<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-11855
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION. THIS *
* PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1996
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 16, 1996)
$300,000,000 (APPROXIMATE)
[FIRSTPLUS LOGO]
FIRSTPLUS INVESTMENT CORPORATION,
(SELLER)
FIRSTPLUS FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
FIRSTPLUS HOME LOAN OWNER TRUST 1996-3
The FIRSTPLUS HOME LOAN OWNER TRUST 1996-3 (the "Trust") will be established
pursuant to a Trust Agreement, to be dated as of September 1, 1996 (the "Trust
Agreement"), between FIRSTPLUS INVESTMENT CORPORATION (the "Seller") and
Wilmington Trust Company, as owner trustee (the "Owner Trustee"). The Trust will
issue Class A-1 Asset Backed Notes (the "Class A-1 Notes"), Class A-2 Asset
Backed Notes (the "Class A-2 Notes"), Class A-3 Asset Backed Notes (the "Class
A-3 Notes"), Class A-4 Asset Backed Notes (the "Class A-4 Notes"), Class A-5
Asset Backed Notes (the "Class A-5 Notes"), Class A-6 Asset Backed Notes (the
"Class A-6 Notes") and Class A-7 Asset Backed Notes (the "Class A-7 Notes" and,
together with the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and
Class A-6 Notes, the "Notes") pursuant to an Indenture to be dated as of
September 1, 1996 (the "Indenture"), between the Trust and First Bank National
Association, a national banking association, as Indenture Trustee (the
"Indenture Trustee"). The Trust will also issue Asset Backed Certificates (the
"Certificates" and, together with the Notes, the "Offered Securities") pursuant
to the Trust Agreement.
It is a condition to the issuance of each Class of Notes that they each be
rated "AAA" by Standard & Poor's Ratings Group, a division of The McGraw Hill
Companies, Inc. ("Standard & Poor's") and "Aaa" by Moody's Investors Service,
Inc. ("Moody's" and, together with Standard & Poor's, the "Rating Agencies"). It
is a condition to the issuance of the Certificates that they be rated "AAA" by
Standard & Poor's and "Aaa" by Moody's. The Notes and the Certificates will be
unconditionally and irrevocably guaranteed to the extent described herein
pursuant to the terms of a financial guaranty insurance policy (the "Guaranty
Policy") issued by MBIA Insurance Corporation (the "Securities Insurer").
(LOGO)
BEFORE PURCHASING ANY OFFERED SECURITIES, PROSPECTIVE INVESTORS SHOULD
REVIEW THE INFORMATION SET FORTH HEREIN AND IN THE PROSPECTUS, SEE "RISK
FACTORS" AND "PREPAYMENT AND YIELD CONSIDERATIONS" HEREIN, AND SEE "RISK
FACTORS" IN THE PROSPECTUS.
(continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
==========================================================================================================================
ORIGINAL INTEREST PRICE TO UNDERWRITING PROCEEDS TO
PRINCIPAL BALANCE RATE PUBLIC(1) DISCOUNT DEPOSITOR(2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A-1 Notes............... $ % % % %
- --------------------------------------------------------------------------------------------------------------------------
Class A-2 Notes............... $ % % % %
- --------------------------------------------------------------------------------------------------------------------------
Class A-3 Notes............... $ % % % %
- --------------------------------------------------------------------------------------------------------------------------
Class A-4 Notes............... $ % % % %
- --------------------------------------------------------------------------------------------------------------------------
Class A-5 Notes............... $ % % % %
- --------------------------------------------------------------------------------------------------------------------------
Class A-6 Notes............... $ % % % %
- --------------------------------------------------------------------------------------------------------------------------
Class A-7 Notes............... $ % % % %
- --------------------------------------------------------------------------------------------------------------------------
Certificates.................. $ % % % %
- --------------------------------------------------------------------------------------------------------------------------
Total......................... $ $ $ $
==========================================================================================================================
</TABLE>
(1) Plus accrued interest, if any, at the applicable rate from September 1,
1996.
(2) Before deducting expenses, estimated to be $ .
The Offered Securities are offered by the Underwriters when, as and if
issued and accepted by the Underwriters and subject to their right to reject
orders in whole or in part. It is expected that delivery of the Offered
Securities will be made in book-entry form only through the Same Day Funds
Settlement System of The Depository Trust Company on or about September , 1996
against payment therefor in immediately available funds.
BANC ONE CAPITAL CORPORATION BEAR, STEARNS & CO. INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS SEPTEMBER , 1996.
<PAGE> 2
(Continued from preceding page)
For capitalized terms used but not defined herein, see the "Index of Terms"
included as Appendix A to both this Prospectus Supplement and the Prospectus.
The assets of the Trust will primarily include a pool of home loans (the
"Home Loan Pool") consisting of (1) secured loans ("Secured Loans"), which will
be secured by either (i) mortgages, deeds of trust or other similar security
instruments (the "Mortgages") or (ii) security instruments creating a lien on
personal property such as home appliances or furnishings; and (2) unsecured
loans ("Unsecured Loans" and, together with the Secured Loans, the "Home
Loans"), which will not be secured by any interest in real or personal property.
Substantially all of the Mortgages for the Secured Loans will be junior (i.e.,
second, third, etc.) in priority to one or more senior liens on the related
mortgaged properties ("Mortgaged Properties"), which will consist primarily of
owner occupied single family residences. All of the Home Loans will be
conventional loans (i.e., not insured or guaranteed by a governmental agency)
("Conventional Loans"). The Home Loans will consist of loans for which the
related proceeds were used to finance (i) property improvements, (ii) the
acquisition of personal property such as home appliances or furnishings, (iii)
debt consolidation, or (iv) in combination, property improvements, debt
consolidation and for other purposes, which loans are marketed by the Transferor
under the name "BusterPlus(TM) Loans".
Distributions on the Offered Securities will be made to the holders of the
Offered Securities on the 20th day of each month, or, if such day is not a
Business Day, the next succeeding Business Day (each, a "Distribution Date"),
beginning in October 1996. The Notes will be secured by the assets of the Trust
pursuant to the Indenture. Interest on all Classes of Notes will accrue at the
fixed per annum interest rates specified on the cover hereof. On each
Distribution Date, the Noteholders will be entitled to receive, from and to the
extent that funds are available therefor in the Note Distribution Account,
distributions with respect to interest and principal calculated as described
herein. See "Description of the Offered Securities -- Distributions on the
Notes" herein. The Certificates will represent undivided ownership interests in
the Trust. Interest on the Certificates will accrue at the fixed per annum
interest rate specified on the cover hereof. On each Distribution Date, the
Certificateholders will be entitled to receive, from and to the extent that
funds are available therefor in the Certificate Distribution Account,
distributions with respect to interest and principal calculated as described
herein. See "Description of the Offered Securities -- Distributions on the
Certificates" herein. Distributions of principal and interest on the
Certificates will be subordinated in priority to payments due on the Notes as
described herein.
The yield to maturity on the Offered Securities will depend on (i) the rate
and timing of principal reductions of the outstanding principal balances of the
Offered Securities from the receipt of payments of principal and interest on and
other principal reductions of the Home Loans (including scheduled payments,
prepayments, delinquencies, liquidations, recognition of defaults and allocation
of losses by the Servicer, and substitutions and repurchases by the Transferor
and the Seller), (ii) any principal reductions of the outstanding principal
balances of the Offered Securities from amounts remaining on deposit in the Pre-
Funding Account after the termination of the Funding Period, and (iii) the price
paid for the Offered Securities by the holders thereof. Because a substantial
portion of the Home Loans will consist of Secured Loans that are secured by
junior liens, the prepayment experience of the Home Loan Pool may be
significantly different from that of a pool of conventional first lien
residential mortgage loans with equivalent interest rates and maturities or
unsecured consumer loans with equivalent interest rates and maturities.
Prospective investors should carefully consider the associated risks. See "Risk
Factors" and "Prepayment and Yield Considerations" herein.
PROCEEDS OF THE ASSETS IN THE TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED SECURITIES. THE NOTES REPRESENT OBLIGATIONS OF, AND THE CERTIFICATES
REPRESENT UNDIVIDED OWNERSHIP INTERESTS IN, THE TRUST ONLY AND DO NOT REPRESENT
OBLIGATIONS OF OR INTERESTS IN THE SELLER, THE TRANSFEROR, THE SERVICER, THE
INDENTURE TRUSTEE, THE OWNER TRUSTEE, THE SECURITIES INSURER OR ANY OF THEIR
RESPECTIVE AFFILIATES. NONE OF THE NOTES, THE CERTIFICATES OR THE HOME LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE
SELLER OR THE TRANSFEROR OR ANY OF THEIR RESPECTIVE AFFILIATES OR ANY OTHER
PERSON, EXCEPT THAT THE NOTES AND THE CERTIFICATES WILL BE INSURED BY THE
SECURITIES INSURER UNDER THE GUARANTY POLICY.
------------------------------
ii
<PAGE> 3
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE OFFERED SECURITIES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS
PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE OFFERED SECURITIES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE OFFERED
SECURITIES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------------
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission"), on behalf of the Trust, a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended. This Prospectus
Supplement and the related Prospectus, which form a part of the Registration
Statement, omit certain information contained in such Registration Statement in
accordance with the rules and regulations of the Commission. The Registration
Statement can be inspected and copied at the Public Reference Room of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, Suite
1300, New York, New York 10048. Copies of such information can be obtained at
prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a web site on the Internet that contains reports, proxy and
information statements and other information regarding the Seller. The address
of such web site is http://www.sec.gov.
REPORTS TO SECURITYHOLDERS
Unaudited monthly and annual reports concerning the Notes and Certificates
will be sent by the Indenture Trustee and Owner Trustee, respectively, to the
Beneficial Owners of the Notes and Certificates, as applicable. So long as any
Note or Certificate is in book-entry form, such reports will be sent to Cede &
Co., as the nominee of DTC and as the registered owner of such Notes pursuant to
the Indenture or such Certificates pursuant to the Trust Agreement,
respectively. DTC will supply such reports to Security Owners of any such Notes
or Certificates in accordance with its procedures.
iii
<PAGE> 4
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the accompanying
Prospectus. Certain capitalized terms used herein may be defined elsewhere in
this Prospectus Supplement or in the Prospectus. See "Index of Terms" included
as an Appendix A to both this Prospectus Supplement and the Prospectus.
Capitalized terms that are used but not defined herein, will have the meanings
assigned to such terms in the Prospectus.
Issuer..................... FIRSTPLUS Home Loan Owner Trust 1996-3 (the "Trust"
or the "Issuer"), a Delaware business trust
established pursuant to a trust agreement (the
"Trust Agreement") dated as of September 1, 1996,
between the Seller and the Owner Trustee.
Seller..................... FIRSTPLUS INVESTMENT CORPORATION (the "Seller"), a
Texas corporation, in its capacity as Seller of the
Home Loans to the Trust.
Servicer and Transferor.... FIRSTPLUS FINANCIAL, INC. ("FFI" or the "Servicer"
or the "Transferor"), a Texas corporation, in its
capacity as Servicer and Transferor of the Home
Loans. FFI is a wholly owned subsidiary of RAC
Financial Group, Inc. ("RAC"), Nevada corporation.
Indenture Trustee.......... First Bank National Association, a national banking
association, as trustee under the Indenture (the
"Indenture Trustee").
Owner Trustee.............. Wilmington Trust Company, as owner trustee under
the Trust Agreement (the "Owner Trustee").
Custodian.................. Bank One, Texas, N.A., as the custodian (the
"Custodian") under the Custodial Agreement dated as
of September 1, 1996 by and between the Owner
Trustee, the Indenture Trustee, and the Custodian.
Closing Date............... On or about September 26, 1996.
Cut-Off Date............... August 31, 1996 with respect to the Initial Home
Loans and, with respect to the Subsequent Home
Loans, the date specified as the cut-off date in
the applicable Subsequent Transfer Agreement (each,
a "Cut-Off Date").
Distribution Date.......... The 20th day of each month or, if such day is not a
business day, then the next succeeding business
day, commencing in October 1996 (each, a
"Distribution Date").
Due Period................. With respect to a Distribution Date, the calendar
month immediately preceding such Distribution Date
(each, a "Due Period").
Determination Date......... The 5th business day prior to each Distribution
Date (each, a "Determination Date").
Record Date................ The last business day of the month immediately
preceding the month in which each Distribution Date
occurs (each, a "Record Date").
The Notes.................. The Trust will issue the Notes pursuant to an
Indenture to be dated as of September 1, 1996 (as
amended and supplemented from time to time, the
"Indenture"), between the Issuer and the Indenture
Trustee, as follows: (1) Class A-1 Asset Backed
Notes (the "Class A-1 Notes") in the aggregate
principal amount of $ ; (2) Class A-2
Asset Backed Notes (the "Class A-2 Notes") in the
aggregate principal amount of $ ; (3)
Class A-3 Asset Backed Notes (the "Class A-3
Notes") in the aggregate principal amount of
$ ;
S-1
<PAGE> 5
(4) Class A-4 Asset Backed Notes (the "Class A-4
Notes") in the aggregate principal amount of
$ ; (5) Class A-5 Asset Backed Notes (the
"Class A-5 Notes") in the aggregate principal
amount of $ ; (6) Class A-6 Asset Backed
Notes (the "Class A-6 Notes") in the aggregate
principal amount of $ ; and (7) Class A-7
Asset Backed Notes (the "Class A-7 Notes") in the
aggregate principal amount of $ . The
foregoing initial aggregate principal balances of
each of the respective Classes of Notes being the
"Original Class Principal Balance" for each such
Class. The Notes will be secured by the assets of
the Trust pursuant to the Indenture. The Notes will
be senior in right of payment to the Certificates
and the Residual Interest.
Interest................. The Noteholders' Monthly Interest Distributable
Amount for each Class of Notes on each Distribution
Date will be equal to thirty days' accrued interest
at the respective Interest Rate for such Class on
the outstanding Class Principal Balance of such
Class immediately preceding such Distribution Date.
Interest on the Notes will accrue on the basis of a
360-day year consisting of twelve 30-day months.
See "Description of the Offered
Securities -- Distributions on the Notes" herein.
Interest will accrue on each Class of the Notes
during each Due Period at the following per annum
interest rates: (i) Class A-1 Notes, % (the
"Class A-1 Rate"); (ii) Class A-2 Notes, % (the
"Class A-2 Rate"); (iii) Class A-3 Notes, %
(the "Class A-3 Rate"); (iv) Class A-4 Notes, %
(the "Class A-4 Rate"); (v) Class A-5 Notes, %
(the "Class A-5 Rate"); (vi) Class A-6 Notes, %
(the "Class A-6 Rate"); and (vii) Class A-7 Notes,
% (the "Class A-7 Rate" and, together with the
Class A-1 Rate, the Class A-2 Rate, the Class A-3
Rate, the Class A-4 Rate, the Class A-5 Rate and
the Class A-6 Rate, the "Interest Rates").
Principal................ On each Distribution Date (except as described
herein), the Regular Principal Distribution Amount
for such Distribution Date will be distributed to
each Class of Notes in ascending order of their
numerical designations, such that no amounts will
be distributed to a Class of Notes until the Class
Principal Balance of each Class having a lower
numerical designation has been reduced to zero. In
addition, if on any Distribution Date the
Overcollateralization Amount is less than the
Required Overcollateralization Amount, the Notes
will be entitled to receive distributions of Excess
Spread, in reduction of their respective Class
Principal Balances, in sequential order as
described above. On each Distribution Date, "Excess
Spread" will equal the excess, if any, of the
Available Collection Amount over the sum of (a) the
Guaranty Insurance Premium, the Indenture Trustee
Fee, the Owner Trustee Fee and the Custodian Fee
(collectively, the "Trust Fees and Expenses"), (b)
the Noteholders' Interest Distributable Amount, (c)
the Regular Principal Distribution Amount, (d) the
Certificateholders' Interest Distributable Amount,
(e) any Securities Insurer Reimbursement Amount,
(f) the Reserve Fund Restoration Amount and (g) the
Servicing Advance Reimbursement Amount. Except as
otherwise described herein, additional amounts from
funds remaining in the Pre-Funding Account upon
termination of the Funding Period may also be
distributed to reduce, on a pro rata basis, the
outstanding Class Principal Balances of
S-2
<PAGE> 6
each Class of Notes and the Certificate Principal
Balance of the Certificates. As described herein,
on certain Distribution Dates on which the
Overcollateralization Amount exceeds the Required
Overcollateralization Amount, Excess Spread will be
distributed to the holders of the Residual
Interest. In addition, if an Overcollateralization
Stepdown Date occurs and the Excess
Overcollateralization Amount is greater than zero,
amounts in respect of the Regular Principal
Distribution Amount otherwise distributable on the
Notes will instead be distributable to the holders
of the Residual Interest. See "Description of the
Offered Securities -- Distributions on the Notes"
herein.
Final Scheduled
Distribution Dates..... The outstanding principal amount of each Class of
Notes, to the extent not previously paid, will be
payable, in full, on the following dates: (i)
, 20 for the Class A-1 Notes (the "Class
A-1 Final Scheduled Distribution Date"); (ii)
, 20 for the Class A-2 Notes (the "Class
A-2 Final Scheduled Distribution Date"); (iii)
, 20 for the Class A-3 Notes (the "Class
A-3 Final Scheduled Distribution Date"); (iv)
, 20 for the Class A-4 Notes (the "Class
A-4 Final Scheduled Distribution Date"); (v)
, 20 for the Class A-5 Notes (the "Class
A-5 Final Scheduled Distribution Date"); (vi)
, 20 for the Class A-6 Notes (the "Class
A-6 Final Scheduled Distribution Date"); and (vii)
, 20 for the Class A-7 Notes (the "Class
A-7 Final Scheduled Distribution Date").
The Certificates........... The Trust will issue Asset Backed Certificates (the
"Certificates" and, together with the Notes, the
"Offered Securities") with an aggregate initial
certificate principal balance ("Original
Certificate Principal Balance") of $ . On
the Closing Date, the Original Certificate
Principal Balance of the Certificates will equal
the excess of the Assumed Pool Principal Balance
over the sum of the Original Class Principal
Balance of all Classes of the Notes as of the
Closing Date. The Certificates will represent
undivided ownership interests in the Trust and will
be issued pursuant to the Trust Agreement. The
Certificates will be subordinate in right of
payment to the Notes to the extent described herein
but will be senior in right of payment to the
Residual Interest. On the Closing Date, an
affiliate of the Seller (the "Affiliated Holder")
will purchase approximately 1% of the Original
Certificate Principal Balance of the Certificates.
Interest................. The Certificateholders' Monthly Interest
Distributable Amount that the Certificateholders
will be entitled to receive on each Distribution
Date will be equal to thirty days' accrued interest
at the Pass Through Rate on the outstanding
Certificate Principal Balance of the Certificates
immediately preceding such Distribution Date.
Interest in respect of the Certificates will accrue
on the basis of a 360-day year consisting of twelve
30-day months. See "Description of the Offered
Securities -- Distributions on the Certificates"
herein.
Interest on the Certificates will accrue during
each Due Period at a rate equal to % per annum
(the "Pass Through Rate").
Principal................ On each Distribution Date after the Notes have been
paid in full (except as described herein), the
Regular Principal Distribution Amount for
S-3
<PAGE> 7
such Distribution Date will be distributable to the
Certificateholders. If the Overcollateralization
Amount is less than the Required
Overcollateralization Amount, the
Certificateholders will be entitled to receive
distributions of Excess Spread in reduction of the
Certificate Principal Balance after the Notes have
been paid in full. Except as otherwise described
herein, additional amounts from funds remaining in
the Pre-Funding Account upon termination of the
Funding Period may also be distributed to reduce,
on a pro rata basis, the outstanding Class
Principal Balances of each Class of Notes and the
Certificate Principal Balance of the Certificates.
As described herein, on certain Distribution Dates
on which the Overcollateralization Amount exceeds
the Required Overcollateralization Amount, Excess
Spread will be distributed to the holders of the
Residual Interest. In addition, if an
Overcollateralization Stepdown Date occurs and the
Excess Overcollateralization Amount is greater than
zero, amounts in respect of the Regular Principal
Distribution Amount otherwise distributable on the
Certificates will instead be distributable to the
holders of the Residual Interest. See "Description
of the Offered Securities -- Distributions on the
Certificates" herein.
Final Scheduled
Distribution
Date................... The final scheduled distribution in respect of the
Certificates has been calculated to be made on
, 20 (the "Final Scheduled
Distribution Date").
Form and Registration of
the Offered Securities..... The Offered Securities will initially be issued
only in book-entry form. Persons acquiring
beneficial ownership interests in the Offered
Securities ("Security Owners") will hold such
Offered Securities through the book entry
facilities of The Depository Trust Company ("DTC").
Transfers within DTC will be in accordance with the
usual rules and operating procedures of the DTC. So
long as each Class of Offered Securities is in
book-entry form, each such Class of Offered
Securities will be evidenced by one or more
certificates registered in the name of the nominee
of DTC. The interests of such Security Owners will
be represented by book-entries on the records of
DTC and participating members thereof. No Security
Owner will be entitled to receive a definitive
certificate representing such person's interest,
except in the event that Definitive Securities are
issued under the limited circumstances described
herein. All references in this Prospectus
Supplement to any Class of Offered Securities
reflect the rights of the Security Owners of such
Class only as such rights may be exercised through
DTC and its participating members so long as such
Class of Offered Securities is held by DTC. See
"Risk Factors -- Book-Entry Registration" herein
and "Certain Information Regarding the
Securities -- Book-Entry Registration" in the
Prospectus. The Security Owners' interests in each
Class of Offered Securities will be held only in
minimum denominations of $100,000 and integral
multiples of $1,000 in excess thereof.
Assets of the Trust........ On the Closing Date, the Trust will purchase Home
Loans (the "Initial Home Loans") having an
aggregate principal balance of approximately
$215,006,133 (the "Initial Pool Principal Balance")
as of the August 31, 1996 Cut-Off Date from the
Seller pursuant to a Sale and Servicing Agreement
to be dated as of September 1, 1996 (as amended and
supplemented from time to time, the "Sale and
Servicing Agreement"),
S-4
<PAGE> 8
among the Trust, the Seller and the Servicer. In
addition, on the Closing Date, the Seller is
expected to deposit approximately $84,993,867 into
a pre-funding account (the "Pre-Funding Account")
for the purchase of additional Home Loans (the
"Subsequent Home Loans") during the Funding Period
(as defined herein). The sum of the aggregate
principal balance of the Initial Home Loans and the
amount expected to be deposited into the
Pre-Funding Account on the Closing Date equals
$300,000,000 (the "Assumed Pool Principal
Balance").
The assets of the Trust will primarily include a
pool of home loans (the "Home Loan Pool")
consisting of (1) secured loans ("Secured Loans"),
which will be secured by either (i) mortgages,
deeds of trust or other similar security
instruments (the "Mortgages") or (ii) security
instruments creating a lien on personal property
such as home appliances or furnishings; and (2)
unsecured loans ("Unsecured Loans" and, together
with the Secured Loans, the "Home Loans"), which
will not be secured by any interest in real or
personal property. The assets of the Trust will
also include (i) payments in respect of the Home
Loans of interest and principal received after the
applicable Cut-Off Date; (ii) amounts on deposit in
the Pre-Funding Account and the Capitalized
Interest Account (as each term is defined herein)
until the expiration of the Funding Period (as
defined herein), (iii) assets on deposit in the
Reserve Fund, (iv) amounts on deposit in the
Collection Account, Note Distribution Account and
Certificate Distribution Account; and (v) certain
other ancillary or incidental funds, rights and
properties related to the foregoing. See
"Description of the Trust -- General" herein. The
Trust will include the unpaid principal balance of
each Home Loan as of the related Cut-Off Date (the
"Cut-Off Date Principal Balance"). The "Principal
Balance" of a Home Loan on any day is equal to its
related Cut-Off Date Principal Balance, minus all
principal reductions credited against the Principal
Balance of such Home Loan since such Cut-Off Date,
including any net loan losses recorded by the
Servicer. With respect to any date, the "Pool
Principal Balance" will be equal to the aggregate
Principal Balances of all Home Loans as of such
date.
The Trust will also issue instruments evidencing
the "residual interest" in the assets of the Trust
(the "Residual Interest"), which are not being
offered hereby. The Residual Interest will be
subordinate in right of payment to the Notes and
the Certificates, and will not be guaranteed or
insured by the Guaranty Policy. In addition to the
purchase of 1% of the Original Certificate
Principal Balance of the Certificates, on the
Closing Date the Affiliated Holder will purchase
approximately 1% of the Residual Interest.
The Home Loans............. The Home Loans will include: (1) Secured Loans,
which will be secured by either (i) Mortgages or
(ii) security instruments creating a lien on
personal property; and (2) Unsecured Loans. All of
the Home Loans will be conventional loans (i.e.,
not insured or guaranteed by a governmental agency)
("Conventional Loans"). The Home Loans will consist
of loans, including in certain instances retail
installment sales contracts, for which the related
proceeds were used to finance (i) property
improvements, (ii) the acquisition of personal
property such as home appliances or furnishings,
(iii) debt consolidation, (iv) the purchase or
S-5
<PAGE> 9
refinancing of single family residential property,
or (v) a combination of property improvements, debt
consolidation and other consumer purposes, which
loans are marketed by the Transferor under the name
"BusterPlus(TM) Loans". Substantially all of the
Mortgages for the Secured Loans will be junior
(i.e., second, third, etc.) in priority to one or
more senior liens on the related mortgaged
properties ("Mortgaged Properties"), which will
consist primarily of owner occupied single family
residences. A majority of the Secured Loans will be
secured by liens on Mortgaged Properties in which
the borrowers have no equity therein (i.e., the
related combined loan-to-value ratios exceed 100%)
at the time of origination of such Secured Loans.
See "The Home Loan Pool" herein and "Description of
the Trust Property -- Home Loans" in the
Prospectus.
The Initial Home Loans included in the Home Loan
Pool will consist of approximately 7,337 loans,
having an Initial Pool Principal Balance of
approximately $215,006,133. See "The Home Loan
Pool" herein. The statistical information presented
in this Prospectus Supplement regarding the Home
Loan Pool is based only on the Initial Home Loans
proposed to be included in the Home Loan Pool as of
the date of this Prospectus Supplement, and does
not take into account any Subsequent Home Loans
that may be added to the Home Loan Pool during the
Funding Period through application of amounts in
the Pre-Funding Account. In addition, prior to the
Closing Date, the Transferor may remove any of the
Initial Home Loans intended for inclusion in the
Home Loan Pool, substitute comparable loans
therefor, or add comparable loans thereto; however,
the aggregate principal balance of Initial Home
Loans so replaced, added or removed may not exceed
5.0% of the Initial Pool Principal Balance. If,
prior to the Closing Date, loans are removed from
or added to the Home Loan Pool as described herein,
an amount equal to the aggregate principal balances
of such loans will be added to or deducted from,
respectively, the Pre-Funding Account Deposit on
the Closing Date. As a result of the foregoing, the
statistical information presented herein regarding
the Initial Home Loans proposed to be included in
the Home Loan Pool as of the date of this
Prospectus Supplement may vary in certain respects
from comparable information based on the actual
composition of the Home Loan Pool at the Closing
Date or any Subsequent Transfer Date. See "Risk
Factors -- Additional Factors Affecting
Delinquencies, Foreclosures and Losses on Home
Loans" and "The Home Loan Pool" herein.
In addition to making additions and deletions to
the Home Loan Pool prior to the Closing Date as
described above, after the Closing Date, the Seller
and the Transferor each have the option (1) to
remove any Home Loans (exclusive of Defective Home
Loans and Defaulted Home Loans) and substitute
Qualified Substitute Home Loans up to an aggregate
amount of not more than 5% without Securities
Insurer approval, and 10% with Securities Insurer
approval, of the aggregate Cut-Off Date Principal
Balances of the Home Loans; and (2) either to
repurchase any Home Loan incident to foreclosure,
default or imminent default thereof (a "Defaulted
Home Loan") or to remove such Defaulted Home Loan
and substitute a Qualified Substitute Home Loan.
The Transferor will be obligated either to
repurchase any Defective Home Loan or to remove
such Defective Home Loan and substitute a
Qualified Substitute Home Loan. As used herein, a
"Qualified Substi-
S-6
<PAGE> 10
tute Home Loan" will have characteristics that are
generally the same as or substantially similar to
the characteristics of the Home Loan which it
replaces. All such repurchases will result in
accelerated payments of principal distributions on
the Offered Securities. See "The Transferor and the
Servicer -- Repurchase or Substitution of Home
Loans" herein.
The Pre-Funding Account.... On the Closing Date, the Trust will direct that a
portion of the proceeds from the sale of the
Offered Securities in an amount equal to
approximately $84,993,867 (the "Pre-Funding Account
Deposit"), be deposited into the Pre-Funding
Account maintained by the Indenture Trustee for the
purpose of purchasing the Subsequent Home Loans
after the Closing Date. The Pre-Funding Account
Deposit will be increased or decreased by an amount
equal to the aggregate of the principal balances of
any Home Loans removed from or added to,
respectively, the Home Loan Pool prior to the
Closing Date as described herein, provided that any
such decrease will not exceed $7,800,000 and any
such increase will not exceed 5.0% of the Initial
Pool Principal Balance. See "The Home Loan Pool"
herein. During the period from the Closing Date
until the earlier of (i) the date on which the
amount in the Pre-Funding Account is reduced to
$25,000 and (ii) December 26, 1996 (the "Funding
Period"), the amount on deposit in the Pre-Funding
Account will be reduced by the amount used to
purchase Subsequent Home Loans in accordance with
the terms of the Sale and Servicing Agreement.
Subsequent Home Loans purchased by the Trust and
added to the Home Loan Pool on any Subsequent
Transfer Date (as defined below) must satisfy the
criteria set forth in the Sale and Servicing
Agreement and must be approved by the Securities
Insurer. See "The Home Loan Pool -- Conveyance of
Subsequent Home Loans" herein. Any date on which
such Subsequent Home Loans will be conveyed by the
Seller to the Trust after the Closing Date is a
"Subsequent Transfer Date".
On the Distribution Date following the Due Period
in which such Funding Period ends, the portion of
the Pre-Funding Account Deposit that is remaining
will be applied to reduce, on a pro rata basis, the
outstanding principal balances of each Class of
Notes and the Certificates; provided, however, that
if such remaining portion is less than or equal to
$50,000, such amount will be included in the
Noteholders' Distributable Amount and will be
distributed sequentially to each Class of Notes in
reduction of the respective Class Principal
Balances thereof. See "Risk Factors -- Acquisition
of Subsequent Home Loans from Pre-Funding Account,"
"Description of the Transfer and Servicing
Agreements -- Pre-Funding Account" and "Prepayment
and Yield Considerations" herein.
Capitalized Interest
Account.................... On the Closing Date, an amount (the "Capitalized
Interest Account Deposit"), as approved by the
Rating Agencies and the Securities Insurer, to
cover the projected interest shortfall from amounts
in the Pre-Funding Account during the Funding
Period, will be deposited in an Eligible Account
maintained by and in the name of the Indenture
Trustee (the "Capitalized Interest Account") from a
portion of the proceeds from the sale of the
Offered Securities. Any amounts remaining in the
Capitalized Interest Account on any Determination
Date that are not required to cover the interest
shortfall for the related Distribution Date and the
anticipated interest shortfall during the remainder
of the
S-7
<PAGE> 11
Funding Period as described herein will be
distributed to the Affiliated Holder, including any
net reinvestment income thereon. See "Description
of the Transfer and Servicing
Agreements -- Capitalized Interest Account" herein.
Credit Enhancement......... Credit enhancement with respect to the Notes and
the Certificates will be provided by the Guaranty
Policy. As further described herein, credit
enhancement with respect to the Notes and the
Certificates that will be utilized prior to the
Guaranty Policy will be provided by (i) the
subordination of the Certificates, in the case of
the Notes, and the Residual Interest, in the case
of the Notes and the Certificates, (ii) the funds
available in the Reserve Fund, if any, and (iii)
the overcollateralization from principal
attributable to the Residual Interest. See "Risk
Factors -- Additional Credit Enhancement
Limitations" herein.
The Guaranty Policy...... The Seller will obtain a Financial Guaranty
Insurance Policy in the name of the Indenture
Trustee for the benefit of the holders of the
Offered Securities (the "Guaranty Policy") from the
Securities Insurer, the principal operating
subsidiary of MBIA, Inc., a New York Stock
Exchange-listed company. Pursuant to the Guaranty
Policy, the Securities Insurer will irrevocably and
unconditionally guaranty payment on each
Distribution Date to the Indenture Trustee, for the
benefit of the holders of the Offered Securities,
of the related Interest Distribution Amount and the
related Regular Principal Distribution Amount then
payable on each Class of the Notes and the
Certificates. The Securities Insurer's obligations
under the Guaranty Policy will be discharged to the
extent Guaranteed Payments are received by the
Indenture Trustee, whether or not such Guaranteed
Payments are properly applied by the Indenture
Trustee. See "Description of Credit
Enhancement -- The Guaranty Policy" herein. The
Guaranty Policy is noncancellable for any reason.
The Guaranty Policy does not guarantee any
specified rate of prepayments, nor does the
Guaranty Policy provide funds to redeem any of the
Notes or the Certificates, as applicable. For a
description of the Securities Insurer, see
"Description of Credit Enhancement -- The Guaranty
Policy" herein.
Subordination............ The rights of the holders of the Certificates to
receive distributions of interest and principal
from amounts available in the Certificate
Distribution Account on each Distribution Date will
be subordinated to such rights of the holders of
the Notes. On the Closing Date, the initial
Certificate Principal Balance of the Certificates
will be equal to the excess of the Assumed Pool
Principal Balance over the sum of the Class
Principal Balance of all Classes of the Notes as of
the Closing Date. The rights of the holders of the
Residual Interest to receive any distributions from
amounts available in the Certificate Distribution
Account will be subordinated to such rights of the
holders of the Notes and the Certificates. In
addition, Net Loan Losses in respect of the Home
Loans will be allocated to the principal, if any,
attributable to the Residual Interest until such
principal has been reduced to zero. The
subordination of the Certificates and Residual
Interest to the Notes is intended to enhance the
likelihood of regular receipt by the holders of the
Notes of the full amount of interest and principal
distributions due to such holders and to afford
such holders protection against losses on the Home
Loans. The subordination of the Residual Interest
to the Certificates is intended to
S-8
<PAGE> 12
enhance the likelihood of regular receipt by the
holders of the Certificates of the full amount of
interest and principal distributions due to such
holders and to afford such holders protection
against losses on the Home Loans. See "Description
of Credit Enhancement -- Subordination and
Allocation of Losses" herein.
Reserve Fund............. The Offered Securities will have the benefit of a
Reserve Fund that will be included as part of the
Trust and pledged to the Indenture Trustee. On the
Closing Date, the Indenture Trustee will establish
the Reserve Fund and will deposit into the Reserve
Fund an aggregate amount of $ , or
approximately % of the Assumed Pool Principal
Balance as of the Cut-Off Date (the "Reserve Fund
Requirement"), which deposit will consist of cash
proceeds from the sale of the Offered Securities in
an amount equal to $ . On or after the
Closing Date, the Seller may substitute either or a
combination of a limited guaranty or letter of
credit for the release of a comparable amount of
cash from the Reserve Fund to the Seller in an
amount not to exceed 50% of the Reserve Fund
Requirement; provided that the Securities Insurer
and Rating Agencies have consented to such
substitution. If on any Distribution Date funds
from the Reserve Fund are needed to make the
required distributions of principal and interest to
the Noteholders and Certificateholders, then the
balance of cash funds, if any, available in the
Reserve Fund will be withdrawn prior to a
withdrawal of funds from a draw under any limited
guaranty or letter of credit.
As further described below, the Reserve Fund
Requirement will be subject to reduction from time
to time in accordance with the provisions of the
Sale and Servicing Agreement and any amounts on
deposit in the Reserve Fund in excess of the
reduced Reserve Fund Requirement on a Distribution
Date will first cause a reduction in the amount of
any the letter of credit or limited guaranty then
on deposit in the Reserve Fund until such amount is
reduced to zero and, second, will result in the
release of any cash funds to the holders of the
Residual Interest until such funds are reduced to
zero.
Overcollateralization.... As of each Determination Date occurring after
termination of the Funding Period, the
"Overcollateralization Amount" will equal the
excess of the Pool Principal Balance over the
aggregate outstanding principal balances of the
Offered Securities. On the Closing Date, the
Overcollateralization Amount will be zero. As a
result of the application of Excess Spread in
reduction of the outstanding principal balances of
the Offered Securities, the Overcollateralization
Amount is expected to increase over time until such
amount is equal to the Required
Overcollateralization Amount. In addition, assuming
that sufficient amounts of Excess Spread are
distributed as an additional reduction of the
outstanding principal balances of the Offered
Securities, the Overcollateralization Amount will
eventually replace the Reserve Fund as credit
enhancement for the Notes and Certificates. This
replacement of the Reserve Fund will be
accomplished by an incremental reduction of the
Reserve Fund Requirement for each increase of the
Overcollateralization Amount over a certain interim
level of required overcollateralization determined
by the Securities Insurer and approved by each
Rating Agency, until the Overcollateralization
Amount is equal to the Required
Overcollateralization Amount and the Reserve Fund
Requirement is reduced to zero.
S-9
<PAGE> 13
On the Closing Date, the "Required
Overcollateralization Amount" is expected to be an
amount equal to approximately $ , or
% of the Assumed Pool Principal Balance and,
subject to certain floors, caps and triggers, the
Required Overcollateralization Amount may increase
or decrease over time. An increase in the Required
Overcollateralization Amount will result if the
delinquency or default experience on the Home Loans
exceeds certain levels set forth in the Sale and
Servicing Agreement. If such an increase occurs,
then to the extent that Excess Spread is available,
the principal amortization of the Offered
Securities would be accelerated by the distribution
of such Excess Spread to the holders of the Offered
Securities until the Required Overcollateralization
Amount is achieved.
The Required Overcollateralization Amount may also
be decreased in certain circumstances, resulting,
most likely, in overcollateralization at such time
in excess of such required amount. Excess
overcollateralization may also result from
distributions in reduction of the principal
balances of the Offered Securities. If on any
Distribution Date identified as an
"Overcollateralization Stepdown Date" the Excess
Overcollateralization Amount (as defined below)
exceeds zero, all or a portion of the principal (up
to the Overcollateralization Reduction Amount)
which would otherwise be distributed to the holders
of the Offered Securities will instead be
distributed to the holders of the Residual
Interest, until the Excess Overcollateralization
Amount is reduced to zero. In such circumstances,
the rate of principal payments distributed to the
holders of the Offered Securities would be reduced
relative to the amortization of the Home Loans.
With respect to any Distribution Date, the "Excess
Overcollateralization Amount" is equal to (x) the
Overcollateralization Amount on such Distribution
Date after taking into account all distributions to
be made on such Distribution Date (except for any
distributions of Overcollateralization Reduction
Amounts as described herein) minus (y) the Required
Overcollateralization Amount. With respect to any
Distribution Date which is not an
Overcollateralization Stepdown Date, the
"Overcollateralization Reduction Amount" is zero;
and with respect to any Distribution Date which is
an Overcollateralization Stepdown Date, the
Overcollateralization Reduction Amount is the
lesser of (x) the Excess Overcollateralization
Amount on such Distribution Date (after giving
effect to all other distributions on such
Distribution Date), and (y) the Regular Principal
Distribution Amount (as determined without the
deduction of the Overcollateralization Reduction
Amount therefrom) on such Distribution Date. See
"Description of Credit
Enhancement -- Overcollateralization" herein.
While the distribution of Excess Spread to holders
of the Offered Securities has been designed to
produce and maintain a given level of
overcollateralization with respect to the Offered
Securities, there can be no assurance that Excess
Spread will be generated in sufficient amounts to
ensure that such overcollateralization level will
be achieved or maintained at all times. Net Loan
Losses will be allocated to reduce the principal
attributable to the Residual Interest, if any,
thereby reducing the Overcollateralization Amount.
See "Description of Credit Enhance-
S-10
<PAGE> 14
ment -- Subordination and Allocation of Losses" and
"Risk Factors -- Additional Credit Enhancement
Limitations" herein.
Servicing of the Home
Loans...................... The Servicer will perform the loan servicing
functions with respect to the Home Loans pursuant
to the Sale and Servicing Agreement and shall be
entitled to receive a fee (the "Servicing Fee"),
payable monthly, as described herein (see
"Description of the Home Loans -- Servicing"
herein). The Servicer may have subcontracted its
servicing obligations and duties with respect to
certain Home Loans to certain unaffiliated lenders
from whom the Seller purchased such Home Loans,
pursuant to a subservicing agreement between the
Servicer and such lender (each such lender, in this
capacity, a "Subservicer"). However, the Servicer
will not be relieved of its servicing obligations
and duties with respect to these Home Loans. The
Servicer will be responsible for paying the fees of
each Subservicer.
Fees and Expenses of the
Trust...................... On each Distribution Date, prior to distributions
on the Notes, amounts from the Available Collection
Amount will be distributed to pay the following
periodic fees: (1) the Securities Insurer premium
payable under the Guaranty Policy (the "Guaranty
Insurance Premium"); (2) the fees of the Indenture
Trustee (the "Indenture Trustee Fee"); (3) the fees
of the Owner Trustee (the "Owner Trustee Fee") and
(4) the fees of the Custodian (the "Custodian Fee")
(collectively, the "Trust Fees and Expenses");
provided, however, that with respect to the first
Distribution Date the payment of all such Trust
Fees and Expenses will be prorated for the first
Due Period from the Closing Date; and provided,
further, that on the Closing Date, the Guaranty
Insurance Premium will be prepaid for the first
Due Periods. See "Description of the
Transfer and Servicing Agreements -- Trust Fees and
Expenses" and "Description of the Offered
Securities -- Distributions on the Notes" herein.
Optional Termination....... The Affiliated Holder may, at its option, effect an
early redemption or termination of the Offered
Securities on or after any Distribution Date on
which the Pool Principal Balance declines to 15% or
less of the Pool Principal Balance of the Initial
Home Loans and Subsequent Home Loans conveyed to
the Trust as of the respective Cut-Off Dates, in
which case the Indenture Trustee will be directed
to sell all of the Home Loans to a person that is
not affiliated with the Affiliated Holder, the
Seller or the Servicer at a price equal to or
greater than the Termination Price (as defined
herein) and the proceeds from such sale will be
distributed, (i) first, to the Noteholders in an
amount equal to the then outstanding Class
Principal Balance of the Notes plus accrued
interest thereon at the applicable Interest Rates,
(ii) second, to the Certificateholders in an amount
equal to the then outstanding Certificate Principal
Balance of the Certificates plus accrued interest
thereon at the Pass Through Rate, (iii) third, to
the Securities Insurer, in an amount equal to any
amounts owed to the Securities Insurer under the
Insurance Agreement, and (iv) to the holders of the
Residual Interest, in an amount equal to the amount
of proceeds remaining, if any, after the
distributions pursuant to items (i), (ii) and (iii)
above. In addition, the Affiliated Holder may, at
its option, effect an early redemption or
termination of the Offered Securities on or after
any Distribution Date on which the Pool Principal
Balance declines to 10% or less of the Pool
Principal Balance of the
S-11
<PAGE> 15
Initial Home Loans and Subsequent Home Loans
conveyed to the Trust as of the respective Cut-Off
Dates, by paying (i) to the Noteholders, an amount
in respect the Notes equal to the then outstanding
Class Principal Balance of the Notes, plus accrued
interest thereon at the applicable Interest Rates,
(ii) to the Certificateholders, an amount in
respect of the Certificates equal to the then
outstanding Certificate Principal Balance of the
Certificates, plus accrued interest at the Pass
Through Rate, and (iii) to the Securities Insurer,
an amount equal to any amounts owed to the
Securities Insurer under the Insurance Agreement.
In connection with any such optional termination,
to the extent that sufficient proceeds are not
available from the sale of the Home Loans or the
termination of the Trust, the Affiliated Holder
will pay the outstanding fees and expenses, if any,
of the Indenture Trustee, the Owner Trustee, the
Custodian, and the Servicer.
Under certain circumstances as set forth in the
Indenture (i.e., based upon the default experience
of the Home Loans), the Securities Insurer may, at
its option, effect an early redemption or
termination of the Offered Securities.
Tax Status................. In the opinion of Andrews & Kurth L.L.P. ("Tax
Counsel") for federal income tax purposes, the
Notes will be characterized as debt, and the Trust
will not be characterized as an association (or a
publicly traded partnership) taxable as a
corporation. Each Noteholder, by the acceptance of
a Note, will agree to treat the Notes as
indebtedness, and each Certificateholder, by the
acceptance of a Certificate, will agree to treat
the Trust as a partnership in which the
Certificateholders are partners for federal income
tax purposes. Alternative characterizations of the
Trust and the Certificates are possible, but would
not result in materially adverse tax consequences
to Certificateholders. See "Certain Federal Income
Tax Consequences" herein and in the Prospectus for
additional information concerning the application
of federal income tax laws to the Trust and the
Offered Securities.
Certificateholders, who are tax-exempt entities or
non-U.S. persons, will have tax consequences that
may be considered adverse by such holders. See
"Certain Federal Income Tax Consequences -- Trusts
for which a Partnership Election is Made -- Tax
Consequences to Holders of the
Certificates -- Partnership Taxation" and "-- Tax
Consequences to Foreign Certificateholders" in the
Prospectus.
ERISA Considerations....... Subject to the considerations discussed under
"ERISA Considerations" herein and in the
Prospectus, the Notes may be purchased by an
employee benefit plan or an individual retirement
account (a "Plan") subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA") or Section 4975 of the Internal Revenue
Code of 1986, as amended (the "Code"). A fiduciary
of a Plan must determine that the purchase of a
Note is consistent with its fiduciary duties under
ERISA and does not result in a nonexempt prohibited
transaction as defined in Section 406 of ERISA or
Section 4975 of the Code.
The Certificates may not be acquired by (a) an
employee benefit plan subject to the provisions of
Title I of ERISA, (b) a plan described in Section
4975(e)(i) of the Code or (c) any entity whose
underlying assets include plan assets by reason of
a plan's investment in the entity or
S-12
<PAGE> 16
which uses plan assets to acquire certificates. See
"ERISA Considerations" herein and in the
Prospectus. Any benefit plan fiduciary considering
purchase of the Certificates should, among other
things, consult with its counsel in determining
whether all required conditions have been
satisfied.
Legal Investment
Considerations........... For a discussion of certain legal investment
considerations, see "Legal Investment Matters"
herein and in the Prospectus.
Ratings of the Offered
Securities............... It is a condition to the issuance of the Notes that
each of the Class A-1 Notes, Class A-2 Notes, Class
A-3 Notes, Class A-4 Notes, Class A-5 Notes, Class
A-6 Notes and Class A-7 Notes be rated "AAA" by
Standard & Poor's, a division of The McGraw Hill
Companies, Inc. ("Standard & Poor's") and "Aaa" by
Moody's Investors Service, Inc. ("Moody's" and,
together with Standard & Poor's, the "Rating
Agencies"). It is a condition to the issuance of
the Certificates that they be rated "AAA" by
Standard & Poor's and "Aaa" by Moody's. A security
rating does not address the frequency of principal
prepayments or the corresponding effect on yield to
holders of the Offered Securities. None of the
Seller, the Transferor, the Servicer, the Indenture
Trustee, the Owner Trustee, the Securities Insurer
or any other person is obligated to maintain the
rating on any Class of Notes or the Certificates.
S-13
<PAGE> 17
RISK FACTORS
Prospective investors in the Offered Securities should consider the
following risk factors (as well as the factors set forth under "Risk Factors" in
the Prospectus) in connection with the purchase of Notes or Certificates. These
factors are intended to identify the significant sources of risk affecting an
investment in the Offered Securities. Unless the context indicates otherwise,
any numerical or statistical information presented is based upon the
characteristics of the Initial Home Loans proposed to be included in the Home
Loan Pool as of the date of this Prospectus Supplement.
ACQUISITION OF SUBSEQUENT HOME LOANS FROM PRE-FUNDING ACCOUNT
VARIATION IN CREDIT QUALITY AND CHARACTERISTICS OF SUBSEQUENT HOME LOANS.
Any conveyance of Subsequent Home Loans is subject to the conditions set forth
in the Sale and Servicing Agreement, which conditions include among others: (i)
each Subsequent Home Loan must satisfy the representations and warranties
specified in the Sale and Servicing Agreement; (ii) the Transferor will not
select Subsequent Home Loans in a manner that it believes is adverse to the
interests of the holders of the Offered Securities and the Securities Insurer;
and (iii) as of the related Cut-off Date, all of the Home Loans, including the
Subsequent Home Loans to be conveyed to the Trust by the Seller as of such
Cut-off Date, must satisfy certain aggregate statistical criteria set forth in
the Sale and Servicing Agreement. Although each Subsequent Home Loan must
satisfy the eligibility criteria referred to above at the time of its transfer
to the Trust, the Subsequent Home Loans may have been originated or purchased by
the Transferor using credit criteria different from those which were applied to
the Initial Home Loans and may be of a different credit quality and have
different loan characteristics from the Initial Home Loans. After the transfer
of the Subsequent Home Loans to the Trust, the aggregate statistical
characteristics of the Home Loan Pool may vary from those of the Initial Home
Loans as described herein. See "The Home Loan Pool -- Characteristics of Initial
Home Loans", and "-- Conveyance of Subsequent Home Loans" herein.
ABILITY OF TRANSFEROR TO ACQUIRE SUBSEQUENT HOME LOANS. The ability of the
Trust to acquire Subsequent Home Loans is dependent upon the ability of the
Transferor to acquire additional home loans that satisfy the eligibility
criteria for the transfer of Subsequent Home Loans. The ability of the
Transferor to acquire additional home loans may be affected by a variety of
social, economic and competitive factors, including prevailing interest rates,
unemployment levels, the rate of inflation, consumer perceptions of economic
conditions generally and the availability of home loan financing and similar
types of consumer financing. The Transferor and the Seller are unable to
determine and have no basis to predict whether and to what extent economic or
social factors will affect the ability of the Transferor to originate and
purchase Subsequent Home Loans.
EFFECT OF PREPAYMENT FROM PRE-FUNDING ACCOUNT. If the Pre-Funding Account
Deposit has not been fully applied to purchase Subsequent Home Loans by the end
of the Funding Period, and the amount remaining in the Pre-Funding Account (net
of reinvestment income which will be transferred to the Capitalized Interest
Account) is in excess of $50,000, then such amount will be applied to reduce, on
a pro rata basis, the Class Principal Balance of each Class of the Notes and
(except if the Securities Insurer is in default under the Guaranty Policy) the
Certificate Principal Balance of the Certificates. If the Securities Insurer is
in default under the Guaranty Policy, then such remaining amount will be applied
to reduce, on a pro rata basis, the Class Principal Balance of each Class of the
Notes. See "Prepayment and Yield Considerations" herein. Although no assurances
can be given, the Seller expects that the principal amount of the Subsequent
Home Loans sold to the Trust will require the application of substantially all
of the Pre-Funding Account Deposit and that there will be no material principal
prepayment distributed to the holders of the Notes and the Certificates from the
amount remaining in the Pre-Funding Account at the termination of the Funding
Period.
ADDITIONAL EFFECT OF PREPAYMENTS ON YIELD
The extent to which the yield to maturity of an Offered Security may vary
from the anticipated yield will depend upon the degree to which it is purchased
at a premium or discount, and the degree to which the timing
S-14
<PAGE> 18
of distributions to holders thereof is sensitive to scheduled payments,
prepayments, liquidations, defaults and purchases of Home Loans and to the
distribution of Excess Spread and amounts remaining in the Pre-Funding Account
after the Funding Period ends. In the case of any Offered Security purchased at
a discount, an investor should consider the risk that a slower than anticipated
rate of principal distributions to the holders of the Offered Securities
(including without limitation principal prepayments on the Home Loans) could
result in an actual yield to such investor that is lower than the anticipated
yield and, in the case of any Offered Security purchased at a premium, the risk
that a faster than anticipated rate of principal distributions to the holders of
the Offered Securities (including without limitation principal prepayments on
the Home Loans) could result in an actual yield to such investor that is lower
than the anticipated yield. On each Distribution Date, until the Excess
Overcollateralization Amount equals or exceeds zero, the allocation of the
Excess Spread for such Distribution Date as an additional distribution of
principal on the Offered Securities will accelerate the amortization of the
Offered Securities relative to the amortization of the Home Loans; however, on
any Overcollateralization Stepdown Date, the distribution of any
Overcollateralization Reduction Amount to the holder of the Residual Interest,
as described herein, can be expected to result in a slower amortization of the
Offered Securities and may temporarily delay principal distributions to the
holders of the Offered Securities on a Distribution Date. Further, in the event
that significant prepayments of principal distributions are made to holders of
the Offered Securities as a result of excessive prepayments, liquidations,
repurchases and purchases of the Home Loans or distributions of Excess Spread or
amounts remaining in the Pre-Funding Account, there can be no assurance that
holders of the Offered Securities will be able to reinvest such distributions in
a comparable alternative investment having a comparable yield. See "Prepayment
and Yield Considerations" herein.
ADDITIONAL CREDIT ENHANCEMENT LIMITATIONS
ADEQUACY OF CREDIT ENHANCEMENT. Credit enhancement with respect to the
Notes and the Certificates will be provided by the Guaranty Policy. Additional
credit enhancement with respect to the Notes and the Certificates that will be
utilized prior to the Guaranty Policy will be provided by (i) the subordination
of the Certificates, in the case of the Notes, and the Residual Interest in the
case of the Notes and the Certificates, (ii) the funds available in the Reserve
Fund, if any, and (iii) the overcollateralization from the principal
attributable to the Residual Interest which results from the limited
acceleration of the principal amortization of the Offered Securities by the
application of Excess Spread, as described herein. If the Home Loans experience
higher rates of delinquencies, defaults and losses (see "-- Additional Factors
Affecting Delinquencies, Foreclosure, and Losses on Home Loans" below) than
initially anticipated in connection with the rating of the Offered Securities,
there can be no assurance that the amounts available from the additional credit
enhancement will be adequate to cover the delays or shortfalls in distributions
to the holders of the Offered Securities that result from such higher
delinquencies, defaults and losses. If the amounts available from the additional
credit enhancement are inadequate, the holders of the Offered Securities will
bear the risk of any delays and losses resulting from the delinquencies,
defaults and losses on the Home Loans, unless such delays or losses with respect
to the Offered Securities are covered by the Guaranty Policy and paid by the
Securities Insurer as described herein.
While the distribution of Excess Spread to the holders of the Offered
Securities in the manner specified herein has been designed to produce and
maintain a given level of overcollateralization with respect to the Offered
Securities, there can be no assurance that Excess Spread will be generated in
sufficient amounts to ensure that such overcollateralization level will be
achieved or maintained at all times.
While the funding and maintenance of the Reserve Fund is intended to
enhance the likelihood of timely payment of distributions to the holders of the
Notes and the Certificates and to decrease the likelihood that such holders of
the Notes and the Certificates will experience losses, under certain
circumstances as described herein, the Reserve Fund could be depleted and
shortfalls could result. The holders of the Residual Interest will not be
required to refund any amounts previously distributed to such holders pursuant
to the Transfer and Servicing Agreements, including any distributions of Excess
Spread and Excess Reserve Amount, regardless of whether there are sufficient
funds on a subsequent Distribution Date to make a full distribution to holders
of the Notes and the Certificates.
S-15
<PAGE> 19
SUBORDINATION OF CERTIFICATES. Distributions of interest and principal on
the Certificates will be subordinated in priority of payment to interest and
principal due on the Notes. Consequently, the Certificateholders may not receive
any distributions for a Due Period until the full amount of interest and
principal on the Notes on the related Distribution Date has been distributed to
the Noteholders. In the event of any default by the Securities Insurer, the
Certificates will be more sensitive to losses experienced on the Home Loans. See
"Description of Credit Enhancement -- Subordination and Allocation of Losses"
herein.
RATINGS OF SECURITIES INSURER. The respective ratings of each Class of
Notes and the Certificates depends primarily on an assessment by the Rating
Agencies of the claims-paying ability of the Securities Insurer. Any reduction
in a rating assigned to the claims-paying ability of the Securities Insurer
below the rating initially given to the Offered Securities may result in a
reduction in the rating of the Offered Securities, any Class of Notes or the
Certificates. There can be no assurance that future adverse economic events will
not cause a reduction in the rating of the Securities Insurer or otherwise
impair the ability of the Securities Insurer to make any Guaranteed Payments
pursuant to the Guaranty Policy to cover any shortfall in the amount of
principal and interest distributable to the holders of the Offered Securities.
See "Description of Credit Enhancement -- The Guaranty Policy" herein.
LIMITATIONS ON RIGHTS OF SECURITYHOLDERS
Prior to a Securities Insurer Default, the Securities Insurer will have the
right to exercise all rights, including voting rights, which the holders of the
Offered Securities are entitled to exercise under the Indenture or the Trust
Agreement, as applicable (the "Offered Securityholder Rights"), without any
consent of such holders; provided, however, that without the consent of each
holder of an Offered Security affected thereby, the Securities Insurer shall not
exercise such Offered Securityholder Rights to amend the Indenture or the Trust
Agreement in any manner that would (i) reduce the amount of, or delay the timing
of, collections of payments on Home Loans or distributions which are required to
be made on any Offered Security, (ii) adversely affect in any material respect
the interests of the holders of any Class of Notes or the Certificates, or (iii)
alter the rights of any such Noteholder or Certificateholder to consent to any
such amendment. While the interests of the Securities Insurer will generally be
aligned with the holders of the Offered Securities, in certain instances the
Securities Insurer could exercise the Offered Securityholder Rights, or consent
to the exercise of certain Offered Securityholder Rights, in a manner that is
adverse to the interests of one or more Noteholders or Certificateholders. For
example, under certain circumstances the Securities Insurer could exercise
certain Offered Securityholder Rights, or refuse its consent to the exercise of
certain Offered Securityholder Rights, in a manner that results in an
unanticipated prepayment of principal to the Noteholders or the
Certificateholders when the prevailing market interest rates at which such
principal can be reinvested have declined. See "Prepayment and Yield
Considerations" herein.
DELINQUENCY STATUS OF INITIAL HOME LOANS
None of the Initial Home Loans were 30 days or more late in their scheduled
monthly payments of principal and interest as of August 31, 1996, however,
approximately 71.2% of the Initial Pool Principal Balance consists of Initial
Home Loans that have a first scheduled monthly payment due date occurring on or
after August 1, 1996, and therefore, it was not possible for such Initial Home
Loans to have had a scheduled monthly payment that was 30 days or more late as
of August 31, 1996. The inclusion of delinquent Initial Home Loans in the Trust
may adversely affect the rate of defaults, liquidations and prepayments in
respect of the Home Loan Pool and the yield on the Offered Securities.
Furthermore, even if any delinquent Initial Home Loans become current after
September 1, 1996, such Home Loans generally will have a greater likelihood of
subsequently becoming delinquent in their scheduled monthly payments. In
addition, to the extent that scheduled monthly payments of principal and
interest are not made on the delinquent Initial Home Loans, then the additional
credit enhancement available for the Offered Securities will be depleted by the
amounts attributable to such delinquent payments, subject to the partial
reimbursement, if any, of the additional credit enhancement if such delinquent
payments or any liquidation proceeds are subsequently collected from the
delinquent Initial Home Loans. See "-- Additional Credit Enhancement
Limitations -- Adequacy of Credit Enhancement" above.
S-16
<PAGE> 20
ADDITIONAL FACTORS AFFECTING DELINQUENCIES, FORECLOSURES AND LOSSES ON HOME
LOANS
UNDERWRITING GUIDELINES. Pursuant to the underwriting guidelines of the
Transferor, the assessment of the creditworthiness of the related borrower is
the primary consideration in underwriting the Home Loans, and with respect to
any Secured Loans, the evaluation of the adequacy of the value of the related
Mortgaged Property or other secured property in relation to the Home Loan,
together with the amount of all liens senior to the lien of the Home Loan (i.e.,
the related "combined loan-to-value ratio"), is given less consideration, and in
certain cases no consideration, in underwriting the Home Loans. See "The
Transferor and Servicer -- Underwriting Criteria" herein. In general, the credit
quality of the Home Loans is lower than that of mortgage loans conforming to the
FNMA or FHLMC underwriting guidelines for first-lien, single family mortgage
loans. Accordingly, the Home Loans are likely to experience higher rates of
delinquencies, defaults and losses (which rates could be substantially higher)
than those rates that would be experienced by similar types of loans
underwritten in conformity with the FNMA or FHLMC underwriting guidelines for
first-lien, single family mortgage loans. In addition, the losses sustained from
defaulted Home Loans are likely to be more severe in relation to the outstanding
principal balance of such defaulted Home Loans, because the costs incurred in
the collection and liquidation of defaulted Home Loans in relation to the
smaller principal balances thereof are proportionately higher than first-lien,
single family mortgage loans, and because in the case of Secured Loans the
majority of such Home Loans are secured by junior liens on Mortgaged Properties
in which the borrowers have no equity therein (i.e., the related combined
loan-to-value ratios exceed 100%) at the time of origination of such Home Loans.
See "-- Additional Credit Enhancement Limitations -- Adequacy of Credit
Enhancement" above.
Although the creditworthiness of the related borrower is the primary
consideration in the underwriting of the Home Loans, no assurance can be given
that such creditworthiness of the borrower will not deteriorate as a result of
future economic and social factors, which deterioration may result in a
delinquency or default by such borrower on the related Home Loan. Furthermore,
because the adequacy of the value of the related Mortgaged Property is given
less consideration, and in certain cases no consideration, in underwriting the
Home Loan, no assurance can be given that in the case of Secured Loans any
proceeds will be recovered from the foreclosure or liquidation of the related
Mortgaged Property from a defaulted Home Loan.
ACQUISITIONS FROM THIRD PARTIES. A significant portion of the Home Loans
will have been acquired by the Transferor through purchases from a network of
correspondent lenders, including correspondent lenders having delegated
underwriting authority ("delegated underwriting correspondents"). See "The Home
Loan Pool -- General" herein. All of the Home Loans that consist of acquisitions
from delegated underwriting correspondents will have been re-underwritten and
reviewed only on a limited sample basis for compliance with the Transferor's
underwriting guidelines. These Home Loans acquired by the Transferor may have
been originated by the originator thereof through the application of the
underwriting guidelines of the Transferor in a manner that is different from the
Transferor's application and such loans may be of a lesser credit quality. In
addition, the Transferor may have acquired certain Home Loans which were
originated by an originator that, at the time of origination thereof, was not an
approved FHA lender or an approved FNMA or FHLMC seller/servicer, and therefore,
did not have an internal quality control program substantially similar to the
FNMA or FHLMC required quality control programs with respect to the underwriting
and origination of such Home Loans. With respect to those Home Loans acquired by
the Transferor that have not been re-underwritten or reviewed, the Transferor
has primarily relied upon the applicable representations and warranties made by
the related seller or originator in determining whether such Home Loans satisfy
the representations and warranties under the Sale and Servicing Agreement with
respect thereto. Accordingly, the Home Loans that were (i) acquired by the
Transferor from delegated underwriting correspondents or (ii) not subject to an
internal quality control program at the time of origination, may subsequently be
determined to be in breach of the applicable representations and warranties
under the Sale and Servicing Agreement, and if such breach materially and
adversely affects the interests of the holders of the Offered Securities or the
Securities Insurer and cannot be cured within the cure period, then such Home
Loans will be deemed to be "Defective Home Loans," and, unless waived by the
Securities Insurer, the Transferor will be required to substitute or repurchase
such Defective Home Loans. Any such repurchase of a Home Loan will result in an
unanticipated prepayment of principal to the holders of the Offered Securities.
See "-- Limitations on
S-17
<PAGE> 21
Repurchase or Replacement of Defective Home Loans by Transferor" below and
"Prepayment and Yield Considerations" herein.
LIMITED HISTORICAL DELINQUENCY, LOSS AND PREPAYMENT INFORMATION. Since
January 1995, the Servicer has substantially increased the volume of
conventional home loans, including additional types of home loans (i.e., its
debt consolidation loans and combination loans or BusterPlus(TM) Loans) that it
has originated, purchased, sold and/or serviced, and thus, it has limited
historical experience with respect to the performance, including the delinquency
and loss experience and the rate of prepayments of these conventional home
loans, with respect to its entire portfolio of loans and in particular with
respect to such increased volume and additional types of loans. Accordingly,
neither the delinquency experience and loan loss and liquidation experience set
forth under "The Transferor and Servicer -- Servicing Experience" herein nor the
prepayment scenarios set forth under "Prepayment and Yield
Considerations -- Weighted Average Life of the Offered Certificates" herein may
be indicative of the performance of the Home Loans included in the Home Loan
Pool. Prospective investors should make their investment determination based on
the Home Loan underwriting criteria, the availability of the Credit Enhancement
described herein, the characteristics of the Initial Home Loans and other
information provided herein, and not based on any prior delinquency experience
and loan loss and liquidation experience information set forth herein or any
rate of prepayments assumed herein.
GEOGRAPHIC CONCENTRATION. Approximately 57.9% and 8.2% of the Initial Pool
Principal Balance will consist of Home Loans that either are secured by
Mortgaged Properties located or have the related borrowers residing in the
States of California and Arizona, respectively. Because of the relative
geographic concentration of the Home Loans within these States, delinquencies
and losses on the Home Loans may be higher than would be the case if the Home
Loans were more geographically diversified. Adverse economic conditions in these
States or geographic regions (which may or may not affect real property values)
may affect the ability of the related borrowers to make timely payments of their
scheduled monthly payments of principal and interest and, accordingly, the
actual rates of delinquencies, defaults and losses on such Home Loans could be
higher than those currently experienced in the home lending and consumer finance
industry for similar types of loans. In addition, with respect to the Secured
Loans in these States, certain of the Mortgaged Properties may be more
susceptible to certain types of special hazards that are not covered by any
casualty insurance, such as earthquakes, floods and other natural disasters and
major civil disturbances, than residential properties located in other parts of
the country. With respect to those Secured Loans secured by Mortgaged Properties
located in the State of California, the California residential real estate
market has experienced a sustained decline over the last several years. In
general, declines in the California residential real estate market may adversely
affect the values of the Mortgaged Properties securing such Secured Loans such
that the outstanding principal balances of such Secured Loans, together with the
outstanding principal amount of any senior mortgage loans on such Mortgaged
Properties, will equal or exceed the value of such Mortgaged Properties.
Accordingly, the actual rates of delinquencies, foreclosures and losses on such
California Secured Loans could be higher than those currently experienced in the
home lending and consumer finance industry in general.
NO SERVICING ADVANCES. In the event of a delinquency or a default with
respect to a Home Loan, neither the Servicer nor any Subservicer will have an
obligation to advance scheduled monthly payments of principal and interest with
respect to such Home Loan. But, the Servicer or any Subservicer will make
reasonable and customary expense advances with respect to the Home Loans in
accordance with their servicing obligations. See "Description of the Transfer
and Servicing Agreements -- Servicing" herein.
DEPENDENCE ON SERVICER FOR SERVICING HOME LOANS. Pursuant to the Sale and
Servicing Agreement, the Servicer, or each Subservicer on behalf of the
Servicer, will perform the daily loan servicing functions for the Home Loans
that include, without limitation, the collection of payments from the Home
Loans, the remittance of funds from such collections for distribution to the
holders of the Offered Securities, the bookkeeping and accounting for such
collections and distributions, all other servicing activities relating to the
Home Loans, the preparation of the monthly servicing and remittance reports
pursuant to the Sale and Servicing Agreement and the maintenance of all records
and files pertaining to such servicing activities. Upon the Servicer's failure
to remedy an Event of Default under the Sale and Servicing Agreement, a majority
of the holders of the Offered Securities or the Indenture Trustee or the Owner
Trustee, with the consent of the Securities Insurer, or the Securities Insurer
may remove the Servicer and appoint a successor servicer
S-18
<PAGE> 22
pursuant to the terms of the Sale and Servicing Agreement. Absent such a
replacement, the holders of the Offered Securities will be dependent upon the
Servicer to adequately and timely perform its servicing obligations and remit to
the Indenture Trustee the funds from the payments of principal and interest
received on the Home Loans, and with respect to Home Loans being serviced by a
Subservicer, the Servicer will be dependent upon such Subservicer to adequately
and timely perform its servicing obligations and remit to the Servicer the funds
from the payments of principal and interest received on such Home Loans. The
manner in which the Servicer, and each Subservicer, as applicable, performs its
servicing obligations will affect the amount and timing of the principal and
interest payments received on the Home Loans. The principal and interest
payments received on the Home Loans are the primary source of funds for the
distributions due to the holders of the Offered Securities under the Sale and
Servicing Agreement. Accordingly, the holders of the Offered Securities will be
dependent upon the Servicer, and each Subservicer, as applicable, to adequately
and timely perform its servicing obligations and such performance will affect
the amount and timing of distributions to the holders of the Offered Securities.
See "The Transferor and Servicer -- Servicing Experience" herein.
REALIZATION UPON DEFAULTED SECURED LOANS. Substantially all of the Secured
Loans are secured by junior liens, and the related senior liens are not included
in the Home Loan Pool. The primary risk to holders of Secured Loans secured by
junior liens is the possibility that adequate funds will not be received in
connection with a foreclosure of the related Mortgaged Property to satisfy fully
both the senior lien(s) and the Home Loan. See "Risk Factors -- Certain Factors
Affecting Delinquencies, Foreclosures and Losses on Underlying
Loans -- Limitations on Realization of Junior Liens" in the Prospectus. In
accordance with the loan servicing practices of the Servicer and any Subservicer
for home loans secured by junior liens in their respective portfolios and based
upon a determination that the realization from a defaulted junior lien Secured
Loan may not an economically viable alternative, neither the Servicer nor any
Subservicer, in most cases, will (i) pursue the foreclosure of a defaulted
Secured Loan, (ii) satisfy the senior mortgage(s) at or prior to the foreclosure
sale of the Mortgaged Property, or (iii) advance funds to keep the senior
mortgage(s) current. The Trust will have no source of funds to satisfy the
senior mortgage(s) or make payments due to the senior mortgagee(s), and,
therefore, holders of the Offered Securities should not expect that any senior
mortgage(s) will be kept current by the Trust for the purpose of protecting any
junior lien Secured Loan. See "Certain Legal Aspects of the Loan
Assets -- Foreclosure -- Junior Liens" in the Prospectus.
NON-RECORDATION OF ASSIGNMENTS. Subject to confirmation by the Rating
Agencies and to the approval of the Securities Insurer, with respect to any
Secured Loan, the Transferor will not be required to record assignments to the
Indenture Trustee of the Mortgages in the real property records for the Secured
Loans, but rather the Transferor, in its capacity as the Servicer, will retain
record title to such Mortgages on behalf of the Indenture Trustee and the
holders of the Offered Securities. See "Description of the Transfer and
Servicing Agreements -- Sale and Assignment of Home Loans" herein.
Although the recordation of the assignments of the Mortgages in favor of
the Indenture Trustee is not necessary to effect a transfer of the Secured Loans
to the Indenture Trustee, if the Transferor or the Seller were to sell, assign,
satisfy or discharge any Secured Loan prior to recording the related assignment
in favor of the Indenture Trustee, the other parties to such sale, assignment,
satisfaction or discharge may have rights superior to those of the Indenture
Trustee. In some states, in the absence of such recordation of the assignments
of the Mortgages, the transfer to the Indenture Trustee of the Secured Loans may
not be effective against certain creditors or purchasers from the Transferor or
a trustee in bankruptcy of the Transferor. If such other parties, creditors or
purchasers have rights to the Secured Loans that are superior to those of the
Indenture Trustee, then the holders of the Offered Securities could lose the
right to future payments of principal and interest from such Secured Loans and
could suffer a loss of principal and interest to the extent that such loss is
not otherwise covered by amounts available from the credit enhancement provided
for the Offered Securities, including the Guaranty Policy.
OTHER LEGAL CONSIDERATIONS. The underwriting, origination, servicing and
collection of the Home Loans are subject to a variety of state and federal laws,
public policies and principles of equity. See "Risk Factors -- Certain Factors
Affecting Delinquencies, Foreclosures and Losses on Underlying Loans -- Certain
Legal Considerations of Home Loans and Contracts" in the Prospectus. The
Transferor will be required to
S-19
<PAGE> 23
repurchase or replace any Home Loan which did not comply with applicable state
and federal laws and regulations as of the Closing Date for any Initial Home
Loan and as of the Subsequent Transfer Date for any Subsequent Home Loan. See
"-- Limitations on Repurchase or Replacement of Defective Home Loans by
Transferor" below.
Depending on the provisions of applicable law and the specific facts and
circumstances involved, violations of these laws, policies or principles may
limit the ability of the Servicer or any Subservicer to collect all or part of
the principal or interest on the Home Loans, may entitle the borrower to a
refund of amounts previously paid, and, in addition, could subject the Servicer
or any Subservicer to damages and administrative sanctions. If the Servicer or
any Subservicer is unable to collect all or part of the principal or interest on
any Home Loans because of a violation of the aforementioned laws, public
policies or general principles of equity, then the Trust may be delayed or
unable to make all distributions owed to the holders of the Offered Securities
to the extent any related losses are not otherwise covered by amounts available
from the credit enhancement provided for the Offered Securities, including the
Guaranty Policy. Furthermore, depending upon whether damages and sanctions are
assessed against the Servicer, any Subservicer or the Transferor, such
violations may materially impact (i) the financial ability of the Servicer or
Subservicer to continue to act in such capacity or (ii) the ability of the
Transferor to repurchase or replace Defective Home Loans if such violation
breaches a representation or warranty contained in the Sale and Servicing
Agreement.
LIMITATIONS ON REPURCHASE OR REPLACEMENT OF DEFECTIVE HOME LOANS BY TRANSFEROR
Pursuant to the Sale and Servicing Agreement, the Transferor has agreed to
cure in all material respects any breach of the Transferor's representations and
warranties set forth in the Sale and Servicing Agreement with respect to
Defective Home Loans. If the Transferor cannot cure such breach within a
specified period of time, the Transferor is required to repurchase such
Defective Home Loans from the Trust or substitute other loans for such Defective
Home Loans and to indemnify the Trust and the Securities Insurer for any losses
incurred in excess of the proceeds received from the repurchase or substitution
of such Defective Home Loans. Although a significant portion of the Home Loans
will have been acquired from unaffiliated correspondent lenders, the Transferor
will make the representations and warranties for all such Home Loans. To the
extent that the Transferor has obtained any representations and warranties from
such unaffiliated correspondent lenders, the Transferor, and the Trust, on
behalf of the holders of the Offered Securities and the Securities Insurer, as
the successors to the Transferor's rights with respect thereto, will have an
additional party that is liable for the repurchase of any Home Loan in breach of
the applicable representations and warranties made by such party. For a summary
description of the Transferor's representations and warranties, see "Description
of the Transfer and Servicing Agreements -- Sale and Assignment of Loan Assets"
in the Prospectus.
No assurance can be given that, at any particular time, the Transferor will
be capable, financially or otherwise, of repurchasing or replacing Defective
Home Loans in the manner described above, or that, at any particular time, any
unaffiliated lender from whom the Transferor obtained the Defective Home Loans
will be capable, financially or otherwise, of repurchasing any Defective Home
Loans from the Transferor. If the Transferor repurchases, or is obligated to
repurchase, defective home loans from any other series of asset backed
securities, the financial ability of the Transferor to repurchase Defective Home
Loans from the Trust may be adversely affected. In addition, other events
relating to the Transferor and its home lending and consumer finance operations
can occur that would adversely affect the financial ability of the Transferor to
repurchase Defective Home Loans from the Trust, including without limitation the
sale or other disposition of all or any significant portion of its assets. If
the Transferor is unable to repurchase or replace a Defective Home Loan, and if
applicable, such unaffiliated lender is unable to repurchase or replace a
Defective Home Loan it sold to the Transferor, then the Servicer, on behalf of
the Trust, will pursue other customary and reasonable efforts, if any, to
recover the maximum amount possible with respect to such Defective Home Loan,
and any resulting loss will be borne by the holders of the Offered Securities to
the extent that such loss is not otherwise covered by amounts available from the
credit enhancement provided for the Offered Securities, including, the Guaranty
Policy. See "-- Additional Credit Enhancement Limitations -- Adequacy of Credit
Enhancement" above and "The Transferor and Servicer" herein.
S-20
<PAGE> 24
LIMITATIONS ON LIQUIDITY OF TRANSFEROR AND SERVICER
As a result of the Transferor's increasing volume of loan originations and
purchases, and its expanding securitization activities, the Transferor requires
substantial capital to fund its operations and has operated, and expects to
continue to operate, on a negative operating cash flow basis. Currently, the
Transferor funds substantially all of its operations, including its loan
originations and purchases, from the capital contributed by RAC, its parent, and
from borrowings under the Transferor's lending arrangements with certain third
parties, including warehouse and term credit facilities. See "The Transferor and
Servicer" herein. There can be no assurance that RAC will be able to contribute
additional capital or that, as the Transferor's existing lending arrangements
mature, the Transferor will have access to the financing necessary for its
operations or that such financing will be available to the Transferor on
favorable terms. To the extent that RAC and the Transferor are unable to arrange
new or alternative methods of financing on favorable terms, the Transferor may
have to curtail its loan origination and purchasing activities, which could have
a material adverse effect on the Transferor's financial condition and, in turn,
its ability to service the Home Loans and to repurchase any Defective Home
Loans.
DISSOLUTION OF TRUST FROM INSOLVENCY OF AFFILIATED HOLDER
On the Closing Date, the Affiliated Holder will be an affiliate of the
Seller and will purchase approximately 1% of the Original Certificate Principal
Balance of the Certificates and approximately 1% of the Residual Interest. The
Trust Agreement will provide that if an Insolvency Event with respect to the
Affiliated Holder occurs, subject to certain conditions, the Trust will
dissolve. The Seller has taken certain steps in structuring the transactions
contemplated hereby that are intended to help insure that an Insolvency Event
with respect to the Affiliated Holder will not occur. These steps include the
formation of the Affiliated Holder as a separate limited-purpose entity pursuant
to formation documents that contain certain limitations (including restrictions
on the nature of the Affiliated Holder's business and restriction on the
Affiliated Holder's ability to commence a voluntary case or proceeding under the
United States Bankruptcy Code or similar applicable state laws ("Insolvency
Laws")). However, there can be no assurance that the activities of the
Affiliated Holder would not result in an Insolvency Event.
If an Insolvency Event with respect to the Affiliated Holder occurs, and
authorization to continue the Trust is not received, the Home Loans will not be
sold, but the Owner Trustee shall adopt a plan of dissolution, acceptable to the
Securities Insurer, that provides for the appointment of a conservator, who
shall be acceptable to the Securities Insurer, to make collections on the Home
Loans for distribution to the holders of the Offered Securities in accordance
with the terms and priority of payment described herein. See "Description of the
Transfer and Servicing Agreements -- Insolvency Event".
USE OF PROCEEDS
The proceeds from the sale of the Offered Securities, net of certain
expenses, will be used by the Trust as consideration for the purchase of the
Initial Home Loans from the Seller and to fund the Pre-Funding Account Deposit,
the Capitalized Interest Account Deposit and the Reserve Fund. The Seller will
use all such proceeds from the sale of the Initial Home Loans to the Trust as
consideration for the purchase of the Initial Home Loans from the Transferor.
The Transferor in turn will use all or a substantial portion of such proceeds
from the sale of the Initial Home Loans to repay certain indebtedness in the
form of one or more warehouse financing arrangements, which have been utilized
to finance the acquisition of such Initial Home Loans and are secured by such
Initial Home Loans, and to replenish its working capital funds that were
previously used to originate, acquire or hold the Home Loans not pledged under a
warehouse financing arrangement. See "Underwriting" herein.
S-21
<PAGE> 25
DESCRIPTION OF THE TRUST
GENERAL
The Issuer, FIRSTPLUS Home Loan Owner Trust 1996-3, is a business trust
formed under the laws of the State of Delaware pursuant to the Trust Agreement
for the transactions described in this Prospectus Supplement. After its
formation, the Trust will not engage in any activity other than (i) acquiring,
holding and managing the Home Loans and the other assets of the Trust and
proceeds therefrom, (ii) issuing the Offered Securities, (iii) making payments
on the Offered Securities and (iv) engaging in other activities that are
necessary, suitable or convenient to accomplish the foregoing or are incidental
thereto or connected therewith.
The Certificates represent an undivided ownership interest in the Trust.
The Residual Interest will represent the residual interest in the assets of the
Trust. It is expected that the Certificates will be sold to third party
investors that are expected to be unaffiliated with the Seller and the
Transferor, the Servicer or the Trust, except that on the Closing Date
approximately 1% of the Original Certificate Principal Balance will be purchased
by the Affiliated Holder. In addition, on the Closing Date, such Affiliated
Holder will purchase approximately 1% of the Residual Interest. The Trust will
initially be capitalized with equity equal to the Certificate Principal Balance
of the Certificates of $ , excluding amounts deposited in the Reserve
Fund. After the Closing Date, the Affiliated Holder may sell the Certificates
and Residual Interest acquired by it to another entity that satisfies the
special purpose entity requirements of the Rating Agencies, with the prior
written consent of the Securities Insurer, and certain other requirements set
forth in the Trust Agreement. The equity of the Trust, together with the net
proceeds from the sale of the Offered Securities, will be used by the Trust to
purchase the Initial Home Loans from the Seller pursuant to the Sale and
Servicing Agreement and to fund the Pre-Funding Account, the Capitalized
Interest Account and the Reserve Fund.
On the Closing Date, the Trust will purchase Home Loans (the "Initial Home
Loans") having an aggregate principal balance of approximately $215,006,133 (the
"Initial Pool Principal Balance") as of the August 31, 1996 Cut-Off Date from
the Seller pursuant to a Sale and Servicing Agreement to be dated as of
September 1, 1996 (as amended and supplemented from time to time, the "Sale and
Servicing Agreement"), among the Trust, the Seller and the Servicer. In
addition, on the Closing Date, the Seller is expected to deposit approximately
$84,993,867 into a pre-funding account (the "Pre-Funding Account") for the
purchase of additional Home Loans (the "Subsequent Home Loans") during the
Funding Period (as defined herein). The sum of the aggregate principal balance
of the Initial Home Loans and the amount expected to be deposited into the
Pre-Funding Account on the Closing Date equals $300,000,000 (the "Assumed Pool
Principal Balance").
The assets of the Trust will primarily include the Home Loan Pool
consisting of (1) Secured Loans which will be secured by either (i) Mortgages or
(ii) security instruments creating a lien on personal property such as home
appliances or furnishings; and (2) Unsecured Loans which will not be secured by
any interest in real or personal property. See "The Home Loan Pool" herein. The
assets of the Trust will also include (i) payments in respect of the Home Loans
of interest and principal received after the applicable Cut-Off Date; (ii)
amounts on deposit in the Pre-Funding Account and the Capitalized Interest
Account until the expiration of the Funding Period, (iii) assets on deposit in
the Reserve Fund, (iv) amounts on deposit in the Collection Account, Note
Distribution Account and Certificate Distribution Account; and (v) certain other
ancillary or incidental funds, rights and properties related to the foregoing.
The Trust will include the unpaid principal balance of each Home Loan as of
the related Cut-Off Date (the "Cut-Off Date Principal Balance"). The "Principal
Balance" of a Home Loan on any day is equal to its related Cut-Off Date
Principal Balance, minus all principal reductions credited against the Principal
Balance of such Home Loan since such Cut-Off Date, including any net loan losses
recorded by the Servicer. With respect to any date, the "Pool Principal Balance"
will be equal to the aggregate Principal Balances of all Home Loans as of such
date.
The Servicer will service the Home Loans pursuant to the Sale and Servicing
Agreement (collectively with the Indenture, the Administration Agreement and the
Trust Agreement, the "Transfer and Servicing
S-22
<PAGE> 26
Agreements") and will be compensated for such services as described under
"Description of the Transfer and Servicing Agreements -- Servicing" herein.
The Trust's principal offices are located in Wilmington, Delaware, in care
of Wilmington Trust Company, as Owner Trustee, at the address set forth below
under "-- The Owner Trustee".
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of the
Closing Date, as if the issuance and sale of the Offered Securities had taken
place on such date:
<TABLE>
<S> <C>
Class A-1 Notes............................................. $
Class A-2 Notes............................................. $
Class A-3 Notes............................................. $
Class A-4 Notes............................................. $
Class A-5 Notes............................................. $
Class A-6 Notes............................................. $
Class A-7 Notes............................................. $
Certificates................................................ $
-------
Total............................................. $
=======
</TABLE>
THE OWNER TRUSTEE
Wilmington Trust Company will act as the Owner Trustee under the Trust
Agreement. Wilmington Trust Company is a Delaware banking corporation and its
principal offices are located at Rodney Square North, 1100 North Market Street,
Wilmington, Delaware 19890-0001.
THE HOME LOAN POOL
GENERAL
The Home Loan Pool will consist of the collective pool of the Initial Home
Loans together with any Subsequent Home Loans conveyed to the Trust after the
Closing Date. All of the Home Loans will be conventional loans (i.e., not
insured or guaranteed by a governmental agency) ("Conventional Loans"). The Home
Loans will consist of loans, including in certain instances retail installment
sale contracts, for which the related net proceeds were used to finance (i)
property improvements, (ii) the acquisition of personal property such as home
appliances or furnishings, (iii) debt consolidation, (iv) the purchase or
refinancing of single family residential property, or (v) a combination of
property improvements, debt consolidation and other consumer purposes, which
loans are marketed by the Transferor under the name "BusterPlus(TM) Loans".
Substantially all of the Mortgages for the Secured Loans will be junior (i.e.,
second, third, etc.) in priority to one or more senior liens on the related
Mortgaged Properties, which will consist primarily of owner occupied single
family residences. A majority of the Secured Loans will be secured by liens on
Mortgaged Properties in which the borrowers have no equity therein (i.e., the
related combined loan-to-value ratios exceed 100%) at the time of origination of
such Secured Loans.
Generally, the Home Loans will have been originated or acquired by the
Transferor in one of four ways: (i) the wholesale purchase of loans, on a flow
basis, originated by other unaffiliated lenders, as correspondents
("correspondent originations"), including delegated underwriting correspondents;
(ii) the origination of loans directly to consumers, including but not limited
to solicitations through direct mail and telemarketing and referrals from home
improvement contractors ("direct originations"); (iii) the indirect origination
and purchase of retail installment sales contracts from a network of independent
contractors or dealers that professionally install the related property
improvements ("indirect originations"); or (iv) the purchase, on a bulk basis,
of loan portfolios originated by other unaffiliated lenders ("portfolio
acquisitions"). Except with respect to the Home Loans acquired from the
delegated underwriting correspondents and through portfolio
S-23
<PAGE> 27
acquisitions, a substantial percentage of the Home Loans will have been
underwritten or re-underwritten to determine whether such Home Loans comply with
the underwriting standards of the Transferor.
For a description of the underwriting criteria applicable to the Home
Loans, see "The Transferor and Servicer -- Underwriting Criteria" herein. All of
the Home Loans will be acquired by the Transferor and sold by the Transferor to
the Seller, and pursuant to the Sale and Servicing Agreement, the Seller will
sell, convey, transfer and assign the Home Loans to the Trust. Pursuant to the
Indenture, the Trust will pledge and assign the Home Loans to the Indenture
Trustee for the benefit of the holders of the Offered Securities and the
Securities Insurer. The Trust will be entitled to all payments of interest and
principal and all proceeds received in respect of the Home Loans after (i) the
August 31, 1996 Cut-Off Date with respect to the Initial Home Loans and (ii) the
related Cut-off Date with respect to the Subsequent Home Loans.
PAYMENTS ON THE HOME LOANS
The Home Loans generally provide for a schedule of payments which will be,
if timely paid, sufficient to amortize fully the principal balance of the
related Home Loan on or before its maturity date. The Home Loans have scheduled
monthly payment dates which occur throughout a month. Each Home Loan bears
interest at a fixed rate of interest (the "Home Loan Rate"). Interest with
respect to the Home Loans will accrue on either an "actuarial interest" method
or a "simple interest" or "date of payment" method. No Home Loan provides for
deferred interest or negative amortization.
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day of each month which is fixed at the time
of origination, and payments received after a grace period following such
scheduled day are subject to late charges. For example, a Scheduled Payment on a
Home Loan received either earlier or later (other than delinquent) than the
scheduled due date thereof will not affect the amortization schedule or the
relative application of such payment to principal and interest in respect of
such Home Loan.
The simple interest method provides for the amortization of the amount of a
Home Loan over a series of equal Scheduled Payments. However, unlike the monthly
actuarial interest method, each Scheduled Payment consists of an installment of
interest which is calculated on the basis of the outstanding principal balance
of the related Home Loan at the stated Home Loan Rate and based upon the period
elapsed since the preceding payment of principal was made, using the method
permitted by applicable law. As payments are received under the Home Loan, the
amount received is applied first to interest accrued to the date of payment and
the balance, if any, is applied to reduce the unpaid principal balance.
Accordingly, if a borrower pays a fixed monthly installment on such a Home Loan
before its scheduled monthly due date, the portion of the payment allocable to
interest for the period since the preceding payment was made will be less than
it would have been had the payment been made as scheduled, and the portion of
the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a fixed monthly
installment on such a Home Loan after its scheduled monthly due date, the
portion of the payment allocable to interest for the period since the preceding
payment was made will be greater than it would be had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly lowered. In addition, in certain states a late
charge may be imposed with respect to the past due amount.
With respect to a Home Loan for which interest accrues pursuant to the
simple interest method, if a payment is received on such Home Loan before its
scheduled monthly due date, more of such payment will be used on the related
Distribution Date to pay principal on the Offered Securities than if such
payment was received on such scheduled monthly due date. Conversely, if a
payment is received on such Home Loan after its scheduled monthly due date, less
of such payment will be used on the related Distribution Date to pay principal
on the Offered Securities than if such payment was received on its scheduled due
date. This will not affect the total amount of principal to be received by the
Offered Securities over the life of the transaction, but it may affect the
weighted average lives of the Offered Securities. See "Prepayment and Yield
Considerations" herein.
S-24
<PAGE> 28
CHARACTERISTICS OF INITIAL HOME LOANS
The following is a brief description of certain terms of the Initial Home
Loans proposed to be included in the Home Loan Pool as of the date of this
Prospectus Supplement. Unless otherwise indicated, this description does not
take into account any Subsequent Home Loans that may be added to the Home Loan
Pool during the Funding Period through the application of amounts on deposit in
the Pre-Funding Account. Prior to the Closing Date, the Transferor may remove
any of the Initial Home Loans intended for inclusion in the Home Loan Pool,
substitute comparable loans therefor, or add comparable loans thereto; however,
the aggregate principal balance of Initial Home Loans so replaced, added or
removed cannot exceed 5.0% of the Initial Pool Principal Balance and any such
Initial Home Loans so added must be approved by the Securities Insurer. To the
extent that, prior to the Closing Date, home loans are removed from or added to
the Home Loan Pool, an amount equal to the aggregate principal balances of such
home loans, will be added to or deducted from, respectively, the Pre-Funding
Account Deposit on the Closing Date. As a result, the statistical information
presented below regarding the Initial Home Loans proposed to be included in the
Home Loan Pool as of the date of this Prospectus Supplement may vary in certain
respects from comparable information based on the actual composition of the Home
Loan Pool at the Closing Date. In addition, after the August 31, 1996 Cut-Off
Date, the actual Home Loan Pool may vary from the description below due to a
number of factors, including prepayments after August 31, 1996 Cut-Off Date or
the purchase of any Subsequent Home Loans after the Closing Date. See
"-- Conveyance of Subsequent Home Loans" below. A schedule of the Initial Home
Loans included in the Home Loan Pool as of the Closing Date will be attached to
the Sale and Servicing Agreement delivered to the Indenture Trustee upon
delivery of the Offered Securities. A current report on Form 8-K containing a
description of the Home Loans included in the final Home Loan Pool as of the end
of the Funding Period will be filed with the Commission.
The Initial Home Loans included in the initial Home Loan Pool will consist
of approximately 7,337 loans having an Initial Pool Principal Balance of
approximately $215,006,133. The Initial Home Loans (by aggregate Cut-off Date
Principal Balance) will have the characteristics set forth in the tables
beginning on the following page.
HOME LOAN RATE
<TABLE>
<CAPTION>
RANGE OF NUMBER PERCENT OF TOTAL
HOME LOAN OF INITIAL AGGREGATE BY AGGREGATE
RATES(%) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
8.001 - 9.000 1 $ 10,108.62 0.00%
9.001 - 10.000 2 30,893.95 0.01
10.001 - 11.000 0 0.00 0.00
11.001 - 12.000 69 2,253,196.36 1.05
12.001 - 13.000 451 14,899,396.24 6.93
13.001 - 14.000 1,932 61,573,148.85 28.64
14.001 - 15.000 2,655 78,681,860.87 36.60
15.001 - 16.000 1,618 42,903,070.61 19.95
16.001 - 17.000 464 11,315,210.19 5.26
17.001 - 18.000 107 2,509,985.51 1.17
18.001 - 19.000 26 579,745.00 0.27
19.001 - 20.000 10 199,537.26 0.09
20.001 - 21.000 2 49,979.56 0.02
----- --------------- ------
Totals......................... 7,337 $ 215,006,133.02 100.00%
===== =============== ======
</TABLE>
The weighted average Home Loan Rate of the Initial Home Loans as of the
August 31, 1996 Cut-Off Date was approximately 14.622% per annum.
S-25
<PAGE> 29
CUT-OFF DATE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
RANGE OF NUMBER OF PERCENT OF TOTAL
CUT-OFF DATE INITIAL AGGREGATE BY AGGREGATE
PRINCIPAL BALANCE($) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
0.01 - 10,000.00........................... 63 $ 493,717.58 0.23%
10,000.01 - 20,000.00............................ 1,079 18,464,292.52 8.59
20,000.01 - 30,000.00............................ 3,597 91,420,038.52 42.52
30,000.01 - 40,000.00............................ 1,793 65,770,187.10 30.59
40,000.01 - 50,000.00............................ 722 33,670,393.39 15.66
50,000.01 - 60,000.00............................ 44 2,403,701.81 1.12
60,000.01 - 70,000.00............................ 14 920,937.59 0.43
70,000.01 - 80,000.00............................ 25 1,862,864.51 0.87
----- --------------- -------
Totals...................................... 7,337 $ 215,006.133.02 100.00%
===== =============== =======
</TABLE>
The average principal balance of the Initial Home Loans as of the August
31, 1996 Cut-Off Date was approximately $29,304.37.
ORIGINAL LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
RANGE OF NUMBER OF PERCENT OF TOTAL
PRINCIPAL BALANCE INITIAL AGGREGATE BY AGGREGATE
AT ORIGINATION($) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
0.01 - 10,000.00.......................... 62 $ 483,731.35 0.22%
10,000.01 - 20,000.00.......................... 1,078 18,434,399.10 8.57
20,000.01 - 30,000.00.......................... 3,596 91,370,143.58 42.50
30,000.01 - 40,000.00.......................... 1,795 65,819,993.37 30.61
40,000.01 - 50,000.00.......................... 723 33,710,361.71 15.68
50,000.01 - 60,000.00.......................... 44 2,403,701.81 1.12
60,000.01 - 70,000.00.......................... 14 920,937.59 0.43
70,000.01 - 80,000.00.......................... 25 1,862,864.51 0.87
----- --------------- ------
Totals.................................... 7,337 $ 215,006,133.02 100.00%
===== =============== ======
</TABLE>
The average principal balance of the Initial Home Loans at origination was
approximately $29,351.24.
REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
RANGE OF NUMBER OF PERCENT OF TOTAL
REMAINING TERM TO INITIAL AGGREGATE BY AGGREGATE
MATURITY (MONTHS) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
1 - 30.................................... 2 $ 3,045.92 0.00%
31 - 60.................................... 31 469,127.86 0.22
61 - 90.................................... 22 320,998.99 0.15
91 - 120.................................... 287 6,172,417.03 2.87
121 - 150.................................... 25 573,462.08 0.27
151 - 180.................................... 2,004 54,827,506.59 25.50
181 - 210.................................... 5 84,642.55 0.04
211 - 240.................................... 3,739 112,510,710.90 52.33
241 - 270.................................... 3 77,933.07 0.04
271 - 300.................................... 1,219 39,966,288.03 18.59
----- --------------- ------
Totals............................... 7,337 $ 215,006,133.02 100.00%
===== =============== ======
</TABLE>
The weighted average remaining term to maturity of the Initial Home Loans
as of the August 31, 1996 Cut-Off Date was approximately 230 months.
S-26
<PAGE> 30
GEOGRAPHIC CONCENTRATION
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF BY AGGREGATE
INITIAL AGGREGATE PRINCIPAL
STATE HOME LOANS PRINCIPAL BALANCE BALANCE
- ------------------------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Alabama.......................................... 2 $ 62,344.00 0.03%
Arizona.......................................... 625 17,710,356.23 8.24
Arkansas......................................... 1 45,174.89 0.02
California....................................... 4,016 124,391,821.65 57.86
Colorado......................................... 388 10,613,377.75 4.94
Connecticut...................................... 12 307,405.41 0.14
Florida.......................................... 370 8,964,834.48 4.17
Georgia.......................................... 148 3,381,562.14 1.57
Idaho............................................ 31 927,047.84 0.43
Illinois......................................... 21 502,010.66 0.23
Indiana.......................................... 3 87,776.83 0.04
Iowa............................................. 5 110,355.38 0.05
Kentucky......................................... 11 314,031.59 0.15
Louisiana........................................ 6 157,648.83 0.07
Maryland......................................... 18 582,283.99 0.27
Michigan......................................... 1 25,000.00 0.01
Minnesota........................................ 64 1,501,232.58 0.70
Mississippi...................................... 16 429,467.30 0.20
Missouri......................................... 1 24,347.12 0.01
Nevada........................................... 443 12,955,158.92 6.03
New Jersey....................................... 7 306,206.60 0.14
New Mexico....................................... 8 245,152.40 0.11
New York......................................... 3 57,758.78 0.03
North Carolina................................... 136 4,307,122.68 2.00
Ohio............................................. 1 39,908.33 0.02
Oklahoma......................................... 35 817,298.74 0.38
Oregon........................................... 67 1,942,883.26 0.90
Pennsylvania..................................... 1 29,989.85 0.01
Rhode Island..................................... 20 571,665.03 0.27
South Carolina................................... 98 2,327,737.03 1.08
Tennessee........................................ 49 1,151,608.31 0.54
Texas............................................ 12 200,079.46 0.09
Utah............................................. 176 4,728,755.44 2.20
Virginia......................................... 128 3,460,940.72 1.61
Washington....................................... 390 11,212,851.31 5.22
Wisconsin........................................ 24 512,937.49 0.24
----- --------------- -------
Totals...................................... 7,337 $ 215,006,133.02 100.00%
===== =============== =======
</TABLE>
S-27
<PAGE> 31
MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL BY
AGE INITIAL AGGREGATE AGGREGATE
(IN MONTHS) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Less than 1...................................... 1,834 $ 53,127,288.27 24.71%
1 -- 6........................................... 5,474 161,654,431.14 75.19
7 -- 12.......................................... 29 224,413.61 0.10
----- --------------- -------
Totals...................................... 7,337 $ 215,006,133.02 100.00%
===== =============== =======
</TABLE>
The weighted average age of the Initial Home Loans as of the August 31,
1996 Cut-Off Date was approximately one month.
CONVEYANCE OF SUBSEQUENT HOME LOANS
Under the Sale and Servicing Agreement the obligation of the Trust to
purchase Subsequent Home Loans on a Subsequent Transfer Date for assignment to
the Home Loan Pool is subject to the requirements described under "Description
of the Transfer and Servicing Agreements -- Conveyance of Subsequent Loan
Assets" in the Prospectus, as well as the following additional requirements: (i)
generally such Subsequent Home Loans may not be 30 or more days contractually
delinquent as of the related Cut-Off Date, (ii) the original term to stated
maturity of such Subsequent Home Loans may not exceed 25 years; (iii) generally
each such Subsequent Home Loan will have an interest rate of not less than
8.99%, and a scheduled maturity no later than November 30, 2021; (iv) such
Subsequent Home Loans will be underwritten, re-underwritten or reviewed, as
applicable, in accordance with the underwriting guidelines of the Transferor
(see "The Transferor and Servicer -- Underwriting Criteria") or originated in a
manner similar to the Initial Home Loans; and (v) following the purchase of such
Subsequent Home Loans by the Trust, the Home Loans included in the Home Loan
Pool (including the Subsequent Home Loans purchased by the Trust after the
Closing Date) will have a weighted average interest rate and a weighted average
term to maturity as of each respective Cut-Off Date comparable to the Initial
Home Loans included in the Initial Home Loan Pool. Following the transfer of
such Subsequent Home Loans to the Home Loan Pool, the aggregate statistical
characteristics of the Home Loans then held in the Home Loan Pool may, and
likely will, vary from those of the Initial Home Loans included in the Initial
Home Loan Pool. See "Risk Factors -- Acquisition of Subsequent Home Loans from
Pre-Funding Account" herein.
THE SELLER
FIRSTPLUS INVESTMENT CORPORATION (the "Seller") is a Nevada corporation,
formerly known as Remodelers Investment Corporation, organized in 1995 and is a
wholly owned subsidiary of RAC. The Seller was formed as a limited purpose
finance company to effect the securitization of conventional property
improvement debt consolidation and other consumer loans, property improvement
and manufactured housing loans partially insured by the FHA under the Title I
Program, and other types of assets.
The Seller will acquire from the Transferor all of its right, title and
interest in and to the Home Loans. In turn, the Seller will sell, convey,
transfer and assign the Home Loans to the Trust pursuant to the Sale and
Servicing Agreement for the benefit of the Offered Securities and the Securities
Insurer.
THE TRANSFEROR AND SERVICER
GENERAL
FIRSTPLUS FINANCIAL, INC. ("FFI"), formerly known as Remodelers National
Funding Corp., a Texas corporation, was organized in 1986 and received its Title
I contract of insurance in October of 1986. FFI will transfer the Home Loans to
the Seller (in such capacity, the "Transferor"). FFI also will service the Home
Loans under the Sale and Servicing Agreement (in such capacity, the "Servicer").
FFI is a wholly-
S-28
<PAGE> 32
owned subsidiary of RAC and is primarily engaged in the business of originating,
purchasing, underwriting, selling and/or servicing loans including property
improvement, debt consolidation loans and other consumer loans. As of June 30,
1996 the Transferor employed 754 persons including 71 primarily in loan
servicing. As of June 30, 1996, FFI administered and serviced approximately
$750.5 million in principal balance of property improvement, debt consolidation
and other consumer loans (including loans subserviced by others).
RAC is a publicly held, NASDAQ listed company that completed an initial
public offering of its common stock in February 1996. As of June 30, 1996, the
RAC Consolidated Financial Statements, as unaudited, which included RAC and its
subsidiaries, FFI and SFA: State Financial Acceptance Corporation ("SFAC"), set
forth total assets of $322,852,897, total liabilities of $241,659,061 and total
stockholders' equity of $81,193,836, and for the nine months ended June 30, 1996
set forth net income of $20,837,537. Additionally, as of September 30, 1995, the
RAC Consolidated Financial Statements, as audited, which included RAC, FFI and
SFAC, set forth total assets of $61,340,508, total liabilities of $49,606,637
and total stockholders' equity of $11,733,871, and for the fiscal year ended
September 30, 1995 set forth net income of $5,839,510. Additionally, as of
September 30, 1995, the financial statements of FFI, as audited, set forth total
assets of $49,135,614, total liabilities of $42,732,351, and total stockholder's
equity of $6,403,263. Any credit or other problems associated with the large
number of loans originated in the recent past will not become apparent until
sometime in the future. Consequently, historical results of operations of RAC
and its affiliates may be of limited relevance to an investor seeking to predict
the future financial condition of RAC and its affiliates. See "Risk
Factors -- Limitations on Liquidity of Transferor and Servicer" herein.
FFI, as the Servicer, will service the Home Loans pursuant to the Sale and
Servicing Agreement and be entitled to the Servicing Fee and additional
servicing compensation for serving as the Servicer. See "-- Servicing
Experience" below and "Description of the Transfer and Servicing
Agreements -- Servicing" herein.
UNDERWRITING CRITERIA
The Transferor believes that all Conventional Loans underwritten by it will
have been underwritten pursuant to the Transferor's underwriting requirements.
Generally, the underwriting standards of the Transferor place a greater emphasis
on the creditworthiness of the borrower than on the underlying collateral in
evaluating the likelihood that a borrower will be able to repay a Conventional
Loan.
Generally, the Conventional Loans originated or purchased by the Transferor
will have been made to borrowers that typically have limited access to consumer
financing for a variety of reasons, such as high levels of debt
service-to-income, unfavorable past credit experience, insufficient home equity
value, lower income or a limited credit history. With respect to the loans
originated or purchased by the Transferor, the collection of loan payments from
the related borrowers is subject to various risks from these borrowers,
including without limitation the risk that a borrower will not satisfy their
debt service payments, including payments of interest and principal on the loan,
and that in the case of a secured loan the realizable value of the related
mortgaged property will not be sufficient to repay the outstanding interest and
principal owed on the loan. The Transferor uses its own credit evaluation
criteria to classify the borrowers of loans by risk class as "A" through "D"
grade credits. These criteria include, as a significant component, the credit
evaluation score methodology (the "FICO Score") developed by Fair, Issac and
Company, a consulting firm specializing in creating default predictive models
through scoring mechanisms. Additional criteria includes the borrower's
debt-to-income ratio, mortgage credit history, consumer credit history,
bankruptcies, foreclosures, notice of defaults, deeds in lieu and repossessions.
The Transferor believes that the most important credit characteristics are the
borrower's FICO Score and debt-to-income ratio, the latter of which, generally
may not exceed 45% of the borrower's gross income.
The Transferor has put into place a credit policy that provides a number of
guidelines to assist underwriters in the credit review and decision process.
Such underwriting guidelines provide for the evaluation of a loan applicant's
creditworthiness through the use of a consumer credit report, verification of
employment and a review of the debt service-to-income ratio of the applicant.
Income is verified through various means, including without limitation applicant
interviews, written verifications with employers, review of pay stubs or
S-29
<PAGE> 33
tax returns. The borrower must demonstrate sufficient levels of disposable
income to satisfy debt repayment requirements.
In response to changes and developments in the consumer finance area as
well as the refinement of the Company's credit evaluation methodology, the
Transferor's underwriting requirements for certain types of home loans may
change from time to time, which in certain instances may result in more
stringent and in other instances less stringent underwriting requirements.
Depending upon the date on which the Home Loans were originated or purchased by
the Transferor, such Home Loans included in the Home Loan Pool may have been
originated or purchased by the Transferor under different underwriting
requirements, and accordingly, certain Home Loans included in the Home Loan Pool
may be of a different credit quality and have different loan characteristics
from other Home Loans. Furthermore, to the extent that certain Home Loans were
originated or purchased by the Transferor under less stringent underwriting
requirements, such Home Loans may be more likely to experience higher rates of
delinquencies, defaults and losses than those Home Loans originated or purchased
under more stringent underwriting requirements.
REPURCHASE OR SUBSTITUTION OF HOME LOANS
The Seller and the Transferor each have the option (1) to remove any Home
Loans (exclusive of Defective Home Loans and Defaulted Home Loans) and
substitute Qualified Substitute Home Loans up to an aggregate amount of not more
than 5% without Securities Insurer approval, and 10% with Securities Insurer
approval, of the aggregate Cut-Off Date Principal Balances of the Home Loans;
and (2) either to repurchase any Home Loan incident to foreclosure, default or
imminent default thereof (a "Defaulted Home Loan") or to remove such Defaulted
Home Loan and substitute a Qualified Substitute Home Loan. The Transferor will
be obligated either to repurchase any Defective Home Loan or to remove such
Defective Home Loan and substitute a Qualified Substitute Home Loan. See
"Description of the Trust Property -- Additions, Substitution and Withdrawal of
Assets" in the Prospectus.
Unless waived by the Securities Insurer, the Transferor is required (i)
within 60 days after discovery or notice thereof to cure in all material
respects any breach of the representations or warranties made with respect to a
Defective Home Loan, or (ii) on or before the Determination Date next succeeding
the end of such 60 day period, to repurchase such Defective Home Loan at a price
(the "Purchase Price") equal to the Principal Balance of such Defective Home
Loan as of the date of repurchase, plus all accrued and unpaid interest on such
Defective Home Loan to and including the date of repurchase computed at the Home
Loan Rate. In lieu of repurchasing a Defective Home Loan, the Transferor may
replace such Defective Home Loan with one or more Qualified Substitute Home
Loans. If the aggregate outstanding principal balance of the Qualified
Substitute Home Loan(s) plus accrued interest is less than the outstanding
principal balance of the Defective Home Loan(s) plus accrued interest thereon,
the Transferor will also remit for distribution to the holders of the Offered
Certificates an amount equal to such shortfall. As used herein, a "Qualified
Substitute Home Loan" is a home loan that (i) has an interest rate of not less
than (and not more than) two percentage points more than the Home Loan Rate for
the Defective Home Loan which it replaces (each, a "Deleted Home Loan"), (ii)
matures not more than one year later than and not more than one year earlier
than the Deleted Home Loan, (iii) has a principal balance (after application of
all payments received on or prior to the date of such substitution) equal to or
less than the Principal Balance of the Deleted Home Loan as of such date, (iv)
with respect to a Secured Loan, has a lien priority no lower than the Deleted
Home Loan, (v) complies as of the date of substitution with each representation
and warranty set forth in the Sale and Servicing Agreement with respect to the
Home Loans, and (vi) has a borrower with a comparable credit grade
classification than the borrower with respect to the Deleted Home Loan.
No assurance can be given that, at any particular time, the Transferor will
be capable, financially or otherwise, of repurchasing Defective Home Loans or
substituting Qualified Substitute Home Loans for Defective Home Loans in the
manner described above. If the Transferor repurchases, or is obligated to
repurchase, Defective Home Loans from any additional series of asset backed
securities (each, an "Additional Series"), the financial ability of the
Transferor to repurchase defective home loans from the Trust may be adversely
affected. In addition, other events relating to the Transferor and its mortgage
lending and consumer finance operations can occur that would adversely affect
the financial ability of the Transferor to repurchase
S-30
<PAGE> 34
Defective Home Loans from the Trust, including without limitation the sale or
other disposition of all or any significant portion of its assets. If the
Transferor is unable to repurchase or replace a Defective Home Loan, the
Servicer, on behalf of the Trust, will pursue other customary and reasonable
efforts, if any, to recover the maximum amount possible with respect to such
Defective Home Loan. If the Servicer is unable to collect all amounts due to the
Trust with respect to such Defective Home Loan, the resulting loss will be borne
by the holders of the Offered Securities to the extent that such loss is not
otherwise covered by amounts available from the credit enhancement provided for
the Offered Securities, including the Guaranty Policies. See "Risk
Factors -- Additional Credit Enhancement Limitations" and "-- Limitations on
Repurchase or Replacement of Defective Home Loans by Transferor" herein.
SERVICING EXPERIENCE
Since January 1995, the Servicer has substantially increased the volume of
conventional home loans, including additional types of home loans (i.e., its
debt consolidation loans and combination loans or BusterPlus Loans), that it has
originated, purchased, sold and/or serviced, and thus, the Servicer has limited
historical experience with respect to the performance, including the delinquency
and loss experience and the rate of prepayments of these conventional home
loans, with respect to its entire portfolio of loans and in particular with
respect to such increased volume and additional types of loans. Accordingly, the
delinquency experience and loan loss and liquidation experience set forth in the
Prospectus may not be indicative of the performance of the Home Loans included
in the Home Loan Pool. See "The Servicer and the Transferor" in the Prospectus
for delinquency and default experience with respect to the loans serviced by FFI
through June 30, 1996.
A substantial portion of the Servicer's entire loan servicing portfolio
consists of loans securitized by the Servicer in its capacity as the Transferor
and sold to various trusts in connection with several prior series of asset
backed securities issued and sold through public offerings and private
placements. The applicable pooling and servicing agreement for each of these
trusts provides that the trustee of the related trust may terminate the
Servicer's servicing rights if the related loan delinquency or loss experience
exceeds certain standards. As of June 30, 1996, no servicing rights have been
terminated under the related pooling and servicing agreements. However, there
can be no assurance that the future loan delinquency and loss experience for any
of these trusts will not exceed the applicable standard in the future, and if
such standard is exceeded that the servicing rights of the Servicer will not be
terminated with respect to such trusts.
DESCRIPTION OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Notes and the Certificates will be
provided by the Guaranty Policy. Additional credit enhancement with respect to
the Notes and the Certificates that will be utilized prior to the Guaranty
Policy will be provided by (i) the subordination of the Certificates in the case
of the Notes, and the Residual Interest in the case of the Notes and the
Certificates, (ii) the funds available in the Reserve Fund, if any, and (iii)
the overcollateralization from principal attributable to the Residual Interest.
The information set forth below under the section entitled "The Guaranty
Policy" has been supplied by MBIA Insurance Corporation (the "Securities
Insurer") for inclusion in this Prospectus Supplement and has not been reviewed
or verified by the Transferor, the Servicer, the Seller, the Indenture Trustee,
the Owner Trustee or the Underwriters.
THE GUARANTY POLICY
The Securities Insurer, in consideration of the payment of the premium and
subject to the terms of the Guaranty Policy, thereby unconditionally and
irrevocably guarantees to any Owner that an amount equal to each full and
complete Guaranteed Payment will be received by the Indenture Trustee, or its
successors, as trustee for the Owners, on behalf of the Owners from the
Securities Insurer, for distribution by the Indenture Trustee, to each Owner of
each Owner's proportionate share of the Guaranteed Payment. The Securities
Insurer's obligations under the Guaranty Policy with respect to a particular
Guaranteed Payment will be discharged to the extent funds equal to the
applicable Guaranteed Payment are received by the Indenture
S-31
<PAGE> 35
Trustee, whether or not such funds are properly applied by the Indenture
Trustee. Guaranteed Payments will be made only at the time set forth in the
Guaranty Policy and no accelerated Guaranteed Payments will be made regardless
of any acceleration of the Securities, unless such acceleration is at the sole
option of the Securities Insurer.
Notwithstanding the foregoing paragraph, the Guaranty Policy does not cover
shortfalls, if any, attributable to the liability of the Trust or the Indenture
Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability).
The Securities Insurer will pay any Guaranteed Payment that is a Preference
Amount (as defined below) on the Business Day following receipt on a Business
Day by the Fiscal Agent (as defined below) of (i) a certified copy of the order
requiring the return of a preference payment, (ii) an opinion of counsel
satisfactory to the Securities Insurer that such order is final and not subject
to appeal, (iii) an assignment in such form as is reasonably required by the
Securities Insurer, irrevocably assigning to the Securities Insurer all rights
and claims of each Owner relating to or arising under the Securities against the
debtor which made such preference payment or otherwise with respect to such
preference payment and (iv) appropriate instruments to effect the appointment of
the Securities Insurer as agent for such Owner in any legal proceeding related
to such preference payment, such instruments being in a form satisfactory to the
Securities Insurer, provided that if such documents are received after 12:00
noon New York City time on such Business Day, they will be deemed to be received
on the following Business Day. Such payments will be disbursed to the receiver
or trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Owner and not to any Owner directly unless such
Owner has returned principal or interest paid on such Securities to such
receiver or trustee in bankruptcy, in which case such payment will be disbursed
to such Owner.
The Securities Insurer will pay any other amount payable under the Guaranty
Policy no later than 12:00 noon New York City time on the later of the
Distribution Date on which the related Interest Distribution Amount or Regular
Principal Distribution Amount is due or the second Business Day following
receipt in New York, New York on a Business Day by State Street Bank and Trust
Company, N.A., as Fiscal Agent for the Securities Insurer or any successor
fiscal agent appointed by the Securities Insurer (the "Fiscal Agent"), of a
Notice (as defined below); provided that if such Notice is received after 12:00
noon New York City time on such Business Day, it will be deemed to be received
on the following Business Day. If any such Notice received by the Fiscal Agent
is not in proper form or is otherwise insufficient for the purpose of making a
claim under the Guaranty Policy it will be deemed not to have been received by
the Fiscal Agent for purposes of this paragraph, and the Securities Insurer or
the Fiscal Agent, as the case may be, will promptly so advise the Indenture
Trustee and the Indenture Trustee may submit an amended Notice.
Guaranteed Payments due under the Guaranty Policy, unless otherwise stated
therein, will be disbursed by the Fiscal Agent to the Indenture Trustee on
behalf of the Owners by wire transfer of immediately available funds in the
amount of the Guaranteed Payment less, in respect of Guaranteed Payments related
to Preference Amounts, any amount held by the Indenture Trustee for the payment
of such Guaranteed Payment and legally available therefor.
The Fiscal Agent is the agent of the Securities Insurer only and the Fiscal
Agent will in no event be liable to Owners for any acts of the Fiscal Agent or
any failure of the Securities Insurer to deposit or cause to be deposited
sufficient funds to make payments due under the Guaranty Policy.
Subject to the terms of the Indenture, the Securities Insurer shall be
subrogated to the rights of each Owner to receive payments under the Securities
to the extent of any payment by the Securities Insurer under the Policy.
As used in the Guaranty Policy, the following terms will have the following
meanings:
"Business Day" means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York, New York or in the city in which the
corporate trust office of the Indenture Trustee under the Indenture is located
are authorized or obligated by law or executive order to close.
S-32
<PAGE> 36
"Deficiency Amount" means as of any Distribution Date, the amount by which
the sum of the Interest Distribution Amount and Regular Principal Distribution
Amount exceeds the Available Collection Amount (less Trust Fees and Expenses),
plus all amounts on deposit in the Reserve Fund. See "Description of the Offered
Securities -- Distributions on the Notes" and "-- Distributions on the
Certificates" herein.
"Guaranteed Payment" means (i) as of any Distribution Date, any Deficiency
Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy, substantially in the form of Exhibit A attached to the
Guaranty Policy, the original of which is subsequently delivered by registered
or certified mail, from the Indenture Trustee specifying the Guaranteed Payment
which will be due and owing on the applicable Distribution Date.
"Owner" means (i) each Noteholder (as defined in the Indenture and other
than the Trust, the Seller, the Affiliated Holder or the Servicer) who, on the
applicable Distribution Date is entitled under the terms of the Note to
distribution thereunder and (ii) each Certificateholder (as defined in the Trust
Agreement and other than the Trust, the Seller, the Affiliated Holder or the
Servicer) who, on the applicable Distribution Date is entitled under the terms
of the Certificate to distributions thereunder.
"Indenture" means the Indenture dated as of September 1,1996 between the
Trust and the Indenture Trustee, without regard to any amendment or supplement
thereto.
"Preference Amount" means any amount previously distributed to an Owner in
respect of the Securities that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance with a
final nonappealable order of a court having competent jurisdiction.
"Securities" means the Notes issued pursuant to the Indenture and the
Certificates issued pursuant to the Trust Agreement.
"Trust Agreement" means the Trust Agreement dated as of September 1, 1996
between the Seller and the Owner Trustee, without regard to any amendment or
supplement thereto.
Capitalized terms used in the Guaranty Policy and not otherwise defined in
the Guaranty Policy will have the respective meanings set forth in the Indenture
as of the date of execution of the Guaranty Policy, without giving effect to any
subsequent amendment or modification to the Indenture, unless such amendment or
modification has been approved in writing by the Securities Insurer.
Any notice under the Guaranty Policy or service of process on the Fiscal
Agent of the Securities Insurer may be made at the address listed below for the
Fiscal Agent of the Securities Insurer or such other address as the Securities
Insurer shall specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
The Guaranty Policy is being issued under and pursuant to, and shall be
construed under, the laws of the State of New York, without giving effect to the
conflict of laws principles thereof.
The insurance provided by the Guaranty Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Guaranty Policy is not cancelable for any reason. The premium on the
Guaranty Policy is not refundable for any reason including payment, or provision
being made for payment, prior to the latest Final Scheduled Distribution Date of
the Securities.
THE SECURITIES INSURER
The Securities Insurer, formerly known as Municipal Bond Investors
Assurance Corporation, is the principal operating subsidiary of MBIA, Inc., a
New York Stock Exchange-listed company. MBIA, Inc. is not
S-33
<PAGE> 37
obligated to pay the debts of or claims against the Securities Insurer. The
Securities Insurer is domiciled in the State of New York and is licensed to do
business in and is subject to regulation under the laws of all 50 states, the
District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of
Northern Marina Islands, the Virgin Islands of the United States and the
Territory of Guam. The Securities Insurer has one European branch in the
Republic of France. The State of New York has laws prescribing minimum capital
requirements, limiting classes and concentrations of investments and requiring
the approval of policy rates and forms. State laws also regulate the amount of
both the aggregate and individual risks that may be insured, the payment of
dividends by the Securities Insurer, changes in control and transactions among
affiliates. Additionally, the Securities Insurer is required to maintain
contingency reserves on its liabilities in certain amounts and for certain
periods of time.
The consolidated financial statements of the Securities Insurer, a wholly
owned subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1995 and
December 31, 1994 and for the three years ended December 31, 1995 prepared in
accordance with generally accepted accounting principles, included in the Annual
Report on Form 10-K of MBIA Inc. for the year ended December 31, 1995 and the
consolidated financial statements of the Securities Insurer and its subsidiaries
for the six-months ended June 30, 1996 and for the periods ending June 30, 1996
and June 30, 1995 on Form 10-Q for the period ending June 30, 1996, are hereby
incorporated by reference into this Prospectus Supplement and shall be deemed to
be a part hereof. Any statement contained in a document incorporated by
reference herein shall be modified or superseded for purposes of this Prospectus
Supplement to the extent that a statement contained herein or in any
subsequently filed document which also is incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus Supplement.
The tables below present selected financial information of the Securities
Insurer for the periods ended December 31, 1995 and June 30, 1996, respectively,
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP GAAP
--------------------------- ---------------------------
DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
1995 1996 1995 1996
------------ ----------- ------------ -----------
(AUDITED) (UNAUDITED) (AUDITED) (UNAUDITED)
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Admitted Assets...... $3,814 $ 4,179 Assets............... $4,463 $ 4,691
Liabilities.......... 2,540 2,804 Liabilities.......... 1,937 2,088
Capital and Shareholder's
Surplus............ 1,274 1,375 Equity............... 2,526 2,602
</TABLE>
Copies of the Securities Insurer's 1995 year-end audited financial
statements prepared in accordance with statutory accounting practices are
available from the Securities Insurer. The address of the Securities Insurer is
113 King Street, Armonk, New York 10504. A copy of the Annual Report on Form
10-K of MBIA, Inc. is available from the Securities Insurer or the Securities
and Exchange Commission.
The Securities Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Guaranty Policy and the Securities Insurer set
forth under the heading "The Guaranty Policy".
Moody's rates the claims paying ability of the Securities Insurer "Aaa".
Standard & Poor's rates the claims paying ability of the Securities Insurer
"AAA".
Fitch Investors Service, L.P. rates the claims paying ability of the
Securities Insurer "AAA".
Each rating of the Securities Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Securities Insurer and its ability to pay claims on its
policies of insurance. Any further explanation of the significance of the above
ratings may be obtained only from the applicable rating agency.
S-34
<PAGE> 38
The above ratings are not recommendations to buy, sell or hold any Class of
the Notes or the Certificates, and such ratings may be subject to revision or
withdrawal at any time by the rating agencies. Any downward revision or
withdrawal of any of the above ratings may have an adverse effect on the market
price of any Notes or Certificates. The Securities Insurer does not guaranty the
market price of any Notes or Certificates nor does it guaranty that the ratings
on any Notes or Certificates will not be reversed or withdrawn.
SUBORDINATION AND ALLOCATION OF LOSSES
The rights of the holders of the Certificates to receive distributions of
interest and principal from amounts available in the Certificate Distribution
Account on each Distribution Date will be subordinated to the rights of the
holders of the Notes to receive distributions of interest and principal from
amounts available in the Note Distribution Account on each Distribution Date. On
the Closing Date, the initial Certificate Principal Balance of the Certificates
of $ will be the excess of the Assumed Pool Principal Balance over the
sum of the Class Principal Balances of all Classes of Notes as of the Closing
Date. The rights of the holders of the Residual Interest to receive any
distributions from amounts available in the Certificate Distribution Account
will be subordinated to such rights of the holders of the Notes and the
Certificates. In addition, Net Loan Losses in respect of the Home Loans will be
allocated to the principal, if any, attributable to the Residual Interest until
such principal is reduced to zero. The subordination of the Certificates and the
Residual Interest to the Notes is intended to enhance the likelihood of regular
receipt by the holders of the Notes of the full amount of interest and principal
distributions due to such holders and to afford such holders protection against
losses on the Home Loans. The subordination of the Residual Interest to the
Certificates is intended to enhance the likelihood of regular receipt by the
holders of the Certificates of the full amount of interest and principal
distributions due to such holders and to afford such holders protection against
losses on the Home Loans. See "Risk Factors -- Additional Credit Enhancement
Limitations" herein.
On each Distribution Date, with respect to any Home Loans that became
Liquidated Home Loans during the immediately preceding Due Period, the "Net Loan
Losses" will be equal to the amount (but not less than zero) determined as of
the related Determination Date equal to: (i) the aggregate uncollected Principal
Balances of such Liquidated Home Loans as of the last day of such Due Period,
minus (ii) the aggregate amount of any recoveries with respect to such
Liquidated Home Loans from whatever source, including without limitation any Net
Liquidation Proceeds, any Insurance Proceeds, any Released Mortgaged Property
Proceeds, any payments from the related borrower and any payments made to
purchase such Liquidated Home Loans pursuant to the Sale and Servicing
Agreement, less the amount of any expenses incurred in connection with such
recoveries and liquidation. If on any Distribution Date Net Loan Losses occur,
such Net Loan Losses will be allocated to reduce the principal, if any,
attributable to the Residual Interest. If prior to the final Distribution Date
any Net Loan Losses occur after the Overcollateralization Amount has been
reduced to zero, then the full amount of the interest and principal
distributions due the holders of the Offered Securities will be distributed to
such holders to the extent that sufficient funds are received from (i) Excess
Spread, (ii) any amounts remaining on deposit in the Reserve Fund or (iii)
Guaranteed Payments made under the Guaranty Policy.
THE RESERVE FUND
On the Closing Date, the Seller will establish or will cause to be
established a Reserve Fund for the benefit of the holders of the Offered
Securities. On the Closing Date, cash proceeds from the sale of the Offered
Securities in the amount of $ or approximately % of the Assumed
Pool Principal Balance (the "Reserve Fund Requirement") will be deposited into
the Reserve Fund. On or after the Closing Date, the Seller may substitute either
or a combination of a limited guaranty or letter of credit for the release of a
comparable amount of cash from the Reserve Fund to the Seller in an amount not
to exceed 50% of the Reserve Fund Requirement; provided that the Securities
Insurer and Rating Agencies have consented to such substitution. Assets on
deposit in the Reserve Fund will be available to the Indenture Trustee and the
Owner Trustee for distribution to the holders of the Notes and the Certificates
on each Distribution Date. If on any Distribution Date funds from the Reserve
Fund are needed to make the required distributions of principal and interest to
the Noteholders and the Certificateholders, then the balance of cash funds, if
any, available in the
S-35
<PAGE> 39
Reserve Fund will be withdrawn prior to a withdrawal of funds from a draw under
any limited guaranty or letter of credit that is subsequently substituted into
the Reserve Fund. On any Distribution Date after the withdrawal of the funds
from the Reserve Fund to make the required distributions to the Noteholders and
Certificateholders, to the extent that any Available Collection Amount is
remaining after payment of any Securities Insurer Reimbursement Amount to the
Securities Insurer, such remaining amount will be deposited into the Reserve
Fund or utilized to restore the amount of any limited guaranty or letter of
credit held therein until the amounts available for withdrawal therefrom equal
the Reserve Fund Requirement.
After the Overcollateralization Amount reaches a certain level (which as of
the Closing Date will equal approximately $ or % of the Assumed
Pool Principal Balance) (the "Interim Required Overcollateralization") then,
assuming that sufficient amounts of Excess Spread are distributed as an
additional reduction of the outstanding principal balances of the Offered
Securities, each incremental increase in the Overcollateralization Amount in
excess of the Interim Required Overcollateralization will cause a corresponding
reduction in the Reserve Fund Requirement, until Reserve Fund Requirement is
reduced to zero.
If the amount on deposit in the Reserve Fund on any Distribution Date
(after giving effect to all deposits or withdrawals therefrom on such
Distribution Date) is greater than the Reserve Fund Requirement for such
Distribution Date (such amount, the "Excess Reserve Fund Amount"), except as
described below and subject to certain limitations, the Servicer will instruct
the Indenture Trustee to distribute any Excess Reserve Fund Amount to the holder
of the Residual Interest until the Excess Reserve Fund Amount is reduced to
zero. Neither the Noteholders nor the Certificateholders will have any rights
in, or claims to, such Excess Reserve Fund Amounts.
Amounts held from time to time in the Reserve Fund will continue to be held
for the benefit of Noteholders and Certificateholders. On each Distribution
Date, funds will be withdrawn from amounts on deposit in the Reserve Fund to the
extent that the Available Collection Amount (after the payment of the Trust Fees
and Expenses) with respect to any Due Period is less than the Noteholders'
Distributable Amount and will be deposited in the Note Distribution Account for
distribution to the Noteholders. In addition, after giving effect to such
withdrawal, further funds will be withdrawn from the Reserve Fund (as reduced by
any withdrawal pursuant to the preceding sentence) to the extent that the
portion of the Available Collection Amount remaining after the payment of the
Trust Fees and Expenses and the deposit of the Noteholders' Distributable Amount
into the Note Distribution Account is less than the Certificateholders'
Distributable Amount and will be deposited in the Certificate Distribution
Account for distribution to the Certificateholders.
After the payment in full, or the provision for such payment, of (i) all
accrued and unpaid interest on the Offered Securities and (ii) the outstanding
principal balance of the Offered Securities, any funds remaining on deposit in
the Reserve Fund, subject to certain limitations, will be paid to the holder of
the Residual Interest.
The Reserve Fund is intended to enhance the likelihood of receipt by the
holders of the Offered Securities of the full amount of principal and interest
due them and to decrease the likelihood that the holders of the Offered
Securities will experience delays or losses from delinquent and defaulted Home
Loans. However, as described above, the Reserve Fund will be depleted to the
extent that amounts are withdrawn therefrom and applied to the Noteholders'
Distributable Amount and the Certificateholders' Distributable Amount and to the
extent that the Reserve Fund Requirement is reduced incrementally as the
Overcollateralization Amount exceeds the Interim Required Overcollateralization.
If the amount required to be withdrawn from the Reserve Fund to cover shortfalls
in collections on the Home Loans exceeds the amount of funds on deposit in the
Reserve Fund, the holders of the Offered Securities will bear the risk of any
delays and losses resulting from such shortfalls in collections on the Home
Loans, unless such delays or losses are covered by any amounts available from
the other credit enhancement supporting the Offered Securities including the
Guaranty Policy.
OVERCOLLATERALIZATION
As of each Determination Date occurring after termination of the Funding
Period, the "Overcollateralization Amount" will equal the excess of the Pool
Principal Balance over the aggregate of the sum of the
S-36
<PAGE> 40
Class Principal Balances of all Classes of Notes and the Certificate Principal
Balances of the Certificates. On the Closing Date the Overcollateralization
Amount will be equal to zero. A limited acceleration of the principal
amortization of the Offered Securities relative to the principal amortization of
the Home Loans has been designed to increase the Overcollateralization Amount
over time by making additional sequential distributions of principal to the
holders of the Offered Securities from the distribution of Excess Spread, until
the Overcollateralization Amount is equal to the Required Overcollateralization
Amount. On the Closing Date, the "Required Overcollateralization Amount" is
expected to be an amount equal to approximately $ or % of the
Assumed Pool Principal Balance and, subject to certain floors, caps and
triggers, the Required Overcollateralization Amount may increase or decrease
over time. Assuming that sufficient amounts of Excess Spread are distributed as
an additional reduction of the outstanding principal balances of the Offered
Securities, the Overcollateralization Amount will eventually replace the Reserve
Fund as credit enhancement for the Notes and the Certificates. Amounts on
deposit in the Reserve Fund will be reduced to zero by a proportionate reduction
of the Reserve Fund Requirement for each increase of the Overcollateralization
Amount over the Interim Required Overcollateralization (which will be determined
by the Securities Insurer and approved by each Rating Agency), until the
Overcollateralization Amount is equal to the Required Overcollateralization
Amount and the Reserve Fund Requirement is reduced to zero.
If on any Distribution Date, the Required Overcollateralization Amount
exceeds the Overcollateralization Amount, distributions of Excess Spread, if
any, will be made as an additional distribution of principal to the holders of
the Offered Securities, sequentially among the Classes of Notes and the
Certificates in order of their respective priorities as set forth under
"Description of the Offered Securities -- Distributions on the Notes" and
"-- Distributions on the Certificates" herein. Such distributions of such Excess
Spread are intended to accelerate the amortization of the Class Principal
Balances of all Classes of Notes and the Certificate Principal Balances of the
Certificates, thereby increasing the Overcollateralization Amount. The relative
percentage of the sum of the Class Principal Balances of Notes and the
Certificate Principal Balances of the Certificates to the Pool Principal Balance
will decrease as a result of the application of such Excess Spread to reduce the
Class Principal Balance of the Notes and the Certificate Principal Balance of
the Certificates.
On any Distribution Date with respect to which the Excess
Overcollateralization Amount is greater than zero, all or a portion of the
Excess Spread may be distributed to the holders of the Residual Interest and not
to the holders of the Offered Securities; therefore, ceasing the acceleration of
the principal amortization of the Offered Securities in relation to the
principal amortization of the Home Loan Pool, until such time as the Excess
Overcollateralization Amount is reduced below zero.
On any Distribution Date occurring on an Overcollateralization Stepdown
Date, the holders of the Residual Interest will be entitled to distributions of
all or a portion of the Noteholders' Principal Distributable Amount and
Certificateholders' Principal Distributable Amount that would otherwise be
distributed to such holders of the Offered Securities as described below. Such
amount, the "Overcollateralization Reduction Amount", with respect to any
Distribution Date occurring on an Overcollateralization Stepdown Date will equal
the lesser of (x) the Excess Overcollateralization Amount for such Distribution
Date (after giving effect to all other distributions on such Distribution Date),
and (y) the Regular Principal Distribution Amount (as determined without the
deduction of the Overcollateralization Reduction Amount therefrom) on such
Distribution Date. Prior to the occurrence of an Overcollateralization Stepdown
Date, the Overcollateralization Reduction Amount will equal zero. An
"Overcollateralization Stepdown Date" is any Distribution Date with respect to
which the Required Overcollateralization Amount is permitted to decrease or
"step down" pursuant to the terms of the Transfer and Servicing Agreements,
generally as a result of the delinquency and default experience of the Home Loan
Pool being lower than certain levels established by the Securities Insurer and
set forth in the Transfer and Servicing Agreements and the amortization of the
Pool Principal Balance. The "Excess Overcollateralization Amount" for any
Distribution Date will equal the Overcollateralization Amount for such
Distribution Date minus the Required Overcollateralization Amount for such
Distribution Date (after all distributions for such Distribution Date have been
made).
While the distribution of Excess Spread to the holders of the Offered
Securities and the distribution of any Overcollateralization Reduction Amount to
the holders of the Residual Interest in the manner specified
S-37
<PAGE> 41
above has been designed to produce and maintain a given level of
overcollateralization, there can be no assurance that Excess Spread will be
generated in sufficient amounts to ensure that such overcollateralization level
will be achieved or maintained at all times. Net Loan Losses will be allocated
to reduce the principal, if any, attributable to the Residual Interest, thereby
reducing the level of overcollateralization. See "Risk Factors -- Additional
Credit Enhancement Limitations -- Adequacy of Credit Enhancement" herein.
If on any Determination Date the delinquency or default experience on the
Home Loan Pool exceeds certain levels as established by the Securities Insurer
and confirmed by the Rating Agencies and as set forth in the Transfer and
Servicing Agreements, then the Required Overcollateralization Amount will
increase. Likewise, if on any Determination Date the delinquency and default
experience on the Home Loan Pool is lower than certain levels as established by
the Securities Insurer and confirmed by the Rating Agencies and as set forth in
the Transfer and Servicing Agreements, then under certain circumstances the
Required Overcollateralization Amount will decrease and an Overcollateralization
Stepdown Date will occur on the related Distribution Date.
Pursuant to the Transfer and Servicing Agreements, as of each Determination
Date, the Required Overcollateralization Amount will be based on a calculation
reviewed and approved by the Securities Insurer and each Rating Agency.
Following the termination of the Funding Period, the Required
Overcollateralization Amount will be calculated based on certain percentages of
the Cut-Off Date Principal Balances of the Home Loans, until the Credit Support
Reduction Date, and thereafter, will be calculated based on the lesser of
certain percentages of the Cut-Off Date Principal Balances of the Home Loans and
the outstanding Principal Balances of the Home Loans. The percentages used in
calculating the Required Overcollateralization Amount will be determined based
on the delinquency and default experience of the Home Loans. The "Credit Support
Reduction Date" will occur on the Distribution Date determined pursuant to the
criteria reviewed and approved by the Securities Insurer and each Rating Agency.
DESCRIPTION OF THE OFFERED SECURITIES
GENERAL
The FIRSTPLUS Home Loan Owner Trust 1996-3 (the "Trust") will issue
$ aggregate principal amount of Class A-1 % Asset Backed Notes
(the "Class A-1 Notes"), $ aggregate principal amount of Class A-2
% Asset Backed Notes (the "Class A-2 Notes"), $ aggregate
principal amount of Class A-3 % Asset Backed Notes (the "Class A-3 Notes"),
$ aggregate principal amount of Class A-4 % Asset Backed Notes
(the "Class A-4 Notes") and $ aggregate principal amount of Class A-5
% Asset Backed Notes (the "Class A-5 Notes"), $ aggregate
principal amount of Class A-6 % Asset Backed Notes (the "Class A-6 Notes"),
and $ aggregate principal amount of Class A-7 % Asset Backed Notes
(the "Class A-7 Notes" and, together with the Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5 and Class A-6 Notes, the "Notes") pursuant to an Indenture
to be dated as of September 1, 1996 (the "Indenture"), between the Trust and
First Bank National Association, a national banking association, as Indenture
Trustee (the "Indenture Trustee"). The Trust will also issue $
aggregate principal amount of % Asset Backed Certificates (the
"Certificates" and, together with the Notes, the "Offered Securities") pursuant
to the terms of a Trust Agreement to be dated as of September 1, 1996 (the
"Trust Agreement"), between the Seller and the Owner Trustee. The Notes will be
secured by the assets of the Trust pursuant to the Indenture. The Certificates
will represent an undivided ownership interest in the Trust.
On the 20th day of each month, or, if such day is not a business day, the
first business day immediately following, commencing in October 1996, (each such
date, a "Distribution Date"), the Indenture Trustee or its designee and the
Owner Trustee or its designee will distribute to the persons in whose names the
Notes and Certificates, respectively, are registered on the last day of the
month immediately preceding the month of the related Distribution Date (the
"Record Date"), the portion of the aggregate distribution to be made to each
Noteholder and each Certificateholder as described below. Prior to Book Entry
Termination, distributions on
S-38
<PAGE> 42
the Book Entry Certificates will be made to Beneficial Owners only through DTC
and its DTC Participants. See "Certain Information Regarding the
Securities -- Book-Entry Registration" in the Prospectus.
Beneficial ownership interests in each Class of Notes will be held in
minimum denominations of $100,000 and integral multiples of $1,000 in excess
thereof. Beneficial ownership interests in the Certificates will also be held in
minimum denominations of $100,000 and integral multiples of $1,000 in excess
thereof.
DISTRIBUTIONS ON THE NOTES
For the definitions of certain of the defined terms used in the following
subsection, see "Description of the Transfer and Servicing
Agreements -- Distributions on the Offered Securities; Related Definitions"
below.
Payments of Interest. Interest on the principal balances of each Class of
the Notes will accrue at the respective per annum Interest Rates and will be
payable to the Noteholders monthly on each Distribution Date commencing in
October, 1996. Interest on each Class of Notes will be calculated on the basis
of a 360-day year of twelve 30-day months. Interest distributions on the Notes
will generally be made from the Available Collection Amount remaining after the
payment of the Trust Fees and Expenses. Interest payments to all Classes of
Noteholders will have the same priority. Under certain circumstances, the amount
available for interest payments could be less than the amount of interest
payable on the Notes on any Distribution Date, in which case each Class of
Noteholders will receive their ratable share (based upon the aggregate amount of
interest due to such class of Noteholders) of the aggregate amount available to
be distributed in respect of interest on the Notes.
Payments of Principal. Principal payments will be made to the Noteholders
on each Distribution Date in an amount generally equal to the sum of (i) the
Regular Principal Distribution Amount plus (ii) until the Overcollateralization
Amount equals the Required Overcollateralization Amount, any Excess Spread. On
each Distribution Date that the Overcollateralization Amount exceeds the
Required Overcollateralization Amount, the Excess Spread will be distributed to
the holders of the Residual Interest. In addition, if on any
Overcollateralization Stepdown Date the Excess Overcollateralization Amount
exceeds zero, all or a portion of the principal (up to the Overcollateralization
Reduction Amount) which would otherwise be distributed to the Notes and the
Certificates will instead be distributed to the holders of the Residual
Interest, until the Excess Overcollateralization Amount is reduced to zero.
Furthermore, in the case of the Distribution Date following the Due Period in
which the Funding Period ends, if the amount remaining in the Pre-Funding
Account at the end of the Funding Period (net of reinvestment income which shall
be transferred to the Capitalized Interest Account) is greater than $50,000,
such amount will be distributed to reduce, on a pro rata basis, the outstanding
Class Principal Balances of each Class of Notes and the Certificate Principal
Balance of the Certificates. If such amount is less than or equal to $50,000,
such amount will be applied sequentially to each Class of Notes to reduce the
respective Class Principal Balances thereof. Principal distributions on the
Notes generally will be made from the Available Collection Amount remaining
after the payment of the Trust Fees and Expenses and the distribution of the
Noteholders' Interest Distributable Amount.
On each Distribution Date, all amounts on deposit in the Note Distribution
Account will be paid in the following order of priority:
(i) pro rata to the Noteholders in reduction of their Class Principal
Balances, any amounts remaining from the Pre-Funding Account Deposit at the
end of the Funding Period less the pro rata portion of such amount
deposited in the Certificate Distribution Account based on the Certificate
Principal Balance; provided that such remaining amount is greater than
$50,000;
(ii) pro rata to the Noteholders, the Noteholders' Interest
Distributable Amount;
(iii) the Noteholders' Principal Distributable Amount in the following
order of priority:
(1) to the Class A-1 Noteholders in reduction of the Class
Principal Balance of the Class A-1 Notes, until such Class Principal
Balance has been reduced to zero;
(2) to the Class A-2 Noteholders in reduction of the Class
Principal Balance of the Class A-2 Notes, until such Class Principal
Balance has been reduced to zero;
S-39
<PAGE> 43
(3) to the Class A-3 Noteholders in reduction of the Class
Principal Balance of the Class A-3 Notes, until such Class Principal
Balance has been reduced to zero;
(4) to the Class A-4 Noteholders in reduction of the Class
Principal Balance of the Class A-4 Notes, until such Class Principal
Balance has been reduced to zero;
(5) to the Class A-5 Noteholders in reduction of the Class
Principal Balance of the Class A-5 Notes, until such Class Principal
Balance has been reduced to zero;
(6) to the Class A-6 Noteholders in reduction of the Class
Principal Balance of the Class A-6 Notes, until such Class Principal
Balance has been reduced to zero; and
(7) to the Class A-7 Noteholders in reduction of the Class
Principal Balance of the Class A-7 Notes, until such Class Principal
Balance has been reduced to zero.
All distributions made to the Class A-1 Noteholders, the Class A-2
Noteholders, the Class A-3 Noteholders, the Class A-4 Noteholders, the Class A-5
Noteholders, the Class A-6 Noteholders and the Class A-7 Noteholders on each
Distribution Date will be made on a pro rata basis among the Noteholders of the
respective Class of record on the next preceding Record Date based on the
percentage interest represented by their respective Notes, and except as
otherwise provided herein, will be made through the book-entry system maintained
by DTC.
The Class Principal Balance of each Class of Notes, to the extent not
previously paid, will be due on the following respective dates: the Class A-1
Final Scheduled Distribution Date for the Class A-1 Notes, the Class A-2 Final
Scheduled Distribution Date for the Class A-2 Notes, the Class A-3 Final
Scheduled Distribution Date for the Class A-3 Notes, the Class A-4 Final
Scheduled Distribution Date for the Class A-4 Notes, the Class A-5 Final
Scheduled Distribution Date for the Class A-5 Notes, the Class A-6 Final
Scheduled Distribution Date for the Class A-6 Notes, and the Class A-7 Final
Scheduled Distribution Date for the Class A-7 Notes. The actual date on which
the Class Principal Balance of any Class of Notes is reduced to zero may be
earlier than the respective Final Scheduled Distribution Dates set forth herein
based on a variety of factors, including those described under "Prepayment and
Yield Considerations -- Weighted Average Life of the Offered Securities" herein.
If, on any Distribution Date, the Available Collection Amount, after
payment of the applicable Trust Fees and Expenses, is insufficient to distribute
the Noteholders' Distributable Amount, the Indenture Trustee will, first,
withdraw the amount of such insufficiency from the Reserve Fund to the extent
amounts are available therein, and, second, make a claim under the Guaranty
Policy for the remaining amount of such insufficiency in accordance with the
terms thereof. As described in the preceding sentence, Guaranteed Payments, if
any, for any Notes under the Guaranty Policy will be available only for
distribution to holders of the Notes, as appropriate, to compensate for any
shortfalls in respect of the Noteholders' Distributable Amount.
If, on a particular Distribution Date, the Available Collection Amount, the
amount withdrawn from the Reserve Fund and any Guaranteed Payment applied in the
order described above are not sufficient to make a full distribution of the
Noteholders' Interest Distributable Amount on any Class of Notes, then any such
unpaid Noteholders' Interest Distributable Amount will be carried forward as a
Noteholders' Interest Carry-Forward Amount and will be distributed to holders of
each such Class of Notes on the next Distribution Date to the extent that
sufficient funds are available. Such an interest shortfall could occur, for
example, if losses realized on the Home Loans were exceptionally high or were
concentrated in a particular month, the Reserve Fund was reduced to zero and
Guaranteed Payments were not timely received under the Guaranty Policy. No
interest will accrue on any Noteholders' Interest Carry-Forward Amount or any
Noteholders' Principal Carry-Forward Amount.
DISTRIBUTIONS ON THE CERTIFICATES
For the definitions of certain of the defined terms used in the following
subsection, see "Description of the Transfer and Servicing
Agreements -- Distributions on the Offered Securities; Related Definitions"
below.
S-40
<PAGE> 44
Distributions of Interest. On each Distribution Date, commencing in
October, 1996, the Certificateholders will be entitled to distributions in an
amount equal to the amount of interest that would accrue on the Certificate
Principal Balance during the preceding Due Period at the Pass Through Rate.
Interest on the Certificates will be calculated on the basis of a 360-day year
of twelve 30-day months. Interest distributions with respect to the Certificates
will generally be made from the portion of the Available Collection Amount
remaining after the payment of the Trust Fees and Expenses and the Noteholders'
Distributable Amount.
Distributions of Principal Payments. Certificateholders will be entitled to
the following principal distributions: (i) on the Distribution Date following
the end of the Funding Period, any amounts remaining from the Pre-Funding
Account Deposit less the pro rata portion of such amount deposited into the Note
Distribution Account based on the Class Principal Balances of the Notes;
provided that such remaining amount is greater than $50,000; and (ii) on each
Distribution Date commencing on the Distribution Date on which the Notes are
paid in full, in an amount generally equal to the sum of (A) the Regular
Principal Distribution Amount (less, on the Distribution Date on which the Notes
are paid in full, the portion thereof payable on the Notes) plus (B) until the
Overcollateralization Amount equals the Required Overcollateralization Amount,
any Excess Spread for such Distribution Date. On each Distribution Date that the
Overcollateralization Amount exceeds the Required Overcollateralization Amount,
any Excess Spread will be distributed to the holders of the Residual Interest.
In addition, if on any Overcollateralization Stepdown Date the Excess
Overcollateralization Amount exceeds zero, all or a portion of the principal (up
to the Overcollateralization Reduction Amount) which would otherwise be
distributed to the holders of the Certificates will instead be distributed to
the holders of the Residual Interest, until the Excess Overcollateralization
Amount is reduced to zero. Principal distributions on the Certificates will
generally be made from the portion of the Available Collection Amount remaining
after the payment of the Trust Fees and Expenses and after distribution of the
Noteholders' Distributable Amount (on the Distribution Date on which the Notes
are paid in full) and the Certificateholders' Interest Distributable Amount.
If, on any Distribution Date, the Available Collection Amount, after
payment of the applicable Trust Fees and Expenses and the Noteholders'
Distributable Amount, is insufficient to distribute the Certificateholders'
Distributable Amount, the Indenture Trustee will first, withdrawal the amount of
such insufficiency from the Reserve Fund to the extent amounts are available
therein, and second, make a claim under the Guaranty Policy for the remaining
amount of such insufficiency in accordance with the terms thereof. As described
in the preceding sentence, Guaranteed Payments, if any, for any Certificates
under the Guaranty Policy will be available only for distribution to holders of
the Certificates, as appropriate, to compensate for any shortfalls in respect of
the Certificateholders' Distributable Amount after giving effect to withdrawals
for deficiencies in respect of the Noteholders' Distributable Amount.
If, on a particular Distribution Date, the Available Collection Amount, the
amount withdrawn from the Reserve Fund and any Guaranteed Payment applied in the
order described above are not sufficient to make a full distribution of the
Certificateholders' Interest Distributable Amount on the Certificates, then any
such unpaid Certificateholders' Interest Distributable Amount will be carried
forward as a Certificateholders' Interest Carry-Forward Amount and will be
distributed to the Certificateholders on the next Distribution Date to the
extent that sufficient funds are available. Such an interest shortfall could
occur, for example, if losses realized on the Home Loans were exceptionally high
or were concentrated in a particular month, the Reserve Fund was reduced to zero
and Guaranteed Payments were not timely received under the Guaranty Policy. No
interest will accrue on any Certificateholders' Interest Carry-Forward Amount or
any Certificateholders' Principal Carry-Forward Amount.
SECURITIES INSURER REIMBURSEMENT AMOUNT
On each Distribution Date, after the holders of the Notes and the
Certificates have been paid all amounts to which they are entitled and prior to
any distributions to the holders of the Residual Interest, the Securities
Insurer will be entitled to be reimbursed for any unreimbursed Guaranteed
Payments in respect of the Offered Securities not previously reimbursed and any
other amounts owed to the Securities Insurer under the Insurance Agreement
together with interest thereon at the rate specified in the Insurance Agreement
(the "Securities Insurer Reimbursement Amount") and any accrued and unpaid
Guaranty Insurance Premiums.
S-41
<PAGE> 45
The "Insurance Agreement" means the Insurance and Indemnification Agreement
dated as of the Closing Date among the Securities Insurer, the Seller, FFI, as
the Servicer and Transferor, the Affiliated Holder, the Trust, RAC and the
Indenture Trustee. In connection with each Guaranteed Payment, the Indenture
Trustee, as attorney-in-fact for the holder thereof, will be required to assign
to the Securities Insurer the rights of the Noteholders with respect to the
Notes and the rights of the Certificateholders with respect to the Certificates,
to the extent of such Guaranteed Payments, including, without limitation, in
respect of any amounts due to the Noteholders or the Certificateholders as a
result of a securities law violation arising from the offer and sale of the
Notes or the Certificates. In the event of any Securities Insurer Reimbursement
Amount is outstanding, the holders of the Residual Interest will not be entitled
to receive distributions of any amounts attributable to Excess Spread until the
Securities Insurer has been distributed such Securities Insurer Reimbursement
Amount in full.
OPTIONAL REDEMPTION OF THE NOTES; OPTIONAL PREPAYMENT OF THE CERTIFICATES
The Affiliated Holder may, at its option, effect an early redemption or
termination of the Offered Securities on or after any Distribution Date on which
the Pool Principal Balance declines to 15% or less of the Pool Principal Balance
of the Initial Home Loans and Subsequent Home Loans conveyed to the Trust as of
the respective Cut-Off Dates, in which case the Indenture Trustee will be
directed to sell all of the Home Loans to a person that is not affiliated with
the Affiliated Holder, the Seller or the Servicer at a price equal to or greater
than the Termination Price and the proceeds from such sale will be distributed,
(i) first, to the Noteholders in an amount equal to the then outstanding Class
Principal Balance of the Notes plus accrued interest thereon at the applicable
Interest Rates, (ii) second, to the Certificateholders in an amount equal to the
then outstanding Certificate Principal Balance of the Certificates plus accrued
interest thereon at the Pass Through Rate, (iii) third, to the Securities
Insurer, in an amount equal to any amounts owed to the Securities Insurer under
the Insurance Agreement, and (iv) to the holders of the Residual Interest, in an
amount equal to the amount of proceeds remaining, if any, after the
distributions pursuant to items (i), (ii) and (iii) above. In addition, the
Affiliated Holder may, at its option, effect an early redemption or termination
of the Offered Securities on or after any Distribution Date on which the Pool
Principal Balance declines to 10% or less of the Pool Principal Balance of the
Initial Home Loans and Subsequent Home Loans conveyed to the Trust as of the
respective Cut-Off Dates, by paying (i) to the Noteholders, an amount in respect
the Notes equal to the then outstanding Class Principal Balance of the Notes,
plus accrued interest thereon at the applicable Interest Rates, (ii) to the
Certificateholders, an amount in respect of the Certificates equal to the then
outstanding Certificate Principal Balance of the Certificates, plus accrued
interest at the Pass Through Rate, and (iii) to the Securities Insurer, an
amount equal to any amounts owed to the Securities Insurer under the Insurance
Agreement. In connection with any such optional termination, to the extent that
sufficient proceeds are not available from the sale of the Home Loans or the
termination of the Trust, the Affiliated Holder will pay the outstanding fees
and expenses, if any, of the Indenture Trustee, the Owner Trustee, the
Custodian, and the Servicer. Under certain circumstances as set forth in the
Indenture (i.e., based upon the default experience of the Home Loans), the
Securities Insurer may, at its option, effect an early redemption or termination
of the Offered Securities.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Indenture, Sale and
Servicing Agreement, the Administration Agreement and the Trust Agreement
(collectively, the "Transfer and Servicing Agreements"). Forms of the Transfer
and Servicing Agreements have been filed as exhibits to the Registration
Statement. Copies of the Transfer and Servicing Agreements will be filed with
the Commission following the issuance of the Offered Securities. The summary
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, all the provisions of the Transfer and Servicing Agreements.
The following summary supplements, and to the extent inconsistent therewith
replaces, the description of the general terms and provisions of the Transfer
and Servicing Agreements set forth under the headings "Description of the
Transfer and Servicing Agreements" in the Prospectus, to which description
reference is hereby made.
S-42
<PAGE> 46
SALE AND ASSIGNMENT OF THE HOME LOANS
On the Closing Date, the Transferor will sell, convey, transfer and assign
all of its right, title and interest in and to the Initial Home Loans to the
Seller, and the Seller will sell, convey, transfer and assign the Initial Home
Loans to the Trust. The Trust will, concurrently with the sale, conveyance,
transfer and assignment of the Initial Home Loans and the deposit of funds in
the Pre-Funding Account, Capitalized Interest Account and Reserve Fund, deliver
or cause to be delivered the Offered Securities to the Seller in exchange for
the Initial Home Loans, the Pre-Funding Account Deposit, Capitalized Interest
Account Deposit and Reserve Fund Deposit. The Trust will pledge and assign the
Initial Home Loans, Pre-Funding Account, Capitalized Interest Account and
Reserve Fund to the Indenture Trustee in exchange for the Notes. Each Initial
Home Loan will be identified in a schedule appearing as an exhibit to the Sale
and Servicing Agreement delivered to the Indenture Trustee (the "Home Loan
Schedule").
Following the Closing Date, the funds in the Pre-Funding Account will be
used to purchase from the Seller, from time to time prior to the end of the
Funding Period, subject to the availability thereof, Subsequent Home Loans
consisting of closed-end fixed rate, loans, including in certain instances
retail installment sales contracts, for which the related net proceeds were used
to finance (i) property improvements, (ii) the acquisition of personal property
such as home appliances or furnishings, (iii) debt consolidation, (iv) the
purchase or refinancing of single family residential property, or (v) a
combination of property improvements, debt consolidation and other consumer
purposes, which loans are marketed by the Transferor under the name
"BusterPlus(TM) Loans". See "The Home Loan Pool -- Conveyance of Subsequent Home
Loans" herein. In connection with each purchase of such Subsequent Home Loans,
the Trust will be required to pay to the Seller from the Pre-Funding Account a
cash purchase price of not more than 100% of the principal balance thereof; the
Trust may pay a cash purchase price of less than 100% of the principal balance
thereof for the purpose of increasing the amounts available for distribution,
but in no event less than the fair market value of such Subsequent Home Loans.
In connection with any purchase of Subsequent Home Loans by the Trust after the
Closing Date, the Transferor will assign to the Seller all of its right, title
and interest in and to such Subsequent Home Loans, and the Seller in turn will
sell, convey, transfer and assign to the Trust all of its right, title and
interest in and to such Subsequent Home Loans. The Owner Trustee, on behalf of
the Trust, will pledge and assign such Subsequent Home Loans to the Indenture
Trustee.
In addition, the Seller will, as to each Home Loan, deliver to the
Indenture Trustee or the Custodian the related Note endorsed to the order of the
Indenture Trustee or the Custodian without recourse, any assumption and
modification agreements and in the case of Secured Loans, the Mortgage with
evidence of recording indicated thereon (except for any Mortgage not returned
from the public recording office), an assignment of the Mortgage in the name of
the Indenture Trustee in recordable form, and any intervening assignments of the
Mortgage (each, a "Indenture Trustee's Home Loan File"). Subject to confirmation
by the Rating Agencies and to the approval of the Securities Insurer, with
respect to the Secured Loans the Transferor and the Seller will not be required
to record assignments to the Indenture Trustee of the Mortgages in the real
property records for the Home Loans. See "Risk Factors -- Additional Factors
Affecting Delinquencies, Foreclosures and Losses on Home
Loans -- Non-recordation of Assignments" herein. In such circumstances, the
Transferor and the Seller will deliver to the Indenture Trustee the assignments
of the Mortgages in the name of the Indenture Trustee and in recordable form,
and the Transferor, in its capacity as the Servicer, will retain the record
title to such Mortgages under the applicable real property records, on behalf of
the Trust, the Indenture Trustee and the holders of the Offered Securities. In
all other circumstances with respect to the Secured Loans, pursuant to the
direction of the Rating Agencies or Securities Insurer, assignments to the
Indenture Trustee of the Mortgages will be recorded in the real property records
for those states in which such recording is deemed necessary to protect the
Trust and the Indenture Trustee's interest in the Home Loans against the claims
of certain creditors of the Transferor or subsequent purchasers. In these
circumstances, the Transferor and the Seller will deliver to the Indenture
Trustee after recordation the assignments to the Indenture Trustee of the
Mortgages. In the event that, with respect to any Home Loan as to which
recordation of the related assignment is recorded, the Seller cannot deliver the
Mortgage or any assignment with evidence of recording thereon concurrently with
the conveyance thereof under the Sale and Servicing Agreement because they have
not yet been returned by the public recording office, the Seller will
S-43
<PAGE> 47
deliver or cause to be delivered to the Indenture Trustee or the Custodian a
certified true photocopy of such Mortgage or assignment. The Seller will deliver
or cause to be delivered to the Indenture Trustee or the Custodian any such
Mortgage or assignment with evidence of recording indicated thereon upon receipt
thereof from the public recording office. The Indenture Trustee or the Custodian
will agree, for the benefit of the holders of the Offered Securities, to review
(or cause to be reviewed) each Indenture Trustee's Home Loan File within 45 days
after the conveyance of the related Home Loan to the Trust to ascertain that all
required documents have been executed and received, subject to the applicable
cure period in the Transfer and Servicing Agreements.
PRE-FUNDING ACCOUNT
On the Closing Date, cash in the aggregate amount of approximately
$84,993,867 (the "Pre-Funding Account Deposit") will be deposited in an Eligible
Account (the "Pre-Funding Account"), which account will be part of the Trust and
will be maintained as an Eligible Account with the Indenture Trustee, in its
corporate trust department for the purchase of Subsequent Home Loans. The
Pre-Funding Account Deposit will be increased or decreased by an amount equal to
the aggregate of the principal balances of any home loans removed from or added
to, respectively, the Home Loan Pool prior to the Closing Date, provided that
any such increase or decrease will not exceed 5.0% of the Initial Pool Principal
Balance. During the period (the "Funding Period") from the Closing Date until
the earlier of (i) the date on which the amount on deposit in the Pre-Funding
Account is reduced to $25,000, and (ii) December 26, 1996, the amount on deposit
in the Pre-Funding Account will be reduced by the amount thereof used to
purchase Subsequent Home Loans in accordance with the applicable provisions of
the Sale and Servicing Agreement; provided that the Funding Period will be
subject to an earlier termination if insufficient funds are on deposit in the
Capitalized Interest Account on any Determination Date to cover any interest
shortfall for distributions to the holders of the Offered Securities on the
immediately following Distribution Date. Subsequent Home Loans purchased by and
added to the Trust on any Subsequent Transfer Date must satisfy the criteria set
forth in the Sale and Servicing Agreement and must be approved by the Securities
Insurer. See "The Home Loan Pool -- Conveyance of Subsequent Home Loans" herein.
On the Distribution Date following the Due Period in which such Funding
Period ends, if the amount of the Pre-Funding Account Deposit that is remaining
at the end of the Funding Period (net of reinvestment income which is required
to be transferred to the Capitalized Interest Account) is greater than $50,000,
such amount will be applied to reduce on a pro rata basis, the outstanding Class
Principal Balance of the Notes and (except if the Securities Insurer is in
default under the Guaranty Policy) the Certificate Principal Balance of the
Certificates and thus reducing the weighted average lives of the Notes and the
Certificates. If such remaining amount is less than or equal to $50,000, such
amount will be included in the Noteholders Monthly Principal Distributable
Amount and will be distributed sequentially to each Class of Notes in reduction
of the respective Class Principal Balances thereof. If the Securities Insurer is
in default under the Guaranty Policy, then such remaining amount will be applied
to reduce, on a pro rata basis, the Class Principal Balance of each Class of the
Notes. See "Prepayment and Yield Considerations" herein.
Amounts on deposit in the Pre-Funding Account will be invested in Permitted
Investments. The Sale and Servicing Agreement requires that no Permitted
Investment shall evidence either the right to receive (a) only interest with
respect to the obligations underlying such Permitted Investment or (b) both
principal and interest payments derived from obligations underlying such
Permitted Investment where the interest and principal payments with respect to
such Permitted Investment provide a yield to maturity at par greater than 120%
of the yield to maturity at par of the underlying obligations. Further, no
Permitted Investment may be purchased at a price greater than par if such
Permitted Investment may be prepaid or called at a price less than its purchase
price prior to stated maturity. Permitted Investments are required to mature as
may be necessary for the purchase of Subsequent Home Loans on any Subsequent
Transfer Date no later than the Business Day prior to the related Subsequent
Transfer Date, and in any case, no later than the Business Day prior to the
applicable Distribution Date. All interest and any other investment earnings on
amounts on deposit in the Pre-Funding Account will be transferred to the
Capitalized Interest Account.
S-44
<PAGE> 48
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, at the direction of the Seller, an amount (the
"Capitalized Interest Account Deposit"), as approved by the Securities Insurer
and the Rating Agencies, to cover the projected interest shortfall during the
Funding Period will be deposited in an Eligible Account maintained by and in the
name of the Indenture Trustee (the "Capitalized Interest Account") from a
portion of the sales proceeds from the Offered Securities. The amount on deposit
in the Capitalized Interest Account will be specifically allocated to cover
shortfalls in interest (the "Interest Shortfall") on the Offered Securities that
may arise as a result of the utilization of the Pre-Funding Account for the
purchase by the Trust of Subsequent Home Loans after the Closing Date and will
be so applied by the Indenture Trustee for the distribution of interest to
holders of the Offered Securities. Any amounts remaining in the Capitalized
Interest Account on any Determination Date, that are not required to cover the
anticipated interest shortfall described above, will be distributed to the
holder of the Residual Interest, including any net reinvestment income thereon,
and such amounts will not thereafter be available for distribution to the
holders of the Offered Securities.
Amounts on deposit in the Capitalized Interest Account will be invested in
Permitted Investments as defined in the Sale and Servicing Agreement. All such
Permitted Investments are required to mature no later than the Business Day
prior to the applicable Distribution Date as specified in the Sale and Servicing
Agreement. All interest and any other investment earnings on amounts on deposit
in the Capitalized Interest Account will be available to cover any Interest
Shortfall.
TRUST FEES AND EXPENSES
As compensation for their services pursuant to the applicable Transfer and
Servicing Agreements, the Indenture Trustee is entitled to the Indenture Trustee
Fee, the Owner Trustee is entitled to the Owner Trustee Fee and the Custodian is
entitled to the Custodian Fee. As compensation for its services pursuant to the
Sale and Servicing Agreement, the Servicer is entitled to the Servicing Fee and
additional servicing compensation and reimbursement as described under the
"Servicing" subheading below. As compensation for issuing the Guaranty Policy,
the Securities Insurer is entitled to the Guaranty Insurance Premium.
SERVICING
In consideration for the performance of the daily loan servicing functions
for the Home Loans, the Servicer is entitled to a monthly fee (the "Servicing
Fee"), equal to 0.75% (75 basis points) per annum of the Pool Principal Balance
(as adjusted for Liquidated Home Loans) as of the first day of the immediately
preceding Due Period. See "Risk Factors -- Additional Factors Affecting
Delinquencies, Foreclosures and Losses on Home Loans -- Dependence on Servicer
for Servicing Home Loans" herein. The Servicer will pay the fees of each
Subservicer out of the amounts it receives as the Servicing Fee. In addition to
the Servicing Fee, the Servicer is entitled to retain additional servicing
compensation in the form of assumption and other administrative fees, release
fees, insufficient funds charges, late payment charges and any other servicing-
related penalties and fees.
In the event of a delinquency or a default with respect to a Home Loan
neither the Servicer nor any Subservicer will have an obligation to advance
scheduled monthly payments of principal and interest with respect to such Home
Loan. But, the Servicer or any Subservicer will make reasonable and customary
expense advances with respect to the Home Loans (each, a "Servicing Advance") in
accordance with their servicing obligations under the Sale and Servicing
Agreement and will be entitled to receive the Servicing Advance Reimbursement
Amount for such Servicing Advances as described herein. For example, with
respect to a Secured Loan such Servicing Advances may include costs and expenses
advanced for the preservation, restoration and protection of any Mortgaged
Property, including advances to pay delinquent real estate taxes and
assessments. Any Servicing Advances by the Servicer or any Subservicer will be
reimbursable from the Available Collection Amount after all prior distributions
as described under "-- Collection Account, Note Distribution Account and
Certificate Distribution Account" below or with respect to any Liquidated Home
Loan from the Liquidation Proceeds received therefrom.
S-45
<PAGE> 49
COLLECTION ACCOUNT, NOTE DISTRIBUTION ACCOUNT AND CERTIFICATE DISTRIBUTION
ACCOUNT
The Servicer is required to use its best efforts to deposit in an Eligible
Account (the "Collection Account"), within one business day and in any event to
deposit within two business days of receipt, all payments received after each
Cut-off Date on account of principal and interest on the related Home Loans, all
Net Liquidation Proceeds, Insurance Proceeds, Released Mortgaged Property
Proceeds, any amounts payable in connection with the repurchase or substitution
of any Home Loan and any amount required to be deposited in the Collection
Account in connection with the termination of the Offered Securities. The
foregoing requirements for deposit in the Collection Account will be exclusive
of payments on account of principal and interest collected on the Home Loans on
or before the applicable Cut-off Date. The Servicer may make withdrawals from
the Collection Account only for the purposes specified in the Sale and Servicing
Agreement, including without limitation, the payment to itself of the accrued
and unpaid Servicing Fee. The Collection Account may be maintained at any
depository institution which satisfies the requirements set forth in the
definition of Eligible Account in the Sale and Servicing Agreement. Initially,
the Collection Account will be maintained with Bank One, Texas, N.A., an
affiliate of Banc One Capital Corporation, one of the Underwriters.
Any Subservicer will also maintain a collection account to deposit all
payments received with respect to the Home Loans being serviced by such
Subservicer. Such Subservicer's collection account will be an Eligible Account
and will satisfy requirements that are substantially similar to the requirements
for the Collection Account set forth in the Sale and Servicing Agreement.
AVAILABLE COLLECTION AMOUNT. Distributions on the Offered Securities on
each Distribution Date will be made from the Available Collection Amount. The
Servicer will calculate the Available Collection Amount on the fifth business
day prior to each Distribution Date (each such day, a "Determination Date").
With respect to each Distribution Date, the "Available Collection Amount" is the
sum of (i) all amounts received on the Home Loans or required to be paid by the
Servicer, the Transferor or the Seller (exclusive of amounts not required to be
deposited in the Collection Account and amounts permitted to be withdrawn by the
Servicer from the Collection Account pursuant to the Sale and Servicing
Agreement, including without limitation the Servicing Fee) during the related
Due Period (or, in the case of amounts paid by the Transferor in connection with
the purchase or substitution of a Defective Home Loan) as reduced by any portion
thereof that may not be withdrawn therefrom pursuant to an order of a United
States bankruptcy court of competent jurisdiction imposing a stay pursuant to
Section 362 of the United States Bankruptcy Code, (ii) in the case of a
Distribution Date relating to a Due Period that occurs prior to the end of the
Funding Period, an amount from the Capitalized Interest Account sufficient to
fund any shortfall in the Interest Distribution Amount attributable to the
amounts in the Pre-Funding Account, (iii) in the case of the Distribution Date
following the Due Period in which the Funding Period ends, amounts, if any,
remaining in the Pre-Funding Account at the end of the Funding Period (net of
reinvestment income which must be transferred to the Capitalized Interest
Account), (iv) with respect to the final Distribution Date, an early retirement
of the Offered Securities by the Affiliated Holder or the Securities Insurer,
the Termination Price, and (v) any and all income or gain from investments in
the Collection Account. The "Termination Price" shall be an amount equal to the
sum of (i) the then outstanding Class Principal Balance of the Notes plus
accrued interest thereon at the applicable Interest Rates, (ii) the then
outstanding Certificate Principal Balance of the Certificates plus accrued
interest thereon at the Pass Through Rate, and (iii) any amounts owed to the
Securities Insurer under the Insurance Agreement.
The Servicer will establish and maintain with the Indenture Trustee an
account, in the name of the Indenture Trustee on behalf of the Noteholders, into
which amounts released from the Collection Account, the Pre-Funding Account, the
Reserve Fund and any proceeds from the Guaranty Policy for distribution to the
Noteholders will be deposited and from which all distributions to the
Noteholders will be made (the "Note Distribution Account"). The Servicer will
also establish and maintain with the Indenture Trustee an account, in the name
of the Owner Trustee on behalf of the Certificateholders, into which amounts
released from the Collection Account, the Pre-Funding Account, the Reserve Fund
and any proceeds from the Guaranty Policy for distribution to the
Certificateholders will be deposited and from which all distributions to
S-46
<PAGE> 50
the Certificateholders will be made (the "Certificate Distribution Account" and,
together with the Note Distribution Account, the "Distribution Accounts").
On the Business Day prior to each Distribution Date, the Servicer will
instruct the Indenture Trustee to make the following deposits and distributions,
to the extent of the Available Collection Amount, in the following order of
priority:
(i) in the following order, (a) to the Securities Insurer, an amount
equal to the Guaranty Insurance Premium and all unpaid Guaranty Insurance
Premiums from prior Due Periods, (b) to the Indenture Trustee, an amount
equal to the Indenture Trustee Fee and all unpaid Indenture Trustee Fees
from prior Due Periods, (c) to the Owner Trustee, an amount equal to the
Owner Trustee Fee and all unpaid Owner Trustee Fees from prior Due Periods,
and (d) to the Custodian, an amount equal to the Custodian Fee and all
unpaid Custodian Fees from prior Due Periods;
(ii) to the Note Distribution Account and the Certificate Distribution
Account, pro rata, any amounts remaining from the Pre-Funding Account
Deposit at the end of the Funding Period (net of reinvestment income),
which will be distributed in reduction, on a pro rata basis, of the Class
Principal Balances of each Class of Notes and the Certificate Principal
Balance of the Certificates; provided, however, that if such remaining
amount is less than or equal to $50,000, such amount will be included in
the Noteholders' Monthly Principal Distributable Amount and distributed
only to the Note Distribution Account;
(iii) to the Note Distribution Account, from the Available Collection
Amount remaining after the application of clause (i) through (ii), the
Noteholders' Interest Distributable Amount;
(iv) to the Note Distribution Account, from the Available Collection
Amount remaining after the application of clauses (i) through (iii) above,
the Noteholders' Principal Distributable Amount;
(v) to the Certificate Distribution Account, from the Available
Collection Amount remaining after the application of clauses (i) through
(iv) above, the Certificateholders' Interest Distributable Amount;
(vi) to the Certificate Distribution Account, from the Available
Collection Amount remaining after the application of clauses (i) through
(v) above, the Certificateholders' Principal Distributable Amount;
(vii) to the Securities Insurer, from any remaining Available
Collection Amount the Securities Insurer Reimbursement Amount;
(viii) to the Reserve Fund, from any remaining Available Collection
Amount the excess of the Reserve Fund Requirement over the amount available
in the Reserve Fund on such Distribution Date after making any withdrawals
therefrom (the lesser of such remaining Available Collection Amount and
such excess being the "Reserve Fund Restoration Amount");
(ix) on an Overcollateralization Stepdown Date, to the holders of the
Residual Interest, the Overcollateralization Reduction Amount;
(x) to the Servicer, from any remaining Available Collection Amounts,
an amount equal to any voluntary Servicing Advances previously made by the
Servicer and not previously reimbursed (the "Servicing Advance
Reimbursement Amount"); and
(xi) if the Excess Overcollateralization Amount equals or exceeds
zero, then to the holders of the Residual Interest, the Excess Spread, if
any.
INCOME FROM ACCOUNTS
So long as no Event of Default will have occurred and be continuing,
amounts on deposit in the Note Distribution Account, Certificate Distribution
Account (sometimes referred to herein, together with the Collection Account, as
an "Account") will be invested by the Indenture Trustee, as directed by the
Affiliated Holder, in one or more Permitted Investments (as defined in the Sale
and Servicing Agreement) bearing interest or sold at a discount. So long as no
Event of Default will have occurred and be continuing, amounts on
S-47
<PAGE> 51
deposit in the Collection Account will be invested by the Affiliated Holder, in
one or more Permitted Investments bearing interest or sold at a discount. No
such investment in any Account will mature later than the business day
immediately preceding the next Distribution Date. All income or other gain from
investments in any Account will be deposited in such Account immediately on
receipt, unless otherwise specified herein.
DISTRIBUTIONS ON THE OFFERED SECURITIES; RELATED DEFINITIONS
Distributions on the Offered Securities on each Distribution Date will be
made from the sum of the Available Collection Amount, any funds withdrawn from
the Reserve Fund and any Guaranteed Payments. The Servicer will calculate the
Available Collection Amount on the fifth business day prior to each Distribution
Date (each such day, a "Determination Date"). With respect to each Distribution
Date, the "Required Distribution Amount" is the sum of the Interest Distribution
Amount and the Regular Principal Distribution Amount.
The "Interest Distribution Amount" on any Distribution Date the sum of the
Noteholders' Interest Distributable Amount and the Certificateholders' Interest
Distributable Amount for such Distribution Date.
The "Regular Principal Distribution Amount" on each Distribution Date will
be an amount equal to the lesser of:
(A) the sum of the aggregate Class Principal Balance of the Notes and
the Certificate Principal Balance of the Certificates immediately prior to
such Distribution Date; and
(B) the greater of (1) the sum of (i) each scheduled payment of
principal collected by the Servicer in the related Due Period, (ii) all
partial and full principal prepayments applied by the Servicer during such
related Due Period, (iii) the principal portion of all Net Liquidation
Proceeds, Insurance Proceeds and Released Mortgaged Property Proceeds
received during the related Due Period, (iv) (a) that portion of the
purchase price of any repurchased Home Loan which represents principal and
(b) the principal portion of any Substitution Adjustments required to be
deposited in the Collection Account as of the related Determination Date,
and (v) upon the reduction of the Overcollateralization Amount to zero, the
principal portion of any Net Loan Losses for the preceding Due Period; and
(2) the amount by which (i) the aggregate principal balance of the Offered
Securities as of the preceding Distribution Date (after giving effect to
all payments of principal on such preceding Distribution Date) exceeds (ii)
the Pool Principal Balance plus funds on deposit in the Pre-Funding
Account, each as of the immediately preceding Determination Date;
provided, however, that if such Distribution Date is an Overcollateralization
Stepdown Date, then with respect to the distribution of principal to the
Noteholders and Certificateholders the foregoing amount, in each case, will be
reduced (but not less than zero) by the Overcollateralization Reduction Amount,
if any, for such Distribution Date.
Notwithstanding clauses (B)(1)(v) or (B)(2) of the definition of Regular
Principal Distribution Amount, if on the final Distribution Date the funds
available for distribution are not sufficient to provide for the distribution of
the Regular Principal Distribution Amount and the applicable Noteholders'
Principal Carry-Forward Amount or Certificateholders' Principal Carry-Forward
Amount, in full, then the holders of the Notes or the Certificates, as
applicable, will not be distributed such portion of the Regular Principal
Distribution Amount and Noteholders' Principal Carry-Forward Amount or
Certificateholders' Principal Carry-Forward Amount attributable to such
insufficiency, in which event the amount of such insufficiency will be
written-off and the corresponding principal balances of all Classes of the Notes
and the Certificates will be reduced to zero without the distribution of funds
to fully pay the Notes and the Certificates. If prior to the final Distribution
Date, the Overcollateralization Amount is reduced to zero, the principal portion
of any Net Loan Losses will be included within the Regular Principal
Distribution Amount for the related Distribution Date. However, no corresponding
proceeds of principal from the Home Loans will be included in the Regular
Principal Distribution Amount to provide funds for the distribution of the
portion of the Regular Principal Distribution Amount attributable to such Net
Loan Losses, and the distribution of this portion of the Regular Principal
Distribution Amount to the holders of the Offered Securities will be dependent
upon the receipt of
S-48
<PAGE> 52
funds from, first, the Excess Spread, if any, second, if such Excess Spread does
not provide sufficient funds, then, the withdrawal of any available funds from
the Reserve Fund, and, third, if such Excess Spread and withdrawal from the
Reserve Fund do not provide sufficient funds, any Guaranteed Payment received by
the Indenture Trustee or the Owner Trustee, as applicable. If sufficient funds
for the distribution of this portion of the Regular Principal Distribution
Amount are not provided from the Excess Spread, the Reserve Fund and the
Guaranteed Payment on the applicable Distribution Date, then the amount of such
insufficiency would become a Noteholders' Principal Carry-Forward Amount or
Certificateholders' Principal Carry-Forward Amount, as applicable, which would
ultimately be subject to the write-off on the final Distribution Date to the
extent that sufficient funds are not available for distribution on such final
Distribution Date, including funds distributable to pay such Noteholders'
Principal Carry-Forward Amount or Certificateholders' Principal Carry-Forward
Amount from the receipt of Excess Spread, the Reserve Fund and/or Guaranteed
Payments on or before such final Distribution Date.
For purposes hereof, the following terms shall have the following meanings:
"Insurance Proceeds" on each Distribution Date will be equal to, with
respect to any Home Loan, the proceeds paid to the Indenture Trustee or the
Servicer by any insurer pursuant to any insurance policy covering a Home Loan,
Mortgaged Property or REO Property or any other insurance policy that relates to
a Home Loan, net of any expenses which are incurred by the Indenture Trustee or
the Servicer in connection with the collection of such proceeds and not
otherwise reimbursed to the Indenture Trustee or the Servicer, but excluding any
Guaranty Policy Proceeds and proceeds of any insurance policy that are to be
applied to the restoration or repair of the Mortgaged Property or released to
the borrower in accordance with customary loan servicing procedures.
A "Liquidated Home Loan" is a defaulted Home Loan as to which the Servicer
has determined that all recoverable liquidation and insurance proceeds have been
received, which will be deemed to occur upon the earlier of: (a) in the case of
a Secured Loan the liquidation of the related Mortgaged Property acquired
through foreclosure or similar proceedings, (b) the Servicer's determination in
accordance with customary servicing practices that no further amounts are
collectible from the Home Loan and any related security, or (c) any portion of a
scheduled monthly payment of principal and interest is in excess of 180 days
past due.
"Net Liquidation Proceeds" on each Distribution Date will be equal to any
cash amounts received from Liquidated Home Loans, whether through trustee's
sale, foreclosure sale, disposition of REO, whole loan sales or otherwise (other
than Insurance Proceeds and Released Mortgaged Property Proceeds), and any other
cash amounts received in connection with the management of the Mortgaged
Properties from defaulted Home Loans, in each case, net of any reimbursements to
the Servicer made from such amounts for any unreimbursed Servicing Advances made
and any other fees and expenses paid in connection with the foreclosure,
conservation and liquidation of the related Liquidated Home Loan or Mortgaged
Properties.
"Released Mortgaged Property Proceeds" on each Distribution Date will be
equal to, with respect to any Home Loan, the proceeds received by the Servicer
in connection with (i) a taking of an entire Mortgaged Property by exercise of
the power of eminent domain or condemnation or (ii) any release of part of the
Mortgaged Property from the lien of the related Mortgage, whether by partial
condemnation, sale or otherwise, which in either case are not released to the
borrower in accordance with applicable law, customary mortgage servicing
procedures and the Sale and Servicing Agreement.
"Excess Spread" with respect to any Distribution Date will equal the
portion, if any, of the Available Collection Amount for the related Due Period
that remains after payment of the following amounts: (a) the Trust Fees and
Expenses; (b) the Noteholders' Interest Distributable Amount; (c) the Regular
Principal Distribution Amount; (d) the Certificateholders' Interest
Distributable Amount; (e) the Securities Insurer Reimbursement Amount; (f) the
Reserve Fund Restoration Amount; and (g) the Servicing Advance Reimbursement
Amount.
"Noteholders' Distributable Amount" means, with respect to any Distribution
Date, the sum of the Noteholders' Principal Distributable Amount and the
Noteholders' Interest Distributable Amount.
S-49
<PAGE> 53
"Noteholders' Interest Distributable Amount" means, with respect to any
Distribution Date, the sum of the Noteholders' Monthly Interest Distributable
Amount for such Distribution Date and the Noteholders' Interest Carry-Forward
Amount for such Distribution Date.
"Noteholders' Monthly Interest Distributable Amount" means, with respect to
any Distribution Date, interest accrued for the related Due Period on each Class
of Notes at the respective Interest Rate for such Class on the outstanding
principal balance of the Notes of such Class on the immediately preceding
Distribution Date after giving effect to all payments of principal to the
Noteholders of such Class on or prior to such Distribution Date (or, in the case
of the first Distribution Date, on the Closing Date).
"Noteholders' Interest Carry-Forward Amount" means, with respect to any
Distribution Date, the excess of the Noteholders' Monthly Interest Distributable
Amount for the preceding Distribution Date and any outstanding Noteholders'
Interest Carry-Forward Amount on such preceding Distribution Date, over the
amount in respect of interest that is actually deposited in the Note
Distribution Account on such preceding Distribution Date.
"Noteholders' Principal Distributable Amount" means, with respect to any
Distribution Date, the sum of the Noteholders' Monthly Principal Distributable
Amount for such Distribution Date and the Noteholders' Principal Carry-Forward
Amount as of the close of the preceding Distribution Date; provided, however,
that the Noteholders' Principal Distributable Amount shall not exceed the
outstanding Class Principal Balance of the Notes; and provided, further, that
(i) the Noteholders' Principal Distributable Amount on the Class A-1 Final
Scheduled Distribution Date shall not be less than the amount that is necessary
(after giving effect to other amounts to be deposited in the Note Distribution
Account on such Distribution Date and allocable to principal) to reduce the
outstanding Class Principal balance of the Class A-1 Notes to zero; (ii) the
Noteholders' Principal Distributable Amount on the Class A-2 Final Scheduled
Distribution Date shall not be less than the amount that is necessary (after
giving effect to other amounts to be deposited in the Note Distribution Account
on such Distribution Date and allocable to principal) to reduce the outstanding
Class Principal Balance of the Class A-2 Notes to zero; (iii) the Noteholders'
Principal Distributable Amount on the Class A-3 Final Scheduled Distribution
Date shall not be less than the amount that is necessary (after giving effect to
other amounts to be deposited in the Note Distribution Account on such
Distribution Date and allocable to principal) to reduce the outstanding Class
Principal Balance of the Class A-3 Notes to zero; (iv) the Noteholders'
Principal Distributable Amount on the Class A-4 Final Scheduled Distribution
Date shall not be less than the amount that is necessary (after giving effect to
other amounts to be deposited in the Note Distribution Account on such
Distribution Date and allocable to principal) to reduce the outstanding Class
Principal Balance of the Class A-4 Notes to zero; (v) the Noteholders' Principal
Distributable Amount on the Class A-5 Final Scheduled Distribution Date shall
not be less than the amount that is necessary (after giving effect to other
amounts to be deposited in the Note Distribution Account on such Distribution
Date and allocable to principal) to reduce the outstanding Class Principal
Balance of the Class A-5 Notes to zero; (vi) the Noteholders' Principal
Distributable Amount on the Class A-6 Final Scheduled Distribution Date shall
not be less than the amount that is necessary (after giving effect to other
amounts to be deposited in the Note Distribution Account on such Distribution
Date and allocable to principal) to reduce the outstanding Class Principal
Balance of the Class A-6 Notes to zero; and (vii) the Noteholders' Principal
Distributable Amount on the Class A-7 Final Scheduled Distribution Date shall
not be less than the amount that is necessary (after giving effect to other
amounts to be deposited in the Note Distribution Account on such Distribution
Date and allocable to principal) to reduce the outstanding Class Principal
Balance of the Class A-7 Notes to zero.
"Noteholders' Monthly Principal Distributable Amount" means, with respect
to each Distribution Date, the sum of (i) the Regular Principal Distribution
Amount, plus (ii) until the Overcollateralization Amount equals the Required
Overcollateralization Amount, the Excess Spread, if any.
"Noteholders' Principal Carry-Forward Amount" means, as of the close of any
Distribution Date, the excess of the Noteholders' Monthly Principal
Distributable Amount and any outstanding Noteholders' Principal Carry-Forward
Amount from the preceding Distribution Date over the amount in respect of
principal that is actually deposited in the Note Distribution Account.
S-50
<PAGE> 54
"Certificateholders' Distributable Amount" means, with respect to any
Distribution Date, the sum of the Certificateholders' Principal Distributable
Amount and the Certificateholders' Interest Distributable Amount.
"Certificateholders' Interest Distributable Amount" means, with respect to
any Distribution Date, the sum of the Certificateholders' Monthly Interest
Distributable Amount for such Distribution Date and the Certificateholders'
Interest Carry-Forward Amount for such Distribution Date.
"Certificateholders' Monthly Interest Distributable Amount" means, with
respect to any Distribution Date, 30 days of interest (or, in the case of the
first Distribution Date, interest accrued from and including the Closing Date to
but excluding such Distribution Date) at the Pass Through Rate on the
Certificate Balance on the immediately preceding Distribution Date, after giving
effect to all payments allocable to the reduction of the Certificate Balance
made on or prior to such Distribution Date (or, in the case of the first
Distribution Date, on the Closing Date).
"Certificateholders' Interest Carry-Forward Amount" means, with respect to
any Distribution Date, the excess of the Certificateholders' Monthly Interest
Distributable Amount for the preceding Distribution Date and any outstanding
Certificateholders' Interest Carry-Forward Amount on such preceding Distribution
Date, over the amount in respect of interest that is actually deposited in the
Certificate Distribution Account on such preceding Distribution Date.
"Certificateholders' Principal Distributable Amount" means, with respect to
any Distribution Date, the sum of the Certificateholders' Monthly Principal
Distributable Amount for such Distribution Date and the Certificateholders'
Principal Carry-Forward Amount as of the close of the preceding Distribution
Date; provided, however, that the Certificateholders' Principal Distributable
Amount shall not exceed the Certificate Balance. In addition, on the Final
Scheduled Distribution Date, the principal required to be distributed to
Certificateholders will include the lesser of (a) any scheduled payments of
principal due and remaining unpaid on each Home Loan in the Trust as of the
Final Scheduled Maturity Date or (b) the portion of the amount required to be
advanced under clause (a) above that is necessary (after giving effect to the
other amounts to be deposited in the Certificate Distribution Account on such
Distribution Date and allocable to principal) to reduce the Certificate Balance
to zero, and, in the case of clauses (a) and (b), remaining after any required
distribution in respect of the Notes.
"Certificateholders' Monthly Principal Distributable Amount" means, with
respect to any Distribution Date prior to the Distribution Date on which the
Notes are paid in full, zero; and with respect to any Distribution Date
commencing on the Distribution Date on which the Notes are paid in full, the sum
of (i) the Regular Principal Distribution Amount (less, on the Distribution Date
on which the Notes are paid in full, the portion thereof payable on the Notes),
plus (ii) until the Overcollateralization Amount equals the Required
Overcollateralization Amount, the Excess Spread, if any.
"Certificateholders' Principal Carry-Forward Amount" means, as of the close
of any Distribution Date, the excess of the Certificateholders' Monthly
Principal Distributable Amount and any outstanding Certificateholders' Principal
Carry-Forward Amount from the preceding Distribution Date, over the amount in
respect of principal that is actually deposited in the Certificate Distribution
Account.
RESTRICTIONS ON SECURITYHOLDER RIGHTS
So long as (i) there does not exist a continuing failure by the Securities
Insurer to make a required payment under the Guaranty Policy and (ii) certain
bankruptcy-related events specified in the Sale and Servicing Agreement have not
occurred with respect to the Securities Insurer (any of the events described in
(i) and (ii), a "Securities Insurer Default"), the Securities Insurer will have
the right to exercise all rights, including voting rights, which the Offered
Securityholders are entitled to exercise pursuant to the Indenture and the Trust
Agreement (the "Offered Securityholder Rights"), without any consent of such
Offered Securityholders; provided, however, that without the consent of each
holder of a Class of Notes or Certificates affected thereby, the Securities
Insurer shall not exercise such Offered Securityholder Rights to amend the
Indenture in any manner that would (i) reduce the amount of, or delay the timing
of, collections of payments on Home Loans or distributions which are required to
be made on any Offered Security, (ii) adversely affect
S-51
<PAGE> 55
in any material respect the interests of the holders of any Class of Notes or
the Certificates, or (iii) alter the rights of any such Offered Securityholder
to consent to any such amendment.
INSOLVENCY EVENT
If any of certain events of voluntary corporate dissolution or insolvency,
readjustment of debt, marshalling of assets and liabilities, commencement of
bankruptcy proceedings under an Insolvency Law or similar proceedings with
respect to such person indicating its insolvency or inability to pay its
obligations (each, an "Insolvency Event") occurs with respect to the Affiliated
Holder, the Owner Trustee will retain for the benefit of the holders of the
Offered Securities and the Securities Insurer, all remedies available at law or
under the Trust Agreement and none of the liens or security interests granted
pursuant to the Trust Agreement will be extinguished, released, terminated or
impaired by the same; rather, such liens and security interests will continue to
encumber the assets of the Trust until all principal and interest required to be
distributed on the Offered Securities is paid in full and any other amounts
required to be paid by the Trust under the Trust Agreement are so paid. In any
event, subject to the following, upon the occurrence of an Insolvency Event, the
assets of the Trust held under the Trust Agreement will be sold within 120 days
of the occurrence of such event and the proceeds of such sale will be
distributed in accordance with the provisions of the Trust Agreement.
Notwithstanding the foregoing, the Trust Agreement will not terminate and
the Home Loans will not be sold upon the occurrence of an Insolvency Event if
within ninety (90) days of such Insolvency Event the holders of the aggregate
outstanding Certificate Principal Balance of the Certificates and the Securities
Insurer agree that the Trust will not terminate and the Owner Trustee and the
Securities Insurer have received an opinion of counsel to the Trust from counsel
acceptable to the Securities Insurer and at the expense of the Trust, in form
and substance acceptable to the Securities Insurer, to the effect that the
entity created or reconstituted under the Trust Agreement, if any, would not be
characterized as an association taxable as a corporation for federal income tax
purposes. If such authorization to continue the Trust is not received, the Home
Loans will not be sold, but the Owner Trustee shall adopt a plan of dissolution,
acceptable to the Securities Insurer, that provides for the appointment of a
conservator, who shall be acceptable to the Securities Insurer, to make
collections on the Home Loans for distribution to the holders of the Offered
Securities in accordance with the terms and priority of payment described
herein.
THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Offered Securities in their own names or as pledgees. For
the purpose of meeting the legal requirements of certain jurisdictions, the
Servicer, the Owner Trustee and the Indenture Trustee acting jointly (or in some
instances, the Owner Trustee or the Indenture Trustee acting alone) will have
the power to appoint co-trustees or separate trustees of all or any part of the
Trust with the prior written consent of the Securities Insurer. In the event of
such an appointment, all rights, powers, duties and obligations conferred or
imposed upon the Owner Trustee by the Sale and Servicing Agreement and the Trust
Agreement and the Indenture Trustee by the Indenture will be conferred or
imposed upon the Owner Trustee and the Indenture Trustee, respectively, and in
each such case such separate trustee or co-trustee jointly, or, in any
jurisdiction in which the Owner Trustee or Indenture Trustee will be incompetent
or unqualified to perform certain acts, singly upon such separate trustee or
co-trustee who will exercise and perform such rights, powers, duties and
obligations solely at the direction of the Owner Trustee or the Indenture
Trustee, respectively.
The Owner Trustee and the Indenture Trustee may resign at any time, in
which event the Servicer will be obligated to appoint a successor thereto. The
Servicer, with the prior written consent of the Securities Insurer, or the
Securities Insurer may also remove the Owner Trustee or the Indenture Trustee if
either ceases to be eligible to continue as such under the Trust Agreement or
the Indenture, as the case may be, becomes legally unable to act or becomes
insolvent. In such circumstances, the Servicer will be obligated to appoint a
successor Owner Trustee or a successor Indenture Trustee, as applicable, that is
acceptable to the Securities Insurer. Any resignation or removal of the Owner
Trustee or Indenture Trustee and appointment of a
S-52
<PAGE> 56
successor thereto will not become effective until acceptance of the appointment
by such successor and approval by the Securities Insurer.
The Trust Agreement will provide that the Servicer will pay or cause to be
paid the fees and expenses of the Owner Trustee and the Indenture will provide
that the Servicer will pay or cause to be paid the fees and expenses of the
Indenture Trustee in connection with their duties under the Trust Agreement and
Indenture, respectively. The Trust Agreement and Indenture will further provide
that the Owner Trustee and Indenture Trustee will be entitled to indemnification
by the Transferor and the Seller for, and will be held harmless against, any
loss, liability or expense incurred by the Owner Trustee or Indenture Trustee
not resulting from its own willful misfeasance, bad faith or negligence (other
than by reason of a breach of any of its representations or warranties to be set
forth in the Trust Agreement or Indenture, as the case may be).
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Certificates (other than the execution
and authentication thereof), the Notes or of any Home Loans or related
documents, and will not be accountable for the use or application by the Seller
or the Servicer of any funds paid to the Seller or the Servicer in respect of
the Notes, the Certificates or the Home Loans, or the investment of any monies
by the Servicer before such monies are deposited into the Collection Account,
the Noteholders' Distribution Account or the Certificateholders' Distribution
Account. So long as no Event of Default has occurred and is continuing, the
Owner Trustee will be required to perform only those duties specifically
required of it under the Trust Agreement. Generally, those duties will be
limited to the receipt of the various certificates, reports or other instruments
required to be furnished to the Owner Trustee under the Trust Agreement, in
which case it will only be required to examine them to determine whether they
conform to the requirements of the Trust Agreement. The Owner Trustee will not
be charged with knowledge of a failure by the Servicer to perform its duties
under the Trust Agreement or Sale and Servicing Agreement which failure
constitutes an Event of Default unless the Owner Trustee obtains actual
knowledge of such failure as will be specified in the Trust Agreement.
The Owner Trustee will be under no obligation to exercise any of the rights
or powers vested in it by the Trust Agreement or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Certificateholders, unless such Certificateholders have offered to the Owner
Trustee reasonable security or indemnity against the costs, expenses and
liabilities that may be incurred therein or thereby. Subject to the rights or
consent of the Noteholders, Securities Insurer and Indenture Trustee, no
Certificateholder will have any right under the Trust Agreement to institute any
proceeding with respect to the Trust Agreement, unless such holder previously
has given to the Owner Trustee written notice of the occurrence of an Event of
Default and (i) the Event of Default arises from the Servicer's failure to remit
payments when due or (ii) the holders of Certificates evidencing not less than
25% of the voting interests of the Certificates have made written request upon
the Owner Trustee to institute such proceeding in its own name as the Owner
Trustee thereunder and have offered to the Owner Trustee reasonable indemnity
and the Owner Trustee for 30 days has neglected or refused to institute any such
proceedings.
The Indenture Trustee will make no representations as to the validity or
sufficiency of the Indenture, the Certificates, the Notes (other than the
execution and authentication thereof) or of any Home Loans or related documents,
and will not be accountable for the use or application by the Seller or the
Servicer of any funds paid to the Seller or the Servicer in respect of the
Notes, the Certificates or the Home Loans, or the investment of any monies by
the Servicer before such monies are deposited into the Collection Account or the
Distribution Account. So long as no Indenture Event of Default has occurred and
is continuing, the Indenture Trustee will be required to perform only those
duties specifically required of it under the Indenture. Generally, those duties
will be limited to the receipt of the various certificates, reports or other
instruments required to be furnished to the Indenture Trustee under the
Indenture, in which case it will only be required to examine them to determine
whether they conform to the requirements of the Indenture. The Indenture Trustee
will not be charged with knowledge of a failure by the Servicer to perform its
duties under the Trust Agreement, Sale and
S-53
<PAGE> 57
Servicing Agreement or Administration Agreement which failure constitutes an
Indenture Event of Default unless the Indenture Trustee obtains actual knowledge
of such failure as will be specified in the Indenture.
The Indenture Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Indenture or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Noteholders, unless such Noteholders have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby. Subject to the rights or consent of the
Securities Insurer, no Noteholder will have any right under the Indenture to
institute any proceeding with respect to the Indenture, unless such holder
previously has given to the Indenture Trustee written notice of the occurrence
of an Event of Default and (i) the Event of Default arises from the Servicer's
failure to remit payments when due or (ii) the holders of Class A-1 Notes, Class
A-2 Notes, Class A-3 Notes, Class A-4 Notes, Class A-5 Notes, Class A-6 Notes
and Class A-7 Notes evidencing not less than 25% of the voting interests of each
such Class of Notes, acting together as a single class, have made written
request upon the Indenture Trustee to institute such proceeding in its own name
as the Indenture Trustee thereunder and have offered to the Indenture Trustee
reasonable indemnity and the Indenture Trustee for 30 days has neglected or
refused to institute any such proceedings.
PREPAYMENT AND YIELD CONSIDERATIONS
Except as otherwise provided herein, no principal payments will be made on
the Class A-2 Notes until the Class A-1 Notes have been paid in full, no
principal payments will be made on the Class A-3 Notes until the Class A-2 Notes
have been paid in full, no principal payments will be made on the Class A-4
Notes until the Class A-3 Notes have been paid in full, no principal payments
will be made on the Class A-5 Notes until the Class A-4 Notes have been paid in
full, no principal payments will be made on the Class A-6 Notes until the Class
A-5 Notes have been paid in full and no principal payments will be made on the
Class A-7 Notes until the Class A-6 Notes have been paid in full. In addition,
except as otherwise provided, no distributions of principal with respect to the
Certificates will be made until the Class A-7 Notes have been paid in full. See
"Description of the Offered Securities -- Distributions on the Notes" and
"-- Distributions on the Certificates" herein. As the rate of payment of
principal of each Class of Notes and the Certificates depends primarily on the
rate of payment (including prepayments) of the principal balance of the Home
Loans, final payment of any class of Notes and the final distribution in respect
of the Certificates could occur significantly earlier than their respective
final scheduled Distribution Dates. Holders of the Offered Securities will bear
the risk of being able to reinvest principal payments on the Offered Securities
at yields at least equal to the yield on their respective Offered Securities. No
prediction can be made as to the rate of prepayments on the Home Loans in either
stable or changing interest rate environments. Any reinvestment risk resulting
from the rate of prepayment of the Home Loans and the distribution of such
payments to the holders of the Offered Securities will be borne entirely by the
holders of the Offered Securities.
The subordination of the Certificates to the Notes will provide limited
protection to the Noteholders against losses on the Home Loans. Accordingly, the
yield on the Certificates will be extremely sensitive to the loss experience of
the Home Loans and the timing of any such losses. If the actual rate and amount
of losses experienced by the Home Loans exceed the rate and amount of such
losses assumed by an investor, the yield to maturity on the Certificates may be
lower than anticipated.
The Home Loans are either (i) "simple interest" or "date-of-payment loans"
or (ii) "actuarial method" loans. With respect to a Home Loan that is a "simple
interest" loan, if a payment is received after the scheduled monthly due date, a
smaller portion of such payment will be applied to principal and a greater
portion will be applied to interest than would have been the case had the
payment been received on the scheduled monthly due date, resulting in such Home
Loan having a longer weighted average life than would have been the case had the
payment been made as scheduled. Conversely, if a payment on a Home Loan is
received prior to the scheduled monthly due date, more of such payment will be
applied to principal and less to interest than would have been the case had the
payment been received on the scheduled monthly due date, resulting in such Home
Loan having a shorter weighted average life than would have been the case had
the payment been made as scheduled. See "The Home Loan Pool -- Payments on the
Home Loans" herein.
S-54
<PAGE> 58
The effective yield to the holders of the Offered Securities will be
slightly lower than the yield otherwise produced by the applicable Interest Rate
or Pass Through Rate, because the distribution of the interest accrued during
each Due Period (a calendar month consisting of thirty days, except for the
first Due Period) will not be made until the Distribution Date occurring in the
month following such Due Period. See "Description of the Offered
Securities -- Distributions on the Notes" and "-- Distributions on the
Certificates" herein. This delay will result in funds being passed through to
the holders of the Offered Securities approximately 20 days after the end of the
monthly accrual period, during which 20-day period no interest will accrue on
such funds. As discussed in greater detail below greater than anticipated
distributions of principal can also affect the yield on Offered Securities
purchased at a price greater or less than par.
The rate of principal payments on the Offered Securities, the aggregate
amount of each interest payment on the Offered Securities and the yield to
maturity on the Offered Securities will be directly related to and affected by
the rate and timing of principal reductions on the Home Loans. The principal
reductions on such Home Loans may be in the form of scheduled amortization
payments or unscheduled payments or reductions, which may include prepayments,
repurchases and liquidations or write-offs due to default, casualty, insurance
or other dispositions. On or after any Distribution Date on which the Pool
Principal Balance declines to 15% or less, or 10% or less, of the Pool Principal
Balance of the Initial Home Loans and Subsequent Home Loans conveyed to the
Trust as of the respective Cut-Off Dates, the Affiliated Holder may effect a
redemption of the Notes and prepayment of the Certificates under one of two
optional termination methods as described herein. See "Description of the
Offered Securities -- Optional Redemption of the Notes; Optional Prepayment of
the Certificates" herein. Furthermore, to the extent so provided in the
Indenture, the Securities Insurer may be entitled to exercise a similar right to
effect an optional redemption of the Notes and prepayment of the Certificates.
See "Description of the Offered Securities -- Optional Redemption" herein.
The "weighted average life" of an Offered Security refers to the average
amount of time that will elapse from the Closing Date to the date each dollar in
respect of principal of such Offered Security is repaid. The weighted average
life of the Offered Security will be influenced by, among other factors, the
rate at which principal reductions occur on the Home Loans, the rate at which
Excess Spread is distributed to holders of the Offered Securities as described
herein, and the extent to which any Overcollateralization Reduction Amount is
paid to the holders of the Residual Interest as described herein. If substantial
principal prepayments on the Home Loans are received from unscheduled
prepayments, liquidations or repurchases, then the distributions to the holders
of the Offered Securities resulting from such prepayments may significantly
shorten the actual average life of the Offered Securities than would otherwise
be the case. If the Home Loans experience delinquencies and defaults in the
payment of principal, then the holders of the Offered Securities will similarly
experience a delay in the receipt of principal distributions attributable to
such delinquencies and defaults which in certain instances may result in a
longer actual average life of the Offered Securities than would otherwise be the
case. However, to the extent that the Principal Balances from Liquidated Home
Loans are included in the principal distributions on the Offered Securities as a
result of delinquencies and defaults on the Home Loans (and at such time that
the Overcollateralization Amount has been reduced to zero), then the holders of
the Offered Securities will experience an acceleration in the receipt of
principal distributions which in certain instances may result in a shorter
actual average life of the Offered Securities than would otherwise be the case.
Interest shortfalls on the Home Loans due to principal prepayments in full and
curtailments and any resulting shortfall in amounts distributable on the Offered
Securities will be covered to the extent of amounts available from the credit
enhancement provided for the Offered Securities. See "Risk Factors -- Additional
Credit Enhancement Limitations -- Adequacy of Credit Enhancement" herein.
The rate and timing of principal reductions on the Home Loans will be
influenced by a variety of economic, geographic, social and other factors. These
factors may include changes in borrowers' housing needs, job transfers,
unemployment, borrowers' net equity, if any, in the mortgaged properties,
servicing decisions, homeowner mobility, the existence and enforceability of
"due-on-sale" clauses, seasoning of loans, market interest rates for similar
types of loans and the availability of funds for such loans. A substantial
majority of the Home Loans are subject to prepayment penalties, which may reduce
the amount or the likelihood of prepayments on such Home Loans. The remaining
Home Loans may be prepaid in full or in part at any time without penalty. As
with fixed rate obligations, generally, the rate of prepayment on a pool of
loans
S-55
<PAGE> 59
is affected by prevailing market interest rates for similar types of loans of a
comparable term and risk level. If prevailing interest rates were to fall
significantly below the respective Home Loan Rates on the Home Loans, the rate
of prepayment (and refinancing) would be expected to increase. Conversely, if
prevailing interest rates were to rise significantly above the respective Home
Loan Rates on the Home Loans, the rate of prepayment on the Home Loans would be
expected to decrease. In addition, depending on prevailing market interest
rates, the future outlook for market interest rates and economic conditions
generally, some borrowers may sell or refinance mortgaged properties in order to
realize their equity in the mortgaged properties, to meet cash flow needs or to
make other investments. In addition, any future limitations on the rights of
borrowers to deduct interest payments on mortgage loans for Federal income tax
purposes may result in a higher rate of prepayment on the Secured Loans. The
Seller and the Transferor make no representations as to the particular factors
that will affect the prepayment of the Home Loans, as to the relative importance
of such factors, or as to the percentage of the principal balance of the Home
Loans that will be paid as of any date.
Distributions of principal to holders of the Offered Securities at a faster
rate than anticipated will increase the yield on Offered Securities purchased at
a discount but will decrease the yield on Offered Securities purchased at a
premium, which distributions of principal may be attributable to scheduled
payments and prepayments of principal on the Home Loans, to Excess Spread and to
amounts remaining on deposit in the Pre-Funding Account at the expiration of the
Funding Period. The effect on an investor's yield due to distributions of
principal to the holders of the Offered Securities (including without limitation
prepayments on the Home Loans) occurring at a rate that is faster (or slower)
than the rate anticipated by the investor during any period following the
issuance of the Offered Securities will not be entirely offset by a subsequent
like reduction (or increase) in the rate of such distributions of principal
during any subsequent period.
The rate of delinquencies and defaults on the Home Loans, and the
recoveries, if any, on defaulted Home Loans and foreclosed properties, will also
affect the rate and timing of principal payments on the Home Loans, and
accordingly, the weighted average life of the Offered Securities, and could
cause a delay in the payment of principal or a slower rate of principal
amortization to the holders of Offered Securities. Alternatively, the occurrence
of delinquencies and defaults on the Home Loans could result in an increase in
principal payments or more rapid rate of principal amortization of the Offered
Securities as a result of the inclusion of Net Loan Losses from Liquidated Home
Loans in the amounts distributable to the holders of the Offered Securities as
described herein. Certain factors may influence such delinquencies and defaults,
including origination and underwriting standards, loan-to-value ratios and
delinquency history. In general, defaults on home loans are expected to occur
with greater frequency in their early years, although little data is available
with respect to the rate of default on similar types of home loans. The rate of
default on Home Loans with high loan-to-value ratios, secured by junior liens or
unsecured may be higher than that of home loans with lower loan-to-value ratios
or secured by first liens on comparable properties. Furthermore, the rate and
timing of prepayments, defaults and liquidations on the Home Loans will be
affected by the general economic condition of the region of the country in which
the related Mortgaged Properties are located or the related borrower is
residing. See "The Home Loan Pool" herein. The risk of delinquencies and loss is
greater and voluntary principal prepayments are less likely in regions where a
weak or deteriorating economy exists, as may be evidenced by, among other
factors, increasing unemployment or falling property values.
Because principal distributions are paid to certain Classes of Notes before
other Classes, holders of the Classes of Notes or the Certificates having a
later priority of principal distribution bear a greater risk of losses from
delinquencies and defaults on the Home Loans than holders of the Classes of
Notes having earlier priorities for payment of principal. In addition, because
principal distributions are paid to the Noteholders before the
Certificateholders, the Certificateholders will bear a greater risk of such
losses than holders of the Notes. See "Description of Credit
Enhancement -- Subordination and Allocation of Losses" herein. Nevertheless,
even if losses are allocated to any Class of Notes, the holders of such Class
will be distributed the full amount of the interest and principal distributions
due such holders to the extent that Guaranteed Payments therefor are made under
the Guaranty Policy.
Although certain data have been published with respect to the historical
prepayment experience of certain residential mortgage loans, such mortgage loans
may differ in material respects from the Home Loans and such data may not be
reflective of conditions applicable to the Home Loans. No prepayment history is
S-56
<PAGE> 60
generally available with respect to the types of Home Loans included in the Home
Loan Pool or similar types of loans, and there can be no assurance that the Home
Loans will achieve or fail to achieve any particular rate of principal
prepayment. A number of factors suggest that the prepayment experience of the
Home Loan Pool may be significantly different from that of a pool of
conventional first-lien, single family mortgage loans with equivalent interest
rates and maturities. One such factor is that the principal balance of the
average Home Loan is smaller than that of the average conventional first-lien
mortgage loan. A smaller principal balance may be easier for a borrower to
prepay than a larger balance and, therefore, a higher prepayment rate may result
for the Home Loan Pool than for a pool of first-lien mortgage loans,
irrespective of the relative average interest rates and the general interest
rate environment. In addition, in order to refinance a first-lien mortgage loan,
the borrower must generally repay any junior liens. However, a small principal
balance may make refinancing a Home Loan at a lower interest rate less
attractive to the borrower as the perceived impact to the borrower of lower
interest rates on the size of the monthly payment may not be significant. Other
factors that might be expected to affect the prepayment rate of the Home Loan
Pool include general economic conditions, the amounts of and interest rates on
the underlying senior mortgage loans, and the tendency of borrowers to use real
property mortgage loans as long-term financing for home purchase and junior
liens as shorter-term financing for a variety of purposes, which may include the
direct or indirect financing of home improvement, education expenses, debt
consolidation, purchases of consumer durables such as automobiles, appliances
and furnishings and other consumer purposes. Furthermore, because at origination
the majority of the Secured Loans had combined loan-to-value ratios that
exceeded 100%, the related borrowers for these Home Loans will generally have
significantly less opportunity to refinance the indebtedness secured by the
related Mortgaged Properties including these Home Loans, and, therefore, a lower
prepayment rate may result from the Home Loan Pool than for a pool of mortgage
(including first or junior lien) loans that have combined loan-to-value ratios
less than 100%. Given these characteristics, the Home Loans may experience a
higher or lower rate of prepayment than first-lien mortgage loans.
EXCESS SPREAD AND OVERCOLLATERALIZATION REDUCTION AMOUNT DISTRIBUTIONS
An overcollateralization feature has been designed to accelerate the
principal amortization of the Offered Securities relative to the principal
amortization of the Home Loans. If on any Distribution Date, the Required
Overcollateralization Amount exceeds the Overcollateralization Amount, any
Excess Spread will be distributed sequentially to the holders of each Class of
Notes until the principal of the Class A-7 Notes has been paid in full and then
to the holders of the Certificates as an amount attributable to principal. Once
the Overcollateralization Amount equals the Required Overcollateralization
Amount for such Distribution Date (i.e., the Excess Overcollateralization Amount
equals or exceeds zero), distributions of Excess Spread otherwise distributable
to the holders of the Offered Securities as described above will instead be
distributed to the holders of the Residual Interest, thereby reducing the rate
of and under certain circumstances delaying the principal amortization with
respect to the Offered Securities, until the Excess Overcollateralization Amount
is reduced to zero. If purchased at a premium or a discount, the yield to
maturity on an Offered Security will be affected by the extent to which any
Excess Spread is distributed (a) as principal to the holders of the Offered
Securities or (b) to the holders of the Residual Interest in lieu of
distribution of principal to the holders of the Offered Securities. If the
actual rate of such Excess Spread distributions on the Offered Securities is
slower than the rate anticipated by an investor who purchases an Offered
Security at a discount, the actual yield to such investor will be lower than
such investor's anticipated yield. If the actual rate of Excess Spread
distributions is faster than the rate anticipated by an investor who purchases
an Offered Security at a premium, the actual yield to such investor will be
lower than such investor's anticipated yield. The amount of Excess Spread on any
Distribution Date will be affected by the actual amount of interest received,
collected or recovered in respect of the Home Loans during the related Due
Period.
An additional overcollateralization feature has been designed to limit the
accelerated amortization of the Offered Securities as described in the preceding
paragraph. On each Distribution Date on an Overcollateralization Stepdown Date
and as to which the Excess Overcollateralization Amount is, or, after taking
into account all other distributions to be made on such Distribution Date would
be, greater than zero, amounts which would otherwise be distributed as principal
to the holders of the Notes or the Certificates on such Distribution Date shall
instead be distributed to the holders of the Residual Interest, thereby reducing
the rate
S-57
<PAGE> 61
of and under certain circumstances delaying the principal amortization with
respect to the Offered Securities, until the Excess Overcollateralization Amount
is reduced to zero. Again, if purchased at a premium or a discount, the yield to
maturity on an Offered Security will be affected by the extent to which any
Overcollateralization Reduction Amount is paid to the holders of the Residual
Interest in lieu of payment of principal to the holders of the Offered
Securities. If the actual distributions of any Overcollateralization Reduction
Amount to the holders of the Residual Interest occurs sooner than anticipated by
an investor who purchases an Offered Security at a discount, the actual yield to
such investor may be lower than such investor's anticipated yield. If the actual
distributions of any Overcollateralization Reduction Amount to the holders of
the Residual Interest occurs later than anticipated by an investor who purchases
an Offered Security at a premium, the actual yield to such investor may be lower
than such investor's anticipated yield. The amount of the Overcollateralization
Reduction Amount, if any, distributable on any Distribution Date will be
affected by the Required Overcollateralization Amount, which is affected by the
actual default and delinquency experience of the Home Loan Pool and the
principal amortization of the Home Loan Pool.
REINVESTMENT RISK
The reinvestment risk with respect to an investment in the Offered
Securities will be affected by the rate and timing of principal payments
(including prepayments) in relation to the prevailing interest rates at the time
of receipt of such principal payments. For example, during periods of falling
interest rates, holders of the Offered Securities are likely to receive an
increased amount of principal payments from the Home Loans at a time when such
holders may be unable to reinvest such payments in investments having a yield
and rating comparable to the Offered Securities. Conversely, during periods of
rising interest rates, holders of the Offered Securities are likely to receive a
decreased amount of principal prepayments from the Home Loans at a time when
such holders may have an opportunity to reinvest such payments in investments
having a higher yield than, and a comparable rating to, the Offered Securities.
FINAL SCHEDULED DISTRIBUTION DATES
The "Final Scheduled Distribution Dates" for each Class of Notes and the
Certificates as set forth in the "Summary of Terms" herein have been calculated
generally in accordance with the Modeling Assumptions below and the additional
assumption that no prepayments, delinquencies, liquidations, substitutions or
repurchases are experienced on the Home Loans. The actual maturity of any Class
of Notes or the Certificates may be substantially earlier, and in certain
instances could be later, than the Final Scheduled Distribution Dates set forth
herein under "Summary of Terms".
WEIGHTED AVERAGE LIFE OF THE OFFERED SECURITIES
The following information is given solely to illustrate the effect of
prepayments of the Home Loans on the estimated weighted average lives of the
Offered Securities under certain stated assumptions and is not a prediction of
the prepayment rate that might actually be experienced by the Home Loans.
Weighted average life refers to the average amount of time that will elapse from
the date of delivery of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of the
Offered Securities will be influenced by the rate at which principal of the Home
Loans is paid, which may be in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes reductions of principal
resulting from unscheduled full or partial prepayments, refinancings,
liquidations and write-offs due to defaults, casualties or other dispositions
and repurchases by or on behalf of the Transferor or the Seller), the rate at
which Excess Spread is distributed to holders of the Offered Securities as
described herein, the extent to which any amounts remaining in the Pre-Funding
Account at the expiration of the Funding Period are distributed to the holders
of the Offered Securities as described herein, and the extent to which any
Overcollateralization Reduction Amount is distributed to the or the holders of
the Residual Interest as described herein.
Prepayments on loans such as the Home Loans are commonly measured relative
to a prepayment standard or model. The model used in this Prospectus Supplement
is the prepayment assumption (the "Prepayment Assumption"), which represents an
assumed rate of prepayment each month relative to the then
S-58
<PAGE> 62
outstanding principal balance of the pool of loans for the life of such loans. A
100% Prepayment Assumption assumes a constant prepayment rate ("CPR") of % per
annum of the outstanding principal balance of such loans in the first month of
the life of the loans and an additional approximate % (precisely % of 1%)
(expressed as a percentage per annum) in each month thereafter until the
month; beginning in the
month and in each month thereafter during the life of the loans, a CPR of %
per annum each month is assumed. As used in the table below, 0% Prepayment
Assumption assumes a CPR equal to 0% Prepayment Assumption, i.e., no
prepayments. Correspondingly, 75% Prepayment Assumption assumes prepayment rates
equal to 75% of the Prepayment Assumption, and so forth. The Prepayment
Assumption does not purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
loans, including the Home Loans. Neither the Transferor nor the Seller make any
representations about the appropriateness of the Prepayment Assumption or the
CPR model.
MODELING ASSUMPTIONS. For purposes of preparing the tables below, the
following assumptions (the "Modeling Assumptions") have been made.
(i) all scheduled principal payments on such the Home Loans are timely
received on the first day of a Due Period, which will begin on the first
day of each month and end on the thirtieth day of the month, with the first
Due Period commencing on September 1, 1996, and no delinquencies or losses
occur on the Home Loans;
(ii) the scheduled payments on the Home Loans have been calculated on
the outstanding principal balance (prior to giving effect to prepayments),
the Home Loan Rate and the remaining term to stated maturity such that the
Home Loans will fully amortize by their remaining term to stated maturity;
(iii) all scheduled payments of interest and principal in respect of
the Home Loans have been made through the applicable Cut-off Date;
(iv) the Home Loans in the Home Loan Pool prepay monthly at the
specified percentages of the Prepayment Assumption and no optional or other
early termination of the Offered Securities occurs;
(v) all prepayments in respect of the Home Loans include 30 days of
interest thereon;
(vi) the Closing Date for the Offered Securities is September , 1996
and each year will consist of 360 days;
(vii) cash distributions are received by the holders of the Offered
Certificates on the 20th day of each month, commencing in October 1996;
(viii) the Required Overcollateralization Amount will equal
$ and will be reduced in accordance with the terms of the
Indenture;
(ix) the Interest Rate for each Class of Notes is % and the Pass
Through Rate for the Certificates is %;
(x) the additional fees deducted from the proceeds of the Home Loans
include the Guaranty Insurance Premium, Indenture Trustee Fee, the Owner
Trustee Fee, the Custodian Fee and the Servicing Fee;
(xi) all of the Pre-Funding Account Deposit is used to acquire
Subsequent Home Loans in accordance with the schedule set forth below, and
prior to that date, the Pre-Funding Account Deposit accrues interest at
approximately % per annum;
(xii) no reinvestment income from any Trust account is earned and
available for distribution; and
(xiii) the Home Loan Pool consists of Home Loans having the
following characteristics:
S-59
<PAGE> 63
<TABLE>
<CAPTION>
INITIAL HOME NET HOME
HOME LOAN LOAN REMAINING TERM ORIGINAL TERM
LOAN INTEREST INTEREST TO MATURITY OF AMORTIZATION ASSUMED DELIVERY
NUMBER PRINCIPAL BALANCE RATE RATE (IN MONTHS) (IN MONTHS) OF HOME LOANS
- --------- ----------------- ------------- ------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
The tables on the following pages indicate at the specified percentages of the
Prepayment Assumption the corresponding weighted average life of each Class of
Notes and the Certificates.
S-60
<PAGE> 64
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-1 NOTES
----------------------------------------------
DISTRIBUTION DATE % % % % % % %
- --------------------------------------------------------------------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Balance............................................................
1997...................................................................
1998...................................................................
1999...................................................................
2000...................................................................
2001...................................................................
2002...................................................................
2003...................................................................
2004...................................................................
2005...................................................................
2006...................................................................
2007...................................................................
2008...................................................................
2009...................................................................
2010...................................................................
2011...................................................................
2012...................................................................
2013...................................................................
2014...................................................................
2015...................................................................
2016...................................................................
2017...................................................................
2018...................................................................
Weighted Average Life(2):
No Optional Termination..................................................
<CAPTION>
CLASS A-2 NOTES
----------------------------------------------
DISTRIBUTION DATE % % % % % % %
- --------------------------------------------------------------------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Balance............................................................
1997...................................................................
1998...................................................................
1999...................................................................
2000...................................................................
2001...................................................................
2002...................................................................
2003...................................................................
2004...................................................................
2005...................................................................
2006...................................................................
2007...................................................................
2008...................................................................
2009...................................................................
2010...................................................................
2011...................................................................
2012...................................................................
2013...................................................................
2014...................................................................
2015...................................................................
2016...................................................................
2017...................................................................
2018...................................................................
Weighted Average Life(2):
No Optional Termination..................................................
</TABLE>
- ---------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class of Notes is determined by (a)
multiplying the amount of each distribution of principal thereof by the
number of years from the date of issuance to the related Distribution Date,
(b) summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a) and rounding to two
decimal places.
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Home Loans which may differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
S-61
<PAGE> 65
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-3 NOTES
----------------------------------------------
DISTRIBUTION DATE % % % % % % %
- --------------------------------------------------------------------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Balance............................................................
1997...................................................................
1998...................................................................
1999...................................................................
2000...................................................................
2001...................................................................
2002...................................................................
2003...................................................................
2004...................................................................
2005...................................................................
2006...................................................................
2007...................................................................
2008...................................................................
2009...................................................................
2010...................................................................
2011...................................................................
2012...................................................................
2013...................................................................
2014...................................................................
2015...................................................................
2016...................................................................
2017...................................................................
2018...................................................................
Weighted Average Life(2):
No Optional Termination..................................................
<CAPTION>
CLASS A-4 NOTES
----------------------------------------------
DISTRIBUTION DATE % % % % % % %
- --------------------------------------------------------------------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Balance............................................................
1997...................................................................
1998...................................................................
1999...................................................................
2000...................................................................
2001...................................................................
2002...................................................................
2003...................................................................
2004...................................................................
2005...................................................................
2006...................................................................
2007...................................................................
2008...................................................................
2009...................................................................
2010...................................................................
2011...................................................................
2012...................................................................
2013...................................................................
2014...................................................................
2015...................................................................
2016...................................................................
2017...................................................................
2018...................................................................
Weighted Average Life(2):
No Optional Termination..................................................
</TABLE>
- ---------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class of Notes is determined by (a)
multiplying the amount of each distribution of principal thereof by the
number of years from the date of issuance to the related Distribution Date,
(b) summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a) and rounding to two
decimal places.
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Home Loans which may differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
S-62
<PAGE> 66
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-5 NOTES
----------------------------------------------
DISTRIBUTION DATE % % % % % % %
- --------------------------------------------------------------------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Balance............................................................
1997...................................................................
1998...................................................................
1999...................................................................
2000...................................................................
2001...................................................................
2002...................................................................
2003...................................................................
2004...................................................................
2005...................................................................
2006...................................................................
2007...................................................................
2008...................................................................
2009...................................................................
2010...................................................................
2011...................................................................
2012...................................................................
2013...................................................................
2014...................................................................
2015...................................................................
2016...................................................................
2017...................................................................
2018...................................................................
Weighted Average Life(2):
No Optional Termination..................................................
<CAPTION>
CLASS A-6 NOTES
----------------------------------------------
DISTRIBUTION DATE % % % % % % %
- --------------------------------------------------------------------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Balance............................................................
1997...................................................................
1998...................................................................
1999...................................................................
2000...................................................................
2001...................................................................
2002...................................................................
2003...................................................................
2004...................................................................
2005...................................................................
2006...................................................................
2007...................................................................
2008...................................................................
2009...................................................................
2010...................................................................
2011...................................................................
2012...................................................................
2013...................................................................
2014...................................................................
2015...................................................................
2016...................................................................
2017...................................................................
2018...................................................................
Weighted Average Life(2):
No Optional Termination..................................................
</TABLE>
- ---------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class of Notes is determined by (a)
multiplying the amount of each distribution of principal thereof by the
number of years from the date of issuance to the related Distribution Date,
(b) summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a) and rounding to two
decimal places.
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Home Loans which may differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
S-63
<PAGE> 67
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-7 NOTES
----------------------------------------------
DISTRIBUTION DATE % % % % % % %
- --------------------------------------------------------------------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance............................................................
1997...................................................................
1998...................................................................
1999...................................................................
2000...................................................................
2001...................................................................
2002...................................................................
2003...................................................................
2004...................................................................
2005...................................................................
2006...................................................................
2007...................................................................
2008...................................................................
2009...................................................................
2010...................................................................
2011...................................................................
2012...................................................................
2013...................................................................
2014...................................................................
2015...................................................................
2016...................................................................
2017...................................................................
2018...................................................................
Weighted Average Life(2):
No Optional Termination..................................................
<CAPTION>
DISTRIBUTION DATE
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Initial Balance............................................................
1997...................................................................
1998...................................................................
1999...................................................................
2000...................................................................
2001...................................................................
2002...................................................................
2003...................................................................
2004...................................................................
2005...................................................................
2006...................................................................
2007...................................................................
2008...................................................................
2009...................................................................
2010...................................................................
2011...................................................................
2012...................................................................
2013...................................................................
2014...................................................................
2015...................................................................
2016...................................................................
2017...................................................................
2018...................................................................
Weighted Average Life(2):
No Optional Termination..................................................
</TABLE>
- ---------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class of Notes is determined by (a)
multiplying the amount of each distribution of principal thereof by the
number of years from the date of issuance to the related Distribution Date,
(b) summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a) and rounding to two
decimal places.
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Home Loans which may differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
S-64
<PAGE> 68
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CERTIFICATES
----------------------------------------------
DISTRIBUTION DATE % % % % % % %
- --------------------------------------------------------------------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance............................................................
1997...................................................................
1998...................................................................
1999...................................................................
2000...................................................................
2001...................................................................
2002...................................................................
2003...................................................................
2004...................................................................
2005...................................................................
2006...................................................................
2007...................................................................
2008...................................................................
2009...................................................................
2010...................................................................
2011...................................................................
2012...................................................................
2013...................................................................
2014...................................................................
2015...................................................................
2016...................................................................
2017...................................................................
2018...................................................................
Weighted Average Life(2):
No Optional Termination..................................................
<CAPTION>
DISTRIBUTION DATE
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Initial Balance............................................................
1997...................................................................
1998...................................................................
1999...................................................................
2000...................................................................
2001...................................................................
2002...................................................................
2003...................................................................
2004...................................................................
2005...................................................................
2006...................................................................
2007...................................................................
2008...................................................................
2009...................................................................
2010...................................................................
2011...................................................................
2012...................................................................
2013...................................................................
2014...................................................................
2015...................................................................
2016...................................................................
2017...................................................................
2018...................................................................
Weighted Average Life(2):
No Optional Termination..................................................
</TABLE>
- ---------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of the Certificates is determined by (a)
multiplying the amount of each distribution of principal thereof by the
number of years from the date of issuance to the related Distribution Date,
(b) summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a) and rounding to two
decimal places.
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Home Loans which may differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
S-65
<PAGE> 69
The foregoing tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Home Loans which may differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith. It is unlikely that the
Home Loans will prepay at a constant rate or that all of the Home Loans will
prepay at the same rate. Moreover, the Home Loans actually included in the Home
Loan Pool will not conform to the assumptions made as to the characteristics of
such Home Loans in preparing the above tables. In fact, the characteristics of
the Home Loans will differ in many respects from such assumed characteristics.
See "The Home Loan Pool" herein. To the extent that the Home Loans actually
included in the Home Loan Pool have characteristics that differ from those
assumed in preparing the foregoing tables, the Offered Securities are likely to
have weighted average lives that are shorter or longer than those indicated.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In the opinion of Andrews & Kurth L.L.P. ("Tax Counsel") for federal income
tax purposes, the Notes will be characterized as debt, and the Trust will not be
characterized as an association (or a publicly traded partnership) taxable as a
corporation. Each Noteholder, by the acceptance of a Note, will agree to treat
the Notes as indebtedness, and each Certificateholder, by the acceptance of a
Certificate, will agree to treat the Trust as a partnership in which the
Certificateholders are partners for federal income tax purposes. Alternative
characterizations of the Trust and the Certificates are possible, but would not
result in materially adverse tax consequences to Certificateholders. See
"Certain Federal Income Tax Consequences" in the Prospectus for additional
information concerning the application of federal income tax laws to the Trust
and the Offered Securities.
Certificateholders, who are tax-exempt entities or non-U.S. persons, will
have tax consequences that may be considered adverse by such holders. See
"Certain Federal Income Tax Consequences -- Trusts for Which a Partnership
Election is Made -- Tax Consequences to Holders of the
Certificates -- Partnership Taxation" and "-- Tax Consequences to Foreign
Certificateholders" in the Prospectus.
ERISA CONSIDERATIONS
THE NOTES
The Notes may be purchased by an employee benefit plan or an individual
retirement account (a "Plan") subject to ERISA or Section 4975 of the Internal
Revenue Code of 1986, as amended (the "Code"). A fiduciary of a Plan must
determine that the purchase of a Note is consistent with its fiduciary duties
under ERISA and does not result in a nonexempt prohibited transaction as defined
in Section 406 of ERISA or Section 4975 of the Code. For additional information
regarding treatment of the Notes under ERISA, see "ERISA Considerations" in the
Prospectus.
The Notes may not be purchased with the assets of a Plan if the Seller, the
Servicer, the Indenture Trustee, the Owner Trustee or any of their affiliates
(a) has investment or administrative discretion with respect to such Plan
assets; (b) has authority or responsibility to give, or regularly gives,
investment advice with respect to such Plan assets, for a fee and pursuant to an
agreement or understanding that such advice (i) will serve as a primary basis
for investment decisions with respect to such Plan assets and (ii) will be based
on the particular investment needs for such Plan; or (c) is an employer
maintaining or contributing to such Plan.
THE CERTIFICATES
The Certificates may not be acquired by (a) an employee benefit plan (as
defined in Section 3(3) of ERISA) that is subject to the provisions of Title I
of ERISA, (b) a plan described in Section 4975(e)(1) of the Code or (c) any
entity whose underlying assets include plan assets by reason of a plan's
investment in the entity or which uses plan assets to acquire Certificates. By
its acceptance of a Certificate, each holder of such
S-66
<PAGE> 70
Certificate will be deemed to have represented and warranted that it is not
subject to the foregoing limitation. In this regard, purchasers that are
insurance companies should consult with their counsel with respect to the United
States Supreme Court case interpreting the fiduciary responsibility rules of
ERISA, John Hancock Mutual Life Insurance Co. v. Harris Bank and Trust (decided
December 12, 1993). In John Hancock, the Supreme Court ruled that assets held in
an insurance company's general account may be deemed to be "plan assets" for
ERISA purposes under certain circumstances. Prospective purchasers should
determine whether the decision affects their ability to make purchases of the
Certificates. For additional information regarding treatment of the Certificates
under ERISA, see "ERISA Considerations" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting Agreement
(the "Underwriting Agreement"), the Seller has agreed to cause the Trust to sell
to each of the Note Underwriters named below (collectively, the "Note
Underwriters"), and each of the Note Underwriters has severally agreed to
purchase, the principal amount of Notes set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF:
---------------------------------------------------------------------------------------
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 CLASS A-6 CLASS A-7
UNDERWRITER NOTES NOTES NOTES NOTES NOTES NOTES NOTES
- ------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Banc One Capital
Corporation......
Bear, Stearns & Co.
Inc..............
-------- -------- -------- -------- -------- -------- --------
Total:
======== ======== ======== ======== ======== ======== ========
</TABLE>
The Seller has been advised by the Note Underwriters that they propose
initially to offer the Notes to the public at the prices set forth herein, and
to certain dealers at such price less the initial concession not in excess of
% of the denominations of the Notes per Class A-1 Note, % per Class
A-2 Note, % per Class A-3 Note, % per Class A-4 Note, % per Class
A-5 Note, % per Class A-6 Note and % per Class A-7 Note. The Note
Underwriters may allow, and such dealers may reallow, a concession not in excess
of % per Class A-1 Note, % per Class A-2 Note, % per Class A-3
Note, % per Class A-4 Note, % per Class A-5 Note, % per Class A-6
Note and % per Class A-7 Note to certain other dealers. After the initial
public offering of the Notes, the public offering price and such concessions may
be changed.
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Seller has agreed to cause the Trust to sell to each of the
Certificate Underwriters named below (the "Certificate Underwriters" and,
together with the Note Underwriters, the "Underwriters"), and each of the
Certificate Underwriters has severally agreed to purchase, the principal amount
of Certificates set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF CERTIFICATES
--------------------------------------------------------------------- ----------------
<S> <C>
Banc One Capital Corporation.........................................
Bear, Stearns & Co. Inc..............................................
--------
========
</TABLE>
TOTAL
The Seller has been advised by the Certificate Underwriters that they
propose initially to offer the Certificates to the public at the price set forth
herein, and to certain dealers at such price less the initial concession not in
excess of % per Certificate. The Certificate Underwriters may allow, and
such dealers may reallow, a concession not in excess of % per Certificate
to certain other dealers. After the initial public offering of the Certificates,
the public offering price and such concessions may be changed.
S-67
<PAGE> 71
In addition to the purchase of the Notes and the Certificates pursuant to
the Underwriting Agreement, the Underwriters and their affiliates have several
business relationships with the Transferor and Servicer and its affiliates,
including its parent RAC. Affiliates of the Underwriters provide warehouse
financing and repurchase arrangements to the Transferor for its consumer and
mortgage loans, including property improvement and/or debt consolidation loans.
See "Use of Proceeds" herein. Bank One, Texas, N.A. will also act as the
Custodian of the Issuer's Home Loan Files and will hold the Collection Account
into which the Servicer will deposit remittances on the Home Loans, pursuant to
the Sale and Servicing Agreement. Two other affiliates of Banc One Capital
Corporation have provided certain debt and equity financing to RAC and its
subsidiaries, and these affiliates hold a majority of RAC's outstanding shares
of non-voting common stock and a significant portion of RAC's outstanding shares
of voting and non-voting common stock, combined. The Underwriters, or affiliates
of the Underwriters, also render certain services to RAC in connection with the
public offering of RAC's debt and equity securities from time to time. Daniel J.
Jessee, a Vice Chairman of Banc One Capital Corporation, and Sheldon I. Stein, a
Senior Managing Director of Bear, Stearns & Co. Inc., are each a director of
RAC.
LEGAL INVESTMENT MATTERS
The Offered Securities will not constitute "mortgage related securities"
under the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") because a
substantial number of the Home Loans are unsecured or are secured by liens on
real estate that are not first liens. Accordingly, many institutions with legal
authority to invest in "mortgage related securities" may not be legally
authorized to invest in the Offered Securities.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Offered Securities or to
purchase Offered Securities representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Offered Securities constitute legal
investments for such investors.
RATINGS
It is a condition to the issuance of the Notes that the Class A-1, the
Class A-2 Notes, the Class A-3 Notes, the Class A-4 Notes, the Class A-5 Notes,
the Class A-6 Notes and the Class A-7 Notes be rated "AAA" by Standard & Poor's
and "Aaa" by Moody's. It is a condition to the issuance of the Certificates that
they be rated "AAA" by Standard & Poor's and "Aaa" by Moody's. The ratings
assigned to the Notes and the Certificates will be based primarily on the
claims-paying ability of the Securities Insurer.
The ratings on the Offered Securities address the likelihood of the receipt
by the holders of the Offered Securities of all distributions on the Home Loans
to which they are entitled. The ratings on the Offered Securities also address
the structural, legal and issuer-related aspects associated with the Offered
Securities, including the nature of the Home Loans. In general, the ratings on
the Offered Securities address credit risk and not prepayment risk. The ratings
on the Offered Securities do not represent any assessment of the likelihood that
principal prepayments of the Home Loans will be made by borrowers or the degree
to which the rate of such prepayments might differ from that originally
anticipated. As a result, the initial ratings assigned to the Offered Securities
do not address the possibility that holders of the Offered Securities might
suffer a lower than anticipated yield in the event of principal payments on the
Offered Securities resulting from funds remaining in the Pre-Funding Account at
the end of the Funding Period or rapid prepayments of the Home Loans, or in the
event that the Trust is terminated prior to the Scheduled Final Distribution
Dates of each Class of Notes and the Certificates.
The Seller has not solicited ratings on the Offered Securities with any
rating agency other than the Rating Agencies. However, there can be no assurance
as to whether any other rating agency will rate the Offered Securities, or, if
it does, what rating would be assigned by any such other rating agency. Any
rating on the Offered Securities by another rating agency, if assigned at all,
may be lower than the ratings assigned to the Offered Securities by the Rating
Agencies.
S-68
<PAGE> 72
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to any
of the Offered Securities by the Rating Agencies are subsequently lowered for
any reason, no person or entity is obligated to provide any additional support
or credit enhancement with respect to such Offered Securities.
EXPERTS
The consolidated financial statements of MBIA Insurance Corporation as of
December 31, 1995 and 1994 and for the three years ended December 31, 1995
incorporated by reference into this Prospectus Supplement have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their report
thereon, incorporated by reference herein in reliance upon the authority of such
firm as experts in accounting and auditing.
LEGAL OPINIONS
In addition to the legal opinions described in the Prospectus, certain
legal matters relating to the issuance of the Offered Securities will be passed
upon for the Seller, the Transferor and the Servicer by Andrews & Kurth L.L.P.,
Dallas, Texas and for the Underwriters by Brown & Wood LLP, Washington, D.C.
Andrews & Kurth L.L.P., Dallas, Texas, will also pass on certain federal income
tax and other legal matters for the Trust. Certain legal matters will be passed
upon for the Securities Insurer by Kutak Rock, Omaha, Nebraska.
S-69
<PAGE> 73
INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
"Account"............................................................................. S-47
"Additional Series"................................................................... S-30
"Affiliated Holder"................................................................... S-3
"Assumed Pool Principal Balance"................................................... S-5, S-22
"Available Collection Amount"......................................................... S-46
"Business Day"........................................................................ S-32
"Capitalized Interest Account Deposit"............................................. S-7, S-45
"Capitalized Interest Account"..................................................... S-7, S-45
"Certificate Distribution Account".................................................... S-47
"Certificateholders' Distributable Amount"............................................ S-51
"Certificateholders' Interest Carry-Forward Amount"................................... S-51
"Certificateholders' Interest Distributable Amount"................................... S-51
"Certificateholders' Monthly Interest Distributable Amount"........................... S-51
"Certificateholders' Monthly Principal Distributable Amount".......................... S-51
"Certificateholders' Principal Carry-Forward Amount".................................. S-51
"Certificateholders' Principal Distributable Amount".................................. S-51
"Certificates"................................................................ -i-, S-3, S-38
"Class A-1 Final Scheduled Distribution Date"......................................... S-3
"Class A-1 Rate"...................................................................... S-2
"Class A-2 Final Scheduled Distribution Date"......................................... S-3
"Class A-2 Rate"...................................................................... S-2
"Class A-3 Final Scheduled Distribution Date"......................................... S-3
"Class A-3 Rate"...................................................................... S-2
"Class A-4 Final Scheduled Distribution Date"......................................... S-3
"Class A-4 Rate"...................................................................... S-2
"Class A-5 Final Scheduled Distribution Date"......................................... S-3
"Class A-5 Rate"...................................................................... S-2
"Class A-6 Final Scheduled Distribution Date"......................................... S-3
"Class A-6 Rate"...................................................................... S-2
"Class A-7 Final Scheduled Distribution Date"......................................... S-3
"Class A-7 Rate"...................................................................... S-2
"Code"............................................................................ S-12, S-66
"Collection Account".................................................................. S-46
"Commission"........................................................................... -iii-
"Conventional Loans"......................................................... -ii-, S-5, S-23
"Credit Support Reduction Date"....................................................... S-38
"Custodian"........................................................................... S-1
"Custodian Fee"....................................................................... S-11
"Cut-Off Date"........................................................................ S-1
"Cut-Off Date Principal Balance.................................................... S-5, S-22
"Defaulted Home Loan".............................................................. S-6, S-30
"Defective Home Loans"................................................................ S-17
"Deficiency Amount"................................................................... S-33
"Deleted Home Loan"................................................................... S-30
"Determination Date"......................................................... S-1, S-46, S-48
"Distribution Accounts"............................................................... S-47
"Distribution Date".......................................................... -ii-, S-1, S-38
"DTC"................................................................................. S-4
"Due Period".......................................................................... S-1
</TABLE>
S-70
<PAGE> 74
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
"Excess Overcollateralization Amount"............................................. S-10, S-37
"Excess Reserve Fund Amount".......................................................... S-36
"Excess Spread".................................................................... S-2, S-49
"FFI"...............................................................................S-1, S-28
"FICO Score".......................................................................... S-29
"Final Scheduled Distribution Date"................................................... S-4
"Fiscal Agent"........................................................................ S-32
"Funding Period"................................................................... S-7, S-44
"Guaranteed Payment".................................................................. S-33
"Guaranty Insurance Premium".......................................................... S-11
"Guaranty Policy"................................................................... -i-, S-8
"Home Loan Pool"................................................................... -ii-, S-5
"Home Loan Rate"...................................................................... S-24
"Home Loan Schedule".................................................................. S-43
"Home Loans"....................................................................... -ii-, S-5
"Indenture"............................................................. -i-, S-1, S-33, S-38
"Indenture Trustee"........................................................... -i-, S-1, S-38
"Indenture Trustee Fee"............................................................... S-11
"Indenture Trustee's Home Loan File................................................... S-43
"Initial Home Loans"............................................................... S-4, S-22
"Initial Pool Principal Balance"................................................... S-4, S-22
"Insolvency Event".................................................................... S-52
"Insolvency Laws"..................................................................... S-21
"Insurance Agreement"................................................................. S-42
"Insurance Proceeds".................................................................. S-49
"Interest Distribution Amount"........................................................ S-48
"Interest Rates"...................................................................... S-2
"Interest Shortfall".................................................................. S-45
"Interim Required Overcollateralization".............................................. S-36
"Issuer".............................................................................. S-1
"Liquidated Home Loan"................................................................ S-49
"Moody's".......................................................................... -i-, S-13
"Mortgaged Properties"............................................................. -ii-, S-6
"Mortgages"........................................................................ -ii-, S-5
"Net Liquidation Proceeds"............................................................ S-49
"Net Loan Losses"..................................................................... S-35
"Note Distribution Account"........................................................... S-46
"Noteholders' Distributable Amount"................................................... S-49
"Noteholders' Interest Carry-Forward Amount".......................................... S-50
"Noteholders' Interest Distributable Amount".......................................... S-50
"Noteholders' Monthly Interest Distributable Amount".................................. S-50
"Noteholders' Monthly Principal Distributable Amount"................................. S-50
"Noteholders' Principal Carry-Forward Amount"......................................... S-50
"Noteholders Principal Distributable Amount".......................................... S-50
"Notes"............................................................................... -i-
"Notice".............................................................................. S-33
"Offered Securities".......................................................... -i-, S-3, S-38
"Offered Securityholder Rights"................................................... S-16, S-51
"Original Certificate Principal Balance".............................................. S-3
"Original Class Principal Balance".................................................... S-2
"Overcollateralization Amount"..................................................... S-9, S-36
</TABLE>
S-71
<PAGE> 75
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
"Overcollateralization Reduction Amount".......................................... S-10, S-37
"Overcollateralization Stepdown Date"............................................. S-10, S-37
"Owner"............................................................................... S-33
"Owner Trustee"..................................................................... -i-, S-1
"Owner Trustee Fee"................................................................... S-11
"Pass Through Rate"................................................................... S-3
"Plan"............................................................................ S-12, S-66
"Pool Principal Balance"........................................................... S-5, S-23
"Preference Amount"................................................................... S-33
"Prepayment Assumption"............................................................... S-58
"Pre-Funding Account"........................................................ S-5, S-22, S-44
"Pre-Funding Account Deposit"...................................................... S-7, S-44
"Principal Balance"................................................................ S-5, S-22
"Purchase Price"...................................................................... S-30
"Qualified Substitute Home Loan"................................................... S-6, S-30
"RAC"................................................................................. S-1
"Rating Agencies".................................................................. -i-, S-13
"Record Date"...................................................................... S-1, S-38
"Regular Principal Distribution Amount"............................................... S-48
"Released Mortgaged Property Proceeds"................................................ S-49
"Required Distribution Amount"........................................................ S-48
"Required Overcollateralization Amount"........................................... S-10, S-37
"Reserve Fund Requirement"......................................................... S-9, S-35
"Reserve Fund Restoration Amount"..................................................... S-47
"Residual Interest"................................................................... S-5
"Sale and Servicing Agreement...................................................... S-4, S-22
"Secured Loans".................................................................... -ii-, S-5
"Securities".......................................................................... S-33
"Securities Insurer"............................................................... -i-, S-31
"Securities Insurer Default".......................................................... S-51
"Securities Insurer Reimbursement Amount"............................................. S-41
"Security Owners"..................................................................... S-4
"Seller"...................................................................... -i-, S-1, S-28
"Servicer"......................................................................... S-1, S-28
"Servicing Advance"................................................................... S-45
"Servicing Advance Reimbursement Amount".............................................. S-47
"Servicing Fee"................................................................... S-11, S-45
"SMMEA"............................................................................... S-68
"Standard & Poor's"................................................................ -i-, S-13
"Subsequent Home Loans"............................................................ S-5, S-22
"Subsequent Transfer Date"............................................................ S-7
"Subservicer"......................................................................... S-11
"Tax Counsel"..................................................................... S-12, S-66
"Termination Price"................................................................... S-46
"Transfer and Servicing Agreements"............................................... S-23, S-42
"Transferor"....................................................................... S-1, S-28
"Trust"............................................................................. -i-, S-1
"Trust Agreement"....................................................... -i-, S-1, S-33, S-38
"Trust Fees and Expenses".......................................................... S-2, S-11
"Underwriters"........................................................................ S-67
"Unsecured Loans".................................................................. -ii-, S-5
</TABLE>
S-72
<PAGE> 76
================================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES OFFERED
HEREBY, NOR AN OFFER OF THE SECURITIES IN ANY STATE OR JURISDICTION IN WHICH, OR
TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT
PAGE
----
<S> <C>
Available Information........................... iii
Reports to Securityholders...................... iii
Summary of Terms................................ S-1
Risk Factors.................................... S-14
Use of Proceeds................................. S-21
Description of the Trust........................ S-22
The Home Loan Pool.............................. S-23
The Seller...................................... S-28
The Transferor and Servicer..................... S-28
Description of Credit Enhancement............... S-31
Description of the Offered Securities........... S-38
Description of the Transfer and Servicing
Agreements.................................... S-42
Prepayment and Yield Considerations............. S-54
Certain Federal Income Tax Consequences......... S-66
ERISA Considerations............................ S-66
Underwriting.................................... S-67
Legal Investment Matters........................ S-68
Ratings......................................... S-68
Experts......................................... S-69
Legal Opinions.................................. S-69
Index of Terms.................................. S-70
PROSPECTUS
Prospectus Supplement........................... iii
Available Information........................... iii
Incorporation of Certain Documents by
Reference..................................... iv
Table of Contents............................... v
Summary of Terms................................ 1
Risk Factors.................................... 8
Description of the Notes........................ 18
Description of the Certificates................. 22
Pool Factors and Trading Information............ 23
Certain Information Regarding the Securities.... 24
The Trusts...................................... 30
The Trustee..................................... 30
Description of the Trust Property............... 31
Credit Enhancement.............................. 36
Servicing of the Loan Assets.................... 39
The Seller...................................... 43
The Servicer and the Transferor................. 43
Description of the Transfer and Servicing
Agreements.................................... 44
Certain Legal Aspects of the Loan Assets........ 50
Certain Federal Income Tax Consequences......... 68
ERISA Considerations............................ 78
Legal Investment Matters........................ 79
Plan of Distribution............................ 80
Use of Proceeds................................. 80
Legal Opinions.................................. 80
Index of Terms.................................. 81
</TABLE>
================================================================================
================================================================================
$300,000,000
(APPROXIMATE)
FIRSTPLUS HOME
LOAN OWNER TRUST 1996-3
[FIRSTPLUS LOGO]
FIRSTPLUS
INVESTMENT CORPORATION
(SELLER)
FIRSTPLUS FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
--------------------------------------
PROSPECTUS SUMMARY
--------------------------------------
BANC ONE CAPITAL CORPORATION
BEAR, STEARNS & CO. INC.
SEPTEMBER , 1996
================================================================================
