than July 1, 2009. • Will be fully disbursed no later than September 30, 2009.

20. Section 3: Definitions • Eligible Loan – • Servicing agreement must be able to be terminated with no more than 30 days notice. • Not eligible if previously included in participation. • Not eligible if Lender of Last Resort Loan

21. Section 3: Definitions • Commercial Paper Rate, plus • Fifty basis points, less • Any amount previously paid amount on the loan. Purchase Date – • Date Custodian receives ED’s payment for the Class A Participation Interest. Redemption Payment – • ED’s purchase price of its loan’s participation interest in the loan, plus Participant’s Yield of -

22. Section 4: Delivery, Purchase, Sale • To sell ED Participation Interests, the Sponsor delivers to ED – • A participation purchase request executed by the Sponsor and the Custodian; • A schedule that lists the loans in which Sponsor offers a Participation Interest. • ED signs and returns a copy to the Sponsor. • Any request delivered to ED is irrevocable and binds the Sponsor to transfer the listed loans to the Custodian.

23. Section 4: Delivery, Purchase, Sale • Sponsor transfers title & beneficial interest in the loans to the Custodian in exchange for Participation Interests in the loans. • Sponsor transfers all loan documents to the Custodian (or its delegee) which will hold the documents in secure place in trust for ED. • Delegee could be the Sponsor, a servicer, or another eligible lender. • The Sponsor may sell Participation Interests to ED no more frequently than weekly.

24. Section 4: Delivery, Purchase, Sale • On Purchase Date – • ED purchases Participation Interests from the Sponsor by remitting to the Custodian, which in turn remits to the Sponsor, funds equal to the principal balance of the loans in which ED acquires Participation Interests. • Upon receipt of the funds the Sponsor causes the Custodian to give ED Participation Interests in the loans. • A loan is then subject to ED’s Participation Interest until the Sponsor redeems the loan from ED’s Interest.

25. Section 4: Delivery, Purchase, Sale • On Purchase Date, upon transfer of a loan’s title from Sponsor to Custodian – • Obligations and responsibilities for payment or receipt of SAP, interest subsidies, and fee remission moves from the Sponsor to the Custodian. • Two Form 799 submissions for the quarter will need to be submitted, one for Sponsor and one for Custodian.

26. Section 4: Delivery, Purchase, Sale • If a purchased loan is the only loan evidenced by a promissory note, that note is held in the name of the Custodian. • If the purchased loan is one of several under a single MPN, Custodian records that -- • The Custodian is the legal owner of the purchased loan, and • The Sponsor owns those other loans in which Participation Interests have not been sold.

27. Section 5: Certificates and Schedules • Custodian delivers, by the purchase date – • To ED, a Class A Participation Certificate (Exhibit C); • To the Sponsor, a Class B Participation Certificate (Exhibit D).

28. Section 5: Certificates and Schedules • Custodian provides with each Participation Certificate – • A schedule that lists each loan for which a Participation Interest is evidenced by the Certificate, including the current principal balance and accrued interest on each loan. • A Custodial Certification that the loans have been received by the Custodian and meet all of the requirements.

29. Section 5: Certificates and Schedules • The amount of the aggregate purchase price ED paid for its Participation Interests, • Less the amount of any redemption payments or other payments that ED received and credited against ED’s Participation Interests amount. ED’s Participation Interests equals –

30. Section 5: Certificates and Schedules • All funds received on purchased loans are remitted to and held by the Custodian. These payments include – • Subsidy/SAP Payments • Borrower Payments • Cancellations, and • Redemption Payments

31. Section 5: Certificates and Schedules • Custodian uses such funds on a monthly basis, as follows – • First to ED and then to the Sponsor. • Payments to ED are credited first to the Participant’s Yield then owed on ED’s aggregate Participation Interests. • If full amount of Participant’s Yield due is zero, remainder is allocated to reduce ED’s aggregate Participation Interests. • Any remainder (unlikely until final distribution at the end of Participation) is paid to the Sponsor.

32. Section 6: Security Interest Sponsor grants the Custodian, and the Custodian assigns to ED a first priority security interest in – Purchased Loans, Collections on Purchased Loans, Monies in accounts established under the Agreement; • Proceeds thereon, and • All tangible and intangible rights and security with respect.

33. Section 7: Subsequent Disbursements • Custodian, as owner of the loan, then arranges subsequent disbursements on the loan. • Sponsor provides the funds needed to make subsequent disbursements. • ED increases its Participation Interest in the loan by paying the Custodian, which remits to Sponsor, the amount of the subsequent disbursement(s). • No subsequent disbursement if Sponsor defaults to financing source with claim on loan. Sponsor can sell ED a Participation Interest in a partially-disbursed loan.

34. Section 8: Reporting; Due Diligence Each month the Sponsor provides ED: A twelve month rolling good-faith forecast that – • Estimates the number and principal amount of loans in which the Sponsor believes it will sell Participation Interests, and • The amount the Sponsor expects to redeem in each month.

35. Section 8: Reporting; Due Diligence Each month the Sponsor provides ED: A listing of all principal and interest payments received on loans subject to ED’s Participation Interest; Information on such loans by school, delinquency, and other features as requested by ED; For each servicer, any audit or other annual compliance/operational audits related to the servicing of such loans; Other information requested by ED.

36. Section 8: Reporting; Due Diligence Within 60 days of the execution of the agreement, and on any subsequent dates that ED specifies, the Sponsor or its servicer must provide ED with – A statement of compliance with the Agreement, and An “agreed-upon procedures” letter reporting the results of the review of a sample of purchased loans, conducted by an independent public accountant.

37. Section 8: Reporting; Due Diligence On each monthly reporting date, Custodian provides ED a settlement report listing -- Activity for purchased loans and The amount paid to ED on its Participation Interest and Participant’s Yield. Within 90 days of termination of ED’s Interest, the Custodian provides an audit conducted by an independent auditor.

38. Section 9: Conditions Precedent On or prior to initial purchase, Sponsor delivers to ED -- The Adoption Agreement; Its Officer’s Certificate (Exhibit E); Its Opinion of Counsel (Exhibit F); Certified copies of all agreements to aggregate, transfer or cause to transfer legal title to loans.

39. Section 9: Conditions Precedent On or prior to initial purchase, the Sponsor delivers to ED -- Reports of searches for tax & UCC liens & judgments; Certified copies of related servicing agreements; Participation Certificates; Other documents as requested.

40. Section 9: Conditions Precedent On or prior to each purchase date -- The Sponsor delivers to ED -- A participation purchase request and any assistance needed to determine whether all required documentation is present and is correct, If applicable, a security release certification (Exhibit G); A list of lockboxes and copies of servicing instructions;

41. Section 9: Conditions Precedent On or prior to each purchase date -- The Sponsor delivers to ED -- Other documents and information requested by ED. If the Sponsor is an ELT, add’l documents of authority to transfer loans. The Sponsor delivers loan documents to the Custodian. The Custodian delivers to ED -- Loan schedule & custodial certification; Exception report.

42. Section 10: Reps & Warranties • Sponsor & ELT, as applicable warrant that -- • Sponsor has internal controls in place to verify the existence and accuracy of legal documents, credit documents, and underwriting decisions. • Further Loan Level Representations by Sponsor and ELT -- • If E-signed, note executed in compliance with applicable law; • Including ED’s “Standards” (Applicability Provision) • Any security interest to be released upon ED’s purchase of Participation Interest in the Loan.

43. Section 10: Reps and Warranties • Custodian warrants that it -- • Is a National or State-chartered bank, duly organized and in good standing under laws of its State. • Is an eligible lender under HEA §435(d)(1)(A); • Has a long-term senior unsecured debt rating of at least investment grade by S&P, Moody’s or Fitch; • Has a combined capital and surplus of at least $50 million; • Is administratively capable of performing the functions of a Custodian; • Is not affiliated with the Sponsor or ELT.

44. Section 11: Collections; Distributions Custodian will set up Collection Account in which all payments & proceeds received on purchased loans will be deposited. Sponsor will cause servicers to deposit into the Custodian’s Collection Account any collections on purchased loans within two business days of receipt. Custodian grants ED a first priority security interest in the Collection Account.

45. Section 11: Collections; Distributions • At least once a month, and at the termination of the Agreement, the Custodian will distribute funds on deposit in the Collection Account as follows: • First, to ED to pay aggregate outstanding Participant’s Yield then due, • Then, to ED to reduce the aggregate outstanding principal balance of ED’s Participation Interest until such balance is zero; • Last, to the Sponsor, any remaining amounts.

46. Section 12: Servicing • Each purchased loan must be serviced by an eligible servicer at the direction of Custodian. • Sponsor is responsible for servicing costs. • Servicing agreement must -- • Acknowledge that ED is an intended third-party beneficiary of the Servicing Agreement; • Provide that all collections are to be deposited within two business days; • Provide that if Sponsor Puts loans to ED, ED may, on 30 days’ notice, terminate servicing agreement and have loans transferred without payment of a deconversion charge.

47. Section 13: Servicing Agreements Custodian must ensure that the Sponsor takes steps to enforce the terms and conditions of Servicing Agreements including making prompt payment of all amounts due. Custodian must notify ED if it becomes aware of any failure of the Servicer to perform its obligations and may not waive any Servicer default without written approval from ED. Custodian must not consent or agree to any modification to the Servicing Agreement that materially adversely impacts ED’s rights or security.

48. Section 13: Servicing Agreements • By March 30, 2009 and again on September 30, 2009, the Custodian must obtain a certification from the Servicer that: • A review was conducted of the Servicer’s activities during the preceding calendar year and its performance under the Servicing Agreement; • To the best of the official’s knowledge, the review showed that the Servicer -- • Had fulfilled its obligations under the Servicing Agreement; or • Had defaulted in specific obligations, describing the nature & stature of each default.

49. Section 14: Liabilities and Indemnities • Sponsor is liable only to the extent of its obligations under Agreement and those delegated to it by the Custodian. • Sponsor will indemnify ED against liability for claims from -- • Willful misfeasance, bad faith or negligence by Sponsor, ELT, or Servicer in performance of their respective duties; or • Sponsor’s breach of representations or obligations under the Agreement or the Servicing Agreement. • Any other claim arising from the Agreement.

50. Section 14: Liabilities and Indemnities • Sponsor will indemnify the Custodian, its personnel and agents against liabilities arising from Agreement or ownership of legal title to loans.