<PAGE> 1
Filed pursuant to Rule 424(b)(2)
Registration Number 333-26527
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 JUNE 6, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 6, 1997)
$
[FIRSTPLUS LOGO]
FIRSTPLUS INVESTMENT CORPORATION,
(SELLER)
FIRSTPLUS FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
FIRSTPLUS HOME LOAN OWNER TRUST 1997-2
The FIRSTPLUS HOME LOAN OWNER TRUST 1997-2 will be established
pursuant to a Trust Agreement among FIRSTPLUS INVESTMENT CORPORATION, as
Seller, Wilmington Trust Company, as Owner Trustee, and First Bank National
Association, in its capacity as Co-Owner Trustee. The Trust will issue twelve
classes of Asset Backed Notes set forth below (the "Notes"), pursuant to an
Indenture dated as of June 1, 1997, between the Trust and First Bank National
Association, in its capacity as Indenture Trustee. The Trust will also issue a
single class of Asset Backed Certificates (the "Certificates") pursuant to the
Trust Agreement and instruments evidencing the residual interest in the assets
of the Trust (the "Residual Interest"). The Notes and the Certificates are
referred to together herein as the "Securities". Only the Notes are offered
hereby.
It is a condition to the issuance of the Notes that they each be rated
by the Rating Agencies as described herein under "Ratings".
BEFORE PURCHASING ANY NOTES, PROSPECTIVE INVESTORS SHOULD REVIEW THE
INFORMATION SET FORTH HEREIN AND IN THE PROSPECTUS, UNDER "RISK FACTORS" AT
PAGE S-13 AND "PREPAYMENT AND YIELD CONSIDERATIONS" AT PAGE S-48 HEREIN, AND
UNDER "RISK FACTORS" AT PAGE 11 IN THE PROSPECTUS.
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. (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 SELLER (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
- -------------------------------------------------------------------------------------------------------------
Class A-8 Notes
- -------------------------------------------------------------------------------------------------------------
Class A-9 Notes
- -------------------------------------------------------------------------------------------------------------
Class M-1 Notes
- -------------------------------------------------------------------------------------------------------------
Class M-2 Notes
- -------------------------------------------------------------------------------------------------------------
Class B-1 Notes
- -------------------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . .
=============================================================================================================
</TABLE>
(1) Plus accrued interest, if any, at the applicable rate from June 1, 1997.
(2) Before deducting expenses, estimated to be $350,000.
The Notes 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 Notes will be made in
book-entry form only through the Same Day Funds Settlement System of The
Depository Trust Company on or about June , 1997 against payment therefor in
immediately available funds.
PAINEWEBBER INCORPORATED
BANC ONE CAPITAL CORPORATION
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
The date of this Prospectus Supplement is June , 1997.
<PAGE> 2
(Continued from preceding page)
The assets of the Trust will primarily consist of Home Loans, which
will be secured by Mortgages. All of the Home Loans will be conventional loans
(i.e., not insured or guaranteed by a governmental agency). The Home Loans will
consist of loans for which the related proceeds were used to finance (i)
property improvements, (ii) debt consolidation, and (iii) a combination of
property improvements, debt consolidation, cash-out or other consumer purposes.
Substantially all of the Mortgages for the Home 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. In addition, substantially all of the Home Loans will be
secured by liens on Mortgaged Properties in which the borrowers have little or
no equity at the time of origination (i.e., the related combined loan-to-value
ratios approach or exceed 100%). See "Risk Factors -- Additional Factors
Affecting Delinquencies, Defaults and Losses on Home Loans" herein.
Payments on the Notes will be made to the holders of the Notes (the
"Noteholders") on each Payment Date occurring on the 10th day of each month,
or, if such day is not a Business Day, the next succeeding Business Day,
beginning in July 1997. 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
respective fixed per annum interest rates specified on the cover hereof. On
each Payment Date, the Noteholders will be entitled to receive, from and to the
extent that funds are available therefor in the Note Payment Account, payments
with respect to interest and principal calculated as described herein. See
"Description of the Notes -- Payments and Distributions" herein. Payments of
interest and principal on the Class M-1 and Class M-2 Notes (the "Mezzanine
Notes") will be subordinated in priority to payments of interest and principal,
respectively, on the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6, Class A-7, Class A-8 and Class A- 9 Notes (the "Senior Notes") as
described herein. Payments of interest and principal on the Class B-1 Notes
will be subordinated in priority to payments of interest and principal,
respectively, on the Mezzanine Notes and the Senior Notes as described herein.
The Certificates will represent undivided ownership interests in the
Trust. On each Payment Date, the holders of the Certificates (the
"Certificateholders") will be entitled to receive, from and to the extent that
funds are available therefor in the Certificate Distribution Account,
distributions in respect of interest and principal calculated as described
herein. Distributions of interest and principal on the Certificates will be
subordinated in priority to payments of interest and principal, respectively,
on the Notes. See "Description of the Notes -- Payments and Distributions"
herein.
Credit enhancement with respect to the Notes will be provided by (A)
the subordination of (i) the Residual Interest and the Certificates to the
Notes and (ii) the Class B-1, Class M-2 and Class M-1 Notes, respectively, to
each Class of Notes having a higher priority and (B) the overcollateralization
feature described herein. The Notes are NOT insured by any financial guaranty
insurance policy. See "Description of Credit Enhancement" herein.
The yields to maturity on the Notes will depend on (i) the rate and
timing of principal reductions of the outstanding principal balances of the
Notes as a result of the receipt of payments of principal and interest on, and
other principal reductions of, the Home Loans (including scheduled payments,
prepayments, delinquencies, liquidations, defaults, losses, substitutions,
repurchases and modifications), (ii) any principal reductions of the
outstanding principal balances of the Notes from amounts remaining on deposit
in the Pre-Funding Account after the termination of the Funding Period, and
(iii) the price paid for the Notes by the Noteholders. Because substantially
all of the Home Loans will be 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 and "Risk Factors" in the Prospectus.
The Class M-1 Notes will be subordinate to the Senior Notes, the Class
M-2 Notes will be subordinate to the Class M-1 Notes, the Class B-1 Notes will
be subordinate to the Class M-2 Notes, and the Residual Interest and the
Certificates will be subordinate to the Class B-1 Notes, in each case to the
extent described herein. Investors should consider that, as a result of such
subordination, the yields to maturity on the Mezzanine Notes and the Class B-1
Notes will be sensitive, in varying degrees (and will each be more sensitive
than the yields to maturity on the Senior Notes), to delinquencies and losses
on the Home Loans.
ii
<PAGE> 3
PROCEEDS OF THE ASSETS IN THE TRUST ARE THE SOLE SOURCE OF PAYMENTS ON
THE NOTES. THE NOTES REPRESENT OBLIGATIONS OF 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 CO-OWNER TRUSTEE OR
ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE NOTES NOR THE HOME LOANS ARE
INSURED OR GUARANTEED BY ANY FINANCIAL GUARANTY INSURER OR ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR BY THE SELLER OR THE TRANSFEROR OR ANY OF THEIR
RESPECTIVE AFFILIATES OR ANY OTHER PERSON.
___________________________________________
This Prospectus Supplement does not contain complete information about
the offering of the Notes. 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 Notes 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 NOTES, 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.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
NOTES, INCLUDING STABILIZING AND THE PURCHASE OF NOTES TO COVER SYNDICATE SHORT
POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING" HEREIN.
_____________________________
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.
iii
<PAGE> 4
REPORTS TO NOTEHOLDERS
Unaudited monthly and annual reports concerning the Notes will be sent
by the Indenture Trustee to the Beneficial Owners of the Notes. So long as any
Note 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. DTC will supply such reports to Noteholders in accordance with its
procedures.
iv
<PAGE> 5
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
1997-2 (the "Trust" or the
"Issuer"), a Delaware business
trust, established pursuant to a
trust agreement dated as of June
1, 1997 (the "Trust Agreement"),
among the Seller, the Owner
Trustee, the Co-Owner Trustee and
the Affiliated Holder.
Seller . . . . . . . . . . . . . . . . . FIRSTPLUS INVESTMENT CORPORATION
(the "Seller"), a Nevada
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 FIRSTPLUS Financial
Group, Inc. ("FFG"), a Nevada
corporation.
Indenture Trustee . . . . . . . . . . . . First Bank National Association, a
national banking association, as
trustee under the Indenture (in
such capacity, the "Indenture
Trustee"), and as co- owner
trustee under the Trust Agreement
and the Sale and Servicing
Agreement (in such capacity, the
"Co-Owner 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 June 1, 1997 by and between the
Owner Trustee, the Indenture
Trustee and the Custodian.
Closing Date . . . . . . . . . . . . . . On or about June , 1997.
Cut-Off Date . . . . . . . . . . . . . . May 31, 1997 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").
Payment Date . . . . . . . . . . . . . . The 10th day of each month or, if
such day is not a Business Day,
then the next succeeding Business
Day, commencing in July 1997
(each, a "Payment Date").
Due Period . . . . . . . . . . . . . . . With respect to a Payment Date,
the calendar month immediately
preceding such Payment Date (each,
a "Due Period").
Determination Date . . . . . . . . . . . The 3rd Business Day prior to each
Payment Date (each, a
"Determination Date").
S-1
<PAGE> 6
Record Date . . . . . . . . . . . . . . . With respect to each Payment Date,
the close of business on the last
Business Day of the month
immediately preceding the month in
which such Payment Date occurs
(each, a "Record Date").
The Notes . . . . . . . . . . . . . . . . The Trust will issue Asset Backed
Notes (the "Notes") pursuant to an
Indenture dated as of June 1, 1997
(as amended and supplemented from
time to time, the "Indenture"),
between the Issuer and the
Indenture Trustee. The initial
aggregate principal balance of
each Class of Notes (the "Original
Class Principal Balance" for each
such Class) is set forth on the
cover hereof. The "Class
Principal Balance" with respect to
each Class of Notes, as of any
date of determination, will be
equal to the Original Class
Principal Balance of each such
Class reduced by (i) all amounts
previously distributed to
Noteholders of such Class in
reduction of the Class Principal
Balance of such Class on all
previous Payment Dates and (ii)
any Allocable Loss Amounts applied
thereto. The Notes will be
secured by the assets of the Trust
pursuant to the Indenture and, as
described herein, will be senior
in right of payment to the
Certificates and the Residual
Interest. In addition, as
described herein, the Class M-1
Notes will be subordinate to the
Senior Notes, the Class M-2 Notes
will be subordinate to the Class
M-1 Notes, the Class B-1 Notes
will be subordinate to the Class
M-2 Notes, the Certificates will
be subordinate to the Class B-1
Notes, and the Residual Interest
will be subordinate to the
Certificates, in each case to the
extent described herein. Interest
will accrue on each Class of Notes
at the respective rates set forth
on the cover hereof (as to each
Class, a "Note Interest Rate").
Interest . . . . . . . . . . . . . . . Interest on each Class of Notes
will be payable on each Payment
Date in an amount equal to
interest accrued for the related
Due Period at the respective Note
Interest Rate for such Class on
the Class Principal Balance
thereof immediately preceding such
Payment Date after giving effect
to all payments of principal to
the Noteholders of such Class on
or prior to the immediately
preceding Payment Date. See
"Description of the
Notes--Payments and Distributions"
herein.
Principal . . . . . . . . . . . . . . Principal of each Class of Notes
will be payable on each Payment
Date as described herein under
"Description of the
Notes--Payments and
Distributions."
Maturity Date . . . . . . . . . . . . The outstanding principal amount
of, and all accrued and unpaid
interest on, each Class of Notes,
to the extent not previously paid,
will be payable in full on
(the "Maturity Date"), although it
is anticipated that the actual
final Payment Date for each Class
of Notes may occur significantly
earlier than the Maturity Date.
The Certificates . . . . . . . . . . . . The Trust will issue Class B-2
Asset Backed Certificates (the
"Certificates") with an aggregate
initial certificate principal
balance (the "Original Certificate
Principal Balance") of $
. On the Closing Date, the
Original Certificate Principal
Balance 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 "Certificate Principal
Balance" of the Certificates, as
of any date
S-2
<PAGE> 7
of determination, will be equal to
the Original Certificate Principal
Balance of the Certificates
reduced by (i) all amounts
previously distributed to
Certificateholders in reduction of
the Certificate Principal Balance
of the Certificates on all
previous Payment Dates and (ii)
any Allocable Loss Amounts applied
thereto. 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. Interest on
the Certificates will accrue at a
fixed rate of % per annum
(the "Pass-Through Rate"). The
Certificates are not offered
hereby. 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.
Priority of Payments
Regular Payment Amount . . . . . . . . The Regular Payment Amount (as
defined herein) will be applied on
each Payment Date in the following
order of priority: (i) to pay
accrued and unpaid interest on the
Senior Notes, pro rata; (ii) to
pay accrued and unpaid interest on
the Class M-1 Notes ; (iii) to pay
accrued and unpaid interest on the
Class M-2 Notes; (iv) to pay
accrued and unpaid interest on the
Class B-1 Notes, (v) to distribute
accrued and unpaid interest on the
Certificates; (vi) to pay as
principal of the Class A-1, Class
A-2, Class A- 3, Class A-4, Class
A-5, Class A-6, Class A-7, Class
A-8 and Class A-9 Notes, in that
order, until the respective Class
Principal Balances thereof are
reduced to zero, the amount
necessary to reduce the aggregate
of the Class Principal Balances of
the Senior Notes to the Senior
Optimal Principal Balance (as
defined herein); (vii) to pay as
principal of the Class M-1 Notes,
until the Class Principal Balance
thereof is reduced to the Class
M-1 Optimal Principal Balance (as
defined herein); (viii) to pay as
principal of the Class M-2 Notes,
until the Class Principal Balance
thereof is reduced to the Class
M-2 Optimal Principal Balance (as
defined herein); (ix) to pay as
principal of the Class B-1 Notes,
until the Class Principal Balance
thereof is reduced to the Class
B-1 Optimal Principal Balance (as
defined herein); (x) to distribute
as principal of the Certificates,
until the Certificate Principal
Balance of the Certificates is
reduced to the Certificate Optimal
Principal Balance (as defined
herein); (xi) to pay to the Class
M-1 Notes and the Class M-2 Notes,
in that order, their respective
Deferred Amounts (as defined
herein), if any, until such
Deferred Amounts have been paid in
full; (xii) to pay to the Class
B-1 Notes the applicable Deferred
Amount, if any, until such
Deferred Amount has been paid in
full; (xiii) to distribute to the
Certificates in respect of the
Loss Reimbursement Deficiency (as
defined herein), if any, until
such Loss Reimbursement Deficiency
has been paid in full; and (xiv)
to distribute any remaining amount
to the Residual Interest.
Excess Spread . . . . . . . . . . . . The Excess Spread (as defined
herein) will be applied on each
Payment Date in the following
order of priority (after giving
effect to all payments specified
above under "--Regular Payment
Amount"): (i) in an amount equal
to the Overcollateralization
Deficiency Amount (as
S-3
<PAGE> 8
defined herein), if any, as
follows: (A) to pay as principal of
the Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5, Class
A-6, Class A-7, Class A-8 and Class
A-9 Notes, in that order, until the
respective Class Principal
Balances thereof are reduced to
zero, the amount necessary to
reduce the aggregate of the Class
Principal Balances of the Senior
Notes to the Senior Optimal
Principal Balance; (B) to pay as
principal of the Class M-1 Notes,
until the Class Principal Balance
thereof is reduced to the Class
M-1 Optimal Principal Balance; (C)
to pay as principal of the Class
M-2 Notes, until the Class
Principal Balance thereof is
reduced to the Class M-2 Optimal
Principal Balance; (D) to pay as
principal of the Class B-1 Notes,
until the Class Principal Balance
thereof is reduced to the Class
B-1 Optimal Principal Balance; and
(E) to distribute as principal of
the Certificates, until the
Certificate Principal Balance
thereof is reduced to the
Certificate Optimal Principal
Balance; (ii) to pay to the Class
M-1 and Class M-2 Notes, in that
order, their respective Deferred
Amounts, if any, until such
Deferred Amounts have been paid in
full; (iii) to pay to the Class
B-1 Notes the applicable Deferred
Amount, if any, until such
Deferred Amount has been paid in
full; (iv) to distribute to the
Certificates in respect of the
Loss Reimbursement Deficiency, if
any, until such Loss Reimbursement
Deficiency has been paid in full;
and (v) to distribute the
remaining amount to the Residual
Interest.
Form and Registration of the
Notes . . . . . . . . . . . . . . . . . The Notes will initially be issued
only in book-entry form. Persons
acquiring beneficial ownership
interests in the Notes ("Note
Owners") will hold such Notes
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 DTC. So long as
each Class of Notes is in
book-entry form, each such Class
of Notes will be evidenced by one
or more certificates registered in
the name of the nominee of DTC.
The interests of such Note Owners
will be represented by
book-entries on the records of DTC
and participating members thereof.
No Note Owner will be entitled to
receive a definitive certificate
representing such person's
interest, except in the event that
Definitive Notes are issued under
the limited circumstances
described herein. All references
in this Prospectus Supplement to
any Class of Notes reflect the
rights of the Note Owners of such
Class only as such rights may be
exercised through DTC and its
participating members so long as
such Class of Notes is held by
DTC. See "Risk Factors--Book-
Entry Registration" and "Certain
Information Regarding the
Securities -- Book-Entry
Registration" in the Prospectus.
The Note Owners' interests in each
Class of Notes 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 $567,862,216 (the
"Initial Pool Principal Balance")
as of the May 31, 1997 Cut-Off
Date from the Seller pursuant to a
Sale and Servicing Agreement to be
dated as of June 1, 1997 (the
"Sale and Servicing Agreement")
among the Trust, as Issuer, the
Seller, as Seller, FFI, as
S-4
<PAGE> 9
Transferor and Servicer, and First
Bank National Association, as
Indenture Trustee and Co-Owner
Trustee. In addition, on the
Closing Date, the Seller is
expected to deposit approximately
$182,137,784 into a pre-funding
account (the "Pre-Funding Account")
for the purchase of additional Home
Loans (the "Subsequent Home Loans")
during the Funding Period. 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
$750,000,000.
The assets of the Trust will
primarily include a pool of home
loans (the "Home Loan Pool")
consisting of loans ("Home Loans"),
which will be secured by mortgages,
deeds of trust or other similar
security instruments (the
"Mortgages"). The assets of the
Trust will also include (i)
payments of interest and principal
in respect of the Home Loans
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) amounts on
deposit in the Collection Account,
Note Payment Account and
Certificate Distribution Account;
and (iv) 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 Cut-Off
Date Principal Balance minus all
principal reductions credited
against the Principal Balance of
such Home Loan since such Cut-Off
Date; provided, however, that the
Principal Balance of a Liquidated
Home Loan shall be zero. 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 Securities.
The Home Loans . . . . . . . . . . . . . As further described herein, all
of the Home Loans will be
conventional loans (i.e., not
insured or guaranteed by a
governmental agency)
("Conventional Loans") and will be
secured by Mortgages.
Substantially all of the Mortgages
for the Home 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. See "The Home
Loan Pool" herein and "Description
of the Trust Property -- Mortgage
Loans" in the Prospectus.
Substantially all of the Home
Loans will be secured by liens on
Mortgaged Properties in which the
borrowers have little or no equity
(i.e., the related combined
loan-to-value ratios exceed 100%)
at the time of origination. See
"The Home Loan Pool" herein.
"Combined loan-to-value ratio"
means, with respect to any Home
Loan, the fraction, expressed as a
percentage, the numerator of which
is the principal balance of such
Home Loan at origination plus, in
the case of
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a junior lien Home Loan, the
aggregate outstanding principal
balance of the related senior lien
loans on the date of origination of
such Home Loan, and the denominator
of which is the appraised or stated
value of the related Mortgaged
Property at the time of origination
of such Home Loan (determined as
described herein under "The
Transferor and the Servicer --
Underwriting Criteria").
The Initial Home Loans will consist
of approximately 18,554 loans,
having an Initial Pool Principal
Balance of approximately
$567,862,216. 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 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 such loans so
replaced, added or removed may not
exceed 10% 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) the
Pre-Funding Account Deposit on the
Closing Date. As a result of the
foregoing, the statistical
information presented herein
regarding the home loans expected
to be included in the Home Loan
Pool as of the date of this
Prospectus Supplement (1) does not
take into account any Subsequent
Home Loans that may be added to the
Home Loan Pool during the
Pre-Funding Period through the
application of amounts in the
Pre-Funding Account and (2) 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 -- Acquisition of
Subsequent Home Loans" and "The
Home Loan Pool" herein.
As further described herein, the
Transferor and the Servicer will
each have the option after the
Closing Date (i) to remove any Home
Loans and substitute Qualified Home
Loans therefor up to an aggregate
amount not to exceed 10% of the
Assumed Pool Principal Balance, and
(ii) either to repurchase any Home
Loan incident to foreclosure,
default or imminent default thereof
or to remove such Home Loan and
substitute a Qualified Substitute
Home Loan therefor. The Transferor
will also be obligated either to
repurchase any Home Loan as to
which a representation or warranty
has been breached, which breach
remains uncured for a period of 60
days and has a materially adverse
effect on the interests of the
Securityholders in such Home Loan
(each, a "Defective Home Loan") or
to remove such Defective Home Loan
and substitute a Qualified
Substitute Home Loan. As used
herein, a "Qualified Substitute
Home Loan" will have
characteristics that are generally
the same as or substantially
similar to the characteristics of
the Home Loan which it replaces.
The repurchase of any Home Loan
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<PAGE> 11
(rather than the replacement
thereof through substitution) will
result in accelerated principal
payments and distributions on the
Notes. See "The Transferor and
Servicer -- Repurchase or
Substitution of Home Loans" herein.
The Pre-Funding Account . . . . . . . . . On the Closing Date, the Seller is
expected to deposit a portion of
the proceeds from the sale of the
Securities in an amount equal to
approximately $182,137,784 (the
"Pre-Funding Account Deposit")
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 increase or decrease will
not exceed 5.0% of the Initial
Pool Principal Balance. See
"Description of the Transfer and
Servicing Agreements --
Pre-Funding Account" 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
$50,000 or less and the Transferor
directs that the Funding Period
end and (ii) September , 1997
(the "Funding Period"), the amount
on deposit in the Pre-Funding
Account will be reduced in
accordance with the terms of the
Sale and Servicing Agreement by
the amount used to purchase
Subsequent Home Loans. Subsequent
Home Loans purchased by the Trust
and added to the Home Loan Pool on
any Subsequent Transfer Date must
satisfy the criteria set forth in
the Sale and Servicing Agreement.
See "The Home Loan Pool --
Conveyance of Subsequent Home
Loans" herein. A "Subsequent
Transfer Date" is any date on
which any such Subsequent Home
Loans will be conveyed by the
Seller to the Trust after the
Closing Date.
On the Payment Date following the
Due Period in which the 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
Regular Principal Payment Amount
and will be paid sequentially to
each Class of Notes in reduction of
the respective Class Principal
Balances thereof; and provided
further that if an event of default
has occurred under the Indenture,
such amount will be distributed on
a pro rata basis in reduction of
the Class Principal Balances of
each Class of Notes. 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
approved by the Rating Agencies
(the "Capitalized Interest Account
Deposit") 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
Securities. The Capitalized
Interest Account will be
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<PAGE> 12
available to cover the projected
interest shortfall in respect of
amounts on deposit in the
Pre-Funding Account during the
Funding Period. Any amounts
remaining in the Capitalized
Interest Account on any
Determination Date that are not
required to cover the interest
shortfall for the related Payment
Date and the anticipated interest
shortfall during the remainder of
the Funding Period as described
herein will be distributed to the
holders of the Residual Interest,
including any net reinvestment
income thereon on the related
Payment Date. See "Description of
the Transfer and Servicing
Agreements -- Capitalized Interest
Account" herein.
Credit Enhancement . . . . . . . . . . . Credit enhancement with respect to
the Notes will be provided by (A)
the subordination of (i) the
Residual Interest and the
Certificates to the Notes and (ii)
the Class B-1, Class M-2 and Class
M-1 Notes, respectively, to each
Class of Notes having a higher
priority, and (B) the
overcollateralization feature
described herein. The Notes are
not insured by any financial
guaranty insurance policy. See
"Risk Factors -- Adequacy of
Credit Enhancement" and
"Description of Credit
Enhancement" herein.
Subordination . . . . . . . . . . . . The rights of the holders of the
Class M-1 Notes to receive
payments of interest on each
Payment Date will be subordinated
to such rights of the holders of
the Senior Notes, the rights of
the holders of the Class M-2 Notes
to receive payments of interest on
each Payment Date will be
subordinated to such rights of the
holders of the Class M-1 Notes and
the Senior Notes, the rights of
the holders of the Class B-1 Notes
to receive payments of interest on
each Payment Date will be
subordinated to such rights of the
holders of the Mezzanine Notes and
the Senior Notes, and the rights
of the holders of the Certificates
to receive distributions of
interest on each Payment Date will
be subordinated to the rights of
the Noteholders to receive
payments of interest on such
Payment Date. In addition, the
rights of the holders of the Class
M-1 Notes to receive payments of
principal on each Payment Date
will be subordinated to such
rights of the holders of the
Senior Notes, the rights of the
holders of the Class M-2 Notes to
receive payments of principal on
each Payment Date will be
subordinated to such rights of the
holders of the Class M-1 Notes and
the Senior Notes, the rights of
the holders of the Class B-1 Notes
to receive payments of principal
on each Payment Date will be
subordinated to such rights of the
holders of the Mezzanine Notes and
the Senior Notes, and the rights
of the holders of the Certificates
to receive distributions of
principal on each Payment Date
will be subordinated to the rights
of the Noteholders to receive
payments of principal on such
Payment Date. The rights of
holders of the Residual Interest
to receive distributions on each
Payment Date will be subordinated
to the rights of the Noteholders
and the Certificateholders to
receive payments and distributions
on such Payment Date. The
subordination feature described
above is intended to enhance the
likelihood of regular receipt by
the holders of the Senior Notes,
the Class M-1 Notes, the Class M-2
Notes and the Class B-1 Notes, in
that order of priority, of the
full amount of interest and
principal payments due to such
holders and to afford such holders
protection against losses on the
Home Loans. See "Description of
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<PAGE> 13
Credit Enhancement -- Subordination
and Allocation of Losses" herein.
Application of Allocable Loss
Amounts . . . . . . . . . . . . . . . . . In the event that (a) the
aggregate of the outstanding
principal balances of the
Securities on any Payment Date
(after giving effect to all
payments and distributions on such
date) exceeds (b) the sum of (i)
the Pool Principal Balance as of
the end of the preceding Due
Period and (ii) the amount, if
any, on deposit in the Pre-Funding
Account as of the end of such Due
Period (such excess, an "Allocable
Loss Amount"), such Allocable Loss
Amount will be applied in
reduction of the Certificate
Principal Balance of the
Certificates until the Certificate
Principal Balance thereof has been
reduced to zero, and then in
reduction of the Class Principal
Balances of the Class B-1 Notes,
the Class M-2 Notes and the Class
M-1 Notes, in that order, until
the respective Class Principal
Balances thereof have been reduced
to zero. Allocable Loss Amounts
will not be applied to the
reduction of the Class Principal
Balance of any Class of Senior
Notes. With respect to any
Allocable Loss Amounts so applied,
holders of the Class B-1 Notes and
the Mezzanine Notes will be
entitled to receive payments of
Deferred Amounts and holders of
the Certificates will be entitled
to receive payment of Loss
Reimbursement Deficiencies under
the circumstances and to the
extent provided herein. See
"Description of the Notes --
Application of Allocable Loss
Amounts" herein.
Overcollateralization . . . . . . . . As of each Payment Date, the
"Overcollateralization Amount"
will be an amount (not less than
zero) equal to the excess of (a)
the sum of (i) the Pool Principal
Balance as of the end of the
preceding Due Period and (ii) the
amount, if any, on deposit in the
Pre-Funding Account as of the end
of such Due Period over (b) the
aggregate of the Class Principal
Balances of all Classes of Notes
and the Certificate Principal
Balance of the Certificates, after
giving effect, unless otherwise
specified, to all payments on the
Notes and distributions in respect
of the Certificates and the
Residual Interest on such Payment
Date. 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
Securities as described herein,
the Overcollateralization Amount
is expected to increase over time
until such amount is equal to the
Required Overcollateralization
Amount.
Except as otherwise provided
herein, the "Required
Overcollateralization Amount"
prior to the Overcollateralization
Stepdown Date will be equal to the
greater of (x) % of the Assumed
Pool Principal Balance (as defined
herein) and (y) the Net
Delinquency Calculation Amount (as
defined herein). On and after
the Overcollateralization Stepdown
Date, the Required
Overcollateralization Amount will
be equal to the greater of (x) %
of the Pool Principal Balance as
of the end of the preceding Due
Period and (y) the Net Delinquency
Calculation Amount; provided
however, that the Required
Overcollateralization Amount will
in no event be less than % of
the Assumed Pool Principal
Balance.
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<PAGE> 14
While the payment of Excess Spread
to holders of the Notes and the
holders of the Certificates (the
"Securityholders") has been
designed to produce and maintain a
given level of
overcollateralization with respect
to the 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. See "Description of Credit
Enhancement -- Subordination and
Allocation of Losses" and "Risk
Factors -- Adequacy of Credit
Enhancement" 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") and other
servicing compensation
(collectively, the "Servicing
Compensation"), payable monthly,
as described herein. See
"Description of the Transfer and
Servicing Agreements --
Servicing" herein. The Servicer
may have subcontracted its
servicing obligations and duties
with respect to certain Home Loans
to certain unaffiliated lenders,
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 such Home Loans. The
Servicer will be responsible for
paying the fees of each
Subservicer.
Fees and Expenses of the Trust . . . . . In addition to the Servicing
Compensation, on each Payment
Date, prior to payments and
distributions on the Securities,
amounts from the Available
Collection Amount will be
distributed to pay the following
periodic fees: (1) the fees of the
Indenture Trustee and the Co-Owner
Trustee (the "Indenture Trustee
Fee"); and (2) the fees of the
Owner Trustee (the "Owner Trustee
Fee") (collectively, such fees
together with the Servicing
Compensation, the "Trust Fees and
Expenses"); provided, however,
that with respect to the first
Payment Date, the payment of all
such Trust Fees and Expenses will
be prorated for the first Due
Period from the Closing Date. See
"Description of the Transfer and
Servicing Agreements -- Trust Fees
and Expenses" and "Description of
the Notes -- Payments and
Distributions" herein.
Optional Termination . . . . . . . . . . The Affiliated Holder may, at its
option, effect an early redemption
of the Notes on or after any
Payment Date on which the Pool
Principal Balance declines to 17%
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 as
described herein. In addition,
the Affiliated Holder may, at its
option, effect an early redemption
of the Notes on or after any
Payment 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 providing for
the payments as described herein.
See "Description of the Notes --
Optional Redemption of the Notes"
herein.
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<PAGE> 15
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 for federal
income tax purposes. See "Certain
Federal Income Tax Consequences"
herein and in the Prospectus for
additional information concerning
the application of federal income
tax laws to the Notes.
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.
Legal Investment
Considerations . . . . . . . . . . . . . The Notes will not constitute
"mortgage related securities for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984
("SMMEA"), because substantially
all of the Mortgages securing the
Home Loans are not first
mortgages. Accordingly, many
institutions with legal authority
to invest in comparably rated
securities backed by first
mortgages may not be legally
authorized to invest in the Notes.
See "Legal Investment Matters"
herein and in the Prospectus.
Ratings of the Securities . . . . . . . . It is a condition to the issuance
of the Notes that (i) each of the
Senior Notes be rated "AAA" by
Standard & Poor's Rating Services,
a division of The McGraw-Hill
Companies, Inc. ("Standard &
Poor's"), Duff & Phelps Credit
Rating Co. ("DCR") and Fitch
Investors Service, L.P. ("Fitch"
and, together with Standard &
Poor's and DCR, the "Rating
Agencies"), (ii) the Class M-1
Notes be rated "AA" by each Rating
Agency, (iii) the Class M-2 Notes
be rated "A" by each Rating
Agency, and (iv) the Class B-1
Notes be rated "BBB" by each
Rating Agency. A security rating
does not address the frequency of
principal prepayments or the
corresponding effect on yield to
Noteholders. None of the Seller,
the Transferor, the Servicer, the
Indenture Trustee, the Owner
Trustee or any other person is
obligated to maintain the rating
on any of the Notes.
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<PAGE> 16
RISK FACTORS
Prospective investors in the Notes 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 certain significant sources of risk affecting
an investment in the Notes. 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
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 Noteholders; 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
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 ORIGINATE OR ACQUIRE SUBSEQUENT HOME LOANS.
The ability of the Trust to acquire Subsequent Home Loans is dependent upon the
ability of the Transferor to originate or acquire additional home loans that
satisfy the eligibility criteria for the transfer of Subsequent Home Loans.
See "The Home Loan Pool -- Conveyance of Subsequent Home Loans" herein. The
ability of the Transferor to originate or 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 on the Payment Date
following the Due Period in which the Funding Period ends, such amount will be
applied to reduce, on a pro rata basis, the outstanding Class Principal Balance
of each Class of the Notes and the outstanding Certificate Principal Balance of
the Certificates. If such remaining amount is equal to or less than $50,000,
such amount will be included in the Regular Principal Payment Amount and will
be paid sequentially to each Class of Notes in reduction of the Class Principal
Balance thereof. Notwithstanding the foregoing, if an event of default has
occurred under the Indenture, 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 paid to the Noteholders from the amount remaining
in the Pre-Funding Account at the termination of the Funding Period.
PREPAYMENT AND YIELD CONSIDERATIONS
The Home Loans may generally be prepaid in whole or in part at any
time; however, with respect to certain Home Loans, a prepayment charge, as
permitted by applicable law, may apply to full and partial prepayments during
the first three years after origination. The Servicer will be entitled to
retain any prepayment charges paid in respect of the Home Loans. See
"Description of the Transfer and Servicing Agreements - Trust Fees and
Expenses" herein. Loans similar to the Home Loans have been originated in
significant volume only during the past few years and neither the
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<PAGE> 17
Transferor nor the Seller is aware of any publicly available studies or
statistics on the rate of prepayment of such loans, including the Home Loans.
The Trust's prepayment experience may be affected by a wide variety of factors,
including general economic conditions, interest rates, the availability of
alternative financing, homeowner mobility, the combined loan-to-value ratios of
the Home Loans and the receipt of proceeds from credit life and disability
insurance policies in respect of the Home Loans. In addition, substantially
all of the Home Loans contain due-on-sale provisions and the Servicer intends,
except under the circumstances described in the succeeding paragraph, to
enforce such provisions unless (i) the Servicer, in a manner consistent with
accepted servicing practices, permits the purchaser of the related Mortgaged
Property to assume the Home Loan, or (ii) such enforcement is not permitted by
applicable law. To the extent permitted by applicable law, such assumption
will not release the original borrower from its obligation under any such Home
Loan. See "Certain Legal Aspects of the Home Loans" in the Prospectus.
In certain cases, the Servicer may, in a manner consistent with its
servicing practices, permit a borrower who is selling his principal residence
and purchasing a new one to substitute the new Mortgaged Property as collateral
for the related Home Loan. In such event, the Servicer will generally require
the borrower to make a partial prepayment in reduction of the principal balance
of the Home Loan to the extent that the borrower has received proceeds from the
sale of the prior residence that will not be applied to the purchase of the new
residence.
The extent to which the yield to maturity of a Note may vary from the
anticipated yield will depend upon (i) the degree to which it is purchased at a
premium or discount, (ii) the degree to which the timing of payments or
distributions to the holder thereof is sensitive to scheduled payments,
prepayments, liquidations, defaults, delinquencies, substitutions,
modifications and repurchases of Home Loans and to the payment or distribution
of Excess Spread and amounts remaining in the Pre-Funding Account after the
Funding Period ends, and (iii) to the application of Allocable Loss Amounts to
the Certificates and the Mezzanine Notes as described herein. In the case of
any Note purchased at a discount, an investor should consider the risk that a
slower than anticipated rate of principal payments and distributions to the
Noteholders (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 Note purchased at a premium, an
investor should consider the risk that a faster than anticipated rate of
principal payments and distributions to the Noteholders (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
Payment Date, until the Overcollateralization Amount is at least equal to the
Required Overcollateralization Amount, the allocation of the Excess Spread for
such Payment Date as an additional payment or distribution of principal on the
Notes will accelerate the amortization of the Notes relative to the
amortization of the Home Loans; however, on the Overcollateralization Stepdown
Date, the distribution of any Overcollateralization Reduction Amount to the
holders of the Residual Interest, as described herein, can be expected to
result in a slower amortization of the Notes and may delay principal payments
and distributions to the Noteholders on a Payment Date. Further, in the event
that significant principal payments or distributions are made to Noteholders as
a result of prepayments, liquidations, repurchases and purchases of the Home
Loans or payments or distributions of Excess Spread and amounts remaining in
the Pre-Funding Account, there can be no assurance that Noteholders will be
able to reinvest such payments or distributions in a comparable alternative
investment having a comparable yield. See "Prepayment and Yield
Considerations" herein.
ADEQUACY OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Notes will be provided by (A)
the subordination of (i) the Residual Interest and the Certificates to the
Class B-1 Notes and each Class of Notes having a higher priority, (ii) the
Class B- 1 Notes to the Class M-2 Notes and each Class of Notes having a higher
priority, (iii) the Class M-2 Notes to the Class M-1 Notes and the Senior
Notes, and (iv) the Class M-1 Notes to the Senior Notes and (B) the
overcollateralization feature described herein. The Notes are NOT insured by
any financial guaranty insurance policy. If the Home Loans experience higher
rates of delinquencies, defaults and losses (see "-- Additional Factors
Affecting Delinquencies, Defaults and Losses on Home Loans" below) than
initially anticipated, there can be no assurance that the amounts available
from the credit enhancement will be adequate to cover the delays or shortfalls
in payments to the Noteholders that result from such higher delinquencies,
defaults and losses. If the amounts available from the credit enhancement are
inadequate, the Noteholders will bear the risk of any delays in payment and
losses resulting from the delinquencies, defaults and losses on the Home Loans.
The rights of the holders of the Class M-1 Notes to receive payments
of interest on each Payment Date will be subordinated to such rights of the
holders of the Senior Notes, the rights of the holders of the Class M-2 Notes
to
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receive payments of interest on each Payment Date will be subordinated to such
rights of the holders of the Class M-1 Notes and the Senior Notes, the rights
of the holders of the Class B-1 Notes to receive payments of interest on each
Payment Date will be subordinated to such rights of the holders of the
Mezzanine Notes and the Senior Notes. In addition, the rights of the holders
of the Class M-1 Notes to receive payments of principal on each Payment Date
will be subordinated to such rights of the holders of the Senior Notes, the
rights of the holders of the Class M-2 Notes to receive payments of principal
on each Payment Date will be subordinated to such rights of the holders of the
Class M-1 Notes and the Senior Notes, and the rights of the holders of the
Class B-1 Notes to receive payments of principal on each Payment Date will be
subordinated to such rights of the holders of the Mezzanine Notes and the
Senior Notes. Consequently, holders of the Class B-1 Notes, the Class M-2
Notes and the Class M-1 Notes will receive no payments of interest and no
payments of principal on a Payment Date until all amounts due on account of
interest and on account of principal, respectively, on Notes having a higher
priority of payment have been paid to the related Noteholders. See
"Description of Credit Enhancement -- Subordination and Allocation of Losses"
herein and "--Additional Factors Affecting Delinquencies, Defaults and Losses
on Home Loans - No Servicer Delinquency Advances" below. As a result of such
subordination, the yields to maturity on the Mezzanine Notes and the Class B-1
Notes will be more sensitive than the yields on the Senior Notes to
delinquencies and losses on the Home Loans.
While the payment of Excess Spread to the Securityholders in the
manner specified herein has been designed to produce and maintain a given level
of overcollateralization with respect to the 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. In particular, as a result of delinquencies on the Home Loans during
any Due Period, the amount of interest received on the Home Loans during such
Due Period may be less than the amount of interest payable or distributable on
the Securities on the related Payment Date. Such an occurrence would cause the
aggregate principal balances of the Securities to decrease at a slower rate
relative to the Pool Principal Balance, resulting in a reduction of the
Overcollateralization Amount and, in some circumstances, an Allocable Loss
Amount.
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, regardless
of whether there are sufficient funds on a subsequent Payment Date to pay all
amounts then payable to the Noteholders.
ADEQUACY OF THE MORTGAGED PROPERTIES AS SECURITY FOR THE HOME LOANS
As of the May 31, 1997 Cut-Off Date, the combined loan-to-value ratios
for substantially all of the Initial Home Loans ranged from approximately 85%
to 125%, with approximately 77.76% of the Initial Pool Principal Balance
consisting of Home Loans having combined loan-to-value ratios in excess of
100%. As of the May 31, 1997 Cut-Off Date, the weighted average combined
loan-to-value ratio of the Initial Home Loans was 109.63%. As a result of the
foregoing, the Mortgaged Properties are not likely to provide adequate security
for the Home Loans. Even assuming that a Mortgaged Property provides adequate
security for the related Home Loan, substantial delays could be encountered in
connection with the liquidation of a Home Loan that would result in current
shortfalls in payments to Noteholders to the extent such shortfalls are not
covered by the credit enhancement described herein. In addition, liquidation
expenses relating to any Liquidated Home Loan (such as legal fees, real estate
taxes, and maintenance and preservation expenses) will reduce the liquidation
proceeds otherwise available for payment to Noteholders. In the event that any
Mortgaged Property fails to provide adequate security for the related Home
Loan, any losses in connection with such Home Loan will be borne by Noteholders
as described herein to the extent that the applicable credit enhancement
described herein is insufficient to absorb all such losses.
RECENT ORIGINATION OF INITIAL HOME LOANS
None of the Initial Home Loans were 30 days or more delinquent in
their scheduled monthly payments of principal and interest as of May 31, 1997.
However, approximately 36.17% of the Initial Pool Principal Balance consists of
Initial Home Loans that have a first scheduled monthly payment due date
occurring after May 1, 1997, and therefore, it was not possible for such
Initial Home Loans to have had a scheduled monthly payment that was 30 days or
more delinquent as of May 31, 1997. See "-- Additional Factors Affecting
Delinquencies, Defaults and Losses on Home Loans -- Limited Historical
Delinquency, Loss and Prepayment Information" below.
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ADDITIONAL FACTORS AFFECTING DELINQUENCIES, DEFAULTS 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. 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. The credit quality of some of the borrowers under the Home
Loans is lower than that of borrowers under mortgage loans conforming to the
FNMA or FHLMC underwriting guidelines for first-lien, single family mortgage
loans. See "The Home Loan Pool -- Characteristics of Initial Home Loans"
herein. Consequently, 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 (and will frequently be
total losses) 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 for first-lien, single family mortgage loans, and
because substantially all of the Home Loans are secured by junior liens on
Mortgaged Properties in which the borrowers have little or no equity at the
time of origination of such Home Loans (i.e., the related combined
loan-to-value ratios approach or exceed 100%). Furthermore, with respect to a
significant number of the Home Loans, the loan-to-value determinations are
based upon the borrower's representations as to the value of the underlying
property; accordingly, there can be no assurance that such values accurately
reflect prevailing market prices. See "--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 the creditworthiness of such 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 or no consideration in underwriting the Home Loan, no assurance can be
given that any proceeds will be recovered from the foreclosure or liquidation
of the Mortgaged Property for a defaulted Home Loan. See "-- Realization Upon
Defaulted Home Loans" below.
In response to changes and developments in the consumer finance area
as well as the refinement of the Transferor'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.
NO SERVICER DELINQUENCY 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. As a result of the foregoing, the
amount of principal and interest received on the Home Loans during any
particular Due Period may be less than the amount of principal and interest
payable or distributable on the Securities on the related Payment Date. Such
an occurrence would cause the aggregate principal balance of the Securities to
decrease at a slower rate relative to the Pool Principal Balance, resulting in
a reduction of the Overcollateralization Amount and, in some circumstances, an
Allocable Loss Amount. However, 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.
RELOCATION AND RELOADING OF DEBT. With respect to Home Loans which in
combination with superior liens have loan-to-value ratios in excess of 100%,
there is a risk that if the related borrowers relocate, such borrowers will be
unable to discharge the Home Loans in full from the sale proceeds of the
related Mortgaged Properties and any other funds available to these borrowers,
in which case the Home Loans could experience higher rates of delinquencies,
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defaults and losses. With respect to Home Loans the proceeds of which were
used in whole or in part for debt consolidation, there can be no assurance
that, following the debt consolidation, the related borrower will not incur
further consumer debt to third party lenders. This reloading of debt could
impair the ability of such borrowers to service their debts, which in turn
could result in higher rates of delinquencies, defaults and losses on the Home
Loans.
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 or through a portfolio acquisition program.
See "The Home Loan Pool -- General" herein. All of such Home Loans will have
been re-underwritten and reviewed for compliance with the Transferor's
underwriting guidelines. 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. Such Home
Loans may be subject to a higher incidence of delinquency or default.
LIMITED HISTORICAL DELINQUENCY, LOSS AND PREPAYMENT INFORMATION.
Since January 1995, the Servicer has substantially increased the volume of
conventional home 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.
Accordingly, neither the delinquency experience and loan loss and liquidation
experience set forth under "The Transferor and Servicer -- Servicing
Experience" herein or under "The Servicer and the Transferor" in the
Prospectus, nor the prepayment scenarios set forth under "Prepayment and Yield
Considerations -- Weighted Average Life of the Notes" 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 41.27% 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
State of California. Because of the relative geographic concentration of
Mortgaged Properties and borrowers within California, 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, including a
recession, in California (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
Home Loans secured by Mortgaged Properties located in California, certain of
such 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. In general,
declines in the California residential real estate market may adversely affect
the values of Mortgaged Properties located in California such that the
outstanding principal balances of such Home Loans, together with the
outstanding principal amount of any senior liens on such Mortgaged Properties,
will equal or exceed the value of such Mortgaged Properties. Accordingly, the
actual rates of defaults and losses on such Home Loans secured by Mortgaged
Properties located in California could be higher than those currently
experienced in the home lending and consumer finance industry in general.
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 on the Home Loans,
the remittance of funds from such collections for payment and distribution to
the Securityholders, the bookkeeping and accounting for such collections and
payments 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 Securityholders or the Indenture Trustee or the Owner Trustee may remove
the Servicer and appoint a successor servicer pursuant to the terms of the Sale
and Servicing Agreement. Absent such a replacement, the Noteholders 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
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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 payments due
to the Noteholders. Accordingly, the Noteholders 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 payments to the Noteholders. See "The Transferor and Servicer --
Servicing Experience" herein.
REALIZATION UPON DEFAULTED HOME LOANS. Substantially all of the Home
Loans are secured by junior liens, and the loans secured by the related senior
liens are not included in the Home Loan Pool. The primary risk to holders of
Home 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 indebtedness secured by the related senior
lien(s) and the related Home Loan. See "Risk Factors -- Certain Factors
Affecting Delinquencies, Foreclosures and Losses on Loan Assets -- 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 Home Loan may not be an
economically viable alternative, neither the Servicer nor any Subservicer, in
most cases, will (i) pursue the foreclosure of a junior lien defaulted Home
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, Noteholders should not expect that any senior mortgage(s) will be
kept current by the Trust for the purpose of protecting any junior lien Home
Loan. See "Certain Legal Aspects of the Loan Assets -- Foreclosure -- Junior
Liens" in the Prospectus. Furthermore, it is unlikely that any of the
foregoing methods of realizing upon a junior lien defaulted Home Loan will be
an economically viable alternative with respect to any Home Loans having a
combined loan-to-value ratio that exceeds 100% at the time of default. As a
result, the Servicer may pursue alternative methods of realizing proceeds from
junior lien defaulted Home Loans, including without limitation, the whole loan
sale of such Home Loans and the modification of such Home Loans, which, among
other things, may include the abatement of accrued interest or the reduction of
a portion of the outstanding Principal Balances of such Home Loans. Because
substantially all of the Home Loans will have combined loan-to-value ratios at
the time of origination that approach or exceed 100%, losses sustained from
defaulted Home Loans are likely to be more severe (and will frequently be total
losses). In fact, no assurance can be given that any proceeds, or a
significant amount of proceeds, will be recovered from the liquidation of
defaulted Home Loans.
Generally, the underwriting requirements of the Transferor do not
require that a borrower obtain fire and casualty insurance or title insurance
as a condition to approving the Home Loan. Accordingly, if a Mortgaged
Property suffers any uninsured hazard or casualty losses, or if the borrower is
found not to have clear title to such Mortgaged Property, Noteholders may bear
the risk of loss resulting from a default by the related borrower to the extent
such losses are not recovered by foreclosure or liquidation proceeds on such
defaulted Home Loans or from amounts available from the credit enhancement
provided for such Notes.
ECONOMIC CONDITIONS. For the limited period of time during which
loans in the nature of the Home Loans have been originated, economic conditions
nationally and in most regions of the country have been generally favorable. A
deterioration in economic conditions could be expected to adversely affect the
ability and willingness of borrowers to repay their Home Loans; however,
because of lenders' limited experience with loans similar to the Home Loans, no
prediction can be made as to the severity of the effect of a general economic
downturn on the rate of delinquencies and defaults on the Home Loans. Because
borrowers under the Home Loans generally have little or no equity in the
related Mortgaged Properties, any significant increase in the rate of
delinquencies and defaults could result in substantial losses to holders of
Notes, in particular the Class B-1 Notes and the Mezzanine Notes. See
"--Adequacy of the Mortgaged Properties as Security for the Home Loans" and
"--Additional Factors Affecting Delinquencies, Defaults and Losses on Home
Loans" above and "Prepayment and Yield Considerations" herein.
NON-RECORDATION OF ASSIGNMENTS. Subject to confirmation by the Rating
Agencies, with respect to the Home Loans secured by Mortgaged Properties
located in certain states, the Transferor will not be required to record
assignments to the Indenture Trustee of the Mortgages in the real property
records of these states for such Home Loans, but rather the Transferor, in its
capacity as the Servicer, will retain record title to such Mortgages on behalf
of the
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Indenture Trustee and the Noteholders. See "Description of the Transfer and
Servicing Agreements -- Sale and Assignment of the 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 Home
Loans to the Indenture Trustee, if the Transferor or the Seller were to sell,
assign, satisfy or discharge any Home 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 Home
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 Home Loans that are
superior to those of the Indenture Trustee, then the Noteholders could lose the
right to future payments of principal and interest from such Home 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 such Notes.
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. For example, the Federal
District Court for the Eastern District of Virginia recently announced a
decision indicating that Federal law prohibits lenders from paying independent
mortgage brokers a premium for loans with above-market interest rates. The
Transferor will be required to 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. 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 or a rescission of
the related Home Loan, 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 payments owed to the Noteholders to the extent any related
delays or losses are not otherwise covered by amounts available from the
applicable credit enhancement provided for the Notes. 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. See "-- Limitations on
Repurchase or Replacement of Defective Home Loans by Transferor" below and
"Risk Factors -- Certain Factors Affecting Delinquencies, Defaults and Losses
on Loan Assets -- Certain Legal Considerations of the Loan Assets" in the
Prospectus.
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. Although a significant portion of the Home
Loans will have been acquired from unaffiliated correspondent lenders, the
Transferor will make the same 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 Securityholders, 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 Defective Home Loans
from the Trust 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
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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 termination of its lending arrangements that provide funding
for its assets or operations, or 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, an 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 delay or
loss will be borne by the Noteholders to the extent that such delay or loss is
not otherwise covered by amounts available from the credit enhancement provided
for the Notes. See "-- Adequacy of Credit Enhancement" above and "The
Transferor and Servicer" herein.
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 FFG, 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 FFG 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 FFG 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 or replace any Defective Home Loans.
DISSOLUTION OF TRUST DUE TO 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 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 ensure 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
will not result in an Insolvency Event. If an Insolvency Event with respect to
the Affiliated Holder occurs, except as described under "Description of the
Transfer and Servicing Agreements -- Insolvency Event" herein, the Indenture
Trustee will promptly sell, dispose of or otherwise liquidate the Home Loans in
a commercially reasonable manner on commercially reasonable terms, except under
certain limited circumstances. The proceeds from any such sale, disposition or
liquidation of the Home Loans will be treated as collections on the Home Loans,
deposited in the Collection Account and paid to the Noteholders in accordance
with the terms and priority of payment described herein.
USE OF PROCEEDS
The proceeds from the sale of the 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 and the Capitalized
Interest Account. 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 under 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 the
remainder will be used for working capital. See "Underwriting" herein.
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DESCRIPTION OF THE TRUST
GENERAL
The Issuer, FIRSTPLUS Home Loan Owner Trust 1997-2, 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 Securities and the Residual
Interest, (iii) making payments on the Notes and distributions in respect of
the Certificates and the Residual Interest, 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 undivided ownership interests in the Trust.
The Residual Interest will represent the residual interest in the assets of the
Trust. It is expected that approximately 1% of the Original Certificate
Principal Balance of the Certificates will be purchased by the Affiliated
Holder. In addition, on the Closing Date, such Affiliated Holder will purchase
approximately 1% of the Residual Interest and the Transferor will retain the
remaining 99% of the Residual Interest. 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 and certain other requirements set forth in the Trust
Agreement.
On the Closing Date, the Trust will purchase Home Loans (the "Initial
Home Loans") having an aggregate principal balance of approximately
$567,862,216 (the "Initial Pool Principal Balance") as of the May 31, 1997
Cut-Off Date from the Seller pursuant to a Sale and Servicing Agreement to be
dated as of June 1, 1997 (as amended and supplemented from time to time, the
"Sale and Servicing Agreement"), among the Trust, the Seller, the Servicer and
the Indenture Trustee. In addition, on the Closing Date, the Seller is
expected to deposit approximately $182,137,784 into the Pre-Funding Account for
the purchase of Subsequent Home Loans during the Funding Period. 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 $750,000,000.
The assets of the Trust will primarily consist of Home Loans which
will be secured by Mortgages. See "The Home Loan Pool" herein. The assets of
the Trust will also include (i) payments of interest and principal in respect
of the Home Loans 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) amounts on deposit in the
Collection Account, Note Payment Account and Certificate Distribution Account;
and (iv) 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;
provided, however, that the Principal Balance of a Liquidated Home Loan shall
be zero. 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 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 and Co-Owner Trustee".
S-20
<PAGE> 25
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 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 . . . . . . . . . . . . . . . . . $
Class A-8 Notes . . . . . . . . . . . . . . . . . $
Class A-9 Notes . . . . . . . . . . . . . . . . . $
Class M-1 Notes . . . . . . . . . . . . . . . . . $
Class M-2 Notes . . . . . . . . . . . . . . . . . $
Class B-1 Notes . . . . . . . . . . . . . . . . . $
Class B-2 Certificates . . . . . . . . . . . . . . $
Total . . . . . . . . . . . . . . . . . . $
</TABLE>
THE OWNER TRUSTEE AND CO-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.
Certain functions of the Owner Trustee under the Trust Agreement and
the Sale and Servicing Agreement will be performed by First Bank National
Association, in its capacity as Co-Owner Trustee under the Trust Agreement and
the Sale and Servicing Agreement, including maintaining the Certificate
Distribution Account and making distributions therefrom.
First Bank National Association and the Servicer will also perform
certain additional administrative functions on behalf of the Trust pursuant to
the terms of an administration agreement (the "Administration Agreement") among
the Trust, First Bank National Association and the Servicer.
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. The Home
Loans will consist of loans for which the related net proceeds were used to
finance (i) property improvements, (ii) debt consolidation, and (iii) a
combination of property improvements, debt consolidation, cash-out or other
consumer purposes. A small number of Home Loans may be evidenced by retail
installment sales contracts that are secured by Mortgages. Substantially all
of the Mortgages for the Home 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.
Substantially all of the Home Loans will be secured by liens on Mortgaged
Properties in which the borrowers have little or no equity (i.e., the related
combined loan-to-value ratios approach or exceed 100%) at the time of
origination of such Home 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
S-21
<PAGE> 26
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"). All 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 originated or 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 Noteholders. 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 May 31, 1997 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 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" 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
on 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 less than one month after the previous payment, 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 more than one month after
the previous payment, 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 less than
one month after the previous payment, more of such payment will be used on the
related Payment Date to pay principal on the Notes than if such payment was
received on such scheduled monthly due date. Conversely, if a payment is
received on such Home Loan more than one month after the previous payment, less
of such payment will be used on the related Payment Date to pay principal on
the Notes 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 Notes over
the life of the transaction, but it may affect the weighted average lives of
the Notes. See "Prepayment and Yield Considerations" herein.
Certain of the borrowers with respect to the Home Loans may be covered
by credit life and/or disability insurance policies, which provide for payment
in full of the outstanding principal balance of the related Home Loans in the
event of the accidental death, disability or (in some cases) unemployment of
the related borrower. If a borrower covered by such a policy elects to cancel
the policy, the amount of the premium refund payable in connection with such
S-22
<PAGE> 27
cancellation will be applied as a principal payment on the related Home Loan.
Any proceeds received by the Trust in respect of such insurance policies will
affect the rate of prepayments on the Home Loans. See "Prepayment and Yield
Considerations" herein.
CHARACTERISTICS OF INITIAL HOME LOANS
Set forth below is certain statistical information regarding
characteristics of the Initial Home Loans expected to be included in the Home
Loan Pool as of the date of this Prospectus Supplement. 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; provided, however, that the aggregate principal balance of Initial
Home Loans so replaced, added or removed will not exceed 5.0% of the Initial
Pool Principal Balance. 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
characteristics of the Initial Home Loans expected 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 May 31, 1997
Cut-Off Date, the characteristics of the actual Home Loan Pool may vary from
the information below due to a number of factors, including prepayments after
the May 31, 1997 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. 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 18,554 loans having an Initial Pool Principal Balance
of approximately $567,862,216. Except as provided above, 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. The
sums of the amounts and percentages in the following tables may not equal the
totals shown due to rounding.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
S-23
<PAGE> 28
HOME LOAN RATE
<TABLE>
<CAPTION>
RANGE OF PERCENT OF TOTAL
HOME LOAN NUMBER OF AGGREGATE BY AGGREGATE
RATES (%) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
9.000 to 9.999 . . . . . . . . . . . . . . . . . 2 $ 114,648 0.02%
10.000 to 10.999 . . . . . . . . . . . . . . . . . 242 7,585,681 1.34
11.000 to 11.999 . . . . . . . . . . . . . . . . . 2,301 76,680,024 13.50
12.000 to 12.999 . . . . . . . . . . . . . . . . . 4,434 145,586,542 25.64
13.000 to 13.999 . . . . . . . . . . . . . . . . . 4,233 131,884,065 23.22
14.000 to 14.999 . . . . . . . . . . . . . . . . . 3,797 111,351,027 19.61
15.000 to 15.999 . . . . . . . . . . . . . . . . . 2,196 60,511,493 10.66
16.000 to 16.999 . . . . . . . . . . . . . . . . . 1,005 26,156,240 4.61
17.000 to 17.999 . . . . . . . . . . . . . . . . . 293 6,798,768 1.20
18.000 to 18.999 . . . . . . . . . . . . . . . . . 47 1,100,684 0.19
19.000 to 19.999 . . . . . . . . . . . . . . . . . 4 93,044 0.02
------ ------------ ------
Total . . . . . . . . . . . . . . . . . . 18,554 $567,862,216 100.00%
====== ============ ======
</TABLE>
The weighted average Home Loan Rate of the Initial Home Loans as of the May 31,
1997 Cut-Off Date was approximately 13.75% per annum.
CURRENT PRINCIPAL BALANCE DISTRIBUTION
<TABLE>
<CAPTION>
RANGE OF PERCENT OF TOTAL
CUT-OFF DATE NUMBER OF AGGREGATE BY AGGREGATE
PRINCIPAL BALANCES ($) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
Up to 10,000 166 $ 1,538,322 0.27%
10,000.01 to 20,000 . . . . . . . . . . . . . . . . 3,144 52,155,910 9.18
20,000.01 to 30,000 . . . . . . . . . . . . . . . . 7,231 183,702,377 32.35
30,000.01 to 40,000 . . . . . . . . . . . . . . . . 4,938 173,698,052 30.59
40,000.01 to 50,000 . . . . . . . . . . . . . . . . 2,127 98,752,530 17.39
50,000.01 to 60,000 . . . . . . . . . . . . . . . . 572 32,023,225 5.64
60,000.01 to 70,000 . . . . . . . . . . . . . . . . 268 17,616,513 3.10
70,000.01 to 80,000 . . . . . . . . . . . . . . . . 108 8,375,286 1.47
------ ------------ ------
Total . . . . . . . . . . . . . . . . . 18,554 $567,862,216 100.00%
====== ============ ======
</TABLE>
The average principal balance of the Initial Home Loans as of the May 31, 1997
Cut-Off Date was approximately $30,606.
S-24
<PAGE> 29
ORIGINAL LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
RANGE OF PERCENT OF TOTAL
PRINCIPAL BALANCES NUMBER OF AGGREGATE BY AGGREGATE
AT ORIGINATION ($) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ ----------- ----------------- -----------------
<S> <C> <C> <C>
Up to 10,000 158 $ 1,467,753 0.26%
10,000.01 to 20,000 . . . . . . . . . . . . . . . 3,110 51,422,737 9.06
20,000.01 to 30,000 . . . . . . . . . . . . . . . 7,252 183,911,351 32.39
30,000.01 to 40,000 . . . . . . . . . . . . . . . 4,947 173,847,269 30.61
40,000.01 to 50,000 . . . . . . . . . . . . . . . 2,137 99,098,986 17.45
50,000.01 to 60,000 . . . . . . . . . . . . . . . 572 32,002,506 5.64
60,000.01 to 70,000 . . . . . . . . . . . . . . . 270 17,736,329 3.12
70,000.01 to 80,000 . . . . . . . . . . . . . . . 108 8,375,286 1.47
------ ------------ ------
Total . . . . . . . . . . . . . . . . 18,554 $567,862,216 100.00%
====== ============ ======
</TABLE>
The average principal balance of the Initial Home Loans at origination was
approximately $30,778.
REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
RANGE OF PERCENT OF TOTAL
REMAINING TERMS NUMBER OF AGGREGATE BY AGGREGATE
TO MATURITY (MONTHS) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Up to 60 . . . . . . . . . . . . . . . . . 310 $ 6,053,401 1.07%
61 to 90 . . . . . . . . . . . . . . . . . 200 4,276,214 0.75
91 to 120 . . . . . . . . . . . . . . . . . 1,890 46,262,043 8.15
121 to 150 . . . . . . . . . . . . . . . . . 67 1,709,934 0.30
151 to 180 . . . . . . . . . . . . . . . . . 6,218 180,757,625 31.83
181 to 210 . . . . . . . . . . . . . . . . . 11 381,855 0.07
211 to 240 . . . . . . . . . . . . . . . . . 3,206 100,652,910 17.72
241 to 270 . . . . . . . . . . . . . . . . . 1 11,833 0.00
271 to 300 . . . . . . . . . . . . . . . . . 6,651 227,756,402 40.11
------ ------------ ------
Total . . . . . . . . . . . . . . . . 18,554 $567,862,216 100.00%
====== ============ ======
</TABLE>
The weighted average remaining term to maturity of the Initial Home Loans as of
the May 31, 1997 Cut-Off Date was approximately 229 months.
MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
PERCENT OF TOTAL
AGE NUMBER OF AGGREGATE BY AGGREGATE
(IN MONTHS) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C>
Up to 12 . . . . . . . . . . . . . . . . . . . 18,104 $557,000,348 98.09%
13 to 24 . . . . . . . . . . . . . . . . . . . 447 10,752,047 1.89
Over 24 . . . . . . . . . . . . . . . . . . . . 3 109,821 0.02
------ ------------ ------
Total . . . . . . . . . . . . . . . . 18,554 $567,862,216 100.00%
====== ============ ======
</TABLE>
The weighted average age of the Initial Home Loans as of the May 31, 1997
Cut-Off Date was approximately 3 months.
S-25
<PAGE> 30
GEOGRAPHIC CONCENTRATION
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF AGGREGATE BY AGGREGATE
STATE HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- ---------- ----------------- -----------------
<S> <C> <C> <C>
Alabama . . . . . . . . . . . . . . . . . . . . 13 $ 337,838 0.06%
Alaska . . . . . . . . . . . . . . . . . . . . 12 529,374 0.09
Arkansas . . . . . . . . . . . . . . . . . . . 71 2,117,602 0.37
Arizona . . . . . . . . . . . . . . . . . . . . 796 23,075,015 4.06
California . . . . . . . . . . . . . . . . . . 7,056 234,347,620 41.27
Colorado . . . . . . . . . . . . . . . . . . . 861 25,480,069 4.49
Connecticut . . . . . . . . . . . . . . . . . . 41 1,124,114 0.20
Delaware . . . . . . . . . . . . . . . . . . . 9 302,443 0.05
District of Columbia . . . . . . . . . . . . . 7 234,592 0.04
Florida . . . . . . . . . . . . . . . . . . . . 1,308 37,361,471 6.58
Georgia . . . . . . . . . . . . . . . . . . . . 757 21,649,990 3.81
Hawaii . . . . . . . . . . . . . . . . . . . . 1 34,747 0.01
Idaho . . . . . . . . . . . . . . . . . . . . . 233 6,866,851 1.21
Illinois . . . . . . . . . . . . . . . . . . . 364 10,652,358 1.88
Indiana . . . . . . . . . . . . . . . . . . . . 411 11,712,458 2.06
Iowa . . . . . . . . . . . . . . . . . . . . . 54 1,506,896 0.27
Kansas . . . . . . . . . . . . . . . . . . . . 151 4,708,931 0.83
Kentucky . . . . . . . . . . . . . . . . . . . 105 2,683,790 0.47
Louisiana . . . . . . . . . . . . . . . . . . . 70 2,102,899 0.37
Maryland . . . . . . . . . . . . . . . . . . . 453 13,874,536 2.44
Massachusetts . . . . . . . . . . . . . . . . . 140 4,534,272 0.80
Michigan . . . . . . . . . . . . . . . . . . . 367 10,167,589 1.79
Minnesota . . . . . . . . . . . . . . . . . . . 305 9,319,905 1.64
Mississippi . . . . . . . . . . . . . . . . . . 67 1,817,353 0.32
Missouri . . . . . . . . . . . . . . . . . . . 260 7,050,042 1.24
Montana . . . . . . . . . . . . . . . . . . . . 36 1,117,767 0.20
North Carolina . . . . . . . . . . . . . . . . 370 10,365,509 1.83
North Dakota . . . . . . . . . . . . . . . . . 6 150,459 0.03
Nebraska . . . . . . . . . . . . . . . . . . . 53 1,467,959 0.26
New Hampshire . . . . . . . . . . . . . . . . . 32 953,818 0.17
New Jersey . . . . . . . . . . . . . . . . . . 127 3,449,055 0.61
New Mexico . . . . . . . . . . . . . . . . . . 138 4,331,387 0.76
New York . . . . . . . . . . . . . . . . . . . 53 1,453,282 0.26
Nevada . . . . . . . . . . . . . . . . . . . . 585 17,665,426 3.11
Ohio . . . . . . . . . . . . . . . . . . . . . 324 8,186,443 1.44
Oklahoma . . . . . . . . . . . . . . . . . . . 221 6,074,756 1.07
Oregon . . . . . . . . . . . . . . . . . . . . 236 7,011,559 1.23
Pennsylvania . . . . . . . . . . . . . . . . . 172 4,794,510 0.84
Rhode Island . . . . . . . . . . . . . . . . . 24 671,779 0.12
South Carolina . . . . . . . . . . . . . . . . 278 7,633,129 1.34
South Dakota . . . . . . . . . . . . . . . . . 10 318,167 0.06
Tennessee . . . . . . . . . . . . . . . . . . . 377 10,265,703 1.81
Texas . . . . . . . . . . . . . . . . . . . . . 11 120,631 0.02
Utah . . . . . . . . . . . . . . . . . . . . . 286 8,625,124 1.52
Vermont . . . . . . . . . . . . . . . . . . . . 4 134,007 0.02
Virginia . . . . . . . . . . . . . . . . . . . 465 13,344,989 2.35
Washington . . . . . . . . . . . . . . . . . . 686 21,838,934 3.85
West Virginia . . . . . . . . . . . . . . . . . 15 366,868 0.06
Wisconsin . . . . . . . . . . . . . . . . . . . 93 2,662,388 0.47
Wyoming . . . . . . . . . . . . . . . . . . . . 40 1,265,811 0.22
------ ------------ ------
TOTAL 18,554 $567,862,216 100.00%
====== ============ ======
</TABLE>
S-26
<PAGE> 31
CREDIT SCORE
<TABLE>
<CAPTION>
PERCENT OF TOTAL
RANGE OF NUMBER OF AGGREGATE BY AGGREGATE
CREDIT SCOREs HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
600 to 619 . . . . . . . . . . . . . . . . . . . 121 $ 2,906,993 0.51%
620 to 639 . . . . . . . . . . . . . . . . . . . 2,278 55,330,430 9.74
640 to 659 . . . . . . . . . . . . . . . . . . . 3,792 107,450,245 18.92
660 to 679 . . . . . . . . . . . . . . . . . . . 3,625 114,747,911 20.21
680 to 699 . . . . . . . . . . . . . . . . . . . 3,507 115,619,343 20.36
700 to 719 . . . . . . . . . . . . . . . . . . . 2,700 90,722,121 15.98
720 to 739 . . . . . . . . . . . . . . . . . . . 1,470 47,020,647 8.28
740 to 759 . . . . . . . . . . . . . . . . . . . 711 22,542,307 3.97
760 to 779 . . . . . . . . . . . . . . . . . . . 272 8,960,674 1.58
780 or More . . . . . . . . . . . . . . . . . . . 78 2,561,545 0.45
------ ------------ ------
Total . . . . . . . . . . . . . . . . . 18,554 $567,862,216 100.00%
====== ============ ======
</TABLE>
The weighted average Credit Score of the Initial Home Loans as of the May 31,
1997 Cut-Off Date was approximately 681.
DEBT-TO-INCOME RATIO
<TABLE>
<CAPTION>
PERCENT OF TOTAL
RANGE OF NUMBER OF AGGREGATE BY AGGREGATE
DEBT-TO-INCOME RATIOS HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
20.00 and Under . . . . . . . . . . . . . . . . . 440 $ 12,594,078 2.22%
20.01 to 25.00 . . . . . . . . . . . . . . . . . 1,323 38,260,055 6.74
25.01 to 30.00 . . . . . . . . . . . . . . . . . 2,568 76,253,550 13.43
30.01 to 35.00 . . . . . . . . . . . . . . . . . 3,975 118,696,592 20.90
35.01 to 40.00 . . . . . . . . . . . . . . . . . 4,578 138,293,516 24.35
40.01 to 45.00 . . . . . . . . . . . . . . . . . 4,348 136,744,565 24.08
45.01 to 50.00 . . . . . . . . . . . . . . . . . 1,287 45,941,895 8.09
Greater than 50 . . . . . . . . . . . . . . . . . 35 1,077,965 0.19
------ ------------ ------
Total . . . . . . . . . . . . . . . . . 18,554 $567,862,216 100.00%
====== ============ ======
</TABLE>
The weighted average debt-to-income ratio of the Initial Home Loans as of the
May 31, 1997 Cut-Off Date was approximately 36%.
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 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) 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, and the scheduled maturity may not be later than
; (iii) each such Subsequent Home Loan will have an interest rate
of not less than %; (iv) such Subsequent Home Loans will be underwritten,
re-underwritten or reviewed, as applicable, in accordance with the underwriting
guidelines of the Transferor in effect at such time (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) will have a weighted average interest rate and a
weighted average remaining term to maturity as of each respective Cut-Off Date
comparable to those of the Initial Home Loans included in the initial Home Loan
Pool. Following the transfer of such Subsequent Home Loans to the Trust, the
aggregate statistical
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<PAGE> 32
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 FFG. 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 Notes.
THE TRANSFEROR AND SERVICER
GENERAL
FIRSTPLUS FINANCIAL, INC., a Texas corporation, was organized in 1986.
FFI, in its capacity as Transferor, will transfer the Home Loans to the Seller.
FFI, in its capacity as Servicer, also will service the Home Loans under the
Sale and Servicing Agreement. FFI is a wholly-owned subsidiary of FFG and is
primarily engaged in the business of originating, purchasing, underwriting,
selling and/or servicing loans including property improvement, debt
consolidation and other consumer loans. As of March 31, 1997, the Transferor
employed 1,255 persons, including 174 persons who work in loan servicing. As
of March 31, 1997, FFI administered and serviced approximately $2.7 billion in
principal balance of property improvement, debt consolidation and other
consumer loans (including loans subserviced by others).
FFG is a publicly held, NASDAQ listed company that completed an
initial public offering of its common stock in February 1996 and an additional
public offering of its common stock in January 1997. As of March 31, 1997, the
FFG Consolidated Financial Statements, as unaudited, which included FFG and its
principal subsidiary, FFI, set forth total assets of $1,469,206,000, total
liabilities of $1,161,568,000 and total stockholders' equity of $307,638,000,
and for the three months ended March 31, 1997 set forth net income of
$29,870,000. As of September 30, 1996, the FFG Consolidated Financial
Statements, as audited, which included FFG and FFI, set forth total assets of
$710,384,000, total liabilities of $615,815,000 and total stockholders' equity
of $94,569,000, and for the fiscal year ended September 30, 1996 set forth net
income of $34,212,000. As of September 30, 1996, the financial statements of
FFI, as audited, set forth total assets of $655,203,000, total liabilities of
$472,183,000, and total stockholder's equity of $183,020,000. 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 FFG and its affiliates may be
of limited relevance to an investor seeking to predict the future financial
condition of FFG 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 will be entitled to the Servicing Fee and to
certain additional servicing compensation. See "-- Servicing Experience"
below and "Description of the Transfer and Servicing Agreements -- Servicing"
herein.
UNDERWRITING CRITERIA
The Transferor believes that all Home 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.
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<PAGE> 33
In many cases, the Home Loans 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. The collection of loan payments from each borrower with respect to a
Home Loan is subject to various risks, including, without limitation, the risk
that such borrower will not be able to make payments of interest and principal
on the loan and that the realizable value of the related mortgaged property
will not be sufficient to repay the outstanding interest and principal owed on
such loan. The Transferor uses its own credit evaluation criteria to classify
the loans by risk class. These criteria include, as a significant component,
the credit score (the "Credit Score") derived based on a methodology developed
by Fair, Isaac and Company, a consulting firm specializing in creating default
predictive models through scoring mechanisms. The Credit Scores, which are
obtained from national credit reporting organizations, are numerical
representations of borrowers' estimated default probability, and generally
range from a low of 200 to a high of 800. A borrower with a Credit Score of
700 or higher would be assigned the highest classification for credit quality
by the Transferor. Additional criteria include the borrower's debt-to-income
ratio, mortgage credit history, consumer credit history, prior bankruptcies,
prior foreclosures, notices of default, deeds-in-lieu of foreclosure and
repossessions. The Transferor believes that the most important credit
characteristics are the borrower's Credit Score and debt-to-income ratio. The
range of the Credit Scores and debt-to-income ratios of the borrowers under the
Home Loans is set forth under "The Home Loan Pool -- Characteristics of the
Initial Home Loans" herein.
With regard to valuation of prospective Mortgaged Properties, for
loans of $35,000 or less the Transferor relies on the value stated by the
borrower in the loan application; for loans of more than $35,000 and less than
or equal to $50,000 the Transferor obtains a drive-by appraisal, broker price
opinion or comparable determination of value; and for loans in excess of
$50,000 the Transferor requires a full appraisal or a statistical appraisal
based on the value of similar mortgaged properties in the same geographical
area.
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 and that provides for the computer automation of certain underwriting
procedures during the credit review and decision process. The Transferor's
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-to-income ratio of the applicant. The
borrower's income is generally verified through various means, including
without limitation applicant interviews, written verifications with employers
and review of pay stubs or tax returns. A borrower must generally demonstrate
sufficient levels of disposable income to satisfy debt repayment requirements.
Notwithstanding the foregoing, the Transferor offers a "no income verification"
program to certain high credit quality borrowers that have Credit Scores in
excess of 680 and that satisfy a minimum disposable income requirement. Under
the no income verification program, the borrower's employment, but not income,
is verified.
In response to changes and developments in the consumer finance area
as well as the refinement of the Transferor'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 Transferor and the Servicer will each have the option after the
Closing Date (i) to remove any Home Loans and substitute Qualified Home Loans
therefor up to an aggregate amount not to exceed 10% of the Assumed Pool
Principal Balance, and (ii) either to repurchase any Home Loan incident to
foreclosure, default or imminent default thereof or to remove such Home Loan
and substitute a Qualified Substitute Home Loan therefor. The Transferor will
also 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.
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<PAGE> 34
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 applicable 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) is less than the outstanding principal balance of the
Defective Home Loan(s), the Transferor will also remit for payment to the
Securityholders an amount (a "Substitution Adjustment") equal to such
shortfall, which will result in a prepayment of principal on the Securities for
the amount of such shortfall. As used herein, a "Qualified Substitute Home
Loan" is a home loan that (i) has an interest rate which differs from the Home
Loan Rate for the Defective Home Loan which it replaces (each, a "Deleted Home
Loan") by no more than one percentage point, (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) 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 to that of the borrower with respect to
the Deleted Home Loan; provided that with respect to a substitution of multiple
loans, items (i), (ii) and (iii) above may be considered on an aggregate or
weighted average basis.
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, 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 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 Noteholders to the extent that such loss is
not otherwise covered by amounts available from the credit enhancement provided
for such Notes. See "Risk Factors -- Adequacy of Credit Enhancement" 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 that it has originated, purchased, sold
and/or serviced. The Servicer has limited historical data with respect to the
performance, including the delinquency and loss experience and the rate of
prepayments, of the Conventional Loans included in its portfolio of loans. See
"Prepayment and Yield Considerations" herein. 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 loss experience with respect to the loans serviced by FFI prior
to and through December 31, 1996 and certain factors affecting the delinquency
and loss experience of FFI.
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 or sale 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 May 31, 1997,
no servicing rights have been terminated under the related pooling and
servicing agreements or sale 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.
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<PAGE> 35
DESCRIPTION OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Notes will be provided by (A)
the subordination of (i) the Residual Interest to the Certificates, (ii) the
Certificates to the Class B-1 Notes, (iii) the Class B-1 Notes to the Class M-2
Notes, (iv) the Class M-2 Notes to the Class M-1 Notes, and (v) the Class M-1
Notes to the Senior Notes to the extent described below under "--Subordination
and Allocation of Losses" and (B) the overcollateralization feature described
below under "--Overcollateralization."
SUBORDINATION AND ALLOCATION OF LOSSES
On each Payment Date, payments of interest on the Notes will be made
first to the Senior Notes, second to the Class M-1 Notes, third to the Class
M-2 Notes and fourth to the Class B-1 Notes, such that no interest will be paid
on the Class M-1 Notes until all required interest payments have been made on
the Senior Notes, no interest will be paid on the Class M-2 Notes until all
required interest payments have been made on the Senior Notes and the Class M-1
Notes and no interest will be paid on the Class B-1 Notes until all required
interest payments have been made on the Senior Notes and the Mezzanine Notes.
In addition, payments of principal of the Notes will be made sequentially, such
that on each Payment Date no Class of Notes will receive any payments of
principal until the Class Principal Balances of all Classes of Notes of higher
priority (in the case of Class M-1 Notes, all Classes of Senior Notes, in the
case of the Class M-2 Notes, the Class M-1 Notes and all Classes of Senior
Notes, and in the case of the Class B-1 Notes, all Classes of Senior Notes and
Mezzanine Notes) have received all required payments of principal. In
addition, all Allocable Loss Amounts not applied to the Certificate Principal
Balance of the Certificates as described below will be applied first in
reduction of the Class Principal Balance of the Class B-1 Notes, second in
reduction of the Class Principal Balance of the Class M-2 Notes, and third in
reduction of the Class Principal Balance of the Class M-1 Notes, until their
respective Class Principal Balances have been reduced to zero. Allocable Loss
Amounts will not be applied to the Senior Notes. The rights of the holders of
the Certificates to receive distributions of interest and principal on each
Payment Date generally will be subordinated to the rights of the Noteholders to
receive payments of interest and principal, respectively, on each Payment Date.
In addition, no Allocable Loss Amounts will be applied to the reduction of the
Class Principal Balance of the Class B-1 Notes or of any Class of Mezzanine
Notes until the application thereof to the Certificate Principal Balance of the
Certificates has reduced such Certificate Principal Balance to zero. The
rights of the holders of the Residual Interest to receive any distributions on
any Payment Date will be subordinated to the rights of the Certificateholders
and the Noteholders. The subordination described above is intended to enhance
the likelihood of the regular receipt of interest and principal due to the
holders of certain Classes of Notes and to afford such holders protection
against losses on the Home Loans, with the greatest amount of such enhancement
and protection being provided to the Senior Notes, a lesser amount of such
enhancement and protection being provided to the Class M-1 and, in particular,
the Class M-2 Notes, and the least amount of such enhancement and protection
being provided to the Class B-1 Notes. See "Risk Factors--Adequacy of Credit
Enhancement" herein.
On each Payment Date, the "Allocable Loss Amount" will be equal to the
excess, if any, of (a) the aggregate of the outstanding principal balances of
the Securities (after giving effect to all payments and distributions on such
Payment Date) over (b) the sum of (i) the Pool Principal Balance as of the end
of the preceding Due Period and (ii) the amount, if any, on deposit in the
Pre-Funding Account as of the end of the preceding Due Period. As described
herein, the "Pool Principal Balance" at any time will be equal to the aggregate
of the Principal Balances of all Home Loans as of the last day of the
immediately preceding Due Period, and the "Principal Balance" of a Home Loan on
any day is equal to its Cut-Off Date Principal Balance minus all principal
reductions credited against the Principal Balance of such Home Loan since the
Cut-Off Date; provided, however, that the Principal Balance of a Liquidated
Home Loan shall be zero.
OVERCOLLATERALIZATION
As of each Payment Date, the "Overcollateralization Amount" will be an
amount (not less than zero) equal to the excess of (a) the sum of (i) the Pool
Principal Balance as of the end of the preceding Due Period and (ii) the
amount, if any, on deposit in the Pre-Funding Account as of the end of the
preceding Due Period over (b) the aggregate of the Class Principal Balances of
all Classes of Notes and the Certificate Principal Balance of the Certificates,
after giving effect, unless otherwise specified, to all payments on the Notes
and distributions in respect of the Certificates and the Residual Interest on
such Payment Date. On the Closing Date, the Overcollateralization Amount will
be equal to zero. A limited acceleration of the principal amortization of the
Securities relative to the principal amortization of the Home
S-31
<PAGE> 36
Loans has been designed to increase the Overcollateralization Amount over time
by making additional sequential payments and distributions of principal to the
Securityholders from the payment of Excess Spread, until the
Overcollateralization Amount is equal to the Required Overcollateralization
Amount. The "Required Overcollateralization Amount" for any Payment Date
occurring prior to the Overcollateralization Stepdown Date will equal the
greater of (x) % of the Assumed Pool Principal Balance and (y) the Net
Delinquency Calculation Amount (as defined herein). On and after the
Overcollateralization Stepdown Date, the Required Overcollateralization Amount
will be equal to the greater of (x) % of the Pool Principal Balance as of
the end of the preceding Due Period and (y) the Net Delinquency Calculation
Amount; provided however, that the Required Overcollateralization Amount will
in no event be less than % of the Assumed Pool Principal Balance.
If on any Payment Date, an Overcollateralization Deficiency Amount (as
defined herein) exists, Excess Spread, if any, with respect to such Payment
Date will be applied to make additional payments or distributions of principal
to the Securities in the order of priority set forth under "Description of the
Notes --Payments and Distributions" herein. Such payments of Excess Spread
are intended to accelerate the amortization of the Class Principal Balances of
all Classes of Notes and the Certificate Principal Balance of the Certificates
relative to the amortization of the Home Loans, thereby increasing the
Overcollateralization Amount. The percentage obtained by dividing the sum of
(a) the Class Principal Balances of Notes and (b) the Certificate Principal
Balance of the Certificates by (c) the Pool Principal Balance will decrease as
a result of the application of Excess Spread to reduce the Class Principal
Balance of the Notes and the Certificate Principal Balance of the Certificates.
On any Payment Date with respect to which the Overcollateralization
Deficiency Amount is equal to zero, all or a portion of the Excess Spread may
be distributed to the holders of the Residual Interest rather than as principal
to the Securityholders, thereby ceasing the acceleration of the principal
amortization of the Securities in relation to the principal amortization of the
Home Loan Pool, until such time as the Overcollateralization Deficiency Amount
is greater than zero (i.e., due to a reduction in the Overcollateralization
Amount as a result of loan losses or delinquencies, or due to an increase in
the Required Overcollateralization Amount as a result of the failure to satisfy
certain delinquency criteria).
On the Overcollateralization Stepdown Date, the holders of the
Residual Interest will be entitled to distributions of all or a portion of the
Regular Principal Payment Amount that would otherwise be distributed to
Securityholders as described below. Such amount, the "Overcollateralization
Reduction Amount," with respect to the Overcollateralization Stepdown Date will
equal the lesser of (x) the Overcollateralization Surplus Amount (as defined
herein) for such Payment Date (after giving effect to all other payments and
distributions on such Payment Date), and (y) the Regular Principal Payment
Amount (as determined without the deduction of the Overcollateralization
Reduction Amount therefrom) on such Payment Date. Prior to the occurrence of
the Overcollateralization Stepdown Date, the Overcollateralization Reduction
Amount will equal zero.
While the payment or distribution of Excess Spread to the
Securityholders and the distribution of any Overcollateralization Reduction
Amount to the holders of the Residual Interest in the manner specified 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. In particular, a high rate of
delinquencies on the Home Loans during any Due Period could cause the amount of
interest received on the Home Loans during such Due Period to be less than the
amount of interest payable or distributable on the Securities on the related
Payment Date. In such a case, the Class Principal Balances of the Notes and
the Certificate Principal Balance of the Certificates would decrease at a
slower rate relative to the Pool Principal Balance, resulting in a reduction of
the Overcollateralization Amount and, in some circumstances, an Allocable Loss
Amount. In addition, losses on the Home Loans will reduce the
Overcollateralization Amount to zero before Allocable Loss Amounts are applied
in reduction of the Certificate Principal Balance of the Certificates or the
Class Principal Balances of the Class B-1 Notes and the Mezzanine Notes. See
"Risk Factors -- Adequacy of Credit Enhancement" herein.
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<PAGE> 37
DESCRIPTION OF THE NOTES
GENERAL
The Trust will issue the Notes pursuant to the Indenture dated as of
June 1, 1997 (the "Indenture"), between the Trust and the Indenture Trustee.
The Trust will also issue the Certificates pursuant to the terms of a Trust
Agreement dated as of June 1, 1997 (the "Trust Agreement"), among the Seller,
the Owner Trustee, the Co-Owner Trustee and the Affiliated Holder. 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 10th day of each month, or, if such day is not a Business Day,
the first Business Day immediately following, commencing in July 1997, (each
such date, a "Payment Date"), the Indenture Trustee or its designee and the
Owner Trustee or its designee will distribute to the persons in whose names the
Notes are registered on the last day of the month immediately preceding the
month of the related Payment Date (the "Record Date"), the portion of the
aggregate payment to be made to each Noteholder as described below. Prior to
Book-Entry Termination, distributions on the Notes 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.
PAYMENTS AND DISTRIBUTIONS
For the definitions of certain of the defined terms used in the
following subsection, See "--Related Definitions" below.
AVAILABLE COLLECTION AMOUNT. Payments and distributions on the Notes
on each Payment Date will be made from the Available Collection Amount. The
Servicer will calculate the Available Collection Amount on the 3rd Business Day
prior to each Payment Date (each such day, a "Determination Date"). With
respect to each Payment Date, the "Available Collection Amount" is the sum of
(i) all amounts received in respect of the Home Loans or paid by the Servicer,
the Transferor or the Seller (exclusive of amounts not required to be deposited
in the Collection Account), during the related Due Period (and, in the case of
amounts required to be paid by the Transferor in connection with the purchase
or substitution of a Defective Home Loan, deposited in the Collection Account
on or before the related Determination Date), 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 Payment Date
relating to a Due Period that ends prior to the end of the Funding Period, an
amount from the Capitalized Interest Account sufficient to fund any shortfall
in the Interest Payment Amount attributable to the amounts in the Pre-Funding
Account, (iii) in the case of the Payment 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), and (iv) with respect
to the final Payment Date, or an early redemption or termination of the
Securities by the Affiliated Holder, the Termination Price (as defined herein)
or the proceeds from the sale of the Home Loans.
PAYMENTS AND DISTRIBUTIONS OF INTEREST. Interest on the Class
Principal Balance of each Class of Notes and the Certificate Principal Balance
of the Certificates will accrue during each Due Period at the respective per
annum Note Interest Rates or Pass-Through Rate, as applicable, and will be
payable to the Noteholders and distributable to the Certificateholders on each
Payment Date, commencing in July 1997. Interest on each Class of Notes and the
Certificates will be calculated on the basis of a 360-day year of twelve 30-day
months.
Payments and distributions of interest on the Securities will be made
from the Available Collection Amount remaining after the payment of the Trust
Fees and Expenses (the "Available Funds"). On each Payment Date, interest
payments will be made first, to the Classes of Senior Notes, pro rata, second,
to the Class M-1 Notes, third, to the Class M-2 Notes, fourth, to the Class B-1
Notes, and fifth, interest will be distributed to the Certificates. Under
certain circumstances the amount available for interest payments and
distributions on any Payment Date could be less than the amount of interest
payable on all of the Notes and distributable in respect of the Certificates
on such date. Such an interest shortfall could occur, for example, if
delinquencies or losses realized on the Home Loans were exceptionally
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high or were concentrated in a particular month. In such event, any such
interest deficiency with respect to any Class of Notes or the Certificates will
be carried forward as a Noteholders' Interest Carry-Forward Amount or a
Certificateholders' Interest Carry-Forward Amount, as applicable, and will be
distributed to holders of each affected Class of Notes or Certificates on
subsequent Payment Dates to the extent that sufficient funds are available
therefor. The Issuer will remain obligated to pay interest deficiencies on the
Notes that are carried forward until such deficiencies have been paid. See
"--Rights of Noteholders Upon Occurrence of Event of Default" herein.
PAYMENTS AND DISTRIBUTIONS OF PRINCIPAL. Principal payments and
distributions will be made to the Securityholders on each Payment Date in an
amount generally equal to the excess of (a) the sum of (i) the Regular
Principal Payment Amount and (ii) if the related Due Period occurs before the
Funding Period ends and thereafter to the extent of the Overcollateralization
Deficiency Amount, any Excess Spread for such Payment Date, over (b) the
Overcollateralization Surplus Amount, if any. Furthermore, in the case of the
Payment 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. Notwithstanding the foregoing, if an event of default has
occurred under the Indenture, such remaining amount will be included in the
Regular Principal Payment Amount and will be paid on a pro rata basis to the
Classes of Notes in reduction of their Class Principal Balances. Principal
payments on the Notes will be made from the Available Funds remaining after the
payment of the Noteholders' Interest Payable Amount and the Certificateholders'
Interest Distributable Amount.
On each Payment Date, principal distributions on the Certificates will
be made from the Available Funds remaining after all principal and interest
payable on the Notes on such Payment Date has been paid in full.
PAYMENT AND DISTRIBUTION PRIORITIES
A. On each Payment Date, the Regular Payment Amount will be applied
in the following order of priority:
(i) to pay to the holders of the Senior Notes, pro rata,
the applicable portion of the Noteholders' Interest Payable Amount
required to be paid in respect of the Senior Notes on such Payment
Date;
(ii) to pay to the holders of the Class M-1 Notes the
applicable portion of the Noteholders' Interest Payable Amount
required to be paid in respect of the Class M-1 Notes on such Payment
Date;
(iii) to pay to the holders of the Class M-2 Notes the
applicable portion of the Noteholders' Interest Payable Amount
required to be paid in respect of the Class M-2 Notes on such Payment
Date;
(iv) to pay to the holders of the Class B-1 Notes the
applicable portion of the Noteholders' Interest Payable Amount
required to be paid in respect of the Class B-1 Notes on such Payment
Date;
(v) to distribute to the holders of the Certificates the
Certificateholders' Interest Distributable Amount for such Payment
Date;
(vi) to pay to the holders of the Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5, Class A-6, Class A-7, Class A-8 and
Class A-9 Notes, in that order, until the respective Class Principal
Balances thereof are reduced to zero, the amount necessary to reduce
the aggregate of the Class Principal Balances of the Senior Notes to
the Senior Optimal Principal Balance;
(vii) to pay to the holders of the Class M-1 Notes the
amount necessary to reduce the Class Principal Balance thereof to the
Class M-1 Optimal Principal Balance;
(viii) to pay to the holders of the Class M-2 Notes the
amount necessary to reduce the Class Principal Balance thereof to the
Class M-2 Optimal Principal Balance;
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(ix) to pay to the holders of the Class B-1 Notes the
amount necessary to reduce the Class Principal Balance thereof to the
Class B-1 Optimal Principal Balance;
(x) to distribute to the holders of the Certificates the
amount necessary to reduce the Certificate Principal Balance of the
Certificates to the Certificate Optimal Principal Balance;
(xi) to pay to the holders of the Class M-1 Notes and the
Class M-2 Notes, in that order, their respective Deferred Amounts, if
any, until such Deferred Amounts have been paid in full;
(xii) to pay to the holders of the Class B-1 Notes the
applicable Deferred Amount, if any, until such Deferred Amount has
been paid in full;
(xiii) to distribute to the holders of the Certificates
amounts in respect of the Loss Reimbursement Deficiency, if any, until
such Loss Reimbursement Deficiency has been paid in full; and
(xiv) to distribute any remaining amount to the holders of
the Residual Interest.
B. On each Payment Date, the Excess Spread, if any, will be
distributed in the following order of priority (in each case after giving
effect to all payments and distributions specified in paragraph A. above):
(i) in an amount equal to the Overcollateralization Deficiency
Amount, if any, as follows:
(A) to pay to the holders of the Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5, Class A-6, Class A-7, Class A-8 and
Class A-9 Notes, in that order, until the respective Class Principal
Balances thereof are reduced to zero, the amount necessary to reduce
the aggregate of the Class Principal Balances of the Senior Notes to
the Senior Optimal Principal Balance;
(B) to pay to the holders of the Class M-1 Notes the
amount necessary to reduce the Class Principal Balance thereof to the
Class M-1 Optimal Principal Balance;
(C) to pay to the holders of the Class M-2 Notes the
amount necessary to reduce the Class Principal Balance thereof to the
Class M-2 Optimal Principal Balance;
(D) to pay to the holders of the Class B-1 Notes the
amount necessary to reduce the Class Principal Balance thereof to the
Class B-1 Optimal Principal Balance;
(E) to distribute to the holders of the Certificates, the
amount necessary to reduce the Certificate Principal Balance thereof
to the Certificate Optimal Principal Balance;
(ii) to pay to the holders of the Class M-1 and Class M-2 Notes, in
that order, their respective Deferred Amounts, if any, until such Deferred
Amounts have been paid in full;
(iii) to pay to the holders of the Class B-1 Notes the applicable
Deferred Amount, if any, until such Deferred Amount has been paid in full;
(iv) to distribute to the holders of the Certificates amounts in
respect of the Loss Reimbursement Deficiency, if any, until such Loss
Reimbursement Deficiency has been paid in full; and
(v) to distribute any remaining amount to the holders of the
Residual Interest.
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RELATED DEFINITIONS
"Assumed Pool Principal Balance" means, as of any date of
determination, the sum of (i) the Initial Pool Principal Balance, (ii) the
Cut-Off Date Principal Balance of each Subsequent Home Loan and (iii) the
amount on deposit in the Pre-Funding Account as of such date (not including any
such amount representing investment earnings).
"Business Day" means any day other than (i) a Saturday or Sunday or
(ii) a day on which banking institutions in New York City or in the city in
which the corporate trust office of the Indenture Trustee is located are
authorized or obligated by law or executive order to be closed.
"Certificateholders' Interest Carry-Forward Amount" means, with
respect to any Payment Date, the excess of the Certificateholders' Monthly
Interest Distributable Amount for the preceding Payment Date and any
outstanding Certificateholders' Interest Carry-Forward Amount on such preceding
Payment Date, over the amount in respect of interest that is actually deposited
in the Certificate Distribution Account on such preceding Payment Date.
"Certificateholders' Interest Distributable Amount" means, with
respect to any Payment Date, the sum of the Certificateholders' Monthly
Interest Distributable Amount for such Payment Date and the Certificateholders'
Interest Carry-Forward Amount for such Payment Date; provided however, that on
the Payment Date, if any, on which the Certificate Principal Balance of the
Certificates is reduced to zero through application of the Allocable Loss
Amount, the amount of the Certificateholders' Interest Distributable Amount
will be equal to the Certificateholders' Interest Distributable Amount
calculated without giving effect to this proviso, minus the portion, if any, of
the Allocable Loss Amount that otherwise would be applied to the Class B-1
Notes or the Mezzanine Notes on such Payment Date in the absence of this
proviso.
"Certificateholders' Monthly Interest Distributable Amount" means,
with respect to any Payment Date, interest accrued for the related Due Period
at the Pass-Through Rate on the Certificate Principal Balance of the
Certificates immediately preceding such Payment Date (or, in the case of the
first Payment Date, on the Closing Date).
"Certificate Optimal Principal Balance" means, with respect to any
Payment Date prior to the Overcollateralization Stepdown Date, zero; and with
respect to any other Payment Date, the Pool Principal Balance as of the
preceding Determination Date minus the sum of (i) the aggregate Class Principal
Balance of the Notes (after taking into account any payments made on such
Payment Date in reduction of the Class Principal Balances of the Notes) and
(ii) the Required Overcollateralization Amount for such Payment Date.
"Class B-1 Optimal Principal Balance" means, with respect to any
Payment Date prior to the Overcollateralization Stepdown Date, zero; and with
respect to any other Payment Date, the Pool Principal Balance as of the
preceding Determination Date minus the sum of (i) the aggregate of the Class
Principal Balances of each Class of the Senior Notes and the Mezzanine Notes
(after taking into account payments made on such Payment Date in reduction of
such Class Principal Balances) and (ii) the greater of (x) % of the Pool
Principal Balance as of the preceding Determination Date plus the Required
Overcollateralization Amount for such Payment Date (calculated without giving
effect to the proviso in the definition thereof) and (y) % of the Assumed
Pool Principal Balance.
"Class M-1 Optimal Principal Balance" means, with respect to any
Payment Date prior to the Overcollateralization Stepdown Date, zero; and with
respect to any other Payment Date, the Pool Principal Balance as of the
preceding Determination Date minus the sum of (i) the aggregate of the Class
Principal Balances of each Class of the Senior Notes (after taking into account
payments made on such Payment Date in reduction of such Class Principal
Balances) and (ii) the greater of (x) % of the Pool Principal Balance as of
the preceding Determination Date plus the Required Overcollateralization Amount
for such Payment Date (calculated without giving effect to the proviso in the
definition thereof) and (y) % of the Assumed Pool Principal Balance.
"Class M-2 Optimal Principal Balance" means, with respect to any
Payment Date prior to the Overcollateralization Stepdown Date, zero; and with
respect to any other Payment Date, the Pool Principal Balance as of the
preceding Determination Date minus the sum of (i) the aggregate of the Class
Principal Balances of each Class of the Senior Notes and the Class M-1 Notes
(after taking into account any payments made on such Payment Date in reduction
of such Class Principal Balances) and (ii) the greater of (x) % of the Pool
Principal Balance as of the
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preceding Determination Date plus the Required Overcollateralization Amount for
such Payment Date (calculated without giving effect to the proviso in the
definition thereof) and (y) % of the Assumed Pool Principal Balance.
"Deferred Amount" means, as of any Payment Date and as to any Class
B-1 Notes or any Class of Mezzanine Notes, the amount of Allocable Loss Amounts
previously applied in reduction of the Class Principal Balance thereof (and not
previously reimbursed) plus interest accrued on the unreimbursed portion
thereof at the applicable Note Interest Rate from the Payment Date when so
applied through the end of the Due Period immediately preceding such Payment
Date.
"Excess Spread" means, with respect to any Payment Date, the excess of
(a) the Available Funds over (b) the Regular Payment Amount.
"Insurance Proceeds" on each Payment 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
the 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.
"Interest Payment Amount" means the sum of the Noteholders' Interest
Payable Amount and the Certificateholders' Interest Distributable Amount.
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) 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.
"Loss Reimbursement Deficiency" means, as of any Payment Date and as
to the Certificates, the amount of Allocable Loss Amounts previously applied in
reduction of the Certificate Principal Balance thereof (and not previously
reimbursed).
"Net Delinquency Calculation Amount" means, with respect to any
Payment Date, the excess, if any, of (x) the product of and the Rolling
Six-Month Delinquency Average over (y) the aggregate of the amounts of Excess
Spread for the three preceding Payment Dates.
"Net Liquidation Proceeds" on each Payment 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
Loans or Mortgaged Properties.
"Noteholders' Interest Carry-Forward Amount" means, with respect to
any Payment Date, the excess of the Noteholders' Monthly Interest Payable
Amount for the preceding Payment Date and any outstanding Noteholders' Interest
Carry-Forward Amount on such preceding Payment Date, over the amount in respect
of interest that is actually deposited in the Note Payment Account on such
preceding Payment Date.
"Noteholders' Interest Payable Amount" means, with respect to any
Payment Date, the sum of the Noteholders' Monthly Interest Payable Amount for
such Payment Date and the Noteholders' Interest Carry-Forward Amount for such
Payment Date.
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"Noteholders' Monthly Interest Payable Amount" means, with respect to
any Payment Date, interest accrued for the related Due Period on each Class of
Notes at the respective Note Interest Rate for such Class on the Class
Principal Balance thereof immediately preceding such Payment Date after giving
effect to all payments of principal to the Noteholders of such Class on or
prior to the immediately preceding Payment Date (or, in the case of the first
Payment Date, on the Closing Date).
"Overcollateralization Amount" means, with respect to any Payment
Date, an amount (not less than zero) equal to the excess of (a) the sum of (i)
the Pool Principal Balance as of the end of the preceding Due Period and (ii)
the amount, if any, on deposit in the Pre-Funding Account as of the end of the
preceding Due Period over (b) the aggregate of the Class Principal Balances of
all Classes of Notes and the Certificate Principal Balance of the Certificates,
after giving effect to all payments on the Notes and distributions in respect
of the Certificates and the Residual Interest to be made on such Payment Date
through the application of the Regular Payment Amount with respect to such
Payment Date.
"Overcollateralization Deficiency Amount" means, with respect to any
Payment Date, the excess, if any, of the Required Overcollateralization Amount
for such Payment Date over the Overcollateralization Amount (the
Overcollateralization Amount to be determined, for purposes of this definition,
before giving effect to payments and distributions on such Payment Date
pursuant to paragraph B. under "--Payment and Distribution Priorities" above).
"Overcollateralization Surplus Amount" means, with respect to any
date of determination, the excess, if any, of the Overcollateralization Amount
for such Payment Date over the Required Overcollateralization Amount.
"Overcollateralization Stepdown Date" means the first Payment Date
occurring after as to which the aggregate of the Class Principal
Balances of each Class of the Senior Notes has been reduced to the excess of
(i) the Pool Principal Balance as of the preceding Determination Date over (ii)
the greater of (a) % of the Pool Principal Balance as of the preceding
Determination Date plus the Required Overcollateralization Amount for such
Payment Date (calculated without giving effect to the proviso in the definition
thereof) and (b) % of the Assumed Pool Principal Balance.
"Regular Payment Amount" means, with respect to any Payment Date, the
lesser of (a) the Available Funds and (b) the sum of (i) the Noteholders'
Interest Payable Amount, (ii) the Certificateholders' Interest Distributable
Amount and (iii) the Regular Principal Payment Amount.
"Regular Principal Payment Amount" means, with respect to each Payment
Date, an amount equal to the lesser of:
(A) 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 Due Period, (iii) the principal
portion of all Net Liquidation Proceeds, Insurance Proceeds and Released
Mortgaged Property Proceeds received by the Servicer during the related Due
Period in respect of any Home Loan, to the extent received on or prior to the
date on which such Home Loan became a Liquidated Home Loan, (iv) that portion
of the Purchase Price of any repurchased Home Loan which represents principal
and (v) the principal portion of any Substitution Adjustments required to be
deposited in the Collection Account as of the related Determination Date; and
(B) the aggregate of the outstanding principal balances of the
Securities immediately prior to such Payment Date.
"Released Mortgaged Property Proceeds" on each Payment 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.
"Required Overcollateralization Amount" means, with respect to any
Payment Date occurring prior to the Overcollateralization Stepdown Date, an
amount equal to the greater of (x) % of the Assumed Pool Principal Balance
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and (y) the Net Delinquency Calculation Amount; with respect to any other
Payment Date, an amount equal to the greater of (x) % of the Pool Principal
Balance as of the end of the related Due Period and (y) the Net Delinquency
Calculation Amount; provided, however, that the Required Overcollateralization
Amount will in no event be less than % of the Assumed Pool Principal Balance.
" Rolling Six-Month Delinquency Average" means, with respect to any
Payment Date, the average of the applicable 60-Day Delinquency Amounts for each
of the six immediately preceding Due Periods. As used herein, the "60-Day
Delinquency Amount" for any Due Period is the aggregate of the Principal
Balances of all Home Loans that are 60 or more days delinquent, in foreclosure
or REO Property as of the end of such Due Period, excluding any Liquidated Home
Loan.
"Senior Optimal Principal Balance" means, with respect to any Payment
Date prior to the Overcollateralization Stepdown Date, zero; with respect to
any other Payment Date, an amount equal to the Pool Principal Balance as of the
preceding Determination Date minus the greater of (a) % of the Pool
Principal Balance as of the preceding Determination Date plus the Required
Overcollateralization Amount for such Payment Date (without giving effect to
the proviso in the definition thereof) and (b) % of the Assumed Pool
Principal Balance.
"Termination Price" means an amount equal to the sum of (i) the then
outstanding aggregate Class Principal Balances of the Notes plus all accrued
and unpaid interest thereon at the applicable Note Interest Rates, (ii) the
then outstanding Certificate Principal Balance of the Certificates plus all
accrued and unpaid interest thereon at the Pass- Through Rate, (iii) any Trust
Fees and Expenses due and unpaid on such date, and (iv) any unreimbursed
Servicing Advances including such Servicing Advances deemed to be
nonrecoverable.
APPLICATION OF ALLOCABLE LOSS AMOUNTS
Following any reduction of the Overcollateralization Amount to zero,
any Allocable Loss Amounts will be applied in reduction of the Certificate
Principal Balance of the Certificates until the Certificate Principal Balance
thereof has been reduced to zero, and then, sequentially, to the Class
Principal Balances of the Class B-1 Notes, the Class M-2 Notes and the Class
M-1 Notes, in that order, until their respective Class Principal Balances have
been reduced to zero. The Class Principal Balances of the Senior Notes will
not be reduced by any application of Allocable Loss Amounts. The reduction of
the Class Principal Balance of the Class B-1 Notes or either Class of Mezzanine
Notes by the application of Allocable Loss Amounts will entitle such Class to
reimbursement in an amount equal to the applicable Deferred Amount, in
accordance with the payment priorities specified herein. The reduction of the
Certificate Principal Balance of the Certificates by the application of
Allocable Loss Amounts will entitle the Certificates to reimbursement in an
amount equal to the applicable Loss Reimbursement Deficiency in accordance with
the payment priorities set forth herein. Payments in respect of Loss
Reimbursement Deficiencies will not reduce the Certificate Principal Balance of
the Certificates and payments of Deferred Amounts will not reduce the Class
Principal Balance of the Class B-1 Notes or either Class of the Mezzanine
Notes.
The Deferred Amount with respect to the Class B-1 Notes or either
Class of the Mezzanine Notes will remain outstanding and the Issuer will remain
obligated to pay such Deferred Amount until such amount has been paid in full
to the holders of such Class.
PAYMENT OF DEFERRED AMOUNTS AND LOSS REIMBURSEMENT DEFICIENCIES
Any Deferred Amounts payable to the holders of the Class B-1 Notes or
either Class of the Mezzanine Notes and any amounts in respect of a Loss
Reimbursement Deficiency distributable to the holders of the Certificates as
specified under "--Payment and Distribution Priorities" above will be paid to
the holder of record of the related Class B-1 Notes, Mezzanine Notes or
Certificates, respectively, as of the applicable Record Date, or, in the case
of Mezzanine Notes or Certificates that have been retired, to the last holder
of record, without regard to when the losses for which such reimbursement is
being paid actually occurred. In making the foregoing payments in respect of
Deferred Amounts, amounts attributable to accrued and unpaid interest in
respect of such Deferred Amounts shall be paid prior to amounts attributable to
principal.
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OPTIONAL REDEMPTION OF THE NOTES
The Affiliated Holder may, at its option, effect an early redemption
of the Notes on any Payment Date on or after which the Pool Principal Balance
declines to 17% 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. In addition, the Affiliated Holder may, at its option, effect an early
redemption of the Notes on or after any Payment Date on or after 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 purchasing the Home Loans for a price equal to or
greater than the Termination Price. All proceeds from any such sale of the
Home Loans will be distributed (i) first, to the Indenture Trustee for payment
of the outstanding Trust Fees and Expenses, (ii) second, to the Servicer for
payment of unreimbursed Servicing Advances, including such Servicing Advances
deemed to be nonrecoverable, (iii) third, to the Noteholders in an amount equal
to the then outstanding aggregate of the Class Principal Balances of the Notes,
plus all accrued and unpaid interest thereon at the applicable Note Interest
Rate, (iv) fourth, to the Certificateholders in an amount equal to the then
outstanding Certificate Principal Balance of the Certificates, plus all accrued
and unpaid interest thereon at the Pass-Through Rate, and (v) fifth, to the
holders of the Residual Interest, in an amount equal to the amount of proceeds
remaining, if any, after the payments and distributions specified in clauses
(i) through (iv) above. 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.
RIGHTS OF NOTEHOLDERS UPON OCCURRENCE OF EVENT OF DEFAULT
Under the Indenture, a failure to pay the full amount of the portion
of the Noteholders' Interest Payable Amount payable to the Senior Notes or, if
the Senior Notes have been paid in full, a failure to pay the portion of such
amount payable to the Class of Notes then outstanding that has the highest
priority of payment (the "Highest Priority Class") within five days of the
Payment Date on which such payment is due (without regard to the amount of
Available Funds) will constitute an Event of Default. However, an Event of
Default will not occur solely due (i) to the failure to pay the full amount of
the Noteholders' Interest Payable Amount allocable to any Class of Notes then
outstanding not then having the highest priority of payment (a "Non-Priority
Class") or (ii) to an allocation of Allocable Loss Amounts to a Non-Priority
Class, until all the Classes of Notes having a higher priority of payment have
been paid in full (including all Noteholders' Interest Carry-Forward Amounts
and Deferred Amounts payable with respect thereto), and then only if all
Noteholders' Interest Carry-Forward Amounts and Deferred Amounts payable to
such Non-Priority Class have not been paid. Until the Notes have been declared
due and payable upon an Event of Default, the holders of any Non-Priority Class
may not request the Indenture Trustee to take any action, other than the
application of Available Funds to principal and interest as provided herein,
and may not otherwise take or cause any action to be taken to enforce the
obligation of the Issuer to pay principal and interest on such Non-Priority
Class.
Upon the occurrence of an Event of Default, holders of Senior Notes
representing more than 50% of the Aggregate Class Principal Balances of the
Senior Notes then outstanding may exercise their remedies pursuant to the terms
of the Indenture; provided however, if the aggregate outstanding Class
Principal Balance of the Senior Notes has been reduced to zero, the holders of
the Highest Priority Class representing more than 50% of the Class Principal
Balance of such Class of Notes may exercise their remedies pursuant to the
terms of the Indenture. These remedies include the right to cause the payments
of accrued interest to be paid pro rata in accordance with the amount of unpaid
accrued interest, and to cause payments of principal on the outstanding Notes
to be paid (either in lump sum from proceeds of the sale of the assets pledged
to secure the Notes or from monthly collections on the Home Loans), pro rata
out of remaining Available Funds, regardless of the allocation, or sequential
nature, of principal payments which would otherwise apply as described above,
based upon the Principal Balance of the Notes on the related Determination Date
(an "acceleration"). On each Payment Date on and after any such acceleration
of the Notes, and following the reduction to zero of the Principal Balance of
all Classes of Notes, any remaining Available Funds will be applied in
repayment first, of Deferred Amounts on the Notes, and then of any remaining
amounts due on the Certificates, pro rata. Such remedies also will include the
right to direct the Indenture Trustee's actions under the Indenture unless such
right is otherwise granted to holders of the Notes after an acceleration of the
Notes and to consent to the sale of the assets pledged to secure the Notes.
Should an Event of Default occur, prior to a declaration that the Notes are due
and payable, payments will be applied on each Payment Date in accordance with
the priorities, described above, which would
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otherwise be applicable on such Payment Date had an Event of Default not
occurred. See "Description of the Notes - The Indenture" in the Prospectus.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Indenture, the
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 Notes. 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.
SALE AND ASSIGNMENT OF THE HOME LOANS
On the Closing Date, the Transferor will sell the Initial Home Loans
to the Seller, and the Seller will sell the Initial Home Loans to the Trust.
The Trust will, concurrently with the sale of the Initial Home Loans and the
deposit of funds in the Pre-Funding Account and Capitalized Interest Account,
deliver or cause to be delivered the Securities to the Seller in exchange for
the Initial Home Loans, the Pre-Funding Account Deposit and Capitalized
Interest Account Deposit. The Trust will pledge and assign the Initial Home
Loans, Pre-Funding Account and Capitalized Interest Account 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
having characteristics that are generally similar to the characteristics of the
Initial Home 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 100% of the principal balance thereof. In connection
with any purchase of Subsequent Home Loans by the Trust after the Closing Date,
the Transferor will sell such Subsequent Home Loans to the Seller, and the
Seller in turn will sell such Subsequent Home Loans to the Trust. 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
Custodian the related Note endorsed to the order of the Indenture Trustee
without recourse, any assumption and modification agreements and 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, with respect to the Home Loans
secured by Mortgaged Properties located in certain states, the Transferor and
the Seller will not be required to record assignments to the Indenture Trustee
of the Mortgages in the real property records of these states for such Home
Loans. See "Risk Factors -- Additional Factors Affecting Delinquencies,
Defaults and Losses on Home Loans -- Non-recordation of Assignments" herein.
In such circumstances, the Transferor and the Seller will deliver to the
Custodian 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
Noteholders. In all other circumstances with respect to the Home Loans,
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 Custodian, 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 required, 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
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been returned by the public recording office, the Seller will deliver or cause
to be delivered to the Custodian a certified true photocopy of such Mortgage or
assignment. The Seller will deliver or cause to be delivered to 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 Noteholders, 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
$182,137,784 (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 10.0% 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 $50,000 or less, and (ii)
September , 1997, the amount on deposit in the Pre-Funding Account will be
reduced in accordance with the applicable provisions of the Sale and Servicing
Agreement by amounts used to purchase Subsequent Home Loans; 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 payments and distributions to the
Securityholders on the immediately following Payment 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. See "The
Home Loan Pool -- Conveyance of Subsequent Home Loans" herein.
On the Payment Date following the Due Period in which such Funding
Period ends, if the amount remaining in the Pre-Funding Account 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 Balances of the Notes and the outstanding Certificate Principal
Balance of the Certificates, thus reducing the weighted average lives of the
Securities. If such remaining amount is less than or equal to $50,000, such
amount will be included in the Regular Principal Payment Amount and will be
distributed sequentially to each Class of Notes in reduction of the respective
Class Principal Balances thereof. Notwithstanding the foregoing, if an event
of default has occurred under the Indenture, such remaining amount will be
included in the Regular Principal Payment Amount and will be paid on a pro rata
basis to the Classes of Notes in reduction of their Class Principal Balances.
See "Prepayment and Yield Considerations" herein.
Amounts on deposit in the Pre-Funding Account will be invested in
certain types of investments set forth in the Sale and Servicing Agreement that
have been approved by the Rating Agencies (the "Permitted Investments") at the
direction of the Affiliated Holder. 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 with respect to amounts on deposit in the Pre-Funding Account are
required to mature or otherwise be available for withdrawal no later than one
Business Day prior to a Subsequent Transfer 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.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, at the direction of the Seller, an amount
intended to cover the projected interest shortfall during the Funding Period
(the "Capitalized Interest Account Deposit"), as approved by the Rating
Agencies, 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 Securities. The amount on deposit in
the Capitalized Interest
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Account will be specifically allocated to cover shortfalls in interest (the
"Interest Shortfall") on the 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 payment and distribution of interest to
Securityholders. Any amounts on deposit in the Capitalized Interest Account
that are not required to cover the anticipated Interest Shortfall described
above will be distributed to the holders of the Residual Interest, including
any net reinvestment income thereon, and such amounts will not thereafter be
available for payment to the Noteholders.
Amounts on deposit in the Capitalized Interest Account will be
invested in Permitted Investments at the direction of the Affiliated Holder.
All such Permitted Investments are required to mature no later than three
Business Days prior to the applicable Payment 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, and the Owner Trustee is entitled to the Owner Trustee Fee. The
Indenture Trustee Fee payable on each Payment Date will be equal to % per
annum of the Pool Principal Balance as of the immediately preceding .
Determination Date. The Owner Trustee Fee will be an annual fee equal to
$ . 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 "--Servicing"
below.
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 (the "Servicing
Fee Rate") of the Pool Principal Balance as of the first day of the immediately
preceding Due Period. See "Risk Factors--Additional Factors Affecting
Delinquencies, Defaults and Losses on Home Loans--Dependence on Servicer for
Servicing Home Loans" herein. The Servicer will pay the fees of the Custodian
and the fees of each Subservicer out of the amounts it receives as the
Servicing Fee. As of the Closing Date, none of the Initial Home Loans will be
serviced by a Subservicer. 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,
prepayment charges, late payment charges and any other servicing-related
penalties and fees (collectively such additional compensation and Servicing
Fee, the "Servicing Compensation").
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. However, 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 the Servicer's 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, 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 payments and distributions as
described under "-- Collection Account, Note Payment Account and Certificate
Distribution Account" below or with respect to any Liquidated Home Loan from
the Liquidation Proceeds received therefrom.
COLLECTION ACCOUNT, NOTE PAYMENT 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
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.
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Withdrawals will be made from the Collection Account only for the purposes
specified in the Sale and Servicing Agreement. 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 the
Indenture Trustee.
Amounts on deposit in the Collection Account will be invested in
Permitted Investments at the direction of the Affiliated Holder. All such
Permitted Investments are required to mature no later than three Business Days
prior to the applicable Payment Date as specified in the Sale and Servicing
Agreement. All interest and any other investment earnings on amounts on
deposit in the Collection Account will be distributed to the Servicer on each
Payment Date as additional servicing compensation.
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.
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 and the Pre-Funding
Account for payment to the Noteholders will be deposited and from which all
payments to the Noteholders will be made (the "Note Payment Account"). The
Servicer will also establish and maintain with the Indenture Trustee an
account, in the name of the Co-Owner Trustee on behalf of the
Certificateholders, into which amounts released from the Collection Account and
the Pre-Funding Account for distribution to the Certificateholders will be
deposited and from which all distributions to the Certificateholders will be
made (the "Certificate Distribution Account"). The Note Payment Account and
the Certificate Distribution Account are referred to herein collectively as the
"Payment Accounts".
On the Business Day prior to each Payment Date, the Indenture Trustee
will deposit into the Payment Accounts the applicable portions of the Available
Collection Amount by making appropriate withdrawals from the Collection
Account, the Pre-Funding Account and the Capitalized Interest Account, as
applicable. On each Payment Date, the Indenture Trustee will make withdrawals
from the Payment Accounts for application of the amounts specified below in the
following order of priority:
(i) to provide for the payment of the Trust Fees and Expenses
in the following order, (a) to the Servicer, an amount equal to the
Servicing Compensation and all unpaid Servicing Compensation 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 and (c) to the Owner Trustee, an amount equal to the
Owner Trustee Fee and all unpaid Owner Trustee Fees from prior Due
Periods;
(ii) to provide for reimbursement to the Servicer for any
voluntary Servicing Advances previously made by the Servicer and not
previously reimbursed;
(iii) to the extent of any amounts remaining from the
Pre-Funding Account Deposit at the end of the Funding Period (net of
reinvestment income), to reduce the Class Principal Balances of each
Class of Notes and the Certificate Principal Balance of the
Certificates pro rata; provided, however, that if such remaining
amount is less than or equal to $50,000 or if an event of default has
occurred under the Indenture, such amount will be distributed only in
reduction of the Class Principal Balances of each Class of Notes;
(iv) to provide for payments to the Securityholders and the
holders of the Residual Interest of the amounts specified herein under
"Description of the Notes -- Payments and Distributions."
INCOME FROM ACCOUNTS
So long as no Event of Default will have occurred and be continuing,
amounts on deposit in the Note Payment Account and 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 bearing interest or
sold at a discount. So long as no Event of Default will have occurred and be
continuing,
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amounts on deposit in the Collection Account will be invested at the direction
of 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 Payment Date. All income
or other gain from investments in any Account will be deposited in such Account
immediately on receipt, unless otherwise specified herein.
INSOLVENCY EVENT
If any of certain events of voluntary corporate dissolution or
insolvency, readjustment of debt, marshaling 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 Home Loans shall be liquidated and the Trust will be
terminated 90 days after the date of such Insolvency Event, unless, before the
end of such 90-day period, the Owner Trustee shall have received (i) written
instructions from the Certificateholders holding a majority of the aggregate
outstanding Certificate Principal Balance of the Certificates (other than the
Affiliated Holder), to the effect that such Certificateholders object to the
liquidation of the Home Loans and termination of the Trust, and (ii) an opinion
of counsel to the effect that for federal income tax purposes the continuation
of the Trust pursuant to such instructions from the Certificateholders will not
cause the Trust to be taxable as a corporation. Promptly after the occurrence
of any Insolvency Event with respect to the Affiliated Holder, notice thereof
is required to be given to Noteholders and Certificateholders; provided,
however, that any failure to give such required notice will not prevent or
delay termination of the Trust. Upon termination of the Trust (except in the
circumstances described above), the Owner Trustee shall direct the Indenture
Trustee promptly to sell the assets of the Trust (other than the assets, if
any, on deposit in the Note Payment Account, the Certificate Distribution
Account, the Collection Account, the Pre-Funding Account and the Capitalized
Interest Account) in a commercially reasonable manner and on commercially
reasonable terms. The proceeds from any such sale, disposition or liquidation
of the Home Loans will be treated as collections on the Home Loans, deposited
in the Collection Account and distributed to the Securityholders in accordance
with the terms and priority of payment described herein. See "Description of
the Notes" herein.
THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Notes 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. 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 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. Any
resignation or removal of the Owner Trustee or Indenture Trustee and
appointment of a successor thereto will not become effective until acceptance
of the appointment by such successor.
The Sale and Servicing Agreement will provide that the Servicer will
pay or cause to be paid the fees and expenses of the Owner Trustee and the
Indenture Trustee in connection with their duties under the Trust Agreement and
Indenture, respectively. The Trust Agreement and Indenture will 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).
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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 Note Payment Account or the Certificate 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,
Sale and Servicing Agreement or Administration 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 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, the Servicer or the Owner Trustee of any funds paid to the Seller, the
Servicer or the Owner Trustee 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 Note Payment 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 Transfer and Servicing Agreements. 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 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. 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) Noteholders
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.
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PREPAYMENT AND YIELD CONSIDERATIONS
Except as otherwise described herein, no principal payments will be
made on any Class of Senior Notes until the Class Principal Balance of each
Class of Senior Notes having a lower numerical designation has been reduced to
zero, no principal payments will be made on the Class M-1 Notes until all
required payments have been made in respect of the Senior Notes , no principal
payments will be made on the Class M-2 Notes until all required payments have
been made in respect of the Senior Notes and the Class M-1 Notes, and no
principal payments will be made on the Class B-1 Notes until all required
payments have been made in respect of the Senior Notes and the Mezzanine Notes.
In addition, no distributions of principal with respect to the Certificates
will be made until required payments have been made in respect of all Classes
of Notes. See "Description of the Notes --Payments and Distributions" herein.
As the rate of payment of principal of each Class of Notes depends primarily on
the rate of payment (including prepayments) of the principal balance of the
Home Loans, final payment of any Class of Notes could occur significantly
earlier than the Maturity Date. Noteholders will bear the risk of being able
to reinvest principal payments on the Notes at yields at least equal to the
yield on their respective Notes. 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 payment and distribution of such payments to the
Noteholders will be borne entirely by the Noteholders.
The subordination of the Residual Interest and the Certificates to
the Notes and of the Class B-1 Notes and the Mezzanine Notes to each Class of
Notes having a higher priority will provide limited protection to the
Noteholders against losses on the Home Loans. The yields on the Class B-1
Notes and the Mezzanine Notes will be particularly 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
Class B-1 Notes or the Mezzanine Notes may be lower than anticipated.
The Home Loans are either (i) "simple interest" or (ii) "actuarial
method" loans. With respect to a Home Loan that is a "simple interest" loan,
if a payment is received more than one month after the previous payment, 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 precisely one month after the previous payment, 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 less than one month after the previous payment, more of
such payment will be applied to principal and less to interest than would have
been the case had the payment been received precisely one month after the
previous payment, 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.
The effective yield to the Noteholders will be lower than the yield
otherwise produced by the applicable Note Interest Rate, because the payment of
the interest accrued during each Due Period (a calendar month consisting of
thirty days) will not be made until the Payment Date occurring in the month
following such Due Period. See "Description of the Notes -- Payments and
Distributions" herein. This delay will result in funds being passed through to
the Noteholders approximately 10 days after the end of the monthly accrual
period, during which 10-day period no interest will accrue on such funds. As
discussed in greater detail below, greater than anticipated payments of
principal can also affect the yield on Notes purchased at a price greater or
less than par.
The rate of principal payments on the Notes, the aggregate amount of
each interest payment on the Notes and the yield to maturity on the Notes 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 any
Payment Date on or after the Payment Date on which the Pool Principal Balance
declines to 17% 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 Notes -- Optional
Redemption of the Notes" herein.
The "weighted average life" of a Class of Notes 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 Class is repaid. The weighted average life of
each
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<PAGE> 52
Class of Notes 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 Noteholders 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 payments to the Noteholders resulting from such prepayments may
significantly shorten the actual weighted average lives of the Notes. If the
Home Loans experience delinquencies and defaults in the payment of principal,
then the Noteholders will similarly experience a delay in the receipt of
principal payments attributable to such delinquencies and defaults which in
certain instances may result in longer actual average weighted lives of the
Notes than would otherwise be the case. However, to the extent that principal
in respect of Liquidated Home Loans is included in the principal payments on
the Notes 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 Noteholders will experience an acceleration in the receipt of principal
payments which, in certain instances, may result in shorter actual weighted
average lives of the Notes 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 Notes
will be covered to the extent of amounts available from the applicable credit
enhancement provided for the Notes. See "Risk Factors -- 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. Substantially all
of the Home Loans contain due-on-sale provisions and the Servicer intends,
except under circumstances described under "Risk Factors--Prepayment and Yield
Considerations," to enforce such provisions unless (i) the Servicer, in a
manner consistent with its servicing practices, permits the purchaser of the
related Mortgaged Property to assume the Home Loan, or (ii) such enforcement is
not permitted by applicable law. A substantial majority of the Initial Home
Loans are subject to prepayment penalties, which may reduce the amount or the
likelihood of prepayments on such Initial Home Loans. The remaining Initial
Home Loans may be prepaid in full or in part at any time without penalty. To
the extent that a majority of the Subsequent Home Loans are not subject to
prepayment penalties, the current report on Form 8-K containing a description
of the Home Loans included in the final Home Loan Pool will describe the status
of prepayment penalties with respect to such final Home Loan Pool. As with
fixed rate obligations, generally, the rate of prepayment on a pool of loans 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, 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 Home 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.
Payments of principal to Noteholders at a faster rate than anticipated
will increase the yield on Notes purchased at a discount but will decrease the
yield on Notes purchased at a premium, which payments 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 payments of principal to the Noteholders (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 Notes will not be entirely offset by a subsequent
like reduction (or increase) in the rate of such payments and 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 lives of the Notes, and could cause a delay
in the payment of principal or a slower rate of principal amortization to the
holders of Notes. 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
S-48
<PAGE> 53
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,
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 payments are paid to certain Classes of Notes before
other Classes, holders of the Class B-1 Notes and, to a lesser extent, the
Classes of Mezzanine Notes 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. See "Description of Credit Enhancement --
Subordination and Allocation of Losses" herein.
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
significant historical prepayment data is 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 Home Loans had combined loan-to-value ratios that approached or 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 for 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.
SUBORDINATION OF THE CLASS M-1 NOTES, THE CLASS M-2 NOTES AND THE CLASS B-1
NOTES
As described under "Description of the Notes -- Payments and
Distributions - Payment and Distribution Priorities" herein, on each Payment
Date, the holders of any higher ranking Class of Notes will have a preferential
right to receive amounts of interest and principal due to them on such Payment
Date before any payments or distributions of interest or principal,
respectively, are made on any Class of Notes subordinate to such Class. As a
result, the yields to maturity and the aggregate amount of payments on the
Class M-1 Notes, the Class M-2 Notes and the Class B-1 Notes will be more
sensitive than the yields of higher ranking Notes to the rate of delinquencies
and defaults on the Home Loans.
As more fully described herein, Allocable Loss Amounts will be
allocated first to the Certificates, then to the Class B-1 Notes, then to the
Class M-2 Notes, and then to the Class M-1 Notes, in that order, until the
Certificate Principal Balance or Class Principal Balance thereof, as
applicable, has been reduced to zero. Any Deferred Amounts (as defined herein)
will be paid first to the Class M-1 Notes, second to the Class M-2 Notes and
then to the Class B-1 Notes. The Certificates will be entitled to receive
amounts attributable to Loss Reimbursement Deficiencies after all Deferred
Amounts have been paid in full.
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<PAGE> 54
EXCESS SPREAD AND OVERCOLLATERALIZATION REDUCTION AMOUNT PAYMENTS
An overcollateralization feature has been designed to accelerate the
principal amortization of the Notes and the Certificates relative to the
principal amortization of the Home Loans. If on any Payment Date the Required
Overcollateralization Amount exceeds the Overcollateralization Amount, any
Excess Spread will be distributed sequentially to the Securityholders in the
order and amounts specified herein under "Description of the Notes -- Payments
and Distributions--Payment and Distribution Priorities." If the
Overcollateralization Amount equals or exceeds the Required
Overcollateralization Amount for such Payment Date, Excess Spread otherwise
payable or distributable to the Securityholders as described above will instead
be paid or distributed, first, to the Mezzanine Notes in respect of Deferred
Amounts, if any, until the Deferred Amounts have been paid in full, then to the
Class B-1 Notes in respect of Deferred Amounts, if any, until the Deferred
Amounts have been paid in full, then to the Certificates in respect of Loss
Reimbursement Deficiencies, if any, until the Loss Reimbursement Deficiencies
have been paid in full, and thereafter to the holders of the Residual Interest.
On the Overcollateralization Stepdown Date and on each Payment Date thereafter
as to which the Overcollateralization Amount is, or after taking into account
all other payments and distributions to be made on such Payment Date, would be
at least equal to the Required Overcollateralization Amount, amounts otherwise
payable or distributable as principal to the Securityholders on such Payment
Date in reduction of their Class Principal Balances or Certificate Principal
Balance, as applicable, will instead be paid or distributed, first, to the
Mezzanine Notes, in payment of their respective Deferred Amounts, then to the
Class B-1 Notes, in payment of their Deferred Amounts, then to the Certificates
in payment of their Loss Reimbursement Deficiencies, and thereafter to the
holders of the Residual Interest, thereby reducing the rate of and under
certain circumstances delaying the principal amortization of the Securities,
until the Overcollateralization Amount is reduced to the Required
Overcollateralization Amount. As described herein, the yield to maturity on a
Class of Notes purchased at a premium or discount will be affected by the
extent to which any Excess Spread is distributed to the holders of the Residual
Interest in lieu of payment or distribution to the related Noteholders in
reduction of their Class Principal Balances. If such Excess Spread
distributions to the holders of the Residual Interest occur sooner than
anticipated by an investor who purchases a Class of Notes at a discount, the
actual yield to such investor may be lower than such investor's anticipated
yield. If such Excess Spread distributions to the holders of the Residual
Interest occur later than anticipated by an investor who purchases a Class of
Notes at a premium, the actual yield to such investor may be lower than such
investor's anticipated yield.
The amount of Excess Spread, if any, distributable to the holders of
the Residual Interest in reduction of the Overcollateralization Amount on any
Payment Date will be affected by the Required Overcollateralization Amount, and
by the actual default and delinquency experience and principal amortization of
the Home Loans during the related Due Period. In particular, high rates of
delinquencies on the Home Loans during any Due Period may cause the amount of
interest received on the Home Loans during such Due Period to be less than the
amount of interest payable or distributable on the Securities on the related
Payment Date. Such an occurrence will cause the Class Principal Balances of
the Notes and the Certificate Principal Balance of the Certificates to decrease
at a slower rate relative to the Pool Principal Balance, resulting in a
reduction of the Overcollateralization Amount and, in some circumstances, an
Allocable Loss Amount.
REINVESTMENT RISK
The reinvestment risk with respect to an investment in the Notes 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, Noteholders 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 Notes. Conversely, during periods of rising interest rates,
Noteholders 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 Notes.
MATURITY DATE
The Maturity Date, which is ,
has been calculated as the sixth Payment Date following the Due Period in which
the latest maturing Home Loan is scheduled to mature. The actual maturity of
any Class of Notes may be substantially earlier than the Maturity Date.
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<PAGE> 55
WEIGHTED AVERAGE LIVES OF THE NOTES
The following information is given solely to illustrate the effect of
prepayments of the Home Loans on the weighted average lives of the Notes 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 lives of the Notes 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, including without limitation those resulting
from unscheduled full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties or other dispositions, substitutions and
repurchases by or on behalf of the Transferor or the Seller), the rate at which
Excess Spread is distributed to Noteholders as described herein, the extent to
which any amounts remaining in the Pre-Funding Account at the expiration of the
Funding Period are paid to the Noteholders as described herein, and the extent
to which any Overcollateralization Reduction Amount is distributed to 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
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 2.0%
per annum of the outstanding principal balance of such loans in the first month
of the life of the loans and an additional approximately 0.9091% (expressed as
a percentage per annum) in each month thereafter until the twelfth month;
beginning in the twelfth month and in each month thereafter during the life of
the loans, a CPR of 12.0% per annum each month is assumed. As used in the
table below, 0% Prepayment Assumption assumes prepayment rates equal to 0% of
the Prepayment Assumption (i.e., no prepayments), which would include a CPR of
0%. 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 makes 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 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 June 1, 1997, no
delinquencies or losses occur on the Home Loans and all Home Loans
have a first payment date that occurs thirty (30) days after the
origination thereof;
(ii) the scheduled payments on the Home Loans have been
calculated on the basis of 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, no optional
or other early termination of the Securities occurs and no
substitutions or repurchases of the Home Loans occur;
(v) all prepayments in respect of the Home Loans include
30 days of interest thereon;
(vi) the Closing Date for the Notes is June , 1997,
each month consists of 30 days and each year will consist of 360 days;
(vii) cash payments are received by the Securityholders on
the 10th day of each month, commencing in July 1997;
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<PAGE> 56
(viii) the Required Overcollateralization Amount will equal
$ and will be reduced in accordance with the terms of
the Indenture;
(ix) the Note Interest Rate for each Class of Notes are as
set forth on the cover page hereof and the Pass-Through Rate for the
Certificates is as set forth herein;
(x) the additional fees deducted from the interest
collections in respect of the Home Loans include the Indenture Trustee
Fee, the Owner Trustee 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 payment or distribution; and
(xiii) the Home Loan Pool consists of Home Loans having the
following characteristics:
<TABLE>
<CAPTION>
INITIAL HOME NET HOME
HOME PRINCIPAL LOAN LOAN REMAINING TERM ORIGINAL TERM
LOAN --------- INTEREST INTEREST TO MATURITY OF AMORTIZATION ASSUMED DELIVERY
NUMBER BALANCE RATE RATE (IN MONTHS) (IN MONTHS) OF HOME LOANS
------ ------- ---------- ----------- ----------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C>
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
</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.
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<PAGE> 57
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-1 NOTES
---------------------------------------------------------------
PAYMENT DATE % % % % % %
------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Balance . . . . . . . . . 100 100 100 100 100 100
Weighted Average Life(2):
No Optional Termination . . .
<CAPTION>
CLASS A-2 NOTES
-------------------------------------------------------------
PAYMENT DATE % % % % % %
------------ ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Balance . . . . . . . . . 100 100 100 100 100 100
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 payment of principal thereof by the number
of years from the date of issuance to the related Payment Date, (b)
summing the results and (c) dividing the sum by the aggregate payments of
principal referred to in clause (a) and rounding to one decimal place.
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.
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<PAGE> 58
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-3 NOTES
-----------------------------------------------------------
PAYMENT DATE % % % % % %
------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Balance . . . . . . . . . 100 100 100 100 100 100
Weighted Average Life(2):
No Optional Termination . . .
<CAPTION>
CLASS A-4 NOTES
-------------------------------------------------------
PAYMENT DATE % % % % % %
------------ ---- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Balance . . . . . . . . . 100 100 100 100 100 100
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 payment of principal thereof by the
number of years from the date of issuance to the related Payment Date,
(b) summing the results and (c) dividing the sum by the aggregate
payments of principal referred to in clause (a) and rounding to one
decimal place.
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.
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<PAGE> 59
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-5 NOTES
--------------------------------------------------------
PAYMENT DATE % % % % % %
------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Balance . . . . . . . . 100 100 100 100 100 100
Weighted Average Life(2):
No Optional Termination . . .
<CAPTION>
CLASS A-6 NOTES
------------------------------------------------------------
PAYMENT DATE % % % % % %
------------ ---- ----- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Balance . . . . . . . . 100 100 100 100 100 100
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 payment of principal thereof by the number
of years from the date of issuance to the related Payment Date, (b)
summing the results and (c) dividing the sum by the aggregate payments of
principal referred to in clause (a) and rounding to one decimal place.
* The percentage in this table is less than 0.5% but greater than zero
percent.
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.
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<PAGE> 60
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-7 NOTES
--------------------------------------------------------
PAYMENT DATE % % % % % %
------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Balance . . . . . . . . 100 100 100 100 100 100
Weighted Average Life(2):
No Optional Termination . . .
<CAPTION>
CLASS A-8 NOTES
-----------------------------------------------------------------
PAYMENT DATE % % % % % %
------------ ---- ----- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Balance . . . . . . . . 100 100 100 100 100 100
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 payment of principal thereof by the number
of years from the date of issuance to the related Payment Date, (b)
summing the results and (c) dividing the sum by the aggregate payments of
principal referred to in clause (a) and rounding to one decimal place.
* The percentage in this table is less than 0.5% but greater than zero
percent.
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.
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<PAGE> 61
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-9 NOTES
-------------------------------------------------------
PAYMENT DATE % % % % % %
------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Balance . . . . . . . . . 100 100 100 100 100 100
Weighted Average Life(2):
No Optional Termination . . .
<CAPTION>
CLASS M-1 NOTES
---------------------------------------------------------
PAYMENT DATE % % % % % %
------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Balance . . . . . . . . . 100 100 100 100 100 100
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 payment of principal thereof by the
number of years from the date of issuance to the related Payment Date,
(b) summing the results and (c) dividing the sum by the aggregate
payments of principal referred to in clause (a) and rounding to one
decimal place.
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.
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<PAGE> 62
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS M-2 NOTES
--------------------------------------------------------
PAYMENT DATE % % % % % %
------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Balance . . . . . . . . 100 100 100 100 100 100
Weighted Average Life(2):
No Optional Termination . . .
<CAPTION>
CLASS B-1 NOTES
------------------------------------------------------------
PAYMENT DATE % % % % % %
------------ ---- ----- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Balance . . . . . . . . 100 100 100 100 100 100
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 payment of principal thereof by the number
of years from the date of issuance to the related Payment Date, (b)
summing the results and (c) dividing the sum by the aggregate payments of
principal referred to in clause (a) and rounding to one decimal place.
* The percentage in this table is less than 0.5% but greater than zero
percent.
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.
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<PAGE> 63
The paydown scenarios for the Notes set forth in the foregoing tables
are subject to significant uncertainties and contingencies (including those
discussed above under "Prepayment and Yield Considerations"). As a result,
there can be no assurance that any of the foregoing paydown scenarios and the
Modeling Assumptions on which they were made will prove to be accurate or that
the actual weighted average lives of the Notes will not vary from those set
forth in the foregoing tables, which variations may be shorter or longer, and
which variations may be greater with respect to later years. Furthermore, 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, the payment experience of such Home Loans and
certain other factors affecting the payments on the Notes will not conform to
the Modeling Assumptions made in preparing the above tables. In fact, the
characteristics and payment experience of the Home Loans will differ in many
respects from such Modeling Assumptions. See "The Home Loan Pool" herein. To
the extent that the Home Loans actually included in the Home Loan Pool have
characteristics and a payment experience that differ from those assumed in
preparing the foregoing tables, the Notes are likely to have weighted average
lives that are shorter or longer than those set forth in the foregoing tables.
See "Risk Factors -- Additional Effect of Prepayments on Yield" herein.
In light of the uncertainties inherent in the foregoing paydown
scenarios, the inclusion of the weighted average lives of the Notes in the
foregoing tables should not be regarded as a representation by the Servicer,
the Seller, the Underwriters or any other person that such weighted average
lives will be achieved or that any of the foregoing paydown scenarios will be
experienced.
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 for federal income tax purposes. 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 Notes.
The Notes may be treated as having been issued with original issue
discount. As a result, Noteholders may be required to recognize income with
respect to the Notes somewhat in advance of the receipt of cash attributable to
that income. The prepayment assumption that will be used for purpose of
computing original issue discount for federal income tax purposes is % of
the Prepayment Assumption.
ERISA CONSIDERATIONS
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.
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 Underwriters named below (collectively, the
"Underwriters"), and each of the Underwriters has severally agreed to purchase,
the principal amount of Notes set forth opposite its name in the tables below:
S-59
<PAGE> 64
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF:
----------------------------------------------------------
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
UNDERWRITER NOTES NOTES NOTES NOTES
----------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
PaineWebber Incorporated . . . . . . . . . .
Banc One Capital Corporation . . . . . . . .
Bear, Stearns & Co. Inc. . . . . . . . . . .
Merrill Lynch Pierce Fenner & Smith
Incorporated . . . . . .
Total . . . . . . . . . . . . . . . . . . . .
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF:
----------------------------------------------------------
CLASS A-5 CLASS A-6 CLASS A-7 CLASS A-8
UNDERWRITER NOTES NOTES NOTES NOTES
----------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
PaineWebber Incorporated . . . . . . . . . .
Banc One Capital Corporation . . . . . . . .
Bear, Stearns & Co. Inc. . . . . . . . . . .
Merrill Lynch Pierce Fenner & Smith
Incorporated . . . . . .
Total . . . . . . . . . . . . . . . . . . . .
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF:
----------------------------------------------------------
CLASS A-9 CLASS M-1 CLASS M-2 CLASS B-1
UNDERWRITER NOTES NOTES NOTES NOTES
----------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
PaineWebber Incorporated . . . . . . . . . .
Banc One Capital Corporation . . . . . . . .
Bear, Stearns & Co. Inc. . . . . . . . . . .
Merrill Lynch Pierce Fenner & Smith
Incorporated . . . . . .
Total . . . . . . . . . . . . . . . . . . . .
</TABLE>
The Seller has been advised by the 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, % per Class M-1 Note and % per
Class M-2 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, % per Class M-1 Note and % per Class
M-2 Note. After the initial public offering of the Notes, the public offering
price and such concessions may be changed.
S-60
<PAGE> 65
Until the distribution of the Notes is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Notes. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Notes. Such transactions consist
of bids or purchases for the purpose of pegging, fixing or maintaining the
price of the Notes.
If the Underwriters create a short position in the Notes in connection
with the offering, i.e., if they sell more Notes than are set forth on the
cover page of this Prospectus Supplement, the Underwriters may reduce that
short position by purchasing Notes in the open market.
In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be
higher than it might be in the absence of such purchases.
Neither the Seller nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the Notes. In
addition, neither the Seller nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The Underwriters expect to make a secondary market in the Notes, but
have no obligation to do so. There can be no assurance that any such secondary
market will develop or, if it does develop, that it will continue.
In addition to the purchase of the Notes 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 FFG. Affiliates of the Underwriters provide warehouse financing and
repurchase arrangements to the Transferor for its consumer and mortgage loans,
including property improvement, debt consolidation and combination loans. See
"Use of Proceeds" herein. In addition, affiliates of certain Underwriters may
provide other term financing arrangements to the Transferor for the Residual
Interest retained by it and other residual interest securities retained by it
that were issued in connection with one of the prior series of asset backed
securities involving the Transferor. 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 FFG and
its subsidiaries, and these affiliates hold a majority of FFG's outstanding
shares of non-voting common stock and a significant portion of FFG's
outstanding shares of voting and non-voting common stock, combined. Certain of
the Underwriters, or affiliates of such Underwriters, also render certain
services to FFG in connection with the public offering of FFG'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 FFG.
LEGAL INVESTMENT MATTERS
The Notes 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 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 Notes.
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase the Notes or to purchase
Notes 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 Notes constitute legal investments for such investors.
RATINGS
It is a condition to the issuance of the Notes that (i) each of the
Senior Notes be rated "AAA" by each Rating Agency, (ii) the Class M-1 Notes be
rated "AA" by each Rating Agency, (iii) the Class M-2 Notes be rated "A" by
each Rating Agency, and (iv) the Class B-1 Notes be rated "BBB" by each Rating
Agency.
The ratings on the Notes address the likelihood of the receipt by the
Noteholders of all payments and distributions on the Home Loans to which they
are entitled. The ratings on the Notes also address the structural, legal
S-61
<PAGE> 66
and issuer-related aspects associated with the Notes, including the nature of
the Home Loans. In general, the ratings on the Notes address credit risk and
not prepayment risk. The ratings on the Notes 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
Notes do not address the possibility that Noteholders might suffer a lower than
anticipated yield in the event of principal payments on the Notes 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 Payment Dates of each Class of Notes
and the Certificates.
The Seller has not solicited ratings on the Notes from any rating
agency other than the Rating Agencies. However, there can be no assurance as
to whether any other rating agency will rate the Notes, or, if it does, what
rating would be assigned by any such other rating agency. Any rating on the
Notes by another rating agency, if assigned at all, may be lower than the
ratings assigned to the Notes by the Rating Agencies.
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 Notes 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 Notes.
LEGAL OPINIONS
In addition to the legal opinions described in the Prospectus, certain
legal matters relating to the issuance of the Notes 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.
S-62
<PAGE> 67
APPENDIX A
INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
"60-Day Delinquency Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-39
"Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
"Administration Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
"Affiliated Holder" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
"Allocable Loss Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9, S-31
"Assumed Pool Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5, S-20
"Available Collection Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
"Available Funds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
"Business Day" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
"Capitalized Interest Account Deposit" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-42
"Capitalized Interest Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-42
"Certificate Distribution Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
"Certificate Optimal Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
"Certificate Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Certificateholders" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
"Certificateholders' Interest Carry-Forward Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
"Certificateholders' Interest Distributable Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
"Certificateholders' Monthly Interest Distributable Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
"Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover, S-2
"Class B-1 Optimal Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
"Class M-1 Optimal Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
"Class M-2 Optimal Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
"Class Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11, S-59
"Collection Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
"Commission" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
"Conventional Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
"Co-Owner Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"CPR" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-51
"Credit Score" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
"Custodian" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Cut-Off Date Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5, S-20
"Cut-Off Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"DCR" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
"Defective Home Loan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
"Deferred Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
"Deleted Home Loan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-30
"Determination Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-33
"DTC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
"Due Period" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"ERISA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
"Excess Spread" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
"FFG" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"FFI" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Funding Period" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-42
"Home Loan Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
"Home Loan Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
"Home Loan Schedule" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
"Home Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
"Indenture Trustee Fee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
</TABLE>
S-63
<PAGE> 68
<TABLE>
<S> <C>
"Indenture Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Indenture Trustee's Home Loan File" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
"Indenture" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-33
"Initial Home Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4, S-20
"Initial Pool Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4, S-20
"Insolvency Event" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
"Insolvency Laws" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-19
"Insurance Proceeds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
"Interest Payment Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
"Interest Shortfall" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
"Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Liquidated Home Loan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
"Loss Reimbursement Deficiency" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
"Maturity Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Mezzanine Notes" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
"Modeling Assumptions" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-51
"Mortgaged Properties" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
"Mortgages" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
"Net Delinquency Calculation Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
"Net Liquidation Proceeds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
"Note Interest Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Note Owners" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
"Note Payment Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
"Noteholders" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
"Noteholders' Interest Carry-Forward Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
"Noteholders' Interest Payable Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
"Noteholders' Monthly Interest Payable Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
"Notes" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover, S-2
"Original Certificate Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Original Class Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Overcollateralization Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9, S-31, S-38
"Overcollateralization Deficiency Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-38
"Overcollateralization Stepdown Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-38
"Overcollateralization Surplus Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-38
"Owner Trustee Fee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
"Owner Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Pass-Through Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
"Payment Accounts" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
"Payment Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-33
"Permitted Investments" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
"Plan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11, S-59
"Pool Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5, S-20, S-31
"Prepayment Assumption" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-51
"Pre-Funding Account Deposit" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-42
"Pre-Funding Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5, S-42
"Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5, S-31
"Purchase Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-30
"Qualified Substitute Home Loan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6, S-30
"Rating Agencies" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
"Record Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-33
"Registration Statement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
"Regular Payment Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-38
"Regular Principal Payment Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-38
"Released Mortgaged Property Proceeds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-38
"Required Overcollateralization Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9, S-32, S-38
"Residual Interest" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover, S-5
</TABLE>
S-64
<PAGE> 69
<TABLE>
<S> <C>
"Sale and Servicing Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4, S-20
"Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover
"Securityholders" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
"Seller" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-28
"Senior Notes" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
"Senior Optimal Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-39
"Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Servicing Advance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
"Servicing Compensation" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10, S-43
"Servicing Fee Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
"Servicing Fee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10, S-43
"SMMEA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11, S-61
"Standard & Poor's" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
"Subsequent Home Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
"Subsequent Transfer Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
"Subservicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
"Substitution Adjustment" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-30
"Tax Counsel" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11, S-59
"Termination Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-39
"Transfer and Servicing Agreements" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20, S-41
"Transferor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Trust Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-33
"Trust Fees and Expenses" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
"Trust" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Underwriters" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-59
"Underwriting Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-59
</TABLE>
S-65
<PAGE> 70
PROSPECTUS
ASSET BACKED NOTES
ASSET BACKED CERTIFICATES
FIRSTPLUS INVESTMENT CORPORATION,
AND CERTAIN TRUSTS, ALL OF THE BENEFICIAL
OWNERSHIP INTEREST IN WHICH IS OWNED BY
FIRSTPLUS INVESTMENT CORPORATION
The Asset Backed Notes (the "Notes") and the Asset Backed Certificates
(the "Certificates" and, together with the Notes, the "Securities") described
herein may be sold from time to time in one or more series (each, a "Series"),
in amounts, at prices and on terms to be determined at the time of sale and to
be set forth in a supplement to this Prospectus (a "Prospectus Supplement").
Each Series of Securities, which may include one or more classes (each, a
"Class") of Notes and/or Certificates, will be issued by either FIRSTPLUS
INVESTMENT CORPORATION ("FIC") or a separate entity (each, a "Trust") formed by
FIC solely for the purpose of issuing the Notes of the related Series (either
such entity, as applicable, the "Issuer"). Each Trust will be formed pursuant
to either (i) a Trust Agreement (each, a "Trust Agreement") to be entered into
among FIC, as Seller (in its capacity as Seller, the "Seller") and the owner
trustee specified in the related Prospectus Supplement (the "Owner Trustee") or
(ii) a Pooling and Servicing Agreement (each, a "Pooling and Servicing
Agreement") to be entered into among the Seller, FIRSTPLUS FINANCIAL, INC., as
Servicer (the "Servicer") and the trustee specified in the related Prospectus
Supplement (the "Trustee"). If a Series of Securities includes Notes, such
Notes of a Series will be issued and secured pursuant to an Indenture (each, an
"Indenture") between the Issuer and the Indenture Trustee specified in the
related Prospectus Supplement (the "Indenture Trustee") and will represent
indebtedness of the related Issuer. If a Series of Securities includes
Certificates, such Certificates of a Series will represent undivided ownership
interest in the related Trust. The related Prospectus Supplement will specify
which Class or Classes of Notes, if any, and which Class or Classes of
Certificates, if any, of the related Series are being offered thereby.
(Continued on next page)
See "ERISA Considerations" herein and in the related Prospectus
Supplement for a discussion of restrictions on the acquisition of Securities by
"plan fiduciaries."
BEFORE PURCHASING ANY OFFERED SECURITIES, PROSPECTIVE INVESTORS SHOULD
REVIEW THE INFORMATION SET FORTH HEREIN UNDER THE CAPTION "RISK FACTORS" AND
SUCH INFORMATION AS MAY BE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE
RELATED PROSPECTUS SUPPLEMENT.
NOTES OF A SERIES WILL CONSTITUTE NON-RECOURSE OBLIGATIONS OF THE RELATED
ISSUER. CERTIFICATES OF A SERIES WILL EVIDENCE INTERESTS ONLY IN THE RELATED
TRUST. EXCEPT AS OTHERWISE SET FORTH HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT, THE SECURITIES WILL NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE SERVICER, ANY ORIGINATOR, THE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE SECURITIES NOR THE UNDERLYING LOAN ASSETS WILL BE
GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR ANY OTHER PERSON OR ENTITY,
EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT.
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. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Securities offered hereby unless accompanied by a
Prospectus Supplement.
The date of this Prospectus is June 6, 1997
<PAGE> 71
(Continued from prior page)
The primary assets securing or backing each Series, as applicable (the
"Trust Property") will consist primarily of a segregated pool (a "Loan Asset
Pool") of one or more of the following mortgage related assets (the "Loan
Assets"): (i) pools (each, a "Mortgage Pool") of single family (one- to four-
unit) residential mortgage loans, timeshare mortgage loans and loans evidenced
by retail installment sales or installment loan agreements that are secured by
first or junior liens on real property (the "Mortgage Loans"); and (ii) pools
(each, a "Contract Pool") of loans evidenced by retail installment sales or
installment loan agreements, including loans secured by new or used
Manufactured Homes (as defined herein) that are not considered to be interests
in real property because such Manufactured Homes are not permanently affixed to
real estate ("Secured Contracts") and loans evidenced by retail installment
sales or installment loan agreements which are not secured by any interest in
real or personal property ("Unsecured Contracts" and, together with the Secured
Contracts, the "Contracts"). To the extent specified in the related Prospectus
Supplement, the Loan Assets may include Title I Mortgage Loans and Title I
Contracts. If specified in the related Prospectus Supplement, the Trust
Property for a Series of Securities may include the rights or other ancillary
or incidental assets (together with the Loan Assets, collectively, the
"Assets") that are intended (i) to provide credit enhancement for the ultimate
or timely distributions of proceeds from the Loan Assets to holders of the
Securities ("Securityholders") or (ii) to assure the servicing of the Loan
Assets. The Loan Assets 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, (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". Unless otherwise provided in the related
Prospectus Supplement, the Loan Assets will be serviced by FIRSTPLUS FINANCIAL,
INC., as Servicer (the "Servicer") pursuant to a sale and servicing agreement
(each, as amended and supplemented from time to time, a "Sale and Servicing
Agreement") between (i) FIC, the Transferor, the Servicer and the related
Indenture Trustee if FIC is the Issuer or (ii) the Issuer, the Seller, the
Servicer and the related Indenture Trustee, if a Trust is the Issuer.
Each Class of Securities of a Series will represent the right to receive
specified payments in respect of collections of principal and interest on the
related Assets, at the rates, on the dates and in the manner described herein
and in the related Prospectus Supplement. If a Series includes multiple
Classes of Securities, the rights of one or more Classes of Securities to
receive payments may be senior or subordinate to the rights of one or more of
the other Classes of such Series. Distributions on Certificates of a Series
may be subordinated in priority to payments due on any related Notes of such
Series to the extent described herein and in the related Prospectus Supplement.
A Series may include one or more Classes of Notes and/or Certificates which
differ as to the timing and priority of payment, interest rate or amount of
distributions in respect of principal or interest or both. A Series may
include one or more Classes of Notes or Certificates entitled to distributions
in respect of principal with disproportionate, nominal or no interest
distributions, or to interest distributions, with disproportionate, nominal or
no distributions in respect of principal. The rate of payment in respect of
principal of any Class of Notes and distributions in respect of principal of
the Certificates of any Class will depend on the priority of payment of such
Class and Certificates and the rate and timing of payments (including
prepayments, defaults, liquidations and repurchases of Assets) on the related
Assets. A rate of payment lower or higher than that anticipated may affect the
weighted average life of each Class of Securities in the manner described
herein and in the related Prospectus Supplement. See "Risk Factors -- Effect
of Prepayments on Average Life".
<PAGE> 72
Offers of the Securities may be made through one or more different
methods, including offerings through underwriters, as more fully described
herein and in the related Prospectus Supplement. See "Plan of Distribution"
herein. There will have been no public market for any Series of Securities
prior to the offering thereof. There can be no assurance that a secondary
market will develop for the Securities of any Series or, if it does develop,
that such market will continue.
-iii-
<PAGE> 73
PROSPECTUS SUPPLEMENT
As further described herein, the Prospectus Supplement relating to each
Series of Securities offered thereby (the "Offered Securities") will, among
other things, set forth, as and to the extent appropriate: (i) a description
of each Class of such Offered Securities, including with respect to each such
Class the following (A) the applicable payment or distribution provisions, (B)
the aggregate principal amount, if any, (C) the rate at which interest accrues
from time to time, if at all, or the method of determining such rate, and (D)
whether interest will accrue from time to time on its aggregate principal
amount, if any, or on a specified notional amount, if at all; (ii) information
with respect to any other Classes of Securities of the same Series; (iii) the
respective dates on which payments or distributions are to be made; (iv)
information as to the Assets, including the Loan Assets and Credit Enhancement,
constituting the related Trust Property; (v) the circumstances, if any, under
which the Securities may be subject to redemption or early termination; (vi)
additional information with respect to the method of payment or distribution in
respect of such Offered Securities; (vii) the initial percentage ownership
interest in the related Trust to be evidenced by each Class of Certificates of
such Series; (viii) information concerning the Trustee (as defined herein) of
the related Trust; (ix) if the related Trust Property consists of Mortgage
Loans or Contracts, information concerning the Servicer and any Master Servicer
(each as defined herein) of such Mortgage Loans or Contracts; (x) information
as to the nature and extent of subordination of any Class of Securities of such
Series, including a Class of Offered Securities; and (xi) whether such Offered
Securities will be initially issued in definitive or book-entry form.
The actual characteristics of the Loan Assets relating to a Series will
not deviate in any material respect from the parameters specified in the
related Prospectus Supplement; provided, however, that if the characteristics
described therein materially differ from the actual characteristics, a
supplement to such Prospectus Supplement will be distributed.
-iv-
<PAGE> 74
AVAILABLE INFORMATION
FIC has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (together with all amendments and
exhibits thereto, referred to herein as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Securities to be offered from time to time pursuant to this Prospectus. For
further information, reference is made to the Registration Statement which may
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at the
Commission's regional offices at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, New York, New
York 10048. Copies of the Registration Statement may also be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by FIC pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, as amended, subsequent to the date of
this Prospectus and prior to the termination of the offering of the Securities
shall be deemed to be incorporated by reference in this Prospectus. Any
statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
FIC will provide without charge to each person, including any beneficial
owner of Securities, to whom a copy of this Prospectus is delivered, on the
written or oral request of any such person, a copy of any or all of the
documents incorporated herein or in any related Prospectus Supplement by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to FIC at 3773 Howard Hughes Parkway, Suite 300N, Las
Vegas, Nevada 89109 (Telephone: (702) 866-2236), Attention: Russell D.
Ungerman.
-v-
<PAGE> 75
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUPPLEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . . v
SUMMARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Limited Liquidity and Fluctuation in Value from Market
Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . 11
General . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Lack of a Secondary Market . . . . . . . . . . . . . . . . . . 11
Book Entry Registration . . . . . . . . . . . . . . . . . . . 11
Limited Nature of Ongoing Information . . . . . . . . . . . . 12
Sensitivity to Fluctuations in Prevailing Interest
Rates . . . . . . . . . . . . . . . . . . . . . . . . . 12
Limited Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Additions, Substitutions and Withdrawals of Assets . . . . . . 13
Effect of Prepayments on Average Life . . . . . . . . . . . . . . . . 13
Effect of Prepayments on Yield . . . . . . . . . . . . . . . . . . . 15
Limitations of Credit Enhancement . . . . . . . . . . . . . . . . . . 15
Limitations Regarding Types of Losses Covered . . . . . . . . 15
Disproportionate Benefits to Certain Classes and
Series . . . . . . . . . . . . . . . . . . . . . . . . 15
Limitations Regarding the Amount of Credit
Enhancement . . . . . . . . . . . . . . . . . . . . . . 16
Limitations on FHA Insurance for Title I Loans . . . . . . . . 16
Limited Nature of Ratings . . . . . . . . . . . . . . . . . . . . . . 17
Adverse Tax Consequences . . . . . . . . . . . . . . . . . . . . . . 18
Original Issue Discount . . . . . . . . . . . . . . . . . . . 18
Certain Factors Affecting Delinquencies, Foreclosures and
Losses on Loan Assets . . . . . . . . . . . . . . . . . . . . 18
General . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Geographic Concentration . . . . . . . . . . . . . . . . . . . 18
Decline in Value of a Loan Asset . . . . . . . . . . . . . . . 18
Limitations on Realizations of Junior Liens . . . . . . . . . 19
Certain Legal Considerations of the Loan Assets . . . . . . . 19
Risks Associated with Certain Loan Assets . . . . . . . . . . . . . . 20
No Hazard Insurance for Title I Mortgage Loans . . . . . . . . 20
Contracts Secured by Manufactured Homes . . . . . . . . . . . 20
Unsecured Contracts . . . . . . . . . . . . . . . . . . . . . 21
Consumer Protection Laws related to Contracts . . . . . . . . 21
Reliance on Management of Timeshare Units . . . . . . . . . . 21
Recharacterization of Sale of Loan Assets as Borrowing . . . . . . . 22
Risks Relating to Indexed Securities . . . . . . . . . . . . . . . . 22
</TABLE>
-vi-
<PAGE> 76
<TABLE>
<S> <C>
DESCRIPTION OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . 23
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Principal and Interest on the Notes . . . . . . . . . . . . . . . . . 23
The Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Modification of Indenture . . . . . . . . . . . . . . . . . . 24
Events of Default; Rights upon Event of Default . . . . . . . 25
Certain Covenants . . . . . . . . . . . . . . . . . . . . . . 27
Annual Compliance Statement . . . . . . . . . . . . . . . . . 27
Indenture Trustee's Annual Report . . . . . . . . . . . . . . 27
Satisfaction and Discharge of Indenture . . . . . . . . . . . 27
The Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . . 27
Administration Agreement . . . . . . . . . . . . . . . . . . . . . . 28
DESCRIPTION OF THE CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . 28
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Distributions of Principal and Interest . . . . . . . . . . . . . . . 29
POOL FACTORS AND TRADING INFORMATION . . . . . . . . . . . . . . . . . . . . 29
CERTAIN INFORMATION REGARDING THE SECURITIES . . . . . . . . . . . . . . . . 30
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Fixed Rate Securities and Floating Rate Securities . . . . . . . . . 31
Indexed Securities . . . . . . . . . . . . . . . . . . . . . . . . . 31
Book-Entry Registration . . . . . . . . . . . . . . . . . . . . . . . 32
Definitive Securities . . . . . . . . . . . . . . . . . . . . . . . . 36
THE TRUSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
DESCRIPTION OF THE TRUST PROPERTY . . . . . . . . . . . . . . . . . . . . . . 39
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Additions, Substitution and Withdrawal of Assets . . . . . . . . . . 42
Pre-Funding Arrangements . . . . . . . . . . . . . . . . . . . . . . 43
CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Overcollateralization . . . . . . . . . . . . . . . . . . . . . . . . 45
Cross-Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Guaranty Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 46
Mortgage Pool Insurance . . . . . . . . . . . . . . . . . . . . . . . 46
Special Hazard Insurance . . . . . . . . . . . . . . . . . . . . . . 47
Reserve Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
</TABLE>
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<PAGE> 77
<TABLE>
<S> <C>
SERVICING OF THE LOAN ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 48
Enforcement of Due-on-Sale Clauses . . . . . . . . . . . . . . . . . 48
Realization Upon Defaulted Loan Assets . . . . . . . . . . . . . . . 48
Waivers and Deferments of Certain Payments . . . . . . . . . . . . . 49
Subservicers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Removal and Resignation of Servicer . . . . . . . . . . . . . . . . . 49
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Servicing Procedures . . . . . . . . . . . . . . . . . . . . . . . . 50
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . 50
Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Administration and Servicing Compensation and Payment of
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
THE SELLER AND THE ISSUER . . . . . . . . . . . . . . . . . . . . . . . . . . 52
THE SERVICER AND THE TRANSFEROR . . . . . . . . . . . . . . . . . . . . . . . 53
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS . . . . . . . . . . . . 55
Sale and Assignment of Loan Assets . . . . . . . . . . . . . . . . . 55
Conveyance of Subsequent Loan Assets . . . . . . . . . . . . . . . . 57
Repurchase or Substitution of Loan Assets . . . . . . . . . . . . . . 58
Evidence as to Compliance . . . . . . . . . . . . . . . . . . . . . . 58
List of Securityholders . . . . . . . . . . . . . . . . . . . . . . . 58
Administration of the Distribution Account . . . . . . . . . . . . . 59
Reports to Securityholders . . . . . . . . . . . . . . . . . . . . . 60
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Rights Upon Event of Default . . . . . . . . . . . . . . . . . . . . 61
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
CERTAIN LEGAL ASPECTS OF THE LOAN ASSETS . . . . . . . . . . . . . . . . . . 62
General Legal Considerations . . . . . . . . . . . . . . . . . . . . 63
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Cooperative Loans . . . . . . . . . . . . . . . . . . . . . . 63
Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Cooperative Loans . . . . . . . . . . . . . . . . . . . . . . 66
Junior Liens . . . . . . . . . . . . . . . . . . . . . . . . . 67
Right of Redemption . . . . . . . . . . . . . . . . . . . . . 68
Anti-Deficiency Legislation and Other Limitations
on Lenders . . . . . . . . . . . . . . . . . . . . . . 68
Enforceability of Certain Provisions . . . . . . . . . . . . . 69
Adjustable Rate Loans . . . . . . . . . . . . . . . . . . . . 71
Environmental Legislation . . . . . . . . . . . . . . . . . . 71
Truth in Lending Act . . . . . . . . . . . . . . . . . . . . . . . . 72
Applicability of Usury Laws . . . . . . . . . . . . . . . . . . . . . 73
Soldiers' and Sailors' Civil Relief Act . . . . . . . . . . . . . . . 73
The Title I Program . . . . . . . . . . . . . . . . . . . . . . . . . 74
General . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Requirements for Title I Property Improvement Loans
and Contracts . . . . . . . . . . . . . . . . . . . . . 77
Requirements for Title I Manufactured Home
Contracts . . . . . . . . . . . . . . . . . . . . . . . 79
</TABLE>
-viii-
<PAGE> 78
<TABLE>
<S> <C>
Title I Underwriting Requirements . . . . . . . . . . . . . . 81
Claims Procedures Under Title I . . . . . . . . . . . . . . . 82
No Rights of Securityholders Against FHA . . . . . . . . . . . 83
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . 83
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE . . . . . . . . . . . . . . 84
Tax Characterization of the Trust as a Partnership . . . . . . . . . 84
Tax Consequences to Holders of the Notes . . . . . . . . . . . . . . 84
Treatment of the Notes as Indebtedness . . . . . . . . . . . . 84
OID, Indexed Securities, etc . . . . . . . . . . . . . . . . . 85
Interest Income on the Notes . . . . . . . . . . . . . . . . . 85
Sale or Other Disposition . . . . . . . . . . . . . . . . . . 85
Foreign Holders . . . . . . . . . . . . . . . . . . . . . . . 85
Backup Withholding . . . . . . . . . . . . . . . . . . . . . . 86
Possible Alternative Treatments of the Notes . . . . . . . . . 86
Tax Consequences to Holders of the Certificates . . . . . . . . . . 86
Treatment of the Trust as a Partnership . . . . . . . . . . . 86
Indexed Securities, etc . . . . . . . . . . . . . . . . . . . 87
Partnership Taxation. . . . . . . . . . . . . . . . . . . . . 87
Discount and Premium . . . . . . . . . . . . . . . . . . . . . 88
Section 708 Termination . . . . . . . . . . . . . . . . . . . 88
Disposition of Certificates . . . . . . . . . . . . . . . . . 88
Allocations Between Transferors and Transferees . . . . . . . 89
Section 754 Election . . . . . . . . . . . . . . . . . . . . . 89
Administrative Matters . . . . . . . . . . . . . . . . . . . . 89
Tax Consequences to Foreign Certificateholders . . . . . . . . 90
Backup Withholding . . . . . . . . . . . . . . . . . . . . . . 91
TRUSTS TREATED AS GRANTOR TRUSTS . . . . . . . . . . . . . . . . . . . . . . 91
Tax Characterization of the Trust as a Grantor Trust . . . . . . . . 91
Characterization . . . . . . . . . . . . . . . . . . . . . . . 91
Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Stripped Notes and Stripped Coupons . . . . . . . . . . . . . . . . 92
Original Issue Discount . . . . . . . . . . . . . . . . . . . 93
Market Discount . . . . . . . . . . . . . . . . . . . . . . . 93
Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Election to Treat All Interest as OID . . . . . . . . . . . . 95
Sale or Exchange of a Grantor Trust Certificate . . . . . . . 95
Non-U.S. Persons . . . . . . . . . . . . . . . . . . . . . . 95
Information Reporting and Backup Withholding . . . . . . . . . 95
NOTES ISSUED BY FIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
LEGAL INVESTMENT MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . 97
</TABLE>
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<PAGE> 79
<TABLE>
<S> <C>
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
INDEX OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
</TABLE>
-x-
<PAGE> 80
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to the Securities of any Series contained in the
related Prospectus Supplement to be prepared and delivered in connection with
the offering of such Securities. Certain capitalized terms used herein are
defined elsewhere in this Prospectus on the pages indicated in the "Index of
Terms".
ISSUER . . . . . . . . . . . With respect to each Series of Securities,
FIRSTPLUS INVESTMENT CORPORATION ("FIC") or a
separate entity (each, a "Trust") formed by
FIC solely for the purpose of issuing such
Notes. Each Trust will be formed pursuant to
either a Trust Agreement (as amended and
supplemented from time to time, a "Trust
Agreement") between the Seller and the
applicable Owner Trustee for such Trust (the
"Trust") or a Pooling and Servicing Agreement
(as amended and supplemented from time to
time, the "Pooling and Servicing Agreement")
among the Seller, the Servicer and the Trustee
for such Trust.
SELLER . . . . . . . . . . . With respect to each Series in which the
Issuer is a Trust, FIRSTPLUS INVESTMENT
CORPORATION (the "Seller").
SERVICER . . . . . . . . . . FIRSTPLUS FINANCIAL, INC.("FFI" or the
"Transferor" or the "Servicer").
PASS THROUGH TRUSTEE . . . . With respect to each Series of Securities that
is issued by a grantor trust, the Pass-Through
Trustee specified in the related Prospectus
Supplement.
OWNER TRUSTEE . . . . . . . . With respect to each Series of Securities that
is issued by an owner trust, the Owner Trustee
specified in the related Prospectus
Supplement.
INDENTURE TRUSTEE . . . . . With respect to any applicable Series of
Securities that includes one or more Classes
of Notes, the Indenture Trustee specified in
the related Prospectus Supplement.
TRUSTEE . . . . . . . . . . . As used herein, the term "Trustee" shall refer
to the Indenture Trustee with respect to a
Series of Notes, the Owner Trustee under the
applicable Trust Agreement with respect to a
Series of Certificates, or the Pass Through
Trustee under the applicable Pooling and
Servicing Agreement with respect to a Series
of Certificates. The Trustees with respect to
each Series will be specified in the related
Prospectus Supplement.
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<PAGE> 81
ADMINISTRATOR . . . . . . . The entity or entities named as Administrator,
if any, in the related Prospectus Supplement
(the "Administrator"), will act as
administrator with respect to one or more
aspects related to any Loan Assets included as
Trust Property. The Administrator may be an
affiliate of the Issuer, the Seller and/or the
Servicer.
MASTER SERVICER . . . . . . . If the related Trust Property consists of
Mortgage Loans or Contracts, the entity or
entities, if any, named as the master servicer
in the related Prospectus Supplement (the
"Master Servicer"), that will act as master
servicer with respect to such Mortgage Loans
or Contracts. The Master Servicer may be an
affiliate of the Seller and/or Servicer.
THE NOTES . . . . . . . . . A Series of Securities may include one or more
Classes of Notes, which will be issued
pursuant to an Indenture between the Issuer
and the Indenture Trustee (as amended and
supplemented from time to time, an
"Indenture"). The related Prospectus
Supplement will specify which Class or
Classes, if any, of Notes of the related
Series are being offered thereby.
To the extent specified in the related
Prospectus Supplement, Notes will be available
for purchase in denominations of $1,000 and
integral multiples thereof and will be
available in book-entry form only.
Noteholders will be able to receive Definitive
Notes only in the limited circumstances
described herein or in the related Prospectus
Supplement. See "Certain Information
Regarding the Securities -- Definitive
Securities".
To the extent specified in the related
Prospectus Supplement, each Class of Notes
will have a stated principal amount and will
bear interest at a specified rate or rates
(with respect to each Class of Notes, the
"Interest Rate"). Each Class of Notes may
have a different Interest Rate, which may be a
fixed, variable or adjustable Interest Rate,
or any combination of the foregoing. The
related Prospectus Supplement will specify the
Interest Rate for each Class of Notes, or the
method for determining the Interest Rate.
With respect to a Series that includes two or
more Classes of Notes, each Class may differ
as to the timing and priority of payments,
seniority, allocations of losses, Interest
Rate or amount of payments of principal or
interest, or payments of principal or interest
in respect of any such Class or Classes may or
may not be made upon the occurrence of
specified
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<PAGE> 82
events or on the basis of collections from
designated portions of the Trust Property.
In addition, a Series may include one or more
Classes of Notes entitled to (i) principal
payments with disproportionate, nominal or no
interest payments or (ii) interest payments
with disproportionate, nominal or no principal
payments.
To the extent specified in the related
Prospectus Supplement, the Seller, the
Servicer or a successor thereto may have an
option to purchase the Trust Property in the
manner and on the respective terms and
conditions as set forth in the related
Prospectus Supplement.
THE CERTIFICATES . . . . . . A Series may include one or more Classes of
Certificates and may or may not include any
Notes. The related Prospectus Supplement will
specify which Class or Classes, if any, of the
Certificates are being offered thereby.
To the extent specified in the related
Prospectus Supplement, Certificates will be
available for purchase in a minimum
denomination of $1,000 and in integral
multiples thereof and will be available in
book-entry form only. Certificateholders will
be able to receive Definitive Certificates
only in the limited circumstances described
herein or in the related Prospectus
Supplement. See "Certain Information
Regarding the Securities--Definitive
Securities".
To the extent specified in the related
Prospectus Supplement, each Class of
Certificates will have a stated Certificate
Balance specified in the related Prospectus
Supplement (the "Certificate Balance") and
will accrue interest on such Certificate
Balance at a specified rate (with respect to
each Class of Certificates, the "Pass Through
Rate"). Each Class of Certificates may have a
different Pass Through Rate, which may be a
fixed, variable or adjustable Pass Through
Rate, or any combination of the foregoing.
The related Prospectus Supplement will specify
the Pass Through Rate for each Class of
Certificates or the method for determining the
Pass Through Rate.
With respect to a Series that includes two or
more Classes of Certificates, each Class may
differ as to timing and priority of
distributions, seniority, allocations of
losses, Pass Through Rate or amount of
distributions in respect of principal or
interest, or distributions in respect of
principal or interest in respect of any such
Class or Classes may or may not be made upon
the occurrence of specified events or on the
basis of
3
<PAGE> 83
collections from designated portions of the
Trust Property.
In addition, a Series may include one or more
Classes of Certificates entitled to (i)
distributions in respect of principal with
disproportionate, nominal or no interest
distributions or (ii) interest distributions
with disproportionate, nominal or no
distributions in respect of principal.
If a Series of Securities includes Classes of
Notes, distributions in respect of the
Certificates may be subordinated in priority
of payment to payments on the Notes to the
extent specified in the related Prospectus
Supplement.
To the extent specified in the related
Prospectus Supplement, the Seller, the
Servicer or a successor thereto may have an
option to purchase the Trust Property in the
manner and on the respective terms and
conditions as set forth in the related
Prospectus Supplement.
THE TRUST PROPERTY . . . . . As specified in the related Prospectus
Supplement, the property securing or backing
each Series (the "Trust Property") will
include Loan Assets consisting of one or more
of the following:
(i) a pool (a "Mortgage Pool") of single
family (one- to four-unit)
residential mortgage loans, including
mortgage loans that are secured by
first or junior liens on the related
mortgaged properties, timeshare
mortgage loans and loans evidenced by
retail installment sales or
installment loan agreements that are
secured by first or junior liens on
real property ("Mortgage Loans"); and
(ii) a pool (a "Contract Pool") of loans
evidenced by retail installment sales
or installment loan agreements,
including loans secured by new or
used Manufactured Homes (as defined
herein) that are not considered to be
interests in real property because
such Manufactured Homes are not
permanently affixed to real estate
("Secured Contracts") and loans
evidenced by retail installment sales
or installment loan agreements which
are not secured by any interest in
real or personal property ("Unsecured
Contracts" and, together with the
Secured Contracts, the "Contracts").
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<PAGE> 84
The Trust Property may also include, or the
related Securities may also have the benefits
of, certain rights and other ancillary or
incidental assets (together with the Loan
Assets, collectively, the "Assets"), that are
intended (i) to enhance the likelihood of
ultimate or timely payments or distributions
of proceeds from the Loan Assets to
Securityholders, including letters of credit,
insurance policies, guaranties, reserve funds
or other types of credit enhancement or any
combination thereof (the "Credit
Enhancement"), or (ii) to assure the servicing
of the Loan Assets, including interest rate
exchange agreements, reinvestment income and
cash accounts. The Loan Assets 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, (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".
The Securities of any Series will be entitled
to payment only from the Trust Property and
any other Assets pledged or otherwise
available for the benefit of the holders of
such Securities as specified in the related
Prospectus Supplement.
The Trust Property of each Series may also
include amounts on deposit in certain trust
accounts, including the related Collection
Account, Distribution Account and any Yield
Maintenance Account, Reserve Fund or other
account identified in the applicable
Prospectus Supplement.
A. Mortgage Loans . . . . . . As specified in the related Prospectus
Supplement for a Series, "Mortgage Loans" may
include: (i) loans secured by first liens on
one-to-four family residential properties;
(ii) loans secured by security interests in
shares issued by private, non-profit,
cooperative housing corporations
("Cooperatives") and in the related
proprietary leases or occupancy agreements
granting exclusive rights to occupy specific
dwelling units in such Cooperatives'
buildings; (iii) loans secured by junior
(i.e., second, third, etc.) liens on the
related mortgaged properties (which may be
evidenced by retail installment sales
contracts and installment loan agreements);
(iv) loans secured by timeshare estates
representing an ownership interest in
5
<PAGE> 85
common with other owners in one or more
vacation units entitling the owner thereof to
the exclusive use of unit and access to the
accompanying recreational facilities for the
week or weeks owned; and (v) loans evidenced
by retail installment sales and installment
loan agreements that are secured by first or
junior liens on real property. See
"Description of the Trust Property -- Mortgage
Loans". Certain of the junior lien Mortgage
Loans may be conventional (i.e., not insured
or guaranteed by a governmental agency)
mortgage loans ("Conventional Mortgage
Loans"), while other junior lien Mortgage
Loans that are property improvement loans may
be partially insured by the Federal Housing
Administration under the Title I Program
("Title I Mortgage Loans"). The related
Prospectus Supplement for a Series will
describe any Mortgage Loans included in the
related Trust Property and will specify
certain information regarding the payment
terms of such Mortgage Loans. See
"Description of the Trust Property -- Mortgage
Loans."
B. Contracts . . . . . . . . As specified in the related Prospectus
Supplement for a Series, "Contracts" may
include: (i) loans evidenced by retail
installments sales or loan agreements,
including loans secured by new or used
Manufactured Homes (as defined herein) that
are not considered to be interests in real
property because such Manufactured Homes are
not permanently affixed to real estate
("Secured Contracts") and (ii) loans evidenced
by retail installment sales or installment
loan agreements which are not secured by any
interest in real or personal property
("Unsecured Contracts"). See "Description of
the Trust Property -- Contracts". Certain
Contracts may be conventional (i.e., not
insured or guaranteed by a governmental
agency) contracts (the "Conventional
Contracts"), while other Contracts may be
partially insured by the FHA under the Title I
Program (the "Title I Contracts"). The
related Prospectus Supplement for a Series
will further describe the type of Contracts,
if any, included in the related Trust
Property. See "Description of the Trust
Property -- Contracts."
C. Pre-Funding
Arrangements . . . . . . . If so specified in the related Prospectus
Supplement, the related Sale and Servicing
Agreement or Pooling and Servicing Agreement
will contain provisions pursuant to which the
related Transferor will agree to transfer
additional Loan Assets (the "Subsequent Loan
Assets") into the related Loan Asset Pool for
a specified period of
6
<PAGE> 86
time following the date on which the related
Securities are issued (such provisions being
referred to herein as a "Pre-Funding
Arrangement"). Any such Pre-Funding
Arrangement will require that any Loan Assets
so transferred conform to the requirements
specified in the related Sale and Servicing
Agreement or Pooling and Servicing Agreement,
as applicable. See "Description of the Trust
Property -- Pre-Funding Arrangements."
TRANSFER OF LOAN ASSETS . . . On or before the date of initial issuance of a
Series of Securities (the related "Closing
Date"), the Loan Assets having an aggregate
principal balance specified in the related
Prospectus Supplement as of the dates
specified therein (the "Cut-off Date") will be
transferred pursuant to (i) the related Sale
and Servicing Agreement if the Issuer is to be
treated as an owner trust, or (ii) the related
Pooling and Servicing Agreement if the Issuer
is to be treated as a grantor trust for
federal income tax purposes.
The Loan Assets will have been (i) originated
by the Transferor in accordance with the
Transferor's underwriting criteria or (ii)
originated by the Transferor's correspondents
in accordance with the Transferor's
underwriting criteria and subsequently
purchased by the Transferor. The Loan Assets
to be included in the Trust Property will be
selected based on the underwriting criteria
specified in the related Sale and Servicing
Agreement or Pooling and Servicing Agreement,
as applicable, and described herein and in the
related Prospectus Supplement.
CREDIT ENHANCEMENT . . . . If and to the extent specified in the related
Prospectus Supplement, credit enhancement with
respect to a Series or any Class or Classes of
Securities may include any one or more of the
following: subordination of one or more other
Classes of Securities, a Reserve Fund, a Yield
Maintenance Account, overcollateralization,
letters of credit, credit or liquidity
facilities, surety bonds, guaranteed
investment contracts, swaps or other interest
rate protection agreements, repurchase
obligations, cash deposits or other agreements
or arrangements with respect to third party
payments or other support. Any form of credit
enhancement may have certain limitations and
exclusions from coverage thereunder and, if
so, such limitations and exclusions from
coverage will be described in the related
Prospectus Supplement. See "Risk Factors --
Limitations of Credit Enhancement" and "Credit
Enhancement".
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<PAGE> 87
TRANSFER AND SERVICING
AGREEMENTS . . . . . . . . . The Assets for a given Series of Securities
will be transferred to the related Issuer
pursuant to a Sale and Servicing Agreement or
a Pooling and Servicing Agreement. The rights
and benefits of any Issuer under a Sale and
Servicing Agreement will be assigned to the
Indenture Trustee as collateral for the Notes
of the related Series. The Servicer will
agree with such Issuer to be responsible for
servicing, managing, maintaining custody of
and making collections on the Assets. If and
to the extent set forth in the related
Prospectus Supplement, FFI will undertake
certain administrative duties under an
Administration Agreement with respect to any
Issuer that has issued Notes.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES . . . . . . . Unless the Prospectus Supplement specifies
that the related Issuer will be treated as a
grantor trust and, except as otherwise
provided in such Prospectus Supplement, upon
the issuance of the related Series of
Securities, Tax Counsel to such Issuer will
deliver an opinion to the effect that for
federal income tax purposes (a) any Notes of
such Series will be characterized as debt and
(b) such Issuer, if a Trust, will not be
characterized as an association (or a publicly
traded partnership) taxable as a corporation.
In respect of any such Series, each
Noteholder, if any, by the acceptance of a
Note of such Series, will agree to treat such
Note as indebtedness, and each
Certificateholder, by the acceptance of a
Certificate of such Series, will agree to
treat such Issuer, if a Trust, as a
partnership in which such Certificateholder is
a partner for federal income tax purposes.
Alternative characterizations of such Trusts
and such Certificates are possible, but would
not result in materially adverse tax
consequences to Certificateholders.
If the Prospectus Supplement specifies that
the related Trust will be treated as a grantor
trust and except as otherwise provided in such
Prospectus Supplement, upon the issuance of
the related Series of Certificates, Tax
Counsel to such Trust will deliver an opinion
to the effect that such Trust will be treated
as a grantor trust for federal income tax
purposes and will not be subject to federal
income tax.
For federal income tax purposes, Notes
generally will be treated as debt obligations
of the related Issuer. Holders of Notes will
not be required to report income with
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respect to such Notes under an accrual method,
unless the Noteholders otherwise use the
accrual method. Notes will not represent
"real estate assets" for purposes of Section
856(c)(5)(A) of the Code or "[l]oans . . .
principally secured by an interest in real
property" within the meaning of Section
7701(a)(19)(C)(v) of the Code.
See "Certain Federal Income Tax
Consequences"for additional information
concerning the application of federal tax laws
to the Securities.
ERISA CONSIDERATIONS . . . . A fiduciary of any employee benefit plan
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or
the Code should carefully review with its own
legal advisors whether the purchase or holding
of Securities could give rise to a transaction
prohibited or otherwise impermissible under
ERISA or the Code. See "ERISA
Considerations." To the extent described in
the Prospectus Supplement for a Series,
certain Classes of Securities of such Series
may not be transferred unless the applicable
Trustee and FIC are furnished with a letter of
representation or an opinion of counsel to the
effect that such transfer will not result in a
violation of the prohibited transaction
provisions of ERISA and the Code and will not
subject the applicable Trustee, the Issuer,
the Seller, the Servicer, the Master Servicer,
if any, or the Administrator, if any, to
additional obligations. If specified in the
related Prospectus Supplement, the United
States Department of Labor may have issued to
the Underwriter an administrative exemption
for certain Classes of Securities. See
"Certain Information Regarding the Securities
-- General" and "ERISA Considerations."
LEGAL INVESTMENT MATTERS . . The Securities of each Series will not
constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") because, to the extent
specified in the related Prospectus
Supplement, a substantial number of the
Mortgage Loans will be secured by liens on
real estate that are not first liens, as
required by SMMEA. Accordingly, many
institutions with legal authority to invest in
"mortgage related securities" may not be
legally authorized to invest in the Securities
of any Series. Investors should consult their
own legal advisors in determining whether and
to what extent the Securities of any
particular Series constitute legal investments
for such investors.
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USE OF PROCEEDS . . . . . . . Substantially all of the net proceeds from the
sale of a Series will be applied to the
simultaneous purchase of the Loan Assets
included in the related Trust Property or to
reimburse the amounts previously used to
effect such purchase, the costs of carrying
the Loan Assets until sale of such Series and
to pay other expenses connected with pooling
the Loan Assets and issuing such Series. See
"Use of Proceeds."
RATING . . . . . . . . . . . It is a condition to the issuance of each
Class of a Series specified as being offered
by the related Prospectus Supplement that the
Securities of such Class be rated in one of
the four highest rating categories established
for such Securities by a nationally recognized
statistical rating agency (a "Rating Agency").
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RISK FACTORS
In considering an investment in the Offered Securities of any Series,
investors should consider, among other things, the following risk factors and
any other factors set forth under the heading "Risk Factors" in the related
Prospectus Supplement.
LIMITED LIQUIDITY AND FLUCTUATION IN VALUE FROM MARKET CONDITIONS
GENERAL. The Offered Securities of any Series may have limited or no
liquidity. Accordingly, an investor may be forced to bear the risk of its
investment in any Offered Securities for an indefinite period of time.
Furthermore, except to the extent described herein and in the related
Prospectus Supplement, Securityholders will have no redemption rights, and the
Offered Securities of each Series are subject to early retirement only under
certain specified circumstances described in the related Prospectus Supplement.
LACK OF A SECONDARY MARKET. There can be no assurance that a secondary
market for the Offered Securities of any Series will develop or, if it does
develop, that it will provide holders with liquidity of investment or that it
will continue for as long as such Offered Securities remain outstanding. The
Prospectus Supplement for any Series of Offered Securities may indicate that an
underwriter specified therein intends to establish a secondary market in such
Offered Securities; however, no underwriter will be obligated to do so. Any
such secondary market may provide less liquidity to investors than any
comparable market for securities that evidence interests in single-family
mortgage loans. To the extent provided in the related Prospectus Supplement,
the Securities may be listed on any securities exchange.
BOOK ENTRY REGISTRATION. To the extent specified in the related
Prospectus Supplement, persons acquiring beneficial ownership interests in the
Securities of any Series or Class will hold their Securities through DTC, in
the United States, or Cedel or Euroclear in Europe. Transfers within DTC,
Cedel or Euroclear, as the case may be, will be in accordance with the usual
rules and operating procedures of the relevant system. So long as the
Securities are Book-Entry Securities, such Securities will be evidenced by one
or more certificates registered in the name of Cede & Co., as the nominee of
DTC, or Citibank N.A. or Morgan Guaranty Trust Company of New York, the
relevant depositaries of Cedel and Euroclear, respectively, and each a
participating member of DTC. No Securityholder 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. See "Certain Information Regarding the Securities -- Book-Entry
Registration". Unless and until Definitive Securities for such Series are
issued, holders of such Securities will not be recognized by the Trustee or any
applicable Indenture Trustee as "Certificateholders", "Noteholders" or
"Securityholders", as the case may be (as such terms are used herein or in the
related Pooling and Servicing Agreement or related Indenture and Trust
Agreement, as applicable). Hence, until Definitive Securities are issued,
holders of such Securities will only be able to exercise the rights of
Securityholders indirectly through DTC (if in the United States) and its
participating organizations, or Cedel and Euroclear (in Europe) and their
respective participating organizations. See "Certain Information Regarding the
Securities -- Book-Entry Registration".
Since transactions in the Securities can be effected only through DTC,
Cedel, Euroclear, participating organizations, indirect participants and
certain banks, the ability of the beneficial owner thereof to pledge such
Securities to persons or entities that do not participate in the DTC, Cedel or
Euroclear system, or otherwise to take actions in respect of such Securities,
may be limited due to lack of a physical certificate representing such
Securities.
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<PAGE> 91
Beneficial owners of Securities may experience some delay in their
receipt of payments or distributions of interest of and principal since such
distributions will be forwarded by the Trustee or Indenture Trustee to DTC and
DTC will credit such payments or distributions to the accounts of its
Participants (as defined herein) which will thereafter credit them to the
accounts of the beneficial owners thereof either directly or indirectly through
indirect participants.
LIMITED NATURE OF ONGOING INFORMATION. The primary source of ongoing
information regarding the Offered Securities of any Series, including
information regarding the status of the related Loan Assets and any Credit
Enhancement for such Offered Securities, will be the periodic reports to
Securityholders to be delivered pursuant to the related Indenture or Pooling
and Servicing Agreement as described herein under the heading "Description of
the Transfer and Servicing Agreements -- Reports to Securityholders". There
can be no assurance that any additional ongoing information regarding the
Offered Securities of any Series will be available through any other source.
The limited nature of such information in respect of a Series of Offered
Securities may adversely affect the liquidity thereof, even if a secondary
market for such Offered Securities does develop.
SENSITIVITY TO FLUCTUATIONS IN PREVAILING INTEREST RATES. Insofar as a
secondary market does develop with respect to any Series of Offered Securities
or Class thereof, the market value of such Offered Securities will be affected
by several factors, including the perceived liquidity thereof, the anticipated
cash flow thereon (which may vary widely depending upon the prepayment and
default assumptions applied in respect of the underlying Loan Assets) and
prevailing interest rates. The price payable at any given time in respect of
certain Classes of Offered Securities (in particular, a Class with a relatively
long average life, or a Class of Interest Only Securities or Principal Only
Securities) may be extremely sensitive to small fluctuations in prevailing
interest rates; and the relative change in price for an Offered Security in
response to an upward or downward movement in prevailing interest rates may not
necessarily equal the relative change in price for such Offered Security in
response to an equal but opposite movement in such rates. Accordingly, the
sale of Offered Securities by a holder in any secondary market that may develop
may be at a discount from the price paid by such holder. FIC is not aware of
any source through which price information about the Offered Securities will be
generally available on an ongoing basis.
LIMITED ASSETS
The Offered Securities and Loan Assets for a Series will be guaranteed
or insured, if at all, to the extent specified in the related Prospectus
Supplement; otherwise neither the Offered Securities of any Series nor the Loan
Assets in the related Trust Property will be guaranteed or insured by, or be
recourse obligations of, the Issuer, the Seller, the Servicer or any of their
respective affiliates, by any governmental agency or instrumentality or by any
other person, and no Offered Security of any Series will represent a claim
against or security interest in the Trust Property for any other Series.
Accordingly, if the related Trust Property includes insufficient assets to make
payments on a Series of Offered Securities, no other assets will be available
for payment of the deficiency, and the holders of one or more Classes of such
Offered Securities will be required to bear the consequent loss. To the extent
provided in the related Prospectus Supplement for a Series that consists of one
or more Classes of Subordinate Securities, on any Distribution Date in respect
of which losses or shortfalls in collections on the Loan Assets have been
incurred, all or a portion of the amount of such losses or shortfalls will be
borne first by one or more Classes of the Subordinate Securities, and,
thereafter, by the remaining Classes of Securities in the priority and manner
and subject to the limitations specified in such Prospectus Supplement.
Because payments and distributions of principal on the Securities of a Series
may, if provided in the related Prospectus Supplement, be applied to
outstanding Classes of such Series in the priority specified in the related
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<PAGE> 92
Prospectus Supplement, a deficiency that arises after Securities of a Class of
any such Series having higher priority in payment or distribution have been
fully or partially repaid will have a disproportionately greater effect on the
Securities of Classes of such Series having lower priority in payment. The
disproportionate effect of any such deficiency is further increased in the case
of Classes of Compound Interest Securities of any Series because, prior to the
retirement of all Classes of such Series having higher priority in payment than
such Compound Interest Securities, interest is not payable, to the extent
provided in the related Prospectus Supplement, but is accrued and added to the
principal of such Compound Interest Securities.
ADDITIONS, SUBSTITUTIONS AND WITHDRAWALS OF ASSETS. To the extent
provided in the related Prospectus Supplement for a Series, the Seller or the
Issuer may, subsequent to the issuance of such a Series, deliver additional
Assets or withdraw Assets previously included in the Trust Property for such
Series, substituting assets therefore or depositing additional Assets or
withdrawing Assets previously deposited in a Reserve Fund for such Series. The
effect of delivery or substitution of other Assets may be to alter the
characteristics and composition of the Assets underlying such Series, either of
which may alter the timing and amount of payments or distributions on, or the
date of the final payment or distribution in respect of, the Securities of such
Series. See "Description of the Trust Property -- Additions, Substitution and
Withdrawal of Assets". Furthermore, certain amounts on deposit from time to
time in certain funds or accounts constituting part of the Trust Property for
a Series, including the Distribution Account and any accounts maintained as
Credit Enhancement, may be withdrawn under certain conditions, if and to the
extent described in the related Prospectus Supplement, for purposes other than
the payment of principal of or interest on the related Series of Securities.
EFFECT OF PREPAYMENTS ON AVERAGE LIFE
As a result of prepayments on the Loan Assets, the amount and timing of
payments or distributions of principal and/or interest on the Offered
Securities of the related Series may be highly unpredictable. Prepayments on
the Loan Assets included in the Trust Property will result in a faster rate of
principal payments on one or more Classes of the related Series of Securities
than if payments on such Loan Assets were made as scheduled. Thus, the
prepayment experience on the Loan Assets included in the Trust Property may
affect the average life of one or more Classes of Securities of the related
Series, including a Class of Offered Securities. The rate of principal
payments on pools of mortgage loans and installment loan contracts varies among
pools and from time to time is influenced by a variety of economic,
demographic, geographic, social, tax and legal factors. For example, if
prevailing interest rates fall significantly below the interest rates borne by
the Loan Assets included in the Trust Property, then, subject to the particular
terms of the Loan Assets (e.g., provisions that prohibit voluntary prepayments
during specified periods or impose penalties in connection therewith) and the
ability of borrowers to obtain new financing, principal prepayments on such
Loan Assets are likely to be higher than if prevailing interest rates remain at
or above the rates borne by those Loan Assets. Conversely, if prevailing
interest rates rise significantly above the interest rates borne by the Loan
Assets included in the Trust Property, then principal prepayments on such Loan
Assets are likely to be lower than if prevailing interest rates remain at or
below the interest rates borne by those Loan Assets. In addition to
fluctuations in prevailing interest rates, the rate of prepayments on the Loan
Assets may be influenced by changes and developments in the types and
structures of loan products being offered to consumers within the mortgage
banking and consumer finance industry and by technological developments and
innovations to the loan underwriting and origination process.
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<PAGE> 93
Accordingly, there can be no assurance as to the actual rate of
prepayment on the Loan Assets included in any given Trust Property or that such
rate of prepayment will conform to any model described herein or in any
Prospectus Supplement. As a result, depending on the anticipated rate of
prepayment for the Loan Assets included in the Trust Property with respect to a
Series, the retirement of any Class of Securities of such Series could occur
significantly earlier or later, and the average life thereof could be
significantly shorter or longer, than expected.
In comparison to first lien single family mortgage loans, FIC is not
aware of any reliable publicly available statistical information regarding the
rates of prepayment of loans such as the Loan Assets that is based upon the
historical loan performance of this segment of the mortgage banking and
consumer finance industry. In fact, this segment of the mortgage banking and
consumer finance industry has undergone significant growth and expansion,
including an increase in new loan originations, as a result of certain social
and economic factors, including recent tax law changes that limit the
deductibility of consumer interest to indebtedness secured by an individual's
principal residence and changes and developments in the types and structures of
loan products being offered to consumers. Therefore, no assurance can be given
as to the level of prepayments that the Loan Assets will experience. In fact,
a number of factors suggest that the prepayment experience of the Loan Assets
may be significantly different from that of any first lien Mortgage Loans with
equivalent interest rates and maturities.
Additional prepayment, yield and weighted average life considerations
with respect to a Series of Securities will be set forth in the related
Prospectus Supplement.
The extent to which prepayments on the Loan Assets included in the Trust
Property of any Series ultimately affect the average life of any Class of
Securities of such Series will depend on the terms and provisions of such
Securities. A Class of Securities, including a Class of Offered Securities,
may provide that on any Distribution Date the holders of such Securities are
entitled to a pro rata share of the prepayments on the Loan Assets included in
the related Trust Property that are distributable on such date, to a
disproportionately large share (which, in some cases, may be all) of such
prepayments, or to a disproportionately small share (which, in some cases, may
be none) of such prepayments. A Class of Securities that entitles the holders
thereof to a disproportionately large share of the prepayments on the Loan
Assets included in the related Trust Property increases the likelihood of early
retirement of such Class ("Call Risk") if the rate of prepayment is relatively
fast; while a Class of Securities that entitles the holders thereof to a
disproportionately small share of the prepayments on the Loan Assets included
in the related Trust Property increases the likelihood of an extended average
life of such Class ("Extension Risk") if the rate of prepayment is relatively
slow. To the extent described in the related Prospectus Supplement, the
respective entitlement of the various Classes of Securityholders of such Series
to receive payments (and, in particular, prepayments) of principal of the Loan
Assets included in the related Trust Property may vary based on the occurrence
of certain events (e.g., the retirement of one or more Classes of Securities of
such Series) or whether certain contingencies do or do not occur (e.g.,
prepayment and default rates with respect to such Loan Assets).
A Series of Securities may include one or more Classes of scheduled
amortization Securities (each, a "Scheduled Amortization Security"), which will
entitle the holders thereof to receive principal payments or distributions
according to a specified principal payment schedule. Although prepayment risk
cannot be eliminated entirely from any Class of Securities, a Class of
Scheduled Amortization Securities will generally provide a relatively stable
cash flow so long as the actual rate of prepayment on the Loan Assets included
in the related Trust Property remains relatively constant at the rate, or
within the range of rates, of prepayment used to establish the specific
principal payment schedule for such Securities. Prepayment
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risk with respect to a given pool of Loan Assets does not disappear, however,
and the stability afforded to Scheduled Amortization Securities comes at the
expense of one or more companion Classes of the same Series (each, a "Companion
Class"), any of which Companion Classes may also be a Class of Offered
Securities. In general, and as more specifically described in the related
Prospectus Supplement, a Companion Class may entitle the holders thereof to a
disproportionately large share of prepayments on the Loan Assets included in
the related Trust Property when the rate of prepayment is relatively fast,
and/or may entitle the holders thereof to a disproportionately small share of
prepayments on the Loan Assets included in the related Trust Property when the
rate of prepayment is relatively slow. As and to the extent described in the
related Prospectus Supplement, a Companion Class absorbs some (but not all) of
the Call Risk and/or Extension Risk that would otherwise belong to the related
Scheduled Amortization Securities if all payments of principal of the Loan
Assets included in the related Trust Property were allocated on a pro rata
basis.
EFFECT OF PREPAYMENTS ON YIELD
A Series of Securities may include one or more Classes of Offered
Securities offered at a premium or discount. Yields on such Classes of
Securities will be sensitive, and in some cases extremely sensitive, to
prepayments on the Loan Assets included in the related Trust Property and,
where the amount of interest payable with respect to a Class is
disproportionately large, as compared to the amount of principal, as with a
Class of Interest Only Securities, a holder might fail to recover its original
investment under some prepayment scenarios. The extent to which the yield to
maturity of any Class of Offered Securities may vary from the anticipated yield
will depend upon the degree to which such Offered Securities are purchased at a
discount or premium and the amount and timing of distributions thereon. An
investor should consider, in the case of any Offered Security purchased at a
premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield to such investor that is lower than the
anticipated yield.
LIMITATIONS OF CREDIT ENHANCEMENT
LIMITATIONS REGARDING TYPES OF LOSSES COVERED. The related Prospectus
Supplement for a Series of Securities will describe any Credit Enhancement
provided with respect thereto. Use of Credit Enhancement will be subject to
the conditions and limitations described herein and in the related Prospectus
Supplement. Moreover, such Credit Enhancement may not cover all potential
losses or delays; for example, Credit Enhancement may or may not cover loss by
reason of fraud or negligence by a mortgage loan originator or other parties.
Any such losses or delays not covered by Credit Enhancement may, at least in
part, be allocated to, or affect payments or distributions to, one or more
Classes of Offered Securities.
DISPROPORTIONATE BENEFITS TO CERTAIN CLASSES AND SERIES. A Series of
Securities may include one or more Classes of Subordinate Securities (which may
include Offered Securities), if provided in the related Prospectus Supplement.
Although subordination is intended to reduce the likelihood of temporary
shortfalls and ultimate losses to holders of the related senior Securities, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more Classes of
Offered Securities of a Series are made in a specified order of priority, any
related Credit Enhancement may be exhausted before the principal of the later
paid Classes of Offered Securities of such Series has been repaid in full. As
a result, the impact of losses and shortfalls experienced with respect to the
Loan Assets may fall primarily upon those Classes of Offered Securities having
a later right of payment. Moreover, if a form of Credit Enhancement covers the
Offered Securities of more than one Series and losses on the related Loan
Assets exceed the amount of such Credit Enhancement, it is possible that the
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<PAGE> 95
holders of Offered Securities of one (or more) such Series will be
disproportionately benefited by such Credit Enhancement to the detriment of the
holders of Offered Securities of one (or more) other such Series.
LIMITATIONS REGARDING THE AMOUNT OF CREDIT ENHANCEMENT. The amount of
any applicable Credit Enhancement supporting one or more Classes of Offered
Securities, including the subordination of one or more other Classes of
Securities, will be determined on the basis of criteria established by each
Rating Agency rating such Classes of Securities based on an assumed level of
defaults, delinquencies and losses on the Loan Assets and certain other
factors. There can be no assurance that the default, delinquency and loss
experience on such Loan Assets will not exceed such assumed levels. See
"Credit Enhancement". If the defaults, delinquencies and losses on such Loan
Assets do exceed such assumed levels, the holders of one or more Classes of
Offered Securities will be required to bear such additional defaults,
delinquencies and losses. Regardless of the form of Credit Enhancement
provided with respect to a Series, the amount of coverage will be limited in
amount and in most cases will be subject to periodic reduction in accordance
with a schedule or formula.
LIMITATIONS ON FHA INSURANCE FOR TITLE I LOANS. The related Prospectus
Supplement will specify the number and percentage of the Title I Mortgage Loans
and/or Title I Contracts, if any, included in the related Trust Property that
are partially insured by the FHA pursuant to Title I Program. Since the FHA
Insurance Amount for the Title I Mortgage Loans and Title I Contracts is
limited as described herein and in the related Prospectus Supplement, and since
the adequacy of such FHA Insurance Amount is dependent upon future events,
including reductions for the payment of FHA claims, no assurance can be given
that the FHA Insurance Amount is or will be adequate to cover 90% of all
potential losses on the Title I Mortgage Loans and Title I Contracts included
in the related Trust Property. If the FHA Insurance Amount for the Title I
Mortgage Loans and Title I Contracts is reduced to zero, such loans and
contracts will be effectively uninsured from and after the date of such
reduction. Under the Title I Program, until a claim for insurance
reimbursement is submitted to the FHA, the FHA does not review or approve for
qualification for insurance the individual Title I Mortgage Loan or Title I
Contract insured thereunder (as is typically the case with other federal loan
insurance programs). Consequently, the FHA has not acknowledged that any of
the Title I Mortgage Loans and Title I Contracts are eligible for FHA
insurance, nor has the FHA reviewed or approved the underwriting and
qualification by the originating lenders of any individual Title I Mortgage
Loans and Title I Contracts. See "Certain Legal Aspects of the Loan Assets --
The Title I Program".
The availability of FHA Insurance reimbursement following a default on a
Title I Mortgage Loan or Title I Contract is subject to a number of conditions,
including strict compliance by the originating lender of such loan, FIC, the
FHA Claims Administrator, the Servicer and any subservicer with the FHA
Regulations in originating and servicing such Title I Mortgage Loan or Title I
Contract, and limits on the aggregate insurance coverage available in FIC's FHA
Reserve. For example, the FHA Regulations provide that, prior to originating a
Title I Mortgage Loan or Title I Contract, a Title I lender must exercise
prudence and diligence in determining whether the borrower and any co-maker or
co-signer is solvent and an acceptable credit risk with a reasonable ability to
make payments on the loan. Although the related Transferor will represent and
warrant that the Title I Mortgage Loans and Title I Contracts have been
originated and serviced in compliance with all FHA Regulations, these
regulations are susceptible to substantial interpretation. Failure to comply
with all FHA Regulations may result in a denial of FHA Claims, and there can be
no assurance that the FHA's enforcement of the FHA Regulations will not become
stricter in the future. See "Certain Legal Aspects of the Loan Assets -- The
Title I Program -- General".
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The FHA will not recognize any Issuer or any Securityholders as the
owners of the Title I Mortgage Loans or Title I Contracts, or any portion
thereof, entitled to submit FHA Claims. Accordingly, neither the Issuer nor
the Securityholders will have a direct right to receive insurance payments from
the FHA. FIC will contract with the Servicer (or another person specified in
the Prospectus Supplement) to serve as the Administrator for FHA Claims (the
"FHA Claims Administrator") pursuant to an FHA claims administration agreement
(the "FHA Claims Administration Agreement"), which will provide for the FHA
Claims Administrator to handle all aspects of administering, processing and
submitting FHA Claims with respect to the Title I Mortgage Loans or Title I
Contracts, in the name and on behalf of FIC. The Securityholders will be
dependent on the FHA Claims Administrator to (i) make claims on the Title I
Mortgage Loans or Title I Contracts in accordance with FHA Regulations and (ii)
remit all FHA Insurance proceeds received from the FHA in accordance with the
related Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable. The Securityholders' rights relating to the receipt of payment
from and the administration, processing and submission of FHA Claims by FIC or
any FHA Claims Administrator are limited and governed by the related Sale and
Servicing Agreement or Pooling and Servicing Agreement, as applicable, and the
FHA Claims Administration Agreement and these functions are obligations of FIC
and the FHA Claims Administrator, but not the FHA. See "Certain Legal Aspects
of the Loan Assets -- The Title I Program -- Claims Procedures under Title I".
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a Class of Offered Securities
will reflect only its assessment of the likelihood that holders of such Offered
Securities will receive payments or distributions to which such Securityholders
are entitled under the related Indenture, Trust Agreement or Pooling and
Servicing Agreement. Such rating will not constitute an assessment of the
likelihood that principal prepayments on the Loan Assets will be made, the
degree to which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional redemption or termination of
the Securities. Furthermore, such rating will not address the possibility that
prepayment of the Loan Assets at a higher or lower rate than anticipated by an
investor may cause such investor to experience a lower than anticipated yield
or that an investor that purchases an Offered Security at a significant premium
might fail to recover its initial investment under certain prepayment
scenarios. Hence, a rating assigned by a Rating Agency does not guarantee or
ensure the realization of any anticipated yield on a Class of Offered
Securities.
The amount, type and nature of Credit Enhancement, if any, provided with
respect to a Series of Securities will be determined on the basis of criteria
established by each Rating Agency rating a Class of Securities of such Series.
Those criteria are sometimes based upon an actuarial analysis of the behavior
of similar types of loans in a larger group. However, there can be no
assurance that the historical data supporting any such actuarial analysis will
accurately reflect future experience, or that the data derived from a large
pool of similar types of loans will accurately predict the delinquency, default
or loss experience of any particular pool of Loan Assets. In other cases, such
criteria may be based upon determination of the values of the Mortgaged
Properties or other properties, if any, that provide security for the Loan
Assets. However, no assurance can be given that those values will not decline
in the future. As a result, the Credit Enhancement required in respect of the
Offered Securities of any Series may be insufficient to fully protect the
holders thereof from losses on the related Loan Assets. See "-- Limitations of
Credit Enhancement" and "Credit Enhancement".
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ADVERSE TAX CONSEQUENCES
ORIGINAL ISSUE DISCOUNT. Certain of the Offered Securities may be
issued with original issue discount for federal income tax purposes. A holder
of a Security issued with original issue discount will be required to include
original issue discount in ordinary gross income for federal income tax
purposes as it accrues, in advance of receipt of the cash, or a portion of the
cash, attributable to such income. Accrued but unpaid interest on the Compound
Interest Securities generally will be treated as original issue discount for
this purpose. At certain rapid Loan Asset prepayment rates, original issue
discount may accrue on certain Classes of Securities that may never receive
payments or distributions of cash in respect thereof, resulting in a loss to
the related Securityholder. See "Certain Federal Income Tax Consequences".
CERTAIN FACTORS AFFECTING DELINQUENCIES, FORECLOSURES AND LOSSES ON LOAN ASSETS
GENERAL. The payment performance of the Offered Securities of any
Series will be directly related to the payment performance of the Loan Assets
included as part of the related Trust Property. Set forth below is a
discussion of certain factors that will affect the full and timely payment of
the Loan Assets included as part of any Trust Property.
GEOGRAPHIC CONCENTRATION. Certain geographic regions of the United
States from time to time will experience weaker regional economic conditions
and housing markets, and, consequently, will experience higher rates of loss
and delinquency on mortgage loans generally. Any concentration of Loan Assets
in such a region may present risk considerations in addition to those generally
present for similar mortgage-backed or asset-backed securities without such
concentration.
DECLINE IN VALUE OF A LOAN ASSET. An investment in Securities secured by
or evidencing an interest in a pool of Mortgage Loans may be adversely affected
by, among other things, a decline in one-to-four family residential property
values. No assurance can be given that values of the Mortgaged Properties have
remained or will remain at the levels existing on the dates of origination of
the related Mortgage Loans. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans in a particular Mortgage Pool, and any other
financing on the Mortgaged Properties, become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies, defaults
and losses could be higher than those now generally experienced with respect to
similar types of loans within the mortgage lending industry. To the extent
that such losses are not covered by applicable insurance policies, if any, or
by any Credit Enhancement as described in the related Prospectus Supplement,
holders of Securities secured by or evidencing interests in such Mortgage Loans
will bear all risk of loss resulting from defaults by borrowers and will have
to look primarily to the value of the related Mortgaged Properties for recovery
of the outstanding principal and unpaid interest of the defaulted Mortgage
Loans. See "Description of the Trust Property -- Mortgage Loans".
An investment in Securities secured by or evidencing interests in
Contracts may be affected by, among other things, a downturn in regional or
local economic conditions. These regional or local economic conditions are
often volatile, and historically have affected the delinquency, loan loss and
repossession experience of Contracts. To the extent that losses on Contracts
are not covered by applicable insurance policies, if any, or by any Credit
Enhancement, holders of the Securities secured by or evidencing interests in
such Contracts will bear all risk of loss resulting from default by borrowers
and will have to look primarily to the value of the underlying asset, if any,
for recovery of the outstanding principal and unpaid interest of the defaulted
Contracts. See "Description of the Trust Property -- Contracts".
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LIMITATIONS ON REALIZATIONS OF JUNIOR LIENS. The primary risk with
respect to defaulted Mortgage 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 related senior lien(s)
and the Mortgage Loan and that other insurance providing for reimbursement for
losses from such default (i.e., the FHA Insurance Amount for a Title I Mortgage
Loan) is not available. The claims of the related senior lienholder(s) will be
satisfied in full out of proceeds of the liquidation of the Mortgaged Property,
if such proceeds are sufficient, before the related Issuer, as the junior
lienholder, receives any payments in respect of the defaulted Mortgage Loan.
If the Servicer or a Subservicer, if any, were to foreclose on any junior lien
Mortgage Loan, it would do so subject to any related senior lien(s). In order
for a junior lien Mortgage Loan to be paid in full at such sale, a bidder at
the foreclosure sale of such Mortgage Loan would have to bid an amount
sufficient to pay off all sums due under the Mortgage Loan and the senior
lien(s) or purchase the Mortgaged Property subject to the senior lien(s). If
proceeds from a foreclosure and liquidation of the related Mortgaged Property
are insufficient to satisfy the costs of foreclosure and liquidation and the
amounts owed under the loans secured by the senior lien(s) and the junior lien
Mortgage Loan in the aggregate, the Issuer, as the junior lienholder, will bear
(i) the risk of delay in payments and distributions while a deficiency judgment
(which may not be available in certain jurisdictions) against the borrower is
obtained and realized and (ii) the risk of loss if the deficiency judgment is
not obtained or realized. Any such delays or losses will be borne by the
Securityholders of a Series to the extent that such delays or losses are not
otherwise covered by amounts available from any Credit Enhancement provided for
the related Securities, as specified in the related Prospectus Supplement. See
"Certain Legal Aspects of the Loan Assets -- Foreclosure -- Junior Liens".
CERTAIN LEGAL CONSIDERATIONS OF THE LOAN ASSETS. Applicable state laws
generally regulate interest rates and other charges that may be assessed on
borrowers, require certain disclosures to borrowers, and may require licensing
of FIC, the Trustee, the Indenture Trustee, the Servicer, the Administrator, if
any, the Master Servicer, if any, and any Subservicer. In addition, most
states have other laws, public policies and general principles of equity
relating to the protection of consumers and the prevention of unfair and
deceptive practices which may apply to the origination, servicing and
collection of the Loan Assets. The Loan Assets may also be subject to federal
laws, including, if applicable, the following: (i) the federal Truth-in-
Lending Act and Regulation Z promulgated thereunder, which require certain
disclosures to the borrowers regarding the terms of the Loan Assets; (ii) the
Real Estate Settlement Procedures Act and Regulation X promulgated thereunder,
which require certain disclosures to the borrowers regarding the settlement and
servicing of the Mortgage Loans; (iii) the Equal Credit Opportunity Act and
Regulation B promulgated thereunder, which prohibit discrimination on the basis
of age, race, color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer Credit
Protection Act; (iv) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; (v) the
Federal Trade Commission Preservation of Consumers' Claims and Defenses Rule,
16 C.F.R. Part 433, regarding the preservation of a consumer's rights; (vi) the
Fair Housing Act, 42 U.S.C. 3601 et seq., relating to the creation and
governance of the Title I Program; (vii) the Home Ownership and Equity
Protection Act; and (viii) the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"). In addition, Federal and state environmental
laws and regulations may also impact the Servicer's or any Subservicer's
ability to realize value with respect to the Mortgaged Properties. See
"Certain Legal Aspects of the Loan Assets".
Depending on the provisions of applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Servicer or any Subservicer to collect all or part of
the principal of or interest on the Loan Assets, may entitle the borrower to a
refund of amounts previously paid, and, in addition, could subject the Servicer
or any Subservicer to damages and
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administrative sanctions. Further, violations of state law can affect the
insurability of the Title I Mortgage Loans and Title I Contracts under FHA
Regulations. See "Certain Legal Aspects of the Loan Assets -- The Title I
Program." If the Servicer or any Subservicer is unable to collect all or part
of the principal or interest on any Loan Asset because of a violation of the
aforementioned laws, public policies or general principles of equity, payments
on or distributions in respect of the Securities may be delayed or the Trustee
may be unable to make all payments or distributions owed to the Securityholders
to the extent any related losses are not otherwise covered by amounts available
from any Credit Enhancement provided for the related Series of Securities.
Furthermore, depending upon whether damages and sanctions are assessed against
the Servicer, the Master Servicer, if any, or any Subservicer, such violations
may materially impact the financial ability of the Master Servicer, if any, the
Servicer or Subservicer to continue to act in such capacity.
To the extent specified in the related Prospectus Supplement, the Seller
or the Transferor will be required to repurchase or replace any Loan Asset
which, at the time of origination, did not comply with applicable federal and
state laws or regulations.
RISKS ASSOCIATED WITH CERTAIN LOAN ASSETS
NO HAZARD INSURANCE FOR TITLE I MORTGAGE LOANS. With respect to any
Title I Mortgage Loans, the FHA Regulations do not require that a borrower
obtain title or fire and casualty insurance as a condition to obtaining a
property improvement loan. With respect to both manufactured home contracts
that are Title I Contracts and property improvement loans that are Title I
Mortgage Loans, if the related Mortgage Property is located in a flood hazard
area, however, flood insurance in an amount at least equal to the loan amount
is required. In addition, the FHA Regulations do not require that the borrower
obtain insurance against physical damage arising from earth movement (including
earthquakes, landslides and mudflows) as a condition to obtaining a property
improvement loan insured under the Title I Program. Accordingly, if a
Mortgaged Property that secures a Title I Mortgage Loan suffers any uninsured
hazard or casualty losses, holders of any Offered Securities secured in whole
or in part by Title I Mortgage Loans may bear the risk of loss resulting from a
default by the borrower to the extent such losses are not recovered by
foreclosure on the defaulted loans or from any FHA Claims payments. Such loss
may be otherwise covered by amounts available from the Credit Enhancement
provided for the Offered Securities, as specified in the related Prospectus
Supplement.
CONTRACTS SECURED BY MANUFACTURED HOMES. The Secured Contracts will be
secured by security interests in Manufactured Homes that are not considered to
be real property because they are not permanently affixed to real estate.
Perfection of security interests in such Manufactured Homes and enforcement of
rights to realize upon the value of such Manufactured Homes as collateral for
the Secured Contracts are subject to a number of Federal and state laws,
including the Uniform Commercial Code as adopted in each state and each state's
certificate of title statutes. The steps necessary to perfect the security
interest in a Manufactured Home will vary from state to state. Because of the
expense and administrative inconvenience involved, the Servicer of a Secured
Contract will not amend any certificate of title to change the lienholder
specified therein from such Servicer to the Issuer or the applicable Trustee
and will not deliver any certificate of title to such Issuer or Trustee or note
thereon such Issuer's or Trustee's interest. Consequently, in some states, in
the absence of such an amendment, the assignment to such Issuer or Trustee of
the security interest in the Manufactured Home may not be effective or such
security interest may not be perfected and, in the absence of such notation or
delivery to such Issuer or Trustee, the assignment of the security interest in
the Manufactured Home may not be effective against creditors of the Servicer or
a trustee in bankruptcy of the Servicer. If any related Credit Enhancement is
exhausted and
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a Secured Contract is in default, then recovery of amounts due on such Secured
Contracts is dependent on repossession and resale of the Manufactured Home
securing such Secured Contract. Certain other factors may limit the ability of
the Servicer to realize upon the Manufactured Homes or may limit the amount
realized to less than the amount due.
UNSECURED CONTRACTS. The obligations of the borrower under any
Unsecured Contract included as part of the related Trust Property will not be
secured by an interest in the related real estate or otherwise, and the related
Issuer, as the owner of such Unsecured Contract and the related Indenture
Trustee, as assignee for the benefit of the Noteholders, of the Issuer's
interest in such Unsecured Contract, will be a general unsecured creditor as to
such obligations. As a consequence, in the event of a default under an
Unsecured Contract, the related Issuer or Indenture Trustee, as applicable,
will have recourse only against the borrower's assets generally, along with all
other general unsecured creditors of the borrower. In a bankruptcy or
insolvency proceeding relating to an borrower on an Unsecured Contract, the
obligations of the borrower under such Unsecured Contract may be discharged in
their entirety, notwithstanding the fact that the portion of such borrower's
assets made available to the related Trustee as a general unsecured creditor to
pay amounts due and owing thereunder are insufficient to pay all such amounts.
A borrower on an Unsecured Contract may not demonstrate the same degree of
concern over performance of its obligations under such Unsecured Contract as if
such obligations were secured by a single family residence owned by such
borrower.
CONSUMER PROTECTION LAWS RELATED TO CONTRACTS. Numerous federal and
state consumer protection laws impose requirements on lending under retail
installment sales contracts and installment loan agreements such as the
Contracts, and the failure by the lender or seller of goods to comply with such
requirements could give rise to liabilities of assignees for amounts due under
such agreements and claims by such assignees may be subject to set-off as a
result of such lender's or seller's noncompliance. These laws would apply to a
Trustee as an assignee of Contracts. FIC will warrant that each Contract
complies with all requirements of law and, with respect to any Secured
Contract, will make certain warranties relating to the validity, subsistence,
perfection and priority of the security interest in each Manufactured Home
securing such Secured Contract. A breach of any such warranty that materially
adversely affects the interests of the Securityholders in any Contract would
create an obligation of the Seller to repurchase or replace such Contract
unless such breach is cured.
RELIANCE ON MANAGEMENT OF TIMESHARE UNITS. Unlike most conventional
single-family residential properties, the value of a timeshare unit is
substantially dependent on the management of the resort property in which it is
located. Management of timeshare resort properties includes operation of a
reservation system, maintenance of the physical structure, refurbishing of
individual units, maintenance and management of common areas and recreational
facilities, and facilitating the rental of individual units on behalf of
timeshare owners. In addition, timeshare units, which are purchased for
intervals of one or more specified weeks each year, are marketed as the owner's
purchase of future vacation opportunities rather than as a primary residence, a
second home or an investment. Accordingly, while borrowers are obligated to
make payments under their Mortgage Loans irrespective of any defect in, damage
to or change in conditions (such as poor management, faulty construction or
physical, social or environmental conditions) relating to the timeshare
properties, any such defect, damage or change in conditions could result in
delays in payment or in defaults by borrowers whose timeshare units are
affected.
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RECHARACTERIZATION OF SALE OF LOAN ASSETS AS BORROWING
In the event of the bankruptcy or insolvency of an affiliate of the
Issuer it is possible that a creditor, receiver, trustee in bankruptcy or other
party in interest may claim that the transactions through which the Issuer
acquired the Loan Assets were pledges of the Loan Assets rather than true
sales, and that, accordingly, the Loan Assets should be part of such
affiliate's bankruptcy estate. The transactions have been structured applying
principles such that following the bankruptcy of such affiliate, a court, in a
proceeding considering the transfers of the Loan Assets from such affiliate to
the Issuer, should treat the transfers of the Loan Assets as a true sale and,
therefore, the Loan Assets should not be part of such affiliate's bankruptcy
estate. The Issuer and any such affiliate will treat transfers of the Loan
Assets as sales from the affiliate to the Issuer for tax and accounting
purposes, but such treatment will not preclude a creditor, receiver, trustee in
bankruptcy or other party in interest of any such affiliate from pursuing such
claim. If such transactions are determined to be sales to the Issuer, the Loan
Assets would not be part of any such affiliate's bankruptcy estate and would
not be available for distribution to any such affiliate's creditors or equity
security holders.
Additionally, in the event of the bankruptcy or insolvency of any of the
Issuer's affiliates, a creditor, receiver, trustee in bankruptcy or other party
in interest may seek a court order consolidating the assets and liabilities of
the Issuer with the estate of such affiliate ("substantive consolidation") with
the result that their combined estate will be made subject to their combined
liabilities. This transaction has been structured applying principles such
that following the bankruptcy of an affiliate of the Issuer, a court, upon
motion of a creditor, receiver, trustee in bankruptcy or other party in
interest, should not consolidate the assets and liabilities of the Issuer and
such affiliate on the basis of any legal theories regarding substantive
consolidation previously recognized by courts of competent jurisdiction in
bankruptcy proceedings. The foregoing statement is based on and subject to a
number of assumptions concerning facts and circumstances that have been noted,
cited or acknowledged by courts adjudicating similar claims in prior cases and
certain other assumptions regarding the separate corporate identities of the
Issuer and its affiliates, many of which relate to the manner in which the
Issuer and its affiliates have conducted and will conduct their respective
businesses.
If either of the foregoing positions is argued before a court, such
argument could prevent, even if ultimately unsuccessful, timely payments of
amounts due on the Securities, and could result, if ultimately successful, in
payment of reduced amounts on the Securities.
RISKS RELATING TO INDEXED SECURITIES
An investment in Securities indexed, as to principal, premium and/or
interest, to one or more values of currencies (including exchange rates and
swap indices between currencies), commodities, interest rates or other indices
entails significant risks that are not associated with similar investments in a
conventional fixed-rate debt security. If the interest rate of such a Security
is so indexed, it may result in an interest rate that is less than that payable
on a conventional fixed-rate debt security issued at the same time, including
the possibility that no interest will be paid, and, if the principal amount of
such a Security is so indexed, the principal amount payable on the related
final Distribution Date may be less than the original purchase price of such
Security if allowed pursuant to the terms of such Security, including the
possibility that no principal will be paid. The secondary market for such
Securities will be affected by a number of factors, independent of the
characteristics of the Loan Assets, structure of the cash flows and the value
of the applicable currency, commodity, interest rate or other index, including
the volatility of the applicable currency, commodity, interest rate or other
index, the time remaining to the maturity of such
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Securities, the amount outstanding of such Securities and market interest
rates. The value of the applicable currency, commodity, interest rate or other
index depends on a number of interrelated factors, including economic,
financial and political events. Additionally, if the formula used to determine
the principal amount, premium, if any, or interest payable with respect to such
Securities contains a multiple or leverage factor, the effect of any change in
the applicable currency, commodity, interest rate or other index may be
increased. The historical experience of the relevant currencies, commodities,
interest rates or other indices should not be taken as an indication of future
performance of such currencies, commodities, interest rates or other indices
during the term of any Security. The credit ratings assigned to any Series or
Class of Securities, in no way, are reflective of the potential impact of the
factors discussed above, or any other factors, on the market value of the
Securities. Accordingly, prospective investors should consult their own
financial and legal advisors as to the risks entailed by an investment in such
Securities and the suitability of such Securities in light of their particular
circumstances.
DESCRIPTION OF THE NOTES
GENERAL
With respect to each Series, one or more Classes of Notes may be issued
pursuant to the terms of an Indenture, a form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
The following summary does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Notes and
the Indenture.
Unless otherwise specified in the related Prospectus Supplement, each
Class of Notes will initially be represented by one or more Notes, in each case
registered in the name of the nominee of DTC (together with any successor
depository selected by the Issuer, the "Depository") except as set forth below.
Unless otherwise specified in the related Prospectus Supplement, the Notes will
be available for purchase in denominations of $1,000 and integral multiples
thereof in book-entry form only. FIC has been informed by DTC that DTC's
nominee will be Cede, unless another nominee is specified in the related
Prospectus Supplement. Accordingly, such nominee is expected to be the holder
of record of the Notes of each Class. Unless and until Definitive Notes are
issued under the limited circumstances described herein or in the related
Prospectus Supplement, no Noteholder will be entitled to receive a physical
certificate representing a Note. All references herein and in the related
Prospectus Supplement to actions by Noteholders refer to actions taken by DTC
upon instructions from its participating organizations (the "DTC Participants")
and all references herein and in the related Prospectus Supplement to
distributions, notices, reports and statements to Noteholders refer to
payments, notices, reports and statements to DTC or its nominee, as the
registered holder of the Notes, for payment or distribution to Noteholders in
accordance with DTC's procedures with respect thereto. See "Certain
Information Regarding the Securities--Book-Entry Registration" and
"--Definitive Securities".
PRINCIPAL AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of losses,
Interest Rate and amount of or method of determining payments of principal and
interest on each Class of Notes of a given Series will be described in the
related Prospectus Supplement. The rights of holders of any Class of Notes to
receive payments of principal and interest may be senior or subordinate to the
rights of holders of any other Class or Classes of Notes of such Series, as
described in the related Prospectus Supplement. See "Certain Information
Regarding the Securities -- General". Unless otherwise provided in the related
Prospectus
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Supplement, payments of interest on the Notes of such Series will be made prior
to payments of principal thereon. Each Class of Notes may have a different
Interest Rate, which may be a fixed, variable or adjustable Interest Rate (and
which may be zero for Principal Only Securities), or any combination of the
foregoing. The related Prospectus Supplement will specify the Interest Rate
for each Class of Notes of a given Series or the method for determining such
Interest Rate. See "Certain Information Regarding the Securities--Fixed Rate
Securities and Floating Rate Securities". One or more Classes of Notes of a
Series may be redeemable in whole or in part under the circumstances specified
in the related Prospectus Supplement, including as a result of the Servicer's
exercising its option to purchase the related Loan Assets Pool.
One or more Classes of Notes of a given Series may have fixed principal
payment schedules, as set forth in such Prospectus Supplement. Holders of such
Notes would be entitled to receive as payments of principal on any given
Distribution Date the applicable amounts set forth on such schedule with
respect to such Notes, in the manner and to the extent set forth in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
payments to Noteholders of all Classes within a Series in respect of interest
will have the same priority. Under certain circumstances, the amount available
for such payments could be less than the amount of interest payable on the
Notes on any of the dates specified for payments in the related Prospectus
Supplement (each, a "Distribution Date"), in which case each Class of
Noteholders will receive its ratable share (based upon the aggregate amount of
interest due to such Class of Noteholders) of the aggregate amount available to
be paid in respect of interest on the Notes of such Series.
In the case of a Series of Notes which includes two or more Classes of
Notes, the sequential order and priority of payment in respect of principal and
interest, and any schedule or formula or other provisions applicable to the
determination thereof, of each such Class will be set forth in the related
Prospectus Supplement. Payments in respect of principal and interest of any
Class of Notes will be made on a pro rata basis among all the Noteholders of
such Class.
THE INDENTURE
MODIFICATION OF INDENTURE. The related Indenture Trustee and the Issuer
may, with the consent of Noteholders of not less than a majority of the
outstanding principal amount of the Notes of the related Series, enter into a
supplemental indenture for the purpose of adding any provisions to, or changing
in any manner or eliminating any of the provisions of, the related Indenture,
or modifying in any manner the rights of the related Noteholders (except as
provided below).
Unless otherwise specified in the related Prospectus Supplement with
respect to a Series of Notes, without the consent of the holder of each
outstanding Note affected thereby no supplemental indenture will: (i) change
the date of any installment of principal of or interest on any such Note or
reduce the principal amount thereof, the interest rate thereon or the
redemption price with respect thereto or change the provisions of the related
Indenture relating to the application of collections on, or the proceeds of the
sale of, the Trust Property to payment of principal or interest on the Notes or
change any place of payment where, or the coin or currency in which, any such
Note or any interest thereon is payable or impair the right to institute suit
for the enforcement of certain provisions of the related Indenture regarding
payment; (ii) reduce the percentage of the aggregate principal amount of the
outstanding Notes of such Series, the consent of the holders of which is
required for any such supplemental indenture or the consent of the holders of
which is required for any waiver of compliance with certain provisions of the
related Indenture
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or certain defaults thereunder and their consequences as provided for in such
Indenture; (iii) modify or alter the provisions of the related Indenture
regarding the definition of the term "outstanding"; (iv) reduce the percentage
of the aggregate principal amount of the outstanding Notes of such Series, the
consent of the holders of which is required to direct the related Indenture
Trustee to sell or liquidate the Loan Assets if the proceeds of such sale would
be insufficient to pay the principal amount and accrued but unpaid interest on
the outstanding Notes of such Series; (v) modify the sections of the related
Indenture which specify the applicable percentage of the aggregate principal
amount of the outstanding Notes of such Series necessary to amend such
Indenture or certain other related agreements; (vi) modify the provisions of
the related Indenture in such a manner as to affect the calculation of the
amount of any payment of interest or principal due on any Note on any
Distribution Date or to affect the rights of the Noteholders to the benefit of
any provisions for the mandatory redemption of the Notes; or (vii) permit the
creation of any lien ranking prior to or on a parity with the lien of the
related Indenture with respect to any part of the Trust Property or, except as
otherwise permitted or contemplated in such Indenture, terminate the lien of
such Indenture on any such property or deprive the holder of any such Note of
the security provided by the lien of such Indenture.
To the extent provided in the applicable Prospectus Supplement, the
related Indenture Trustee and the Issuer may also enter into supplemental
indentures, without the consent of the Noteholders of the related Series, for
the purpose of, among other things, adding any provisions to or changing in any
manner or eliminating any of the provisions of, the related Indenture or
modifying in any manner the rights of the Noteholders; provided that such
action shall not adversely affect in any material respect the interests of any
Noteholder.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. With respect to the
Notes of a given Series, unless otherwise specified in the related Prospectus
Supplement, "Events of Default" under the related Indenture will consist of:
(i) a default in the payment of any interest on any such Note when the same
becomes due and payable, and such default shall continue for a period of five
days; (ii) a default in the payment of the principal of or any installment of
the principal of any such Note when the same becomes due and payable; (iii) a
default in the observance or performance of any covenant or agreement of the
applicable Issuer made in the related Indenture or any representation or
warranty of the Issuer made in the related Indenture or in any certificate or
other writing delivered pursuant thereto or in connection therewith having been
proven incorrect in any material respect as of the time made, and such default
shall have continued and not been cured, or the circumstance or condition in
respect of which such misrepresentation or warranty was incorrect shall not
have been eliminated or otherwise cured for a period of 30 days after notice
thereof is given to the Issuer by the applicable Indenture Trustee or to such
Issuer and such Indenture Trustee by the holders of at least 25% of the
aggregate principal amount of all Notes then outstanding; or (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the applicable
Issuer or any substantial portion of the Trust Property. However, the amount
of principal required to be paid to Noteholders of such Series under the
related Indenture will generally be limited to amounts available to be
deposited in the Collection Account. Therefore, unless otherwise specified in
the related Prospectus Supplement, the failure to pay principal on a Class of
Notes generally will not result in the occurrence of an Event of Default until
the final scheduled Distribution Date for such Class of Notes.
If an Event of Default should occur and be continuing with respect to
the Notes of any Series, the related Indenture Trustee or holders of a majority
in principal amount of such Notes then outstanding may declare the principal of
such Notes to be immediately due and payable. Unless otherwise specified in
the related Prospectus Supplement, such declaration may, under certain
circumstances, be rescinded by the holders of a majority in principal amount of
such Notes then outstanding.
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If an Event of Default shall have occurred and be continuing, the
Indenture Trustee may, and at the direction of a majority of the Noteholders
shall, do one or more of the following: (i) institute proceedings to collect
amounts due, (ii) foreclose on property included in the Trust Property; (iii)
exercise remedies as a secured party and the UCC; and (iv) sell the related
Loan Assets. Unless otherwise specified in the related Prospectus Supplement,
however, such Indenture Trustee is prohibited from selling the related Loan
Assets following an Event of Default, unless (i) the holders of all such
outstanding Notes consent to such sale, (ii) the proceeds of such sale are
sufficient to discharge in full all amounts then due and unpaid upon such Notes
for principal and interest, or (iii) such Indenture Trustee determines that the
Trust Property will not continue to provide sufficient funds for payment of
principal of and interest on the Notes as they would become due if the Notes
were not declared due and payable and the Indenture Trustee obtains the consent
of holders of 66 2/3% of the aggregate principal amount of all Notes then
outstanding. If the Notes have been declared to be due and payable following
an Event of Default, the Indenture Trustee may, but need not, elect to maintain
possession of the Trust Property.
Subject to the provisions for indemnification and certain limitations
contained in the related Indenture, the holders of a majority of the aggregate
principal amount of the outstanding Notes of a given Series will have the right
to direct the time, method and place of conducting any proceeding for any
remedy available to the applicable Indenture Trustee, and the holders of a
majority of the aggregate principal amount of such Notes then outstanding may,
in certain cases, waive any past default and its consequences, except a default
in the payment of principal of or interest on any of the Notes or in respect of
a covenant or provision of such Indenture that cannot be modified or amended
without the consent of the holders of each such outstanding Note.
Unless otherwise specified in the related Prospectus Supplement, no
holder of a Note of any Series will have the right to institute any proceeding,
judicial or otherwise, with respect to the related Indenture, unless (i) such
holder has previously given written notice to the applicable Indenture Trustee
of a continuing Event of Default, (ii) the holders of not less than 25% of the
aggregate principal amount of the outstanding Notes of such Series have made
written request to such Indenture Trustee to institute such proceeding in
respect of such Event of Default in its own name as Indenture Trustee, (iii)
such holder or holders have offered to such Indenture Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
complying with such request, (iv) such Indenture Trustee for 60 days after its
receipt of such notice, request and offer of indemnity failed to institute such
proceeding and (v) no direction inconsistent with such written request has been
given to such Indenture Trustee during such 60-day period by the holders of a
majority of the aggregate principal amount of the outstanding Notes of such
Series.
In addition, each Indenture Trustee, by entering into the related
Indenture, and the related Noteholders, by accepting the related Notes, will
covenant that they will not at any time institute against the applicable Issuer
or the Servicer, or join in any institution against the applicable Issuer or
the Servicer of any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or other proceeding under any United States federal or
state bankruptcy or similar law in connection with any obligations relating to
the Notes, the related Indenture or certain related documents.
The Notes shall be non-recourse obligations of the Issuer and shall be
limited in right of payment to amounts available from the Trust Property and
any amounts received by the Indenture Trustee under any Credit Enhancement in
respect of the Notes, as provided in the related Indenture. The Issuer shall
not otherwise be liable for payments on the Notes.
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CERTAIN COVENANTS. Each Indenture will provide that the related Issuer
will not consolidate with or merge into any other entity, unless (i) the entity
formed by or surviving such consolidation or merger is organized under the laws
of the United States, any state or the District of Columbia, (ii) such entity
expressly assumes such Issuer's obligation to make due and punctual payments
upon the Notes of the related Series and the performance or observance of every
agreement and covenant of the Issuer under the Indenture, (iii) no Event of
Default shall have occurred and be continuing immediately after such merger or
consolidation, (iv) such Issuer has been advised that the rating of the Notes
or the Certificates of such Series then outstanding would not be reduced or
withdrawn by the Rating Agencies as a result of such merger or consolidation
and (v) such Issuer has received an opinion of counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Issuer or to any related Noteholder or Certificateholder.
Each Issuer will not, among other things, (i) except as expressly
permitted by the applicable Indenture or the applicable Sale and Servicing
Agreements, sell, transfer, exchange or otherwise dispose of any of the
properties or assets of the Issuer, including those included in the Trust
Property unless directed to do so by the Indenture Trustee, (ii) claim any
credit on, or make any deduction from the principal or interest payable in
respect of, the Notes of the related Series (other than amounts properly
withheld under the Code or applicable state law) or assert any claim against
any present or former Noteholder by reason of the payment of taxes levied or
assessed upon any part of the Trust Property, (iii) engage in any business or
activity other than as permitted by the Issuer's charter documents, (iv) permit
the validity or effectiveness of the related Indenture to be amended,
hypothecated, subordinated, terminated or discharged or permit any person to be
released from any covenants or obligations with respect to such Notes under
such Indenture except as may be expressly permitted thereby or (v) permit any
lien, charge, excise, claim, security interest, mortgage or other encumbrance
(other than the lien of the related Indenture) to be created on or extend to or
otherwise arise upon or burden the Trust Property or any part thereof, or any
interest therein or the proceeds thereof.
ANNUAL COMPLIANCE STATEMENT. The Issuer will be required to deliver to
the Indenture Trustee, within 120 days after the end of each fiscal year of
such Issuer, an officer's certificate with respect to the fulfillment of the
Issuer's obligations under the Indenture during the immediately preceding
fiscal year.
INDENTURE TRUSTEE'S ANNUAL REPORT. If required by Section 313(a) of the
Trust Indenture Act (the "TIA"), within 60 days after each February 1, the
Indenture Trustee shall mail to each Noteholder, as required by TIA Section
313(c), a brief report dated as of such date that complies with TIA Section
313(a). The Indenture Trustee also shall comply with TIA Section 313(b).
SATISFACTION AND DISCHARGE OF INDENTURE. An Indenture will cease to be
of further effect with respect to the Notes of any Series, upon the delivery to
the related Indenture Trustee for cancellation of all Notes of such Series or,
with certain limitations, upon deposit with such Indenture Trustee of funds
sufficient for the payment in full of all such Notes.
THE INDENTURE TRUSTEE
The Indenture Trustee for a Series of Notes will be specified in the
related Prospectus Supplement. The Indenture Trustee for any Series may resign
at any time, in which event the Issuer will be obligated to appoint a successor
thereto for such Series. The holders of a majority of the aggregate principal
amount of the related Notes outstanding may remove any such Indenture Trustee
and the Issuer shall remove the Indenture Trustee if (i) such Indenture Trustee
ceases to be eligible to continue as such under the related
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Indenture; (ii) such Indenture Trustee becomes insolvent; (iii) a receiver or
other public official takes charge of such Indenture Trustee or its property;
or (iv) such Indenture Trustee otherwise becomes incapable of acting. In such
circumstances, the Issuer will be obligated to appoint a successor thereto for
the applicable Series of Notes. No resignation or removal of the Indenture
Trustee and no appointment of a successor thereto for any Series of Notes will
become effective until the acceptance of appointment by such successor.
ADMINISTRATION AGREEMENT
If and to the extent specified in the related Prospectus Supplement,
FFI, in its capacity as administrator (the "Administrator"), will enter into an
agreement (as amended and supplemented from time to time, an "Administration
Agreement") with each Issuer that issues Notes and the related Indenture
Trustee pursuant to which the Administrator will agree, to the extent provided
in such Administration Agreement, to provide the notices and to perform other
administrative obligations required by the related Indenture. To the extent
specified in the related Prospectus Supplement, as compensation for the
performance of the Administrator's obligations under the applicable
Administration Agreement and as reimbursement for its expenses related thereto,
the Administrator will be entitled to a monthly administration fee of such
amount as may be set forth in the related Prospectus Supplement (the
"Administration Fee"), which fee will be paid by the Servicer.
DESCRIPTION OF THE CERTIFICATES
GENERAL
With respect to each Series, one or more Classes of Certificates may be
issued pursuant to the terms of a Trust Agreement or a Pooling and Servicing
Agreement, a form of each of which has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The following
summary does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Certificates and the
Trust Agreement or Pooling and Servicing Agreement, as applicable.
Unless otherwise specified in the related Prospectus Supplement and
except for the Certificates, if any, of a given Series purchased by the Seller,
each Class of Certificates will initially be represented by one or more
Certificates registered in the name of the nominee for DTC, except as set forth
below. Unless otherwise specified in the related Prospectus Supplement and
except for the Certificates, if any, of a given Series purchased by the Seller,
the Certificates will be available for purchase in minimum denominations of
$1,000 and integral multiples thereof in book-entry form only. The Seller has
been informed by DTC that DTC's nominee will be Cede, unless another nominee is
specified in the related Prospectus Supplement. Accordingly, such nominee is
expected to be the holder of record of the Certificates of any Series that are
not purchased by the Seller. Unless and until Definitive Certificates are
issued under the limited circumstances described herein or in the related
Prospectus Supplement, no Certificateholder (other than the Issuer) will be
entitled to receive a physical certificate representing a Certificate. All
references herein and in the related Prospectus Supplement to actions by
Certificateholders refer to actions taken by DTC upon instructions from the
Participants and all references herein and in the related Prospectus Supplement
to distributions, notices, reports and statements to Certificateholders refer
to distributions, notices, reports and statements given, made or sent to DTC or
its nominee, as the case may be, as the registered holder of the Certificates,
for distribution to Certificateholders in accordance with DTC's procedures with
respect thereto. See "Certain Information Regarding the Securities--Book-Entry
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Registration" and "--Definitive Securities". Any Certificates of a given
Series owned by the Seller or its affiliates will be entitled to equal and
proportionate benefits under the applicable Trust Agreement or Pooling and
Servicing Agreement, except that such Certificates will be deemed not to be
outstanding for the purpose of determining whether the requisite percentage of
Certificateholders have given any request, demand, authorization, direction,
notice, consent or other action under the Related Documents (other than the
commencement by the related Trust of a voluntary proceeding in bankruptcy as
described under "Description of the Transfer and Servicing
Agreements--Insolvency Event").
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
The timing and priority of distributions, seniority, allocations of
losses, Pass Through Rate and amount of or method of determining distributions
with respect to principal and interest of each Class of Certificates will be
described in the related Prospectus Supplement. Distributions of interest on
such Certificates will be made on the dates specified in the related Prospectus
Supplement (each, a "Distribution Date") and will be made prior to
distributions with respect to principal of such Certificates.
Each Class of Certificates may have a different Pass Through Rate, which
may be a fixed, variable or adjustable Pass Through Rate (and which may be zero
for certain Classes of Certificates) or any combination of the foregoing. The
related Prospectus Supplement will specify the Pass Through Rate for each Cass
of Certificates of a given Series or the method for determining such Pass
Through Rate. See also "Certain Information Regarding the Securities--Fixed
Rate Securities Floating Rate Securities". Unless otherwise provided in the
related Prospectus Supplement, distributions in respect of the Certificates of
a given Series that includes Notes may be subordinate to payments in respect of
the Notes of such Series as more fully described in the related Prospectus
Supplement. Distributions in respect of interest on and principal of any Class
of Certificates will be made on a pro rata basis among all the
Certificateholders of such Class.
In the case of a Series of Certificates which includes two or more
Classes of Certificates, the timing, sequential order, priority of payment or
amount of distributions in respect of interest and principal, and any schedule
or formula or other provisions applicable to the determination thereof, of each
such Class shall be as set forth in the related Prospectus Supplement.
If and as provided in the related Prospectus Supplement, certain amounts
remaining on deposit in the Collection Account after all required distributions
to the related Securityholders have been made may be released to the Seller,
FFI or one or more third party credit or liquidity enhancement providers.
POOL FACTORS AND TRADING INFORMATION
The "Note Pool Factor" for each Class of Notes will be a seven-digit
decimal which the Servicer will compute prior to each distribution with respect
to such Class of Notes indicating the remaining outstanding principal balance
of such Class of Notes, as of the applicable Distribution Date (after giving
effect to payments to be made on such Distribution Date), as a fraction of the
initial outstanding principal balance of such Class of Notes. The "Certificate
Pool Factor" for each Class of Certificates will be a seven-digit decimal which
the Servicer will compute prior to each distribution with respect to such Class
of Certificates indicating the remaining Certificate Balance of such Class of
Certificates, as of the applicable Distribution Date (after giving effect to
distributions to be made on such Distribution Date), as a fraction of the
initial Certificate Balance of such Class of Certificates. Each Note Pool
Factor and each
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Certificate Pool Factor will initially be 1.0000000 and thereafter will decline
to reflect reductions in the outstanding principal balance of the applicable
Class of Notes, or the reduction of the Certificate Balance of the applicable
Class of Certificates, as the case may be. A Noteholder's portion of the
aggregate outstanding principal balance of the related Class of Notes is the
product of (i) the original denomination of such Noteholder's Note and (ii) the
applicable Note Pool Factor. A Certificateholder's portion of the aggregate
outstanding Certificate Balance for the related Class of Certificates is the
product of (a) the original denomination of such Certificateholder's
Certificate and (b) the applicable Certificate Pool Factor.
Unless otherwise provided in the related Prospectus Supplement, the
Securityholders will receive reports on or about each Distribution Date
concerning (i) with respect to the Collection Period immediately preceding such
Distribution Date, payments received on the Loan Assets, the Pool Balance (as
such term is defined in the related Prospectus Supplement, the "Pool Balance"),
each Certificate Pool Factor or Note Pool Factor, as applicable, and various
other items of information, and (ii) with respect to the Collection Period
second preceding such Distribution Date, as applicable, amounts allocated or
distributed on the preceding Distribution Date and any reconciliation of such
amounts with information provided by the Servicer prior to such current
Distribution Date. In addition, Securityholders of record during any calendar
year will be furnished information for tax reporting purposes not later than
the latest date permitted by law. See "Description of the Transfer and
Servicing Agreements -- Reports to Securityholders".
CERTAIN INFORMATION REGARDING THE SECURITIES
GENERAL
To the extent provided in the related Prospectus Supplement, a Series
may include one or more Classes of Securities entitled only to (i) payments
allocable to interest ("Interest Only Securities"); (ii) payments allocable to
principal ("Principal Only Securities") and allocable as between scheduled
payments of principal and Principal Prepayments (as defined below); or (iii)
payments allocable to both principal (and allocable as between scheduled
payments of principal and Principal Prepayments) and interest. A Series of
Securities may include one or more Classes as to which payments or
distributions will be allocated (i) on the basis of collections from designated
portions of the Trust Property, (ii) in accordance with a schedule or formula,
(iii) in relation to the occurrence of events, or (iv) otherwise, in each case
as specified in the related Prospectus Supplement. The timing and amounts of
such payments or distributions may vary among Classes, over time or otherwise,
in each case as specified in the related Prospectus Supplement.
To the extent provided in the related Prospectus Supplement, one or more
Classes of Securities may provide for interest that accrues, but is not
currently payable ("Compound Interest Securities"). With respect to any Class
of Compound Interest Securities, if specified in the related Prospectus
Supplement, any interest that has accrued but is not paid on a given
Distribution Date will be added to the aggregate principal balance of such
Class on that Distribution Date.
To the extent provided in the related Prospectus Supplement, a Series of
Securities may include one or more Classes of Scheduled Amortization Securities
and Companion Securities. "Scheduled Amortization Securities" are Securities
with respect to which payments or distributions of principal are to be made in
specified amounts on specified Distribution Dates, to the extent of funds
available on such Distribution Date. "Companion Securities" are Securities
which receive payments or distributions of all or a portion of any funds
available on a given Distribution Date which are in excess of amounts required
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to be applied to payments or distributions on Scheduled Amortization Securities
on such Distribution Date. Because of the manner of application of payments or
distributions of principal to Companion Securities, the weighted average lives
of Companion Securities of a Series may be expected to be more sensitive to the
actual rate of prepayments on the Loan Assets included in the related Trust
Property than will the Scheduled Amortization Securities of such Series.
To the extent provided in the related Prospectus Supplement, one or more
Series of Securities may constitute a Series of "Special Allocation Securities"
which may include Senior Securities, Subordinated Securities, Priority
Securities and Non-Priority Securities. As more fully described in the related
Prospectus Supplement for a Series of Special Allocation Securities, Special
Allocation Securities are Securities for which the timing and/or priority of
payments or distributions of principal and/or interest may favor one or more
Classes of such Securities over one or more other Classes of such Securities.
Such timing and/or priority may be modified or reordered upon the occurrence of
one or more specified events. To the extent specified in the related
Prospectus Supplement for a Series of Special Allocation Securities, losses on
the Assets included in the related Trust Property may be disproportionately
borne by one or more Classes of such Series, and the proceeds, payments and
distributions from such Assets may be applied to the payment in full of one or
more Classes of such Series before the balance, if any, of such proceeds is
applied to one or more other Classes within such Series. For example, Special
Allocation Securities in a Series may be comprised of one or more Classes of
Senior Securities ("Senior Securities") having a priority in right to payments
or distributions of principal and interest over one or more Classes of
Subordinated Securities ("Subordinated Securities"), to the extent described in
the related Prospectus Supplement, as a form of Credit Enhancement. See
"Credit Enhancement -- Subordination". Typically, Subordinated Securities of a
Series will carry a rating by the rating agencies rating the Securities of such
Series lower than that of the Senior Securities of such Series. In addition,
one or more Classes of Securities of a Series ("Priority Securities") may be
entitled to a priority of payments or distributions of principal or interest
from Assets included in the related Trust Property over another Class of
Securities of such Series ("Non-Priority Securities"), but only after the
exhaustion of other Credit Enhancement applicable to such Series. Priority
Securities and Non-Priority Securities nonetheless may be within the same
rating category.
FIXED RATE SECURITIES AND FLOATING RATE SECURITIES
Any Class of Securities (other than Principal Only Securities) may bear
interest at a fixed rate per annum ("Fixed Rate Securities") or at a variable
or adjustable rate per annum ("Floating Rate Securities"), as more fully
described in the applicable Prospectus Supplement. Each Class of Fixed Rate
Securities will bear interest at the applicable per annum Interest Rate or Pass
Through Rate, as the case may be, specified in the applicable Prospectus
Supplement. Unless otherwise set forth in the applicable Prospectus
Supplement, interest on each Class of Fixed Rate Securities will be computed on
the basis of a 360-day year of twelve 30-day months. See "Description of the
Notes--Principal and Interest on the Notes" and "Description of the
Certificates--Distributions of Principal and Interest".
INDEXED SECURITIES
To the extent so specified in any Prospectus Supplement, any Class of
Securities of a given Series may consist of Securities ("Indexed Securities")
in which the principal amount payable on the final Distribution Date for such
Class (the "Indexed Principal Amount") and/or the interest payable on any
Distribution Date is determined by reference to a measure (the "Index") which
will be related to the exchange rates of one or more currencies or composite
currencies (the "Index Currencies"); the price or prices of specified
commodities; or specified stocks, which may be based on U.S. or foreign
stocks, on
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specified dates specified in the applicable Prospectus Supplement, or such
other price, interest rate, exchange rate or other financial index or indices
as are described in the applicable Prospectus Supplement. Holders of Indexed
Securities may receive a principal amount on the related final Distribution
Date that is greater than or less than the face amount of the Indexed
Securities depending upon the relative value on the related final Distribution
Date of the specified indexed item. Information as to the method for
determining the principal amount payable on the related final Distribution
Date, if any, and, where applicable, certain historical information with
respect to the specific indexed item or items and special tax considerations
associated with investment in Indexed Securities, will be set forth in the
applicable Prospectus Supplement. Notwithstanding anything to the contrary
herein, for purposes of determining the rights of a holder of a Security
indexed as to principal in respect of voting for or against amendments to the
related Trust Agreement, Indenture or Pooling and Servicing Agreement, as the
case may be, and modifications and the waiver of rights thereunder, the
principal amount of such Indexed Security shall be deemed to be the face amount
thereof upon issuance.
If the determination of the Indexed Principal Amount of an Indexed
Security is based on an Index calculated or announced by a third party and such
third party either suspends the calculation or announcement of such Index or
changes the basis upon which such Index is calculated (other than changes
consistent with policies in effect at the time such Indexed Security was issued
and permitted changes described in the applicable Prospectus Supplement), then
such Index shall be calculated for purposes of such Indexed Security by an
independent calculation agent named in the applicable Prospectus Supplement on
the same basis, and subject to the same conditions and controls, as applied to
the original third party. If for any reason such Index cannot be calculated on
the same basis and subject to the same conditions and controls as applied to
the original third party, then the Indexed Principal Amount of such Indexed
Security shall be calculated in the manner set forth in the applicable
Prospectus Supplement. Any determination of such independent calculation agent
shall, in the absence of manifest error, be binding on all parties.
The applicable Prospectus Supplement will describe whether the principal
amount of the related Indexed Security, if any, that would be payable upon
redemption or repayment prior to the applicable final scheduled Distribution
Date will be the Face Amount of such Indexed Security, the Indexed Principal
Amount of such Indexed Security at the time of redemption or repayment or
another amount described in such Prospectus Supplement. See "Risk Factors --
Risks Relating to Indexed Securities".
BOOK-ENTRY REGISTRATION
Unless otherwise specified in the related Prospectus Supplement, each
Class of Securities offered hereby will be represented by one or more
certificates registered in the name of Cede, as nominee of DTC. Unless
otherwise specified in the related Prospectus Supplement, Securityholders may
hold beneficial interests in Securities through DTC (in the United States) or
Cedel or Euroclear (in Europe) directly if they are participants of such
systems, or indirectly through organizations which are participants in such
systems.
No Securityholder will be entitled to receive a certificate representing
such person's interest in the Securities, except as set forth below. Unless
and until Securities of a Class are issued in fully registered certificated
form ("Definitive Securities") under the limited circumstances described below,
all references herein to actions by Noteholders, Certificateholders or
Securityholders shall refer to actions taken by DTC upon instructions from DTC
Participants, and all references herein to payments, distributions, notices,
reports and statements to Noteholders, Certificateholders or Securityholders
shall refer to distributions, notices, reports and statements to Cede, as the
registered holder of the Securities, for distribution to Securityholders in
accordance with DTC procedures. As such, it is anticipated that the only
Noteholder,
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Certificateholder or Securityholder will be Cede, as nominee of DTC.
Securityholders will not be recognized by the related Trustee as Noteholders,
Certificateholders or Securityholders as such terms will be used in the
relevant agreements, and Securityholders will only be permitted to exercise the
rights of holders of Securities of the related Class indirectly through DTC and
DTC Participants, as further described below.
Cedel and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in their respective names
on the books of their respective Depositaries which in turn will hold such
positions in customers' securities accounts in the Depositaries' names on the
books of DTC.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Cedel Participants and Euroclear Participants will
occur in accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel or
Euroclear participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by its Depositary. However, each such cross-market transaction will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines. The relevant European international
clearing system will, if the transaction meets its settlement requirements,
deliver instructions to its Depositary to take action to effect final
settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a DTC Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in
such securities settled during such processing will be reported to the relevant
Euroclear or Cedel participant on such business day. Cash received in Cedel or
Euroclear as a result of sales of Securities by or through a Cedel Participant
or a Euroclear Participant to a DTC Participant will be received with value on
the DTC settlement date but will be available in the relevant Cedel or
Euroclear cash account only as of the business day following settlement in DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York UCC and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participating members ("DTC Participants") and to facilitate
the clearance and settlement of securities transactions between DTC
Participants through electronic book-entries, thereby eliminating the need for
physical movement of certificates. DTC Participants include securities brokers
and dealers, banks, trust companies and clearing corporations which may include
underwriters, agents or dealers with respect to the Securities of any Class or
Series. Indirect access to the DTC system also is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a DTC Participant, either directly or indirectly
(the "Indirect DTC Participants"). The rules applicable to DTC and DTC
Participants are on file with the Commission.
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Unless otherwise specified in the related Prospectus Supplement,
Securityholders that are not DTC Participants or Indirect DTC Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Securities may do so only through DTC Participants and Indirect DTC
Participants. DTC Participants will receive a credit for the Securities on
DTC's records. The ownership interest of each Securityholder will in turn be
recorded on respective records of the DTC Participants and Indirect DTC
Participants. Securityholders will not receive written confirmation from DTC
of their purchase, but Securityholders are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the DTC Participant or Indirect DTC
Participant through which the Securityholder entered into the transaction.
Transfers of ownership interests in the Securities of any Class will be
accomplished by entries made on the books of DTC Participants acting on behalf
of Securityholders.
To facilitate subsequent transfers, all Securities deposited by DTC
Participants with DTC will be registered in the name of Cede, a nominee of DTC.
The deposit of Securities with DTC and their registration in the name of Cede
will effect no change in beneficial ownership. DTC will have no knowledge of
the actual Securityholders and its records will reflect only the identity of
the DTC Participants to whose accounts such Securities are credited, which may
or may not be the Securityholders. DTC Participants and Indirect DTC
Participants will remain responsible for keeping account of their holdings on
behalf of their customers. While the Securities of a Series are held in book-
entry form, Securityholders will not have access to the list of Securityholders
of such Series, which may impede the ability of Securityholders to communicate
with each other.
Conveyance of notices and other communications by DTC to DTC
Participants, by DTC Participants to Indirect DTC Participants and by DTC
Participants and Indirect DTC Participants to Securityholders will be governed
by arrangements among them, subject to any statutory or regulatory requirements
as may be in effect from time to time.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among DTC
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of and interest on
the Securities. DTC Participants and Indirect DTC Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders.
DTC's practice is to credit DTC Participants' accounts on each
Distribution Date in accordance with their respective holdings shown on its
records, unless DTC has reason to believe that it will not receive payment on
such Distribution Date. Payments by DTC Participants and Indirect DTC
Participants to Securityholders will be governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name", and will be the
responsibility of such DTC Participant and not of DTC, the related Indenture
Trustee or Trustee (or any paying agent appointed thereby), the Seller, the
Issuer or the Servicer, subject to any statutory or regulatory requirements as
may be in effect from time to time. Payment of principal of and interest on
each Class of Securities to DTC will be the responsibility of the related
Indenture Trustee or Trustee (or any paying agent), disbursement of such
payments to DTC Participants will be the responsibility of DTC and disbursement
of such payments to the related Securityholders will be the responsibility of
DTC Participants and Indirect DTC Participants. As a result, under the book-
entry format, Securityholders may experience some delay in their receipt of
payments. DTC will forward such payments to its DTC Participants which
thereafter will forward them to Indirect DTC Participants or Securityholders.
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Because DTC can only act on behalf of DTC Participants, who in turn act
on behalf of Indirect DTC Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
DTC has advised FIC that it will take any action permitted to be taken
by a Securityholder only at the direction of one or more DTC Participants to
whose account with DTC the Securities are credited. Additionally, DTC has
advised FIC that it will take such actions with respect to specified
percentages of the Securityholders' interest only at the direction of and on
behalf of DTC Participants whose holdings include undivided interests that
satisfy such specified percentages. DTC may take conflicting actions with
respect to other undivided interests to the extent that such actions are taken
on behalf of DTC Participants whose holdings include such undivided interests.
Neither DTC nor Cede will consent or vote with respect to the
Securities. Under its usual procedures, DTC will mail an "Omnibus Proxy" to
the related Indenture Trustee or Trustee as soon as possible after any
applicable Record Date for such a consent or vote. The Omnibus Proxy will
assign Cede's consenting or voting rights to those DTC Participants to whose
accounts the related Securities are credited on that record date (which record
date will be identified in a listing attached to the Omnibus Proxy).
Cedel Bank, societe anonyme ("Cedel") is incorporated under the laws of
Luxembourg as a professional depository. Cedel holds securities for its
participating organizations ("Cedel Participants") and facilitates the
clearance and settlement of securities transactions between Cedel Participants
through electronic book entry changes in accounts of Cedel Participants,
thereby eliminating the need for physical movement of certificates.
Transactions may be settled in Cedel in any of 28 currencies, including United
States dollars. Cedel provides to Cedel Participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. Cedel
interfaces with domestic markets in several countries. As a professional
depository, Cedel is subject to regulation by the Luxembourg Monetary
Institute. Cedel Participants are recognized financial institutions around the
world including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations and may
include any underwriters, agents or dealers with respect to any Class or Series
of Securities offered hereby. Indirect access to Cedel is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Cedel Participant, either directly
or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear
and settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need
for physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 27
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. The
Euroclear System is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under
contract with Euroclear Clearance System S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks
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(including central banks), securities brokers and dealers and other
professional financial intermediaries and may include any underwriters, agents
or dealers with respect to any Class or Series of Securities offered hereby.
Indirect access to the Euroclear System is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within the Euroclear System,
withdrawals of securities and cash from the Euroclear System and receipts of
payments with respect to securities in the Euroclear System. All securities in
the Euroclear System are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants, and has no record of or relationship with persons holding through
Euroclear Participants.
Payments and distributions with respect to Securities held through Cedel
or Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such payments and
distributions will be subject to tax withholding in accordance with relevant
United States tax laws and regulations. See "Certain Federal Income Tax
Considerations". Cedel or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a Securityholder on behalf of a
Cedel Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to its Depositary's ability to effect such
actions on its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants of
DTC, Cedel and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
DEFINITIVE SECURITIES
Unless otherwise specified in the related Prospectus Supplement, the
Notes, if any, and the Certificates, if any, of a given Series will be issued
in fully registered, certificated form ("Definitive Notes" and "Definitive
Certificates", respectively, and collectively referred to herein as "Definitive
Securities") to Noteholders or Certificateholders or their respective nominees,
rather than to DTC or its nominee, only if (i) DTC is no longer willing or able
to discharge properly its responsibilities as depository with respect to such
Securities and such Administrator or Trustee is unable to locate a qualified
successor (and if it is an Administrator that has made such determination, such
Administrator so notifies the applicable Trustee in writing), (ii) the Issuer,
the Seller the Administrator or the Trustee, as applicable, at its option,
elects to terminate the book-entry system through DTC or (iii) after the
occurrence of an Event of Default or a Servicer Default with respect to such
Securities, holders representing at least a majority of the outstanding
principal amount of the Notes or the Certificates, as the case may be, of such
Series, acting together as a single Class, advise the applicable Trustee
through DTC in writing that the
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continuation of a book-entry system through DTC (or a successor thereto) with
respect to such Notes or Certificates is no longer in the best interest of the
holders of such Securities.
Upon the occurrence of any event described in the immediately preceding
paragraph, the applicable Trustee or Indenture Trustee will be required to
notify all applicable Securityholders of a given Series through Participants of
the availability of Definitive Securities. Upon surrender by DTC of the
definitive certificates representing the corresponding Securities and receipt
of instructions for re-registration, the applicable Trustee or Indenture
Trustee will reissue such Securities as Definitive Securities to such
Securityholders.
Payments and distributions of principal of, and interest on, such
Definitive Securities will thereafter be made by the applicable Trustee or
Indenture Trustee in accordance with the procedures set forth in the related
Indenture or the related Trust Agreement or Pooling and Servicing Agreement, as
applicable, directly to holders of Definitive Securities in whose names the
Definitive Securities were registered at the close of business on the
applicable Record Date specified for such Securities in the related Prospectus
Supplement. Such payments and distributions will be made by check mailed to
the address of such holder as it appears on the register maintained by the
applicable Trustee or Indenture Trustee. The final payment or distribution on
any such Definitive Security, however, will be made only upon presentation and
surrender of such Definitive Security at the office or agency specified in the
notice of final distribution to the applicable Securityholders. The applicable
Trustee or the Indenture Trustee will provide such notice to the applicable
Securityholders not less than 15 nor more than 30 days prior to the date on
which such final payment or distribution is expected to occur.
Definitive Securities will be transferable and exchangeable at the
offices of the applicable Trustee or of a registrar named in a notice delivered
to holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the applicable Trustee or Indenture
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection therewith.
THE TRUSTS
With respect to each Series of Securities with respect to which a Trust
is the Issuer, the Seller will establish a separate Trust pursuant to the
respective Trust Agreement or Pooling and Servicing Agreement, as applicable,
for the transactions described herein and in the related Prospectus Supplement.
On the applicable Closing Date, the Seller will sell the Loan Assets to the
Trust as specified in the related Prospectus Supplement. With respect to each
Series of Securities, the Issuer will pledge the Loan Assets to the Indenture
Trustee, for the benefit of the Noteholders, as specified in the related
Prospectus Supplement.
The Servicer will service the Loan Assets included in the Trust Property
and will receive fees for such services as specified in the related Prospectus
Supplement. To the extent specified in the related Prospectus Supplement, in
order to facilitate the servicing of the Loan Assets, the Seller, the Issuer
and each Trustee will authorize the Servicer to retain physical possession of
the applicable Loan Assets and other documents relating thereto as custodian
with respect to such Loan Assets and related documents.
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The principal offices of each Issuer that is not a grantor trust and the
related Owner Trustee, if any, will be specified in the applicable Prospectus
Supplement.
THE TRUSTEE
As used herein, the term "Trustee" shall refer to the Indenture Trustee
with respect to a Series of Notes, the Owner Trustee under the applicable Trust
Agreement with respect to a Series of Certificates or the Pass-Through Trustee
under the applicable Pooling and Servicing Agreement with respect to a Series
of Certificates. The Trustees with respect to each Series will be specified in
the related Prospectus Supplement. The Trustee's liability in connection with
the issuance and sale of the related Securities is limited solely to the
express obligations of such Trustee set forth in the related Trust Agreement,
Indenture or Pooling and Servicing Agreement, as applicable.
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Issuer, the Seller or the Servicer. In
addition, the Trustee will have the power and the responsibility for appointing
co-trustees or separate trustees of all or any part of the Trust Property
relating to a particular Series of Securities. At any time, for the purpose of
meeting any legal requirements of any jurisdiction in which any part of the
Trust Property may at the time be located, the Seller, or the Issuer, together
with the Trustee, acting jointly, shall have the power and shall execute and
deliver all instruments to appoint one or more Persons approved by the Trustee
to act as co-trustee or co-trustees, jointly with the Trustee, or separate
trustee or separate trustees, of all or any part of the Trust Property, and to
vest in such Person or Persons, in such capacity, such title to the Trust
Property, or any part thereof, and, subject to the provisions of the applicable
Indenture, Trust Agreement or Pooling and Servicing Agreement, such powers,
duties, obligations, rights and trusts as the Seller, or the Issuer, together
with the Trustee, may consider necessary or desirable. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee by the applicable Indenture, Trust Agreement or Pooling and
Servicing Agreement will be conferred or imposed upon the Trustee and such
separate trustee or co-trustee jointly, or in any jurisdiction in which the
Trustee shall be incompetent or unqualified to perform certain acts, singly
upon such separate trustee or co-trustee who shall exercise and perform such
rights, powers, duties and obligations solely at the direction of the Trustee.
The Trustee will make no representations as to the validity or
sufficiency of the applicable Indenture, Trust Agreement or Pooling and
Servicing Agreement, the related Securities, or of any Loan Asset or related
document, and will not be accountable for the use or application by the Seller
or a Transferor of any funds paid to the Seller or such Transferor in respect
of the Securities or the related Assets, or amounts deposited in the related
Distribution Account or deposited into any other account for purposes of making
payments or distributions to Securityholders. If no Event of Default has
occurred, the Trustee will be required to perform only those duties
specifically required of it under the applicable Indenture, Trust Agreement or
Pooling and Servicing Agreement. However, upon receipt of the various
certificates, reports or other instruments required to be furnished to it, the
Trustee will be required to examine them to determine whether they conform to
the requirements of the applicable Indenture, Trust Agreement or Pooling and
Servicing Agreement.
The Trustee may resign at any time and the Seller, the Servicer or the
Administrator, as applicable, may remove the Trustee if the Trustee ceases to
be eligible to continue as such under the applicable Indenture, Trust Agreement
or Pooling and Servicing Agreement, if the Trustee becomes insolvent or in such
other instances, if any, as are set forth in the applicable Indenture, Trust
Agreement or Pooling and
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Servicing Agreement. Following any resignation or removal of the Trustee, the
Seller or Servicer, as applicable, will be obligated to appoint a successor
Trustee. Any resignation or removal of the Trustee and appointment of a
successor Trustee does not become effective until acceptance of the appointment
by the successor Trustee.
DESCRIPTION OF THE TRUST PROPERTY
GENERAL
The Trust Property for a Series of Securities may include (i) Loan
Assets and payments or distributions thereon (subject, if specified in the
Prospectus Supplement, to certain exclusions); (ii) if specified in the
Prospectus Supplement, reinvestment income on such payments or distributions;
(iii) all property acquired by foreclosure or deed in lieu of foreclosure with
respect to any Mortgage Loan or Secured Contract included in the Trust Property
and certain rights of the Administrator, if any, and the Servicer under any
policies required to be maintained in respect of the related Loan Assets; and
(iv) if specified in the Prospectus Supplement, one or more forms of Credit
Enhancement. The Trust Property will consist primarily of Loan Assets.
With respect to a Series, FIC will acquire the Loan Assets in the open
market or in privately negotiated transactions from one or more entities, and
each such entity from whom FIC so acquires a significant portion of the Loan
Assets (individually or collectively, the "Transferor") will be described in
the related Prospectus Supplement, including a description of any affiliation
between the Transferor and FIC. To the extent specified in the related
prospectus supplement, the Loan Assets will have been originated or acquired by
the Transferor in one of four ways: (i) the indirect origination and purchase
of retail installment sales contracts from a network of independent contractors
or dealers professionally installing property improvements ("indirect
originations"); (ii) the origination of loans directly to consumers, including
solicitations through direct mail and telemarketing ("direct originations");
(iii) the wholesale purchase of loans, on a flow basis, originated by other
unaffiliated lenders, as correspondents ("correspondent originations"); or (iv)
the purchase, on a bulk basis, of loan portfolios originated by other
unaffiliated lenders ("portfolio acquisitions"). In acquiring the Loan Assets
from a Transferor, FIC will rely on the representations and warranties made by
the Transferor with respect to such Loan Assets. For a summary description of
the expected representations and warranties with respect to such Loan Assets,
See "Description of the Transfer and Servicing Agreements -- Sale and
Assignment of Loan Assets". As further described in the related Prospectus
Supplement for a Series, the Transferor will be obligated to repurchase or
replace any Loan Assets that, subject to the lapse of any applicable cure
period, are in breach of a representation or warranty made by the Transferor
and such breach has a material and adverse affect on the value of such Loan
Assets or the interest of Securityholders therein. To the extent that FIC has
any obligation to repurchase or replace any Loan Assets for a material breach
of any representations or warranties made by FIC, FIC is not expected to have
the financial capability to repurchase or replace such defective Loan Assets,
but rather FIC will be relying on the related Transferor of such defective Loan
Assets to repurchase or replace them. See "The Seller".
The following is a brief description of the Loan Assets expected to be
included in the Trust Property for each Series. If specific information
respecting the Loan Assets is not known at the time a Series is initially
offered, more general information of the nature described below will be
provided in the related Prospectus Supplement, and specific information will be
set forth in a report on Form 8-K to be filed with the Securities and Exchange
Commission within fifteen days after the initial issuance of such
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Series. A copy of the related Sale and Servicing Agreement or Pooling and
Servicing Agreement with respect to each Series will be attached to the Form 8-
K and will be available for inspection at the corporate trust office of the
related Trustee specified in the related Prospectus Supplement. A schedule of
the Loan Assets relating to each Series, will be attached to the related Sale
and Servicing Agreement or Pooling and Servicing Agreement delivered to the
applicable Trustee upon delivery of such Series.
MORTGAGE LOANS
The Mortgage Loans will be evidenced by promissory notes, retail
installment sales contracts or other evidences of indebtedness (the "Mortgage
Notes") and will be secured by mortgages, deeds of trust or other similar
security instruments (the "Mortgages") creating a lien or security interest on
single family (one-to-four unit) residences, units in planned unit
developments, units in condominium developments, town homes and Manufactured
Homes (as defined herein) (the "Mortgaged Properties") located in various
states. If specified in the Prospectus Supplement, the Mortgage Loans may
include cooperative apartment or manufactured housing loans ("Cooperative
Loans") secured by security interests in shares issued by private, non-profit,
cooperative housing corporations ("Cooperatives") and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific units in such Cooperatives. To the extent specified in the related
Prospectus Supplement, all or a portion of the Mortgages will be junior liens
on the related Mortgaged Properties, and the related superior liens will not be
included in the related Loan Asset Pool. Certain of the Mortgage Loans may be
partially insured to the extent described in the related Prospectus Supplement
(and subject to the conditions described herein and in the related Prospectus
Supplement) by the FHA under the Title I Program (the "Title I Mortgage
Loans"). To the extent specified in the related Prospectus Supplement, the
Mortgage Loans will have scheduled monthly payment dates throughout a month,
and no Mortgage Loan will provide for deferred interest or negative
amortization, and no commercial or multifamily loans will be included in any
Mortgage Loan Pool.
The payment terms of the Mortgage Loans to be included in the Trust
Property for a Series will be described in the related Prospectus Supplement
and may include any of the following features or combinations thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index, a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a rate
that otherwise varies from time to time, or a rate that is convertible from an
adjustable rate to a fixed rate. Changes to an adjustable rate may be subject
to periodic limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the principal of a
loan for such periods and under such circumstances as may be specified in the
related Prospectus Supplement. Mortgage Loans may provide for the payment of
interest at a rate lower than the specified mortgage rate for a period of time
or for the life of the Mortgage Loan with the amount of any difference
contributed from funds supplied by the seller of the Mortgaged Property or
another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
amortization schedule that is significantly longer than the original term to
maturity or on an interest rate that is different from the interest rate on the
Mortgage Loan or may not be amortized during all or a portion of the original
term. Payment of all or a substantial portion of the principal may be due on
maturity. Principal may include interest that has been deferred and added to
the principal balance of the Mortgage Loan.
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(c) Monthly payments of principal and interest may be fixed for the
life of the loan, may increase over a specified period of time or may change
from period to period. Mortgage Loans may include limits on periodic increases
or decreases in the amount of monthly payments and may include maximum or
minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the loan or may decline over time, and may
be prohibited for the life of the loan or for certain periods ("lockout
periods"). Certain loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee in
connection with any such subsequent prepayment. Other loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The loans may include "due-on-sale" clauses which
permit the mortgagee to demand payment of the entire mortgage loan in
connection with the sale or certain transfers of the related mortgaged
property. Other Mortgage Loans may be assumable by persons meeting the then
applicable underwriting standards of the Transferor.
With respect to a Series for which the related Trust Property includes
Mortgage Loans the related Prospectus Supplement may specify, among other
things, information regarding the interest rates (the "Mortgage Rates"), the
average principal balance and the aggregate principal balance of such Mortgage
Loans, the years of origination, geographic dispersion and original principal
balances and the loan-to-value ratios of such Mortgage Loans.
CONTRACTS
As specified in the related Prospectus Supplement for a Series,
"Contracts" may include: (i) loans evidenced by retail installments sales or
loan agreements, including loans secured by new or used Manufactured Homes (as
defined herein) that are not considered to be interests in real property
because such Manufactured Homes are not permanently affixed to real estate
("Secured Contracts") and (ii) loans evidenced by retail installments sales or
loan agreements which are not secured by any interest in real or personal
property ("Unsecured Contracts"). To the extent described in the related
Prospectus Supplement, certain Contracts will be conventional (i.e., not
insured or guaranteed by a governmental agency) contracts (the "Conventional
Contracts"), while other Contracts will be partially insured by the FHA under
the Title I Program (the "Title I Contracts"). To the extent specified in the
related Prospectus Supplement, the Contracts included as part of the Trust
Property for a Series will be fully amortizing and will bear interest at a
fixed annual percentage rate ("APR"). The Secured Contracts differ from
Mortgage Loans in that the Secured Contracts are not secured by an interest in
real property, but rather by an interest in a Manufactured Home that is not
permanently affixed to real estate. In addition, the Contracts differ from
Mortgage Loans in that they are generally originated by a network of
independent contractors or dealers that professionally install property
improvements, rather than by financial institutions or other traditional
mortgage lenders.
While the Unsecured Contracts are not secured by a security interest in
any related real or personal property, such contracts are still subject to the
same underwriting criteria as the Mortgage Loans and the Secured Contracts.
For example, in underwriting an Unsecured Contract, the Transferor will
consider the borrower's credit history and ability to repay the related debt
as well as the value of real or personal property owned by the borrower which
could be the subject of a junior lien in favor of the Transferor; however,
because the Unsecured Contracts generally have smaller principal amounts than
the Mortgage Loans or the Secured Contracts, a junior lien with respect to such
real or personal property will not be
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obtained because the costs associated with obtaining and perfecting such a
junior lien will not justify the benefits provided by such a lien, including
any realization from the enforcement of such lien.
The Manufactured Homes securing the Secured Contracts consist of
manufactured homes within the meaning of 42 United States Code, Section
5402(6), which defines a "Manufactured Home" as "a structure, transportable in
one or more sections, which in the traveling mode, is eight body feet or more
in width or forty body feet or more in length, or, when erected on site, is
three hundred twenty or more square feet, and which is built on a permanent
chassis and designed to be used as a dwelling with or without permanent
foundation when connected to the required utilities, and includes the plumbing,
heating, air-conditioning, and electrical systems contained therein; except
that such term shall include any structure which meets all the requirements of
[this] paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary of
Housing and Urban Development and complies with the standards established under
[this] chapter."
To the extent specified in the Prospectus Supplement with respect to a
Series for which the related Trust Property includes Secured Contracts, for
purposes of calculating the loan-to-value ratio of a Secured Contract relating
to a new Manufactured Home, the "Collateral Value" is no greater than the sum
of a fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site) including
"accessories" identified in the invoice (the "Manufacturer's Invoice Price"),
plus the actual cost of any accessories purchased from the dealer, a delivery
and set-up allowance, depending on the size of the unit and the cost of state
and local taxes, filing fees and up to three years prepaid hazard insurance
premiums. To the extent specified in the related Prospectus Supplement, the
Collateral Value of a used Manufactured Home is the least of the sales price,
the appraised value, and the National Automobile Dealer's Association book
value plus prepaid taxes and hazard insurance premiums. The appraised value of
a Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable.
The related Prospectus Supplement may specify for the Contracts
contained in the related Contract Pool, among other things, the date of
origination of the Contracts; the APRs on the Contracts; the Contract Loan-to-
Value Ratios; the minimum and maximum outstanding principal balance as of the
cut-off date and the average outstanding principal balance; the outstanding
principal balances of the Contracts included in the Contract Pool; and the
original maturities of the Contracts and the last maturity date of any
Contract.
ADDITIONS, SUBSTITUTION AND WITHDRAWAL OF ASSETS
With respect to a Series, as described in the related Prospectus
Supplement, the related Transferor, Seller or Issuer may, subsequent to the
issuance of a Series, (i) deliver additional Assets to be included in the
related Trust Property, (ii) withdraw Assets previously included in the Trust
Property for such Series and substitute comparable assets therefor, or (iii)
withdraw Assets previously included in a Reserve Fund for such Series. Assets
may be added to the Trust Property for a Series subsequent to the issuance of
such Series in the manner described under "Pre-Funding Arrangements" below. In
addition, Assets may be withdrawn from or substituted into the Trust Property
for a Series for the following reasons: (a) curing any breaches of
representations and warranties with respect to such Assets, (b) curing certain
immaterial irregularities with respect to such Assets that do not constitute a
breach of such representations and warranties, or (c) achieving certain
targeted or desired Loan Asset Pool characteristics with respect to the Loan
Assets of a particular Series, including, without limitation, those
characteristics that accommodate the requests of a Rating Agency, the
Underwriters or a third party provider of Credit Enhancement. Any such
additions, withdrawals or substitutions of Assets by the related Transferor or
the Seller or the Issuer
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will be subject to the applicable limitations, requirements and conditions
provided in the related Sale and Servicing Agreement or Pooling and Servicing
Agreement (and described in the related Prospectus Supplement) for such Series.
PRE-FUNDING ARRANGEMENTS
To the extent provided in the related Prospectus Supplement for a
Series, the related Sale and Servicing Agreement or Pooling and Servicing
Agreement will provide for a commitment by the related Trust or Issuer, as
applicable, to subsequently purchase additional Loan Assets ("Subsequent Loan
Assets") following the date on which the related Securities are issued (a "Pre-
Funding Arrangement"). With respect to a Series, the Pre-Funding Arrangement
will require that any Subsequent Loan Assets included in the Trust Property
conform to the requirements and conditions provided in the related Sale and
Servicing Agreement or Pooling and Servicing Agreement. If a Pre-Funding
Arrangement is utilized in connection with the issuance of the Series of
Securities, on the closing date for the issuance of such Series the related
Trustee will be required to deposit in a segregated account (a "Pre-Funding
Account") all or a portion of the proceeds received by such Trustee in
connection with the sale of one or more Classes of Securities of such Series;
and, subsequently, the Issuer will acquire Subsequent Loan Assets in exchange
for the release of money from the Pre-Funding Account for such Series. In
addition, the Pre-Funding Arrangement will be limited to a specified period,
not to exceed three months, during which time any transfers of Subsequent Loan
Assets must occur and to a maximum deposit to the related Pre-Funding Account
of no more than thirty-five percent (35%) of the aggregate proceeds received
from the sale of all Classes of Securities of such Series.
If all of the funds originally deposited in the such Pre-Funding Account
are not used by the end of such specified period, then any remaining amount of
such funds will be applied as a mandatory prepayment of a Class or Classes of
Securities as specified in the related Prospectus Supplement. Although it is
intended that the principal amount of Subsequent Loan Assets to be included as
Trust Property after the closing date for the issuance of any particular Series
will require application of substantially all of the Pre-Funding Account, and
it is not anticipated that there will be any material amount of principal
distributions from amounts remaining on deposit in the Pre-Funding Account in
reduction of the principal balances of any Securities, no assurance can be
given that such a distribution with respect to the Securities will not occur on
the Distribution Date following the Due Period in which the Pre-Funding
Arrangement ends. In any event, it is unlikely that the Transferor will be
able to deliver Subsequent Loan Assets with aggregate principal balances that
exactly equal the Pre-Funding Account, and the portion of the Pre-Funding
Account remaining at the end of the Pre-Funding Arrangement, if any, will be
distributed in reduction of the principal balance of the Securities of the
related Series, as set forth in related Prospectus Supplement.
As may be further specified in the related Prospectus Supplement,
amounts on deposit in the Pre-Funding Account will be invested in short-term
debt obligations of, or debt obligations guaranteed by, the United States,
repurchase agreements that satisfy the criteria specified in the applicable
Sale and Servicing Agreement or Pooling and Servicing Agreement, certificates
of deposit, time deposits and bankers acceptances of any United States
depository institution or trust company, FDIC insured deposits, including
deposits with the related Trustee, commercial paper, debt obligations, and
money market funds; provided such investments are acceptable to each Rating
Agency rating the Series of Offered Securities at the time at which the
investments are made (collectively "Permitted Investments"); and provided
further that an investment in such Permitted Investments will not require the
Issuer for a Series to be registered as an "investment company" under the
Investment Company Act of 1940, as amended. Permitted Investments
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will consist of short term investments that convert into cash or mature within
a short period of time, have minimal or no exposure to fluctuations in value as
a result of market changes in prevailing interest rates and are acceptable to
each Rating Agency rating the applicable Series of Offered Securities.
The utilization of a Pre-Funding Arrangement is intended to improve the
efficiency of the issuance of a Series of Securities and the sale and
assignment of the Loan Assets to the related Issuer through the incremental
delivery of the Loan Assets on the closing date and during the three month
period following the closing date for such Series, which allows for a more even
accumulation of the Loan Assets by the Seller, the Issuer and the related
Transferor and the issuance of a larger principal amount of Securities for such
Series than would be the case without a Pre-Funding Arrangement.
CREDIT ENHANCEMENT
GENERAL
The amount and types of credit and cash flow enhancement arrangements
("Credit Enhancement") and the provider thereof, if applicable, with respect to
each Class of Securities of a given Series, if any, will be set forth in the
related Prospectus Supplement. If and to the extent provided in the related
Prospectus Supplement, Credit Enhancement may be in the form of the
subordination of one or more Classes of Securities of such Series, the
overcollateralization of the Trust Property with respect to a Series, the
establishment of one or more Reserve Funds, the use of a cross-support feature,
the use of a Mortgage Pool Insurance Policy, Guaranty Policy, Special Hazard
Insurance Policy, bankruptcy bond, surety bond, letter of credit, credit or
liquidity facility, guaranteed investment contract, swap or other interest rate
protection agreement, repurchase obligation, yield maintenance agreement, other
agreements with respect to third party payments or other support, cash deposits
or such other form of Credit Enhancement as may be described in the related
Prospectus Supplement, or any combination of two or more of the foregoing. If
specified in the related Prospectus Supplement, Credit Enhancement for a Class
of Securities may cover one or more other Classes of Securities of the same
Series, and Credit Enhancement for a Series of Securities may cover one or more
other Series of Securities.
The presence of Credit Enhancement for the benefit of any Class or
Series of Securities is intended to enhance the likelihood of receipt by the
Securityholders of such Class or Series of the full amount of principal and
interest due thereon and to decrease the likelihood that such Securityholders
will experience losses. To the extent specified in the related Prospectus
Supplement, any Credit Enhancement with respect to a Series will not provide
protection against all risks of loss and will not guarantee repayment of the
entire principal balance of the Securities of such Series and interest thereon.
If losses occur which exceed the amount covered by such Credit Enhancement or
which are not covered by the Credit Enhancement, holders will bear their
allocable share of deficiencies, as described in the related Prospectus
Supplement. In addition, if a form of Credit Enhancement covers more than one
Class or Series of Securities, Securityholders of any such Class or Series will
be subject to the risk that such credit enhancement will be exhausted by the
claims of Securityholders of other Classes or Series.
SUBORDINATION
If specified in the related Prospectus Supplement, payments and
distributions in respect of scheduled principal, interest or any combination
thereof that otherwise would have been payable or distributable to one or more
Classes of a Series (the "Subordinated Securities") will instead be payable to
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one or more other Classes of such Series (the "Senior Securities") under the
circumstances and to the extent provided in such Prospectus Supplement. If
specified in the Prospectus Supplement, delays in receipt of scheduled payments
on the Loan Assets and losses on defaulted Loan Assets will be borne first by
the various Classes of Subordinated Securities and thereafter by the various
Classes of Senior Securities, in each case under the circumstances and subject
to the limitations specified in the Prospectus Supplement. The aggregate
payments and distributions in respect of delinquent payments or distributions
on the Loan Assets over the lives of the Securities of a Series or at any time,
the aggregate losses in respect of defaulted Loan Assets which must be borne by
the Subordinated Securities by virtue of subordination and the amount of the
payments and distributions otherwise due to the Subordinated Securities that
will be distributable to holders of Senior Securities on any Distribution Date
may be limited as specified in the related Prospectus Supplement. If aggregate
payments and distributions in respect of delinquent payments or distributions
on the Loan Assets or aggregate losses in respect of such Loan Assets were to
exceed the total amounts distributable and available for distribution to
holders of Subordinated Securities were to exceed the specified maximum amount,
holders of Senior Securities could experience losses on their Securities.
In addition to or in lieu of the foregoing, if specified in the related
Prospectus Supplement, all or any portion of payments or distributions
otherwise due to holders of Subordinated Securities on any Distribution Date
may instead be deposited into one or more Reserve Funds (as defined below)
established by the related Trustee. If specified in the related Prospectus
Supplement, such deposits may be made (i) on each Distribution Date, (ii) on
each Distribution Date for specified periods, or (iii) on each Distribution
Date until the balance in the Reserve Fund has reached a specified amount and,
following payments from the Reserve Fund to holders of Senior Securities or
otherwise, thereafter to the extent necessary to restore the balance in the
Reserve Fund to required levels, in each case as specified in such Prospectus
Supplement. If specified in the related Prospectus Supplement, amounts on
deposit in the Reserve Fund may be released to the Seller or Issuer or the
holders of any Class of Securities at the times and under the circumstances
specified in such Prospectus Supplement.
If specified in the related Prospectus Supplement, various Classes of
Senior Securities and Subordinated Securities may themselves be subordinate in
their right to receive certain payments and distributions to other Classes of
Senior and Subordinated Securities, respectively, through a cross-support
mechanism or otherwise.
As between Classes of Senior Securities and as between Classes of
Subordinated Securities, payments and distributions may be allocated among such
Classes (i) in the order of their Stated Maturity or Assumed Final Distribution
Dates, (ii) in accordance with a schedule or formula, (iii) in relation to the
occurrence of events, or (iv) otherwise, in each case as specified in the
related Prospectus Supplement. As between Classes of Subordinated Securities,
payments and distributions to holders of Senior Securities on account of
delinquencies or losses and payments to any Reserve Fund will be allocated as
specified in the related Prospectus Supplement.
OVERCOLLATERALIZATION
If provided in the related Prospectus Supplement, the aggregate
principal balance of the Loan Assets included in the Trust Property may exceed
the aggregate original principal balance of the Securities of a Series thereby
creating an "Excess Spread" on each Distribution Date. If provided in the
related Prospectus Supplement, such Excess Spread may be distributed to holders
of Senior Securities to produce and maintain a specified level of
overcollateralization. With respect to a Series of Securities, the
overcollateralization level may be fixed or may increase or decrease over time,
subject to certain floors,
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<PAGE> 125
caps and triggers, as set forth in the related Prospectus Supplement and the
related Indenture, Sale and Servicing Agreement or Pooling and Servicing
Agreement.
CROSS-SUPPORT
If specified in the related Prospectus Supplement, separate Classes of
related Series of Securities may represent the beneficial ownership of or be
separately secured by, separate groups of Assets included in the Trust Property
for a Series or otherwise available for the benefit of such Securities. In
such case, Credit Enhancement may be provided by a cross-support feature which
may require that payments and distributions be made with respect to Securities
evidencing beneficial ownership of or secured by one or more groups of Assets
prior to payments or distributions to Subordinated Securities evidencing a
beneficial ownership interest in or secured by other groups of Assets included
in the same Trust Property. The Prospectus Supplement for a Series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
GUARANTY INSURANCE
If specified in the Prospectus Supplement, one or more financial
guaranty insurance policies (each, a "Guaranty Policy") will be obtained. Each
such Guaranty Policy with respect to a Series will, subject to limitations
described in the related Prospectus Supplement, provide to the holders of the
insured Securities of a Series a guarantee of payment of any interest and/or
principal payments due to such holders on each Distribution Date. The related
Prospectus Supplement will describe the terms of any Guaranty Policy and will
set forth certain information with respect to the applicable insurer.
MORTGAGE POOL INSURANCE
With respect to a Series for which the related Trust Property includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, a
Series for which the related Trust Property includes Contracts), in order to
decrease the likelihood that holders of the Securities of such Series will
experience losses in respect of such Mortgage Loans, if specified in the
related Prospectus Supplement, one or more mortgage pool insurance policies
(each, a "Mortgage Pool Insurance Policy") will be obtained. Each such Mortgage
Pool Insurance Policy will, subject to the limitations described below and in
the Prospectus Supplement, cover loss by reason of default in payments on such
Mortgage Loans up to the amounts specified in the Prospectus Supplement or
reported on Form 8-K and for the periods specified in the Prospectus
Supplement. To the extent specified in the related Prospectus Supplement, the
Servicer under the related Sale and Servicing Agreement or Pooling and
Servicing Agreement will agree to use its best reasonable efforts to cause to
be maintained in effect any such Mortgage Pool Insurance Policy and to file
claims thereunder to the issuer of such Mortgage Pool Insurance Policy (the
"Pool Insurer"). A Mortgage Pool Insurance Policy, however, is not a blanket
policy against loss, since claims thereunder may only be made respecting
particular defaulted Mortgage Loans and only upon satisfaction of certain
conditions precedent set forth in such policy as described in the related
Prospectus Supplement. To the extent specified in the related Prospectus
Supplement, no Mortgage Pool Insurance Policy, if any, will cover losses due to
a failure to pay or denial of a claim under a primary mortgage insurance
policy, irrespective of the reason therefor. The related Prospectus Supplement
will describe the terms of any applicable Mortgage Pool Insurance Policy and
will set forth certain information with respect to the related Pool Insurer.
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SPECIAL HAZARD INSURANCE
With respect to a Series for which the related Trust Property includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, each
Series for which the related Trust Property includes Contracts), in order to
decrease the likelihood that holders of the Securities of such Series will
experience losses in respect of such Mortgage Loans, if specified in the
related Prospectus Supplement, one or more Special Hazard Insurance Policies
(each, a "Special Hazard Insurance Policy") will be obtained. Each such Special
Hazard Insurance Policy with respect to a Series will, subject to limitations
described below and in the related Prospectus Supplement, protect holders of
the Securities of such Series from loss caused by reason of damage to Mortgaged
Properties caused by certain hazards (including earthquakes and, to a limited
extent, tidal waves and related water damage) not covered by the standard form
of hazard insurance policy for the respective states in which the Mortgaged
Properties are located or under flood insurance policies, if any, covering the
Mortgaged Properties and (ii) the application of the coinsurance clause
contained in hazard insurance policies. Any Special Hazard Insurance Policy may
not cover losses occasioned by war, civil insurrection, certain governmental
actions, errors in design, faulty workmanship or materials (except under
certain circumstances), nuclear reaction, flood (if the Mortgaged Property is
located in a federally designated flood area), chemical contamination and
certain other risks. Aggregate claims under each Special Hazard Insurance
Policy will be limited as described in the related Prospectus Supplement. Any
Special Hazard Insurance Policy may also provide that no claim may be paid
unless hazard and if applicable, flood insurance on the Mortgaged Property has
been kept in force and other protection and preservation expenses have been
paid.
The related Prospectus Supplement will describe the terms of any
applicable Special Hazard Insurance Policy and will set forth certain
information with respect to the related special hazard insurer.
RESERVE FUNDS
If specified in the Prospectus Supplement with respect to a Series,
assets such as cash, U.S. Treasury securities, instruments evidencing ownership
of principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in such Prospectus Supplement will be deposited by the Seller or
Issuer in one or more accounts (each, a "Reserve Fund") established and
maintained with the related Trustee. Such cash and the payments on such other
assets will be used to enhance the likelihood of timely payment and
distribution of principal of, and interest on, or, if specified in the related
Prospectus Supplement, to provide additional protection against losses in
respect of the Assets included in the related Trust Property, to pay the
expenses of the related Issuer or for such other purposes specified in such
Prospectus Supplement. Whether or not the Seller or Issuer has any obligation
to make such a deposit, certain amounts to which the holders of the
Subordinated Securities of such Series, if any, the Seller or Issuer would
otherwise be entitled may instead be deposited into the Reserve Fund from time
to time and in the amounts as specified in the related Prospectus Supplement.
Any cash in any Reserve Fund and the proceeds of any other instrument upon
maturity will be invested in Permitted Investments. If a letter of credit is
deposited with the applicable Trustee, such letter of credit will be
irrevocable. To the extent specified in the Prospectus Supplement with respect
to a Series, any instrument deposited therein will name the related Trustee, in
its capacity as trustee for the holders of the Securities of such Series, as
beneficiary and will be issued by an entity acceptable to each rating agency
that rates such Securities. Additional information with respect to such
instruments deposited in the Reserve Funds may be set forth in the Prospectus
Supplement.
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SERVICING OF THE LOAN ASSETS
Except as otherwise noted in the applicable Prospectus Supplement, the
description set forth below of the servicing of Loan Assets is applicable to
Loan Assets included in the Trust Property with respect to a Series of
Securities.
To the extent provided in the related Prospectus Supplement, the Loan
Assets included in the Trust Property for a Series of Securities will be
serviced by (i) the related Servicer as sole servicer, (ii) the related Master
Servicer as administrator or master servicer, (iii) one or more loan servicing
institutions as servicers or (iv) by another institution as master servicer. If
an institution other than the Servicer acts as the sole servicer or as the
master servicer for a Series, the Servicer may have no servicing obligations
with respect to such Series. Generally, the discussion in this section of the
Prospectus is applicable under circumstances when the Servicer is an affiliate
of the Seller or Issuer. If the Servicer is not an affiliate of the Seller or
Issuer, the discussion relating to the servicing of the Loan Assets as set
forth below may be modified or superseded by any discussion relating to the
servicing of the Loan Assets set forth in the Prospectus Supplement.
To the extent specified in the related Prospectus Supplement, the Loan
Assets will be serviced by one or more loan servicing institutions, which may
include the Servicer or a Subservicer, pursuant to a subservicing agreement
between each Subservicer and the Servicer (each, a "Subservicing Agreement"),
which may be entered into only with the prior written consent of the applicable
Trustee and the Administrator, if any.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When a Mortgaged Property has been or is about to be conveyed by the
borrower, the Servicer, on behalf of the Trustee, shall, to the extent it has
knowledge of such conveyance or prospective conveyance, enforce the rights of
the Trustee as the mortgagee of record to accelerate the maturity of the
related Mortgage Loan under any "due-on-sale" clause contained in the related
Mortgage; provided, however, that the Servicer shall not exercise any such
right if the "due-on-sale" clause, in the reasonable belief of the Servicer, is
not enforceable under applicable law. In such event or in the event the
related Mortgage does not contain a "due-on-sale" clause, the Servicer shall
enter into an assumption and modification Agreement with the person to whom
such property has been or is about to be conveyed, pursuant to which such
person becomes liable under such Mortgage and, unless prohibited by applicable
law or the mortgage documents, the borrower remains liable thereon. The
Servicer is also authorized to enter into a substitution of liability agreement
with such person, pursuant to which the original borrower is released from
liability and such person is substituted as borrower and becomes liable under
the Mortgage.
REALIZATION UPON DEFAULTED LOAN ASSETS
With respect to any defaulted Loan Asset as to which no satisfactory
arrangements can be made for collection of delinquent payments or the cure of
any other event of default, the Servicer will take such action as it shall deem
to be in the best interest of the Securityholders. Without limiting the
generality of the preceding sentence, the Servicer will, in accordance with the
servicing standard described above, (i) in the case of Title I Mortgage Loans
and Title I Contracts only, direct the Trustee (or any Administrator) to submit
an FHA Claim to the FHA, in accordance with FHA Regulations, or (ii) in the
case of Mortgage Loans and Contracts, take such other action as the Servicer
deems to be in the best interests of the
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Securityholders, which, if no superior lien exists on the related Mortgaged
Property, could include a foreclosure upon such Mortgaged Property in the name
of the Trustee for the benefit of the Securityholders, provided such action is
economically justified. Typically, however, the Servicer has chosen not to
pursue foreclosures of defaulted loans comparable to the Loan Assets due to the
costs involved. In servicing mortgage loans and contracts secured by junior
liens in their portfolios, it will not be the Servicer's or any Subservicer's
practice to satisfy the senior mortgage(s) at or prior to the foreclosure sale
of the related Mortgaged Property, or to advance funds to keep the senior
mortgage(s) current. In addition, if a defaulted Loan Asset (together with any
senior lien indebtedness) has a high loan-to-value ratio, then the Servicer
will be less likely to foreclose on the related Mortgaged Property, even if the
Servicer has a first-lien position for such defaulted Loan Asset. In the event
an FHA Claim is rejected by the FHA due to circumstances that constitute a
breach of the Transferor's representations and warranties in the applicable
Sale and Servicing Agreement or Pooling and Servicing Agreement, the Transferor
will be required to repurchase the related Title I Mortgage Loan or Title I
Contract at the purchase price and in the manner set forth in such Sale and
Servicing Agreement or Pooling and Servicing Agreement.
In connection with any collection activities or foreclosure, the
Servicer is required to exercise collection and foreclosure procedures with the
same degree of care and skill in its exercise or use, as it would exercise or
use under the circumstances in the conduct of its own affairs.
WAIVERS AND DEFERMENTS OF CERTAIN PAYMENTS
Each Sale and Servicing Agreement and each Pooling and Servicing
Agreement will require the Servicer to make reasonable efforts to collect all
payments called for under the terms and provisions of the Loan Assets.
Consistent with the foregoing, the Servicer may at its own discretion waive any
late payment charge, assumption fee or any penalty interest in connection with
the payment of a Loan Asset or any other fee or charge which the Servicer would
be entitled to retain as servicing compensation and may waive, vary or modify
any term of any Loan Asset or consent to the postponement of strict compliance
with any such term or in any matter grant indulgence to any borrower, subject
to the limitations set forth in the applicable Sale and Servicing Agreement or
Pooling and Servicing Agreement and the FHA Regulations, if applicable.
SUBSERVICERS
The Servicer is permitted under the applicable Sale and Servicing
Agreement or Pooling and Servicing Agreement to enter into servicing
arrangements from time to time with subservicers (each, a "Subservicer")
meeting the requirements of such Sale and Servicing Agreement or Pooling and
Servicing Agreement, provided that the applicable Trustee gives written consent
thereto. Notwithstanding any subservicing arrangements, the Servicer shall not
be relieved of its obligations under the applicable Sale and Servicing
Agreement or Pooling and Servicing Agreement to the applicable Trustee and the
Securityholders, and the Servicer shall be obligated to the same extent and
under the same terms and conditions as if it alone were servicing and
administering the related Loan Assets.
REMOVAL AND RESIGNATION OF SERVICER
To the extent specified in the Prospectus Supplement, the applicable
Trustee may remove the Servicer upon the occurrence and continuation beyond the
applicable cure period of certain events described in the applicable Sale and
Servicing Agreement or Pooling and Servicing Agreement. To the
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extent specified in the Prospectus Supplement, the Servicer will not be
permitted to resign from its obligations and duties except by mutual consent of
the Servicer, the Seller, the Issuer the applicable Trustee and any other
persons so specified in the applicable Sale and Servicing Agreement or Pooling
and Servicing Agreement, or upon the determination that the Servicer's duties
are no longer permissible under applicable law and such incapacity cannot be
cured by the Servicer. No such resignation shall become effective until a
qualified successor has assumed the Servicer's responsibilities and
obligations. Upon removal or resignation of the Servicer, a successor servicer
will be appointed pursuant to the terms and conditions set forth in the
applicable Sale and Servicing Agreement or Pooling and Servicing Agreement.
ADVANCES
To the extent specified in the Prospectus Supplement, neither the
Servicer, nor any Subservicer on behalf of the Servicer, shall have any
obligation to advance its own funds for any delinquent scheduled payments of
principal or interest on any Loan Asset or to satisfy or keep current the
indebtedness secured by any superior liens on the related Mortgaged Property.
To the extent specified in the Prospectus Supplement, no costs incurred by the
Servicer or any Subservicer in respect of servicing advances shall, for the
purposes of payments or distributions to Securityholders, be added to the
amount owing under the related Loan Asset.
SERVICING PROCEDURES
To the extent specified in the related Prospectus Supplement, the
Servicer and each Subservicer will service the Loan Assets pursuant to written
guidelines promulgated by the Seller, the Issuer or the Servicer. The Servicer
will exercise its best reasonable efforts to insure that any Subservicers
service the Loan Assets in compliance with such guidelines and in a manner
consistent with industry standards.
MORTGAGE LOANS. To the extent specified in the related Prospectus
Supplement, the Servicer and each Subservicer will be required to service and
administer the Mortgage Loans and will have full power and authority, acting
alone, to do any and all things in connection with such servicing and
administration which the Servicer may deem necessary or desirable and
consistent with the terms of the applicable Sale and Servicing Agreement or
Pooling and Servicing Agreement. The Servicer, in servicing and administering
the Mortgage Loans, will be required to employ or cause to be employed
procedures (including collection, foreclosure, liquidation and REO Property
management and liquidation procedures) and exercise the same care that it
customarily employs and exercises in servicing and administering loans of the
same type as the Mortgage Loans for its own account, all in accordance with
accepted servicing practices of prudent lending institutions and servicers of
loans of the same type as the Mortgage Loans and giving due consideration to
the Securityholders' reliance on the Servicer. With respect to any Title I
Mortgage Loan, the foregoing servicing standard also shall include the
requirement that the Servicer will and will cause any Subservicer to, comply
with FHA Regulations in servicing the Title I Mortgage Loans so that the FHA
Insurance remains in full force and effect with respect to the Title I Mortgage
Loans, except for good faith disputes relating to FHA Regulations or such FHA
Insurance, unless such disputes would result in the termination or suspension
of such FHA Insurance. The Servicer will be required to maintain the
facilities, procedures and experienced personnel necessary to comply with such
servicing standard and the duties of the Servicer set forth in the applicable
Sale and Servicing Agreement or Pooling and Servicing Agreement.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds of
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liquidation of the Mortgage Loan after the reimbursement to the Servicer of its
expenses and after the satisfaction of any senior liens.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Loan Assets -- General Legal Considerations -- Cooperative Loans". This
approval is usually based on the purchaser's income and net worth and numerous
other factors. Although the Cooperative's approval is unlikely to be
unreasonably withheld or delayed, the necessity of acquiring such approval
could limit the number of potential purchasers for those shares and otherwise
limit the ability to sell and realize the value of those shares.
In general, a "tenant-stockholder" (as defined in Code Section
216(b)(2)) of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of Code Section 216(b)(1) is allowed a
deduction for amounts paid or accrued within his taxable year to the
corporation representing his proportionate share of certain interest expenses
and certain real estate taxes allowable as a deduction under Code Section
216(a) to the corporation under Code Sections 163 and 164. In order for a
corporation to qualify under Code Section 216(b)(1) for its taxable year in
which such items are allowable as a deduction to the corporation, such Code
Section requires, among other things, that at least 80% of the gross income of
the corporation be derived from its tenant-stockholders (as defined in Code
Section 216(b)(2). By virtue of this requirement, the status of a corporation
for purposes of Code Section 216(b)(1) must be determined on a year-to-year
basis. Consequently, there can be no assurance that Cooperatives relating to
the Cooperative Loans will qualify under such Code Section for any particular
year. In the event that such a Cooperative fails to qualify for one or more
years, the value of the collateral securing any related Cooperative Loans could
be significantly impaired because no deduction would be allowable to tenant-
stockholders under Code Section 216(a) with respect to those years. In view of
the significance of the tax benefits accorded tenant-stockholders of a
corporation that qualifies under Code Section 216(b)(1), the likelihood that
such a failure would be permitted to continue over a period of years appears
remote.
So long as it acts as servicer of the Mortgage Loans, the Servicer will
be required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
CONTRACTS. With respect to Trust Property that includes Contracts,
pursuant to the applicable Sale and Servicing Agreement or Pooling and
Servicing Agreement, the Servicer will service and administer the Contracts
assigned to the Trustee as more fully set forth below. The Servicer, either
directly or through Subservicers subject to general supervision by the
Servicer, will perform diligently all services and duties specified in each
Sale and Servicing Agreement or Pooling and Servicing Agreement in the same
manner as prudent lending institutions of property improvement and/or
manufactured housing installment sales contracts of the same type as the
Contracts in those jurisdictions where the related borrowers are located. The
Servicer will monitor the performance of each Subservicer, if any, and, unless
the related Prospectus Supplement states otherwise, will remain liable for the
servicing of the Contracts in accordance with the terms of the applicable Sale
and Servicing Agreement or Pooling and Servicing Agreement. The duties to be
performed by the Servicer or the Subservicer, if any, will include collection
and remittance of principal and interest payments, collection of insurance
claims and, if necessary, repossession.
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ADMINISTRATION AND SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Loan Asset, the Servicer may receive compensation
with respect to each interest payment thereon in an amount specified in the
related Prospectus Supplement. As compensation for its servicing duties, each
Subservicer, if any, will be entitled to a monthly servicing fee in the amount
specified in the related Prospectus Supplement. In addition to the primary
compensation, each Servicer or Subservicer, if any, will retain all assumption
underwriting fees and late payment charges, to the extent collected from
borrowers if provided in the related Prospectus Supplement.
The Servicer and any Subservicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Loan Assets. No loss will be suffered on the Securities by reason of such
expenses to the extent claims for such expenses are paid directly under any
applicable Mortgage Pool Insurance Policy, any primary mortgage insurance
policy, or from any other forms of Credit Enhancement. In the event, however,
that the defaulted Mortgage Loans are not covered by a Mortgage Pool Insurance
Policy, any primary mortgage insurance policy, or another form of Credit
Enhancement, or claims are either not made or not paid under such policies or
Credit Enhancement, or if coverage thereunder has ceased, a loss will occur on
the Securities of the affected Series to the extent that the proceeds from the
liquidation of a defaulted Loan Asset, after reimbursement of the Servicer's
and the Subservicer's expenses, are less than the then outstanding principal
balance of such defaulted Loan Asset.
THE SELLER AND THE ISSUER
FIRSTPLUS INVESTMENT CORPORATION ("FIC") or a Trust formed by FIC for
such purpose, will act as Issuer with respect to each Series of Securities, and
with respect to each Series of Securities in which a Trust is the Issuer, FIC
will act as Seller. FIC, a Nevada corporation, was incorporated in 1995 as a
limited purpose finance corporation. All of the outstanding capital stock of
FIC is owned by RAC Financial Group, Inc., the common stock of which is traded
in the over-the-counter market on the Nasdaq National Market. The Seller
maintains its principal office at 3773 Howard Hughes Parkway, Suite 300N, Las
Vegas, Nevada 89109, and its telephone number is (702) 892-3772.
As a limited purpose finance corporation under the Rating Agency
guidelines, the business operations of FIC will be limited to functions
relating to the issuance of one or more Series of Securities or similar series
of asset-backed or mortgage-backed securities, the acquisition and resale of
Loan Assets and other incidental activities related thereto. FIC does not
have, and is not expected in the future to have, any significant assets. If
FIC were required to repurchase a Loan Asset included in the Trust Property for
a Series, its only sources of funds to make such repurchase would be funds
obtained from the enforcement of a corresponding obligation, if any, on the
part of the Transferor of such Loan Asset or the related Servicer, as the case
may be, or from a Reserve Fund, if any, established to provide funds for such
repurchases.
Neither FIC nor any of its affiliates will insure or guarantee the
Securities of any Series or the Loan Assets backing any such Series. See "Risk
Factors -- Limited Assets."
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THE SERVICER AND THE TRANSFEROR
To the extent specified in the related Prospectus Supplement, the
Servicer with respect to any Series of Securities may be FIRSTPLUS FINANCIAL,
INC. ("FFI"), an affiliate of FIC. In addition, to the extent specified in the
related Prospectus Supplement for a Series, the related Transferor of the Loan
Assets to the Seller or the Issuer, as applicable, for such Series may also be
FFI. See "Description of the Trust Property -- General".
The delinquency and loss experience of FFI for the periods indicated is
set forth below. In the event that FFI is not the Servicer with respect to a
Series, or if an entity other than FFI acts as Servicer with respect to a
Series, the delinquency experience of such Servicer will be set forth in the
related Prospectus Supplement.
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Delinquency Experience
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
DELINQUENCY DATA: 1994 1995
-------- --------------------------------------------
Delinquencies in Serviced Loan
Portfolio (at period end) (1): Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
31-60 days ................... 3.7% 2.3% 1.7% 1.8% 1.5%
61-90 days ................... 1.4 1.0 0.7 0.7 0.5
91 days and over ............. 3.2 3.3 1.9 2.2 2.1
-------- -------- -------- -------- --------
Total .................. 8.3% 6.6% 4.3% 4.7% 4.1%
======== ======== ======== ======== ========
Serviced Loan Portfolio (at
period end) (dollars in
thousands) $ 60,850 $ 70,410 $177,358 $238,584 $387,343
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------
1996 1997
---------------------------------------------- --------
Delinquencies in Serviced Loan
Portfolio (at period end) (1): Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
31-60 days ................... 1.4% 1.1% 0.8% 1.0% 0.9%
61-90 days ................... 0.6 0.5 0.4 0.4 0.4
91 days and over ............. 2.2 1.9 1.5 1.3 1.1
-------- -------- -------- -------- --------
Total .................. 4.2% 3.5% 2.7% 2.7% 2.4
======== ======== ======== ======== ========
Serviced Loan Portfolio (at
period end) (dollars in
thousands) $506,287 $750,529 $1,267,147 $1,882,187 $2,713,137
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, September 30,
----------------- -------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
LOSS AND DEFAULT DATA:
Net Losses as a percentage of the average
Serviced Loan Portfolio (2) ................. 0.44% 0.04% 0.12%
Defaults as a percentage of the average
Serviced Loan Portfolio (2) ................. 2.64% 0.69% 1.29%
</TABLE>
(1) Delinquencies (as a percentage of the total serviced loan portfolio
balance) typically increase in November and December of each calendar
year.
(2) The average serviced loan portfolio is calculated by adding the
beginning and ending balances for the period presented and dividing the
sum by two.
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<PAGE> 134
While the preceding tables generally indicate that FFI is experiencing
declining delinquency, loss and default rates on its serviced loan portfolio as
a whole, such rates have been increasing on a pool-by-pool basis. Although
such increases to date have been within the parameters anticipated by FFI at
the time of the issuance of each Series of Securities, there can be no
assurance that such rates will not continue to increase. Loan Assets that will
be conveyed to the Seller or Issuer in connection with the issuance of a Series
of Securities will generally possess reduced delinquency, default and loss
rates due to certain requirements of the Underwriters and Rating Agencies for
such Series. THE OVERALL DECLINE IN THE DELINQUENCY RATES ON THE SERVICED
LOAN PORTFOLIO IS PRINCIPALLY DUE TO THE INCREASED VOLUME OF LOANS ORIGINATED
BY FFI. FFI CALCULATES ITS DELINQUENCY AND DEFAULT RATES BY DIVIDING THE
AMOUNT OF DELINQUENT OR DEFAULTED LOANS IN THE SERVICED LOAN PORTFOLIO BY THE
TOTAL SERVICED LOAN PORTFOLIO. SINCE FFI AND ITS AFFILIATES ARE ORIGINATING
HIGHER VOLUMES OF NEW LOANS THAT, DUE TO THEIR LACK OF SEASONING, TEND TO HAVE
LOWER DELINQUENCY AND DEFAULT RATES, FFI'S OVERALL DELINQUENCY AND DEFAULT
RATES HAVE DECREASED.
Because delinquencies and losses typically occur months or years after a
loan is originated, data relating to delinquencies and losses as a percentage
of the current portfolio can understate the risk of future delinquencies,
losses or foreclosures. There is no assurance that the delinquency,
foreclosure and loss experience with respect to any of the Loan Assets or with
respect to any pool of Loan Assets will be comparable to the experience
reflected above for assets originated and serviced by FFI or its affiliates.
Because certain Loan Assets may have been underwritten pursuant to standards
that rely primarily on the value of the related Mortgaged Properties rather
than the creditworthiness of the related mortgagor, the actual rates of
delinquencies, foreclosures and losses on such Loan Assets, particularly in
periods during which the value of the related Mortgage Properties has declined,
could be higher than those historically experienced by the mortgage lending
industry in general. In addition, the rate of delinquencies, foreclosures and
losses with respect to the Loan Assets will also be affected by, among other
things, interest rate fluctuations and general and regional economic
conditions. See "Risk Factors -- Certain Factors Affecting Delinquencies,
Foreclosures and Losses on Loan Assets".
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of each Sale and Servicing
Agreement or Pooling and Servicing Agreement pursuant to which an Issuer will
purchase Loan Assets from the Seller or Transferor, as applicable, and the
Servicer will agree to service such Loan Assets, each Trust Agreement (in the
case of a grantor trust, the Pooling and Servicing Agreement) pursuant to which
a Trust will be created and Securities will be issued and each Administration
Agreement pursuant to which FFI will undertake certain administrative duties
with respect to a Trust that issues Notes (collectively, the "Transfer and
Servicing Agreements"). Forms of the Transfer and Servicing Agreements have
been filed as exhibits to the Registration Statement of which this Prospectus
forms a part. This 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.
SALE AND ASSIGNMENT OF LOAN ASSETS
On or prior to the Closing Date specified with respect to any given
Series of Securities in the related Prospectus Supplement (the "Closing Date"),
the Transferor will sell and assign to the Seller or Issuer without recourse,
its entire interest in the Loan Assets comprising the related Loan Asset Pool,
together with all principal and interest on such Loan Assets (subject to
exclusions or adjustments, specified in the related Prospectus Supplement, on
or with respect to such Loan Assets on or after the Cut-off Date), other than
principal and interest due and payable in respect of such Loan Assets on or
before the date specified in the related Prospectus Supplement. On the Closing
Date, the Seller or Issuer will transfer and assign to the applicable Trustee,
without recourse, pursuant to a Sale and Servicing Agreement, a Pooling
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<PAGE> 135
and Servicing Agreement or an Indenture, as applicable, its entire interest in
the Loan Assets comprising the related Loan Asset Pool, together with all
principal and interest on such Loan Assets (subject to exclusions or
adjustments specified in the related Prospectus Supplement, on or with respect
to such Loan Assets on or after the Cut-off Date), other than principal and
interest due and payable in respect of such Loan Assets on or before the date
specified in the related Prospectus Supplement. Each such Loan Asset will be
identified in a schedule appearing as an exhibit to such Sale and Servicing
Agreement or such Pooling and Servicing Agreement (a "Schedule of Loan
Assets"). The applicable Trustee will, concurrently with such transfer and
assignment, execute and deliver the related Securities. Unless otherwise
provided in the related Prospectus Supplement, the net proceeds received from
the sale of the Securities of a given Series will be applied to the purchase of
the related Loan Assets from the Seller or Transferor and, to the extent
specified in the related Prospectus Supplement, to provide for the funding of
the applicable Credit Enhancement.
In addition, as to each Loan Asset that is a Mortgage Loan, the Seller
or Issuer, as applicable, will deliver to the applicable Trustee or its
custodian, as specified in the related Prospectus Supplement, the related
mortgage note ("Mortgage Note") and mortgage ("Mortgage"), any assumption and
modification agreement, an assignment of the Mortgage in recordable form,
evidence of title insurance and, if applicable, the certificate of private
mortgage insurance. In instances where recorded documents cannot be delivered
due to delays in connection with recording, the Seller or Issuer, as
applicable, may deliver copies thereof and deliver the original recorded
documents promptly upon receipt.
With respect to each Loan Asset that is a Cooperative Loan, the Seller
or Issuer will cause to be delivered to the applicable Trustee or its
custodian, as specified in the related Prospectus Supplement, the related
original Cooperative note endorsed to the order of such Trustee, the original
security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate and related blank stock powers. The Seller or Issuer will file in
the appropriate office an assignment and a financing statement evidencing such
Trustee's security interest in each Cooperative Loan.
With respect to each Loan Asset that is a Contract for a Manufactured
Home, the Seller or Issuer will deliver or cause to be delivered to the
applicable Trustee, the original Contract and copies of documents and
instruments related to each Contract and the security interest in the
Manufactured Home securing each Contract. To give notice of the right, title
and interest of the Securityholders to the Contracts, the Seller or Issuer will
cause a UCC-1 financing statement to be filed identifying such Trustee as the
secured party and identifying all Contracts as collateral. To the extent
specified in the related Prospectus Supplement, the Contracts will not be
stamped or otherwise marked to reflect their assignment from the Seller or
Issuer to such Trustee. Therefore, if a subsequent purchaser were able to take
physical possession of the Contracts without notice of such assignment, the
interest of the holders of the Securities of the applicable Series in the
Contracts could be defeated. See "Certain Legal Aspects of the Loan Assets."
To the extent specified in the related Prospectus Supplement, in the
applicable Sale and Servicing Agreement, Pooling and Servicing Agreement or
Indenture, as applicable, the Seller or Issuer generally will represent and
warrant to the applicable Trustee, among other things, that (i) the information
with respect to each Loan Asset set forth in the Schedule of Loan Assets
attached thereto is true and correct in all material respects; (ii) at the date
of initial issuance of the Securities, the Seller or Issuer, as applicable, has
good and marketable title to the Loan Assets included in the Trust Property and
such other items comprising the corpus of the Trust Property are free and clear
of any lien, mortgage, pledge, charge, security interest or other encumbrance;
(iii) at the date of initial issuance of the Securities, no payment in respect
of a Loan Asset is 30 or more days delinquent and there are no delinquent tax
or assessment liens against the related Mortgaged Property, if any; and (iv) at
origination, each Mortgage Loan complied in all material respects with
applicable state and federal laws, including, without limitation, consumer,
usury,
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<PAGE> 136
truth-in-lending, consumer credit protection, equal credit opportunity and
disclosure laws and with respect to any Title I Mortgage Loans, the FHA
Regulations.
In the event that the Seller or Issuer has acquired the Loan Assets for
a Series, if specified in the related Prospectus Supplement, the Seller or
Issuer, as applicable, may, in lieu of making the representations set forth in
the preceding paragraph, cause the entity from which such Loan Assets were
acquired to make such representations (other than those regarding such Seller's
or Issuer's title to the Loan Assets, which will in all events be made by such
Seller or Issuer, as applicable), in the agreement pursuant to which such Loan
Assets are acquired, or if such entity is acting as Servicer, in the applicable
Sale and Servicing Agreement or Pooling and Servicing Agreement, or if such
entity is acting as a Subservicer, in its Subservicing Agreement. In such
event, such representations, and the Seller's rights against such entity in the
event of a breach thereof, will be assigned to the Trustee for the benefit of
the Securityholders of such Series.
CONVEYANCE OF SUBSEQUENT LOAN ASSETS
With respect to a Series of Securities for which a Pre-Funding
Arrangement is provided, in connection with any conveyance of Subsequent Loan
Assets to the Issuer, as applicable, after the issuance of such Series, the
related Sale and Servicing Agreement or Pooling and Servicing Agreement will
require the Transferor and Seller to satisfy the following conditions, among
others: (i) each Subsequent Loan Asset purchased after the Closing Date must
satisfy the representations and warranties contained in the subsequent transfer
agreement to be entered into by the Transferor, the applicable Trustee and the
Seller or Issuer (the "Subsequent Transfer Agreement") and in the related Sale
and Servicing Agreement or Pooling and Servicing Agreement; (ii) the Transferor
will not select such Subsequent Loan Assets in a manner that it believes is
adverse to the interests of the Securityholders; (iii) as of the related Cut-
off date, all of the Loan Assets in the Loan Asset Pool at that time, including
the Subsequent Loan Assets purchased after the closing date will satisfy the
criteria set forth in the related Sale and Servicing Agreement or Pooling and
Servicing Agreement; (iv) the Subsequent Loan Assets will have been approved by
any third party provider of Credit Enhancement, if applicable; and (v) prior to
the purchase of each Subsequent Loan Asset the applicable Trustee will perform
an initial review of certain related loan file documentation for such Loan
Asset and issue an initial certification for which the required documentation
in such loan file has been received with respect to each such Subsequent Loan
Asset. The Subsequent Loan Assets, on an aggregate basis, will have
characteristics similar to the characteristics of the pool of Initial Loan
Assets as described in the related Prospectus Supplement. Each acquisition of
any Subsequent Loan Assets will be subject to the review by any third party
provider of Credit Enhancement, if applicable, the Rating Agencies and the
Transferor's accountants of the aggregate statistical characteristics of the
related Loan Asset Pool for compliance with the applicable statistical criteria
set forth in the related Sale and Servicing Agreement or Pooling and Servicing
Agreement.
REPURCHASE OR SUBSTITUTION OF LOAN ASSETS
The Trustee (or its custodian as specified in the related Prospectus
Supplement) will review the documents delivered to it with respect to the Loan
Assets included in the related Trust Property. To the extent specified in the
related Prospectus Supplement, if any document is not delivered or is found to
be defective in any material respect and the Seller or Issuer cannot deliver
such document or cure such defect within 60 days after notice thereof (which
the applicable Trustee will undertake to give within 45 days of the delivery of
such documents), and if any other party obligated to deliver such document or
cure such defect has not done so and has not substituted or repurchased the
affected Loan Asset, then the Seller or Issuer, as applicable, will, not later
than the Determination Date next succeeding the end of such 60-day period (a)
if provided in the Prospectus Supplement remove the affected Loan Asset from
the Trust Property and substitute one or more other Loan Assets therefor or (b)
repurchase, or cause the Transferor to repurchase the Loan Asset for a price
equal to 100% of its principal balance plus interest thereon as of
57
<PAGE> 137
the date specified in the related Prospectus Supplement, plus the amount of
unreimbursed servicing advances made by the Servicer or any Subservicer with
respect to such Loan Asset. To the extent specified in the related Prospectus
Supplement, such purchase price will be deposited in the Collection Account on
such Determination Date and such repurchase and, if applicable, substitution
obligation will constitute the sole remedy available to holders of the
Securities of the applicable Series or the related Trustee against the Seller
or the Issuer for a material defect in a document relating to a Loan Asset.
If the Prospectus Supplement for a Series of Securities so provides,
then in lieu of agreeing to repurchase or substitute Loan Assets as described
above, the Seller or the Issuer may obtain such an agreement from the entity
which sold such Loan Assets to the Seller or Issuer, as applicable, which
agreement will be assigned to the applicable Trustee for the benefit of the
holders of the Securities of such Series.
EVIDENCE AS TO COMPLIANCE
The related Sale and Servicing Agreement or Pooling and Servicing
Agreement will provide that on or before a specified date after the end of each
of the Servicer's fiscal years elapsing during the term of its appointment,
beginning with the first fiscal year ending after the Closing Date, the
Servicer, at its expense, will furnish to the applicable Trustee and certain
other Persons (i) an opinion by a firm of independent certified public
accountants on the financial position of the Servicer at the end of the
relevant fiscal year and the results of operations and changes in financial
position of the Servicer for such year then ended on the basis of an
examination conducted in accordance with generally accepted auditing standards,
and (ii) if the Servicer is then servicing any Mortgage Loans, a statement from
such independent certified public accountants to the effect that based on an
examination of certain specified documents and records relating to the
servicing of the Servicer's mortgage loan portfolio conducted substantially in
compliance with the audit program for mortgages serviced for the United States
Department of Housing and Urban Development Mortgage Audit Standards, or the
Uniform Single Audit Program for Mortgage Bankers (the "Applicable Accounting
Standards"), such firm is of the opinion that such servicing has been conducted
in compliance with the Applicable Accounting Standards except for (a) such
exceptions as such firm shall believe to be immaterial and (b) such other
exceptions as shall be set forth in such statement.
LIST OF SECURITYHOLDERS
Upon written request of the applicable Trustee, the Registrar for a
Series of Securities will provide to the Trustee, within fifteen days after
receipt of such request, a list of the names and addresses of all holders of
record of the Securities of such Series as of the most recent Record Date for
payment or distributions to holders of Securities of that Series. Upon written
request of three or more holders of record of a Series of Securities for
purposes of communicating with other holders with respect to their rights under
the applicable Indenture, Trust Agreement or Pooling and Servicing Agreement
for such Series, the applicable Trustee will afford such holders access during
business hours to the most recent list of holders of such Series held by such
Trustee. With respect to Book Entry Securities, the only named holder on the
Certificate Register will be the Clearing Agency.
No Indenture, Trust Agreement or Pooling and Servicing Agreement will
provide for the holding of any annual or other meetings of holders of
Securities.
ADMINISTRATION OF THE DISTRIBUTION ACCOUNT
The applicable Sale and Servicing Agreement or Pooling and Servicing
Agreement with respect to a Series will require the Servicer to maintain a
Distribution Account that is either: (i) an account maintained with a
depository institution the debt obligations of which (or, in the case of a
depository institution which is a part of a holding company structure, the debt
obligations of the holding company of
58
<PAGE> 138
which) have a long-term or short-term rating acceptable to each rating agency
that rated the Securities; (ii) an account or accounts the deposits in which
are fully insured by either the Bank Insurance Fund (the "BIF"), the Federal
Deposit Insurance Corporation (the "FDIC") or the Savings Association Insurance
Fund (as successor to the Federal Savings and Loan Insurance Corporation)
("SAIF") of the FDIC; (iii) a trust account (which shall be a "segregated trust
account") maintained with the corporate trust department of a federal or state
chartered depository institution or trust company with trust powers and acting
in its fiduciary capacity for the benefit of the applicable Trustee which
depository institution or trust company will be required to have capital and
surplus of not less than the amount specified in the related Indenture, Trust
Agreement, Sale and Servicing Agreement or Pooling and Servicing Agreement; or
(iv) an account that will not cause any rating agency rating the Securities of
such Series to downgrade or withdraw its then-current rating assigned to the
Securities, as evidenced in writing by such rating agency. The instruments in
which amounts in the Distribution Account may be invested are limited to
Permitted Investments. To the extent specified in the related Prospectus
Supplement, a Distribution Account may be maintained as an interest bearing
account, or the funds held therein may be invested pending each succeeding
Distribution Date in Permitted Investments. To the extent specified in the
related Prospectus Supplement, the Seller, the Issuer or the Trustee will be
entitled to receive any such interest or other income earned on funds in the
Distribution Account as additional compensation. To the extent specified in the
related Prospectus Supplement, the following payments and collections received
subsequent to the cut-off date will be deposited in the Distribution Account:
(i) all payments on account of scheduled principal;
(ii) all payments on account of interest accruing and collected on and
after the date specified in the related Prospectus Supplement, subject to
exclusions or adjustments described in such Prospectus Supplement;
(iii) all Liquidation Proceeds net of certain amounts reimbursed to the
Subservicers or the Servicer, as described in the related Sale and Servicing
Agreement or Pooling and Servicing Agreement;
(iv) all Insurance Proceeds;
(v) all proceeds of any Loan Asset or property acquired in respect
thereof repurchased by the Servicer, the Seller or the Transferor or otherwise
as described herein;
(vi) all amounts, if any, required to be transferred to the
Distribution Account from any Credit Enhancement for the related Series; and
(vii) all other amounts required to be deposited in the Distribution
Account pursuant to the related Indenture, Trust Agreement, Sale and Servicing
Agreement or Pooling and Servicing Agreement.
REPORTS TO SECURITYHOLDERS
Concurrently with each payment or distribution on the Securities of a
Series, to the extent specified in the related Prospectus Supplement, the
applicable Trustee will furnish to the related Securityholders a statement
generally setting forth, to the extent applicable to such Series, among other
things:
(i) the aggregate amount of such distribution allocable to principal,
separately identifying the amount allocable to each Class;
(ii) the amount of such distribution allocable to interest, separately
identifying the amount allocable to each Class;
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<PAGE> 139
(iii) the aggregate principal balance of each Class of the Securities
after giving effect to payments and distributions on such Distribution Date;
(iv) if applicable, the aggregate principal balance of any Class of
Securities which are Compound Interest Securities after giving effect to any
increase in such principal balance that results from the accrual of interest
that is not yet distributable thereon;
(v) if applicable, the amount otherwise distributable to holders of
any Class of Securities that were distributed to holders of other Classes of
Securities;
(vi) if any Class of Securities has priority in the right to receive
Principal Prepayments, the amount of Principal Prepayments received by the
related Trustee in respect of the related Loan Assets;
(vii) certain performance information regarding the Loan Assets,
including delinquency and foreclosure information, specified in the related
Sale and Servicing Agreement or Pooling and Servicing Agreement;
(viii) the amount of coverage then remaining under any Credit
Enhancement; and
(ix) all other information required to be provided pursuant to the
related Indenture, Trust Agreement, Sale and Servicing Agreement or Pooling and
Servicing Agreement.
The Servicer or the applicable Trustee will also furnish annually
customary information deemed necessary for holders of such Securities to
prepare their tax returns.
EVENTS OF DEFAULT
"Events of Default" under the applicable Sale and Servicing Agreement or
Pooling and Servicing Agreement with respect to a Series will consist of (i)
any failure by the Servicer to duly observe or perform in any material respect
any of its covenants or agreements in such Sale and Servicing Agreement or such
Pooling and Servicing Agreement materially affecting the rights of holders of
the Securities of such Series which continues unremedied for 60 days after the
giving of written notice of such failure to the Servicer by the applicable
Trustee or to the Servicer or the applicable Trustee by the holders of such
Securities evidencing interests aggregating not less than 25% of the then
outstanding principal balance of the affected Class of Securities; and (ii)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under a Sale and Servicing Agreement or
Pooling and Servicing Agreement remains unremedied by the Servicer, the
applicable Trustee, or holders of Securities of each Class affected thereby
evidencing, as to each such Class, interests aggregating not less than 51% of
the then outstanding principal balance of such Class, may terminate all of the
rights and obligations of the Servicer under the applicable Sale and Servicing
Agreement or Pooling and Servicing Agreement, whereupon the applicable Trustee,
or a new Servicer appointed pursuant to such Sale and Servicing Agreement or
such Pooling and Servicing Agreement, will succeed to all the responsibilities,
duties and liabilities of the Servicer under such Sale and Servicing Agreement
or such Pooling and Servicing Agreement and will be entitled to similar
compensation arrangements. Notwithstanding its termination as Servicer, the
Servicer will be entitled to receive amounts earned by it under the applicable
Sale and Servicing Agreement or Pooling and Servicing Agreement prior to such
termination. If at the time of any such termination the Servicer is also
servicing as the Administrator, the Servicer's status as Administrator will be
simultaneously
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<PAGE> 140
terminated by the Trustee and the Servicer's responsibilities as such shall be
transferred to the successor servicer, if such person is then qualified to so
act), or to another successor Administrator retained by the applicable Trustee,
or to the applicable Trustee itself if a successor Administrator cannot be
retained in a timely manner. To the extent provided in the related Prospectus
Supplement, unless and until a successor servicer is appointed, the applicable
Trustee will be required to fulfill the duties of the Servicer.
No Securityholder will have any right under the applicable Sale and
Servicing Agreement or Pooling and Servicing Agreement to institute any
proceeding with respect to such Sale and Servicing Agreement or such Pooling
and Servicing Agreement, unless such holder previously has given to the
applicable Trustee written notice of default and unless the holders of
Securities as specified in the applicable Sale and Servicing Agreement or
Pooling and Servicing Agreement have made written request to the applicable
Trustee to institute such proceeding in its own name as trustee thereunder and
have offered to the applicable Trustee reasonable indemnity and the Trustee for
60 days has neglected or refused to institute any such proceedings. However, no
Trustee will be under any obligation to exercise any of the trusts or powers
vested in it by the applicable Indenture, Trust Agreement or Pooling and
Servicing 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 Securityholders,
unless such Securityholders have offered to such Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
AMENDMENT
Each of the Sale and Servicing Agreement with respect to a Series and
the Pooling and Servicing Agreement with respect to a Series may be amended by
the Issuer, or the Seller, as applicable, the Servicer and the applicable
Trustee without the consent of the Securityholders of such Series, to cure any
error or ambiguity, to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein or to add any other
provisions with respect to matters or questions arising under such Sale and
Servicing Agreement or such Pooling and Servicing Agreement provided that such
action will not adversely affect in any material respect the interests of any
Securityholders of such Series. An amendment described above shall not be
deemed to adversely affect in any material respect the interests of the
Securityholders of a Series if either (a) an opinion of counsel satisfactory to
the applicable Trustee is obtained to such effect, or (b) the person requesting
the amendment obtains a letter from each of the rating agencies then rating the
Securities of that Series to the effect that the amendment, if made, would not
result in a downgrading or withdrawal of the rating then assigned by it to such
Securities.
To the extent specified in the Prospectus Supplement, each of the Sale
and Servicing Agreement with respect to a Series and the Pooling and Servicing
Agreement with respect to a Series may also be amended by the Issuer, or the
Seller, as applicable, the Servicer, and the applicable Trustee with the
consent of the Securityholders evidencing interests aggregating in excess of
50% of the then outstanding principal balance of the Securities of the
applicable Series for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of such Sale and Servicing
Agreement or such Pooling and Servicing Agreement or of modifying in any manner
the rights of Securityholders of that Series; provided, however, that no such
amendment may (i) reduce in any manner the amount of, or delay the timing of,
collections of payments received on the related Loan Assets or distributions
which are required to be made on any Security without the consent of the holder
of such Security, (ii) adversely affect in any material respect the interests
of the holders of any Class of Securities in any manner other than as described
in clause (i), without the consent of the holders of Securities evidencing 100%
of the then outstanding principal balance of such Class or (iii) reduce the
aforesaid percentage of Securities of any Class required to consent to any such
amendment, without the consent of the holders of Securities evidencing 100% of
the then outstanding principal balance of such Class.
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<PAGE> 141
CERTAIN LEGAL ASPECTS OF THE LOAN ASSETS
The following discussion contains summaries of certain legal aspects of
the Loan Assets which are general in nature. Because such legal aspects are
governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Loan Assets is situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Loan Assets.
In addition, the following discussion also contains a summary of the
Title I Program, which may be applicable to certain of the Loan Assets. With
respect to each Series for which the related Trust Property includes Contracts,
the related Prospectus Supplement will contain a discussion of certain legal
aspects of manufactured housing contracts.
GENERAL LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other
charges that may be assessed on borrowers, require certain disclosures to
borrowers, and may require licensing of the Transferor, the Seller, the Issuer,
the Trustee, the Administrator, the Servicer and any Subservicer. In addition,
most states have other laws, public policies and general principles of equity
relating to the protection of consumers and the prevention of unfair and
deceptive practices which may apply to the origination, servicing and
collection of the Loan Assets.
The Loan Assets may also be subject to federal laws, including: (i) the
federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the Loan
Assets; (ii) the Real Estate Settlement Procedures Act and Regulation X
promulgated thereunder, which require certain disclosures to the borrowers
regarding the settlement and servicing of the Mortgage Loans; (iii) the Equal
Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit
discrimination on the basis of age, race, color, sex, religion, marital status,
national origin, receipt of public assistance or the exercise of any right
under the Consumer Credit Protection Act; (iv) the Fair Credit Reporting Act,
which regulates the use and reporting of information related to the borrower's
credit experience; (v) the Federal Trade Commission Preservation of Consumers'
Claims and Defenses Rule, 16 C.F.R. Part 433, regarding the preservation of a
consumer's rights; (vi) the Fair Housing Act, 42 U.S.C. 3601 et seq., relating
to the creation and governance of the Title I Program; (vii) the Home Ownership
and Equity Protection Act; and (viii) if applied, the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended (the "Relief Act").
MORTGAGES. The Mortgage Loans will be secured by either deeds of trust,
mortgages, deeds to secure debt or chattel mortgages, depending upon the
prevailing practice in the state in which the Mortgaged Property subject to a
Mortgage Loan is located. In some states, a mortgage creates a lien upon the
real property encumbered by the mortgage. In other states, the mortgage
conveys legal title to the property to the mortgagee subject to a condition
subsequent, i.e., the payment of the indebtedness secured thereby. There are
two parties to a mortgage, the borrower, who is the owner of the property and
usually the borrower, and the mortgagee, who is the lender. Under the mortgage
instrument, the borrower delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
has three parties, the owner of the property and usually the borrower, called
the trustor (similar to a borrower), a lender called the beneficiary (similar
to a mortgagee), and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. The trustee's authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by applicable state law, the express
provisions of the deed of trust or mortgage, and, in some cases, with respect
to deeds of trust, the directions of the beneficiary. Some states use a
security deed or deed to
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secure debt which is similar to a deed of trust except that it has only two
parties: a grantor (similar to a borrower) and a grantee (similar to a
mortgagee). Mortgages, deeds of trust and deeds to secure debt generally are
not prior to liens for real estate taxes and assessments and other charges
imposed under governmental police powers. Priority with respect to mortgages,
deeds of trust and deeds to secure debt and other encumbrances depends on their
terms, the knowledge of the parties to such instrument and generally on the
order of recordation of the mortgage, deed of trust or the deed to secure debt
in the appropriate recording office.
COOPERATIVE LOANS. Certain of the Mortgage Loans may be Cooperative
Loans. The private, non-profit, cooperative apartment corporation owns all the
real property that comprises the project, including the land, separate dwelling
units and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative
apartment building and/or underlying land, as is generally the case, the
cooperative, as project borrower, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a party
are generally subordinate to the interest of the holder of the blanket mortgage
in that building. If the cooperative is unable to meet the payment obligations
arising under its blanket mortgage, the mortgagee holding the blanket mortgage
could foreclose on that mortgage and terminate all subordinate proprietary
leases and occupancy agreements. In addition, the blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not fully
amortize with a significant portion of principal being due in one lump sum at
final maturity. The inability of the cooperative to refinance this mortgage and
its consequent inability to make such final payment could lead to foreclosure
by the mortgagee providing the financing. A foreclosure in either event by the
holder of the blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed the purchase by an
individual tenant-stockholder of cooperative shares or, in the case of a pool
of Mortgage Loans including Cooperative Loans, the collateral securing the
Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing such tenant-
stockholder's pro rata share of the cooperative's payments for its blanket
mortgage, real property taxes, maintenance expenses and other capital or
ordinary expenses. An ownership interest in a cooperative and accompanying
occupancy rights is financed through a cooperative share loan evidenced by a
promissory note and secured by a security interest in the occupancy agreement
or proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the tenant-
stockholder, the lender may sue for judgment on the promissory note, dispose of
the collateral at a public or private sale or otherwise proceed against the
collateral or tenant-stockholder as an individual as provided in the security
agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares.
FORECLOSURE
MORTGAGES. Foreclosure of a mortgage is generally accomplished by
judicial action. Generally, the action is initiated by the service of legal
pleadings upon all parties having an interest of record in the real property.
Delays in completion of the foreclosure may occasionally result from
difficulties in locating necessary parties defendant. Judicial foreclosure
proceedings are often not contested by any of the parties defendant. However,
when the mortgagee's right to foreclose is contested, the legal proceedings
necessary to resolve the issue can be time consuming. After the completion of
a judicial foreclosure, the court
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generally issues a judgment of foreclosure and appoints a referee or other
court officer to conduct the sale of the property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. Foreclosure is
regulated by statutes and rules and is subject to the court's equitable powers.
Generally, a borrower is bound by the terms of the mortgage note and the
mortgage as made and cannot be relieved from his default if the mortgagee has
exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature the court may exercise
equitable powers to relieve a borrower of a default and deny the mortgagee
foreclosure on proof that either the borrower's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a
court of equity may relieve the borrower from an entirely technical default
where such default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non-collusive, regularly
conducted foreclosure sale may be challenged as a fraudulent conveyance,
regardless of the parties' intent, if a court determines that the sale was for
less than reasonably equivalent value and such sale occurred while the borrower
was insolvent and within one year (or within the state statute of limitations
if the trustee in bankruptcy elects to proceed under state fraudulent
conveyance law) of the filing of bankruptcy. Similarly, a suit against the
debtor on the mortgage note may take several years and, generally, is a remedy
alternative to foreclosure, the mortgagee being precluded from pursuing both at
the same time.
In some states, mortgages may also be foreclosed by advertisement
pursuant to a power of sale provided in the mortgage. Foreclosure of a
mortgage by advertisement is essentially similar to foreclosure of a deed of
trust by nonjudicial power of sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust or deed to secure debt which authorizes the trustee to sell the
property upon default by the borrower under the terms of the note, deed of
trust or deed to secure debt. In some states, prior to such sale, the trustee
must record a notice of default and send a copy to the borrower-trustor and to
any person who has recorded a request for a copy of a notice of default and
notice of sale. In addition, in some states, prior to such sale, the trustee
must provide notice to any other individual having an interest of record in the
real property, including any junior lienholders. In some states, the borrower,
or any other person having a junior encumbrance on the real estate, may, during
a reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligations, including
attorney's and trustee's fees to the extent allowed by applicable law. Certain
states may require notices of sale to be published periodically for a
prescribed period in a specified manner prior to the date of the trustee's
sale. In addition, some state laws require that a copy of the notice of sale
be posted on the property and sent to all parties having an interest in the
real property. In certain states, foreclosure under a deed of trust may also
be accomplished by judicial action in the manner provided for foreclosure of
mortgages.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is generally
a public sale. Because of the difficulty a potential buyer at the sale might
have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, a third party may be unwilling to purchase the property at a
foreclosure sale. For these and other reasons, it is common for the lender to
purchase the property from the trustee, referee or other court officer for an
amount equal to the principal amount of the indebtedness secured by the
mortgage or deed of trust, plus accrued and unpaid interest and
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the expenses of foreclosure. Generally, state law controls the amount of
foreclosure costs and expenses, including attorneys' and trustee's fees, which
may be recovered by a lender. In some states there is a statutory minimum
purchase price which the lender may offer for the property. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume ownership of the mortgaged
property and, therefore, the burdens of ownership, including the obligation to
pay taxes, obtain casualty insurance and to make such repairs at its own
expense as are necessary to render the property suitable for sale. The lender
will commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss may be mitigated by the receipt
of any mortgage insurance proceeds.
A second mortgagee may not foreclose on the property securing a second
mortgage unless it forecloses subject to the first mortgage and any other prior
liens, in which case it must either pay the entire amount due on the first
mortgage and such other liens, prior to or at the time of the foreclosure sale
or undertake the obligation to make payments on the first mortgage and such
liens, in either event adding the amounts expended to the balance due on the
second loan, and may be subrogated to the rights of the first mortgagee. In
addition, in the event that the foreclosure of a second mortgage triggers the
enforcement of a "due-on-sale" clause, the second mortgagee may be required to
pay the full amount of the first mortgage to the first mortgagee. Accordingly,
with respect to those Mortgage Loans which are second mortgage loans, if the
lender purchases the property, the lender's title will be subject to all senior
liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage or deed of trust under which the
sale was conducted. Any remaining proceeds are generally payable to the
holders of junior mortgages or deeds of trust and other liens and claims in
order of their priority, whether or not the borrower is in default. Any
additional proceeds are generally payable to the borrower or trustor. The
payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgagee; however, a junior lienholder whose
rights in the property are terminated pursuant to foreclosure by a senior
lienholder will not share in the proceeds from the subsequent disposition of
the property. Junior lienholders may also institute legal proceedings separate
from the foreclosure proceedings of the senior lienholders.
Some states impose prohibitions or limitations on remedies available to
the mortgagee, including the right to recover the debt from the borrower. See
"--Anti-Deficiency Legislation and Other Limitations on Lenders" below.
COOPERATIVE LOANS. The cooperative shares owned by the tenant-
stockholder and pledged to the lender are, in almost all cases, subject to
restrictions on transfer as set forth in the cooperative's Certificate of
Incorporation and Bylaws, as well as the proprietary lease or occupancy
agreement, and may be canceled by the cooperative for failure by the tenant-
stockholder to pay rent or other obligations or charges owned by such tenant-
stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or
occupancy agreement generally permits the cooperative to terminate such lease
or agreement in the event a borrower fails to make payments or defaults in the
performance of covenants required thereunder. Typically, the lender and the
cooperative enter into a recognition agreement which establishes the rights and
obligations of both parties in the event of a default by the tenant-stockholder
on its obligations under the proprietary lease or occupancy agreement. A
default by the tenant-stockholder under the proprietary lease or occupancy
agreement will usually constitute a default under the security agreement
between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to
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terminate such lease or agreement until the lender has been provided with an
opportunity to cure the default. The recognition agreement typically provides
that if the proprietary lease or occupancy agreement is terminated, the
cooperative will recognize the lender's lien against proceeds from a sale of
the cooperative apartment, subject, however, to the cooperative's right to sums
due under such proprietary lease or occupancy agreement. The total amount owed
to the cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and
unpaid interest thereon.
Recognition agreements also provide that in the event of a foreclosure
on a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished by
a sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted. Article 9 of the UCC provides that the
proceeds of the sale will be applied first to pay the costs and expenses of the
sale and then to satisfy the indebtedness secured by the lender's security
interest. The recognition agreement, however, generally provides that the
lender's right to reimbursement is subject to the right of the cooperative
corporation to receive sums due under the proprietary lease or occupancy
agreement. If there are proceeds remaining, the lender must account to the
tenant-stockholder for the surplus. Conversely, if a portion of the
indebtedness remains unpaid, the tenant-stockholder is generally responsible
for the deficiency. See "--Anti-Deficiency Legislation and Other Limitations on
Lenders" below.
JUNIOR LIENS. Certain of the Mortgage Loans, including the Title I
Mortgage Loans, may be secured by junior lien mortgages or deeds of trust.
Second mortgages or deeds of trust are generally junior to first mortgages or
deeds of trust held by other lenders, and third mortgages or deeds of trust are
generally junior to first and second mortgages or deeds of trust held by other
lenders, and so forth. The rights of the Securityholders as the holders of a
junior deed of trust or a junior mortgage, are subordinate in lien and in
payment to those of the holder of the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or beneficiary to receive
and apply hazard insurance and condemnation proceeds and, upon default of the
borrower, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage, the junior
mortgagee's or junior beneficiary's lien will be extinguished unless the junior
mortgagee satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. A junior mortgagee or
beneficiary in some states may satisfy a defaulted senior lien in full and in
some states may cure such default and bring the senior loan current, in either
event, adding the amounts expended to the balance due on the junior loan. In
most states, absent a provision in the mortgage or deed of trust to the
contrary, no notice of default is required to be given to a junior mortgagee or
beneficiary.
Furthermore, the terms of a junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will generally govern. Upon a failure of the borrower or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to
perform the obligation itself. Generally, all sums so expended by the senior
mortgagee or beneficiary become part of the indebtedness secured by the senior
mortgage or deed of trust. To the extent
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a senior mortgagee expends such sums, such sums will generally have priority
over all sums due under the junior mortgage.
RIGHT OF REDEMPTION. The purposes of a foreclosure action are to enable
the mortgagee to realize upon its security and to bar the borrower, and all
persons who have an interest in the property which is subordinate to the
foreclosing mortgagee, from their "equity of redemption." The doctrine of
equity of redemption provides that, until the property covered by a mortgage
has been sold in accordance with a properly conducted foreclosure and
foreclosure sale, those having an interest which is subordinate to that of the
foreclosing mortgagee have an equity of redemption and may redeem the property
by paying the entire debt with interest. In addition, in some states, when a
foreclosure action has been commenced, the redeeming party must pay certain
costs of such action. Those having an equity of redemption must generally be
made parties and duly summoned to the foreclosure action in order for their
equity of redemption to be barred.
The equity of redemption which is a non-statutory right that must be
exercised prior to foreclosure sale should be distinguished from statutory
rights of redemption. In some states, after sale pursuant to a deed of trust
or foreclosure of a mortgage, the borrower and foreclosed junior lienors are
given a statutory period in which to redeem the property from the foreclosure
sale. In some states, statutory redemption may occur only upon payment of the
foreclosure sale price. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a statutory
right of redemption is to diminish the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS. Certain
states have imposed statutory prohibitions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal
action against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, in those states permitting such
election, is that lenders will usually proceed against the security first
rather than bringing a personal action against the borrower. Finally, other
statutory provisions limit any deficiency judgment against the former borrower
following a judicial sale to the excess of the outstanding debt over the fair
market value of the property at the time of the public sale. The purpose of
these statutes is generally to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws, the
Relief Act and state laws affording relief to debtors, may interfere with or
affect the ability of the secured mortgage lender to realize upon collateral
and/or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a
debtor through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure
a monetary default in respect of a mortgage loan on a debtor's residence by
paying arrearages within a reasonable time period and reinstating the original
mortgage loan payment schedule even though the lender accelerated the mortgage
loan and final judgment of foreclosure had been entered in state court
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(provided no sale of the residence had yet occurred) prior to the filing of the
debtor's petition. Some courts with federal bankruptcy jurisdiction have
approved plans, based on the particular facts of the reorganization case, that
effected the curing of a mortgage loan default by paying arrearages over a
number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule or forgiving all or a portion of the debt. Additionally, a
federal bankruptcy court in a Chapter 11 bankruptcy case may be able to reduce
the lender's security interest to the value of the residence, thus leaving the
lender a general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan; however, the United States
Supreme Court has recently eliminated such a risk in Chapter 7 and Chapter 13
bankruptcy cases.
The Internal Revenue Code of 1986, as amended provides priority to
certain tax liens over the lien of a mortgage or deed of trust. In addition,
substantive requirements are imposed upon lenders in connection with the
origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-in-
Lending Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity
Act, Fair Credit Billing Act, Fair Credit Reporting Act, and related statutes
and regulations. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the applicable laws. In some cases, this liability may affect assignees of
the Mortgage Loans.
ENFORCEABILITY OF CERTAIN PROVISIONS. Certain of the Mortgage Loans
will contain a debt-acceleration clause, which permits the lender to accelerate
the debt upon a monetary default of the borrower, after the applicable cure
period. Courts will generally enforce clauses providing for acceleration in
the event of a material payment default. However, courts, exercising equity
jurisdiction, may refuse to allow a lender to foreclose a mortgage or deed of
trust when an acceleration of the indebtedness would be inequitable or unjust
and the circumstances would render the acceleration unconscionable.
Some courts have imposed general equitable principles to limit the
remedies available in connection with foreclosure. These equitable principles
are generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. For example, some courts have required that
the lender undertake affirmative and expensive actions to determine the causes
for the borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lenders' judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right
of lenders to foreclose if the default under the mortgage instrument or deed of
trust is not monetary, such as the borrower's failure to adequately maintain
the property or the borrower's execution of a second mortgage or deed of trust
affecting the property. The exercise by the court of its equity powers will
depend on the individual circumstances of each case. Finally, some courts have
been faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers
under deeds of trust receive notices in addition to those prescribed
statutorily. For the most part, these cases have upheld the statutory notice
provisions as being reasonable or have found that the sale by a trustee under a
deed of trust or under a mortgage having a power of sale does not involve
sufficient state action to afford constitutional protection to the borrower.
Some of the Mortgage Loans may not restrict secondary financing, thereby
permitting the borrower to use the Mortgaged Property as security for one or
more additional loans. Where the borrower encumbers the Mortgaged Property
with one or more junior liens, the senior lender is subjected to additional
risk. First, the borrower may have difficulty servicing and repaying multiple
loans. Second, acts of the senior lender which prejudice the junior lender or
impair the junior lender's security may create
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a superior equity in favor of the junior lender. For example, if the borrower
and the senior lender agree to an increase in the principal amount of or the
interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the borrower is
additionally burdened. Third, if the borrower defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions
taken by junior lenders can impair the security available to the senior lender
and can interfere with or delay the taking of action by the senior lender. The
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made. In certain states, there are or may be specific limitations upon
the late charges which a lender may collect from a borrower for delinquent
payments. Late charges are typically retained by servicers as additional
servicing compensation.
A portion of the Mortgage Loans contain "due-on-sale" clauses. These
clauses permit the lender to accelerate the maturity of the loan if the
borrower sells, transfers or coveys the property. The enforceability of these
clauses has been the subject of legislation or litigation in many states, and
in some cases the enforceability of these clauses was limited or denied.
However, the Garn-St. Germain Depository Institutions Act of 1982 (the "Garn-
St. Germain Act") preempts state constitutional, statutory and case law that
prohibits the enforcement of due-on-sale clauses and permits lenders to enforce
these clauses in accordance with their terms, subject to certain limited
exceptions. The Garn-St. Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
Exempted from the general rule of enforceability of due-on-sale clauses
were mortgage loans (originated other than by federal savings and loan
associations and federal savings banks) that were made or assumed during the
period beginning on the date a state, by statute or final appellate court
decision having statewide effect, prohibited the exercise of due-on-sale
clauses and ending on October 15, 1982 ("Window Period Loans"). However, this
exception applied only to transfers of property underlying Window Period Loans
occurring between October 15, 1982 and October 15, 1985 and does not restrict
enforcement of a due-on-sale clause in connection with current transfers of
property underlying Window Period Loans. Due-on-sale clauses contained in
mortgage loans originated by federal savings and loan associations or federal
savings banks are fully enforceable pursuant to regulations of the Office of
Thrift Supervision (the "OTS"), as successor to the Federal Home Loan Bank
Board which preempt state law restrictions on the enforcement of due-on-sale
clauses.
The Garn-St. Germain Act also sets forth nine instances in which a
mortgage lender covered by the Garn-St. Germain Act may not exercise a due-on-
sale clause, notwithstanding the fact that transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. The Garn-St. Germain Act also grants the Director of the Office
of Thrift Supervision (successor to the Federal Home Loan Bank Board) authority
to prescribe by regulation further instances in which a due-on-sale clause may
not be exercised upon the transfer of the property. To date no such
regulations have been issued. Regulations promulgated under the Garn-St.
Germain Act also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan pursuant to a "due-on-sale" clause.
If interest rates were to rise above the interest rates on the Mortgage
Loans, then any inability of the Servicer or the subservicer to enforce due-on-
sale clauses may result in the Trust Property including a greater number of
Mortgage Loans bearing below-market interest rates than would otherwise be the
case, since a transferee of the property underlying a Mortgage Loan would have
a greater incentive in such circumstances to assume the seller's Mortgage Loan.
Any inability to enforce due-on-sale clauses may affect the average life of the
Mortgage Loans and the number of Mortgage Loans that may be outstanding until
maturity.
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Upon foreclosure, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right
of the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages
receive notices in addition to the statutorily-prescribed minimum. For the most
part, these cases have upheld the notice provisions as being reasonable or have
found that the sale by a trustee under a deed of trust, or under a mortgage
having a power of sale, does not involve sufficient state action to afford
constitutional protections to the borrower.
ADJUSTABLE RATE LOANS. The laws of certain states may provide that
mortgage notes relating to adjustable rate loans are not negotiable instruments
under the Uniform Commercial Code. In such event, the Trustee will not be
deemed to be a "holder in due course" within the meaning of the Uniform
Commercial Code and may take such a mortgage note subject to certain
restrictions on its ability to foreclose and to certain contractual defenses
available to a borrower.
ENVIRONMENTAL LEGISLATION. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens including the lien of a mortgage. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a secured lender (such as a Trustee or a
Trust) to homeowners. In the event that title to a property securing a Mortgage
Loan in a pool of Mortgage Loans was acquired by a Trustee or a Trust and
cleanup costs were incurred in respect of the property, the holders of the
related Securities might realize a loss if such costs were required to be paid.
In addition, the presence of certain environmental contamination, including,
but not limited to, lead-based paint, asbestos and leaking underground storage
tanks could result in the holders of the related Securities realizing a loss if
associated costs were required to be paid. The Seller, the Issuer, the
Administrator, the Underwriters, the Transferors, the Servicers, and any of
their respective affiliates (i) have not caused any environmental site
assessments or evaluations to be conducted with respect to any properties
securing the Mortgage Loans, (ii) are not required to make any such assessments
or evaluations and (iii) make no representations or warranties and assume no
liability with respect to the absence or effect of hazardous wastes or
hazardous substances on any property or any casualty resulting from the
presence or effect of hazardous wastes or hazardous substances.
In the event that title to a Mortgaged Property is acquired by a Trustee
or Issuer and cleanup costs are incurred in respect of such property, the
related Securityholders might realize a loss if such costs are required to be
paid. In addition, the presence of certain environmental contamination,
including, but not limited to, lead-based paint, asbestos and leaking
underground storage tanks could result in the Securityholders realizing a loss
if any associated remedial costs are required to be paid. The Transferor, the
Seller, the Issuer, the Servicer, any subservicer and any of their respective
affiliates (i) have not caused any environmental site assessments or
evaluations to be conducted with respect to any Mortgaged Property, (ii) are
not required to make any such assessments or evaluations and (iii) make no
representations or
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warranties and assume no liability with respect to the absence or effect of
hazardous wastes or hazardous substances on any property or any casualty
resulting from the presence or effect of hazardous wastes or hazardous
substances.
TRUTH IN LENDING ACT
In September 1994, the Reigle Community Development and Regulatory
Improvement Act of 1994 (the "Reigle Act") was enacted which incorporates the
Home Ownership and Equity Protection Act of 1994, and which adds certain
additional provisions to Regulation Z, the implementing regulation of the
Truth-in-Lending Act ("TILA"). These provisions impose additional disclosure
and other requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates or high up-front fees and charges ("covered
loans"). In general, mortgage loans within the purview of the Reigle Act have
annual percentage rates over 10% greater than the yield on Treasury Securities
of comparable maturity and/or fees and points which exceed the greater of 8% of
the total loan amount or $400. The provisions of the Reigle Act apply on a
mandatory basis to all mortgage loans originated on or after October 1, 1995.
These provisions can impose specific statutory liabilities upon creditors who
fail to comply with their provisions and may affect the enforceability of the
related loans. In addition, any assignee of a creditor would generally be
subject to all claims and defenses that the consumer could assert against the
creditor, including, without limitation, the right to rescind the mortgage
loan. A substantial majority of the loans originated or purchased by the
Transferor are covered by the Reigle Act.
The Reigle Act provisions impose additional disclosure requirements on
lenders originating covered loans and prohibit lenders from originating covered
loans that are underwritten solely on the basis of the borrower's home equity
without regard to the borrower's ability to repay the loan. The Transferor
believes that only a small portion of its loans originated in fiscal 1994 and
fiscal 1995 are of the type that, unless modified, would be prohibited by the
Reigle Act. As a result of the Reigle Act provisions, with respect to all
covered loans, the Transferor applies loan underwriting criteria that take into
consideration the borrower's ability to repay.
The Reigle Act provisions also prohibit lenders from including
prepayment fee clauses in covered loans to borrowers with debt-to-income ratios
in excess of 50% or covered loans used to refinance existing loans originated
by the same lender. The Transferor reported immaterial amounts of prepayment
fee revenues in fiscal 1993, 1994 and 1995, respectively. The Transferor will
continue to collect prepayment fees on loans originated prior to effectiveness
of the Reigle Act provisions and on non-covered loans, as well as on covered
loans in permitted circumstances following the effectiveness of the Reigle Act
provisions. The Reigle Act provisions impose other restrictions on covered
loans, including restrictions on balloon payments and negative amortization
features, which the Transferor does not believe will have a material effect on
its operations.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of home improvement first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first
three months of 1980. The Office of Thrift Supervision is authorized to issue
rules and regulations and to publish interpretations governing implementation
of Title V. The statute authorized any state to reimpose interest rate limits
by adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. In addition, even where
Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered
by Title V. Certain states have taken action to reimpose interest rate limits
and/or to limit discount points or other charges.
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A similar federal statute, adopted in 1976, provides federal usury
preemption with respect to Title I Mortgage Loans, such as the Title I Mortgage
Loans. This statute also permits states to reimpose interest rate limits by
passing legislation at any time after June 30, 1976. To date, no state has
enacted any reported statute to reimpose interest rate limits with respect to
any loans, mortgage or advance that is insured under Title I.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's Mortgage Loan (including a
borrower who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active
duty) may not be charged interest above an annual rate of 6% during the period
of such borrower's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such interest rate limitation or
similar limitations under state law could have an effect, for an indeterminate
period of time, on the ability of the Servicer or the subservicer to collect
full amounts of interest on certain of the Mortgage Loans. Any shortfall in
interest collections resulting from the application of the Relief Act or
similar legislation, which would not be recoverable from the related Mortgage
Loans, would result in a reduction of the amounts available for distribution to
the holders of the Offered Securities, but the Offered Securities would receive
the full amount otherwise distributable to such holders to the extent that
amounts are available from the credit enhancement provided for the Offered
Securities. See "Risk Factors -- Limitations of Credit Enhancement". In
addition, the Relief Act imposes limitations which would impair the ability of
the Servicer or subservicer to foreclose on an affected Mortgage Loan during
the borrower's period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default there may be delays and losses occasioned by
the inability to realize upon the related Mortgaged Property in a timely
fashion.
THE TITLE I PROGRAM
GENERAL. Sections 1 and 2(a) of the National Housing Act of 1934, as
amended (the "Act"), authorize the creation of the Federal Housing
Administration (which is an agency within the United States Department of
Housing and Urban Development; such agency and department are referred to
together herein as the "FHA") and the Title I Program. Certain of the Mortgage
Loans or Contracts included in the Trust Property may be loans insured under
the Title I Program. FHA Regulations contain the requirements under which
approved Title I Lenders may obtain insurance against a portion of losses
incurred with respect to eligible loans that have been originated and serviced
in accordance with FHA regulations, up to the amount of such Title I Lender's
FHA Reserve, as described below, and subject to the terms and conditions
established under the Act and FHA Regulations. While FHA Regulations permit
the Secretary of HUD, subject to statutory limitations, to waive a Title I
Lender's noncompliance with FHA Regulations if enforcement would impose an
injustice on the lender (provided the Title I Lender has acted in good faith,
is in substantial compliance with FHA Regulations and has credited the borrower
for any excess charges), in general, an insurance claim against the FHA will be
denied if the Title I loan to which it relates does not strictly satisfy the
requirements of the Act and FHA Regulations.
Unlike certain other government loan insurance programs, loans under the
Title I Program (other than loans in excess of $25,000) are not subject to
prior review by the FHA. Under the Title I Program, the FHA disburses
insurance proceeds with respect to defaulted loans for which insurance claims
have been filed by a Title I Lender prior to any review of such loans. A Title
I Lender is required to repurchase a Title I loan from the FHA that is
determined to be ineligible for insurance after insurance claim payments for
such loan have been paid to such lender. Under the FHA Regulations, if the
Title I Lender's obligation to repurchase the Title I loan is unsatisfied, the
FHA is permitted to offset the unsatisfied obligation against future insurance
claim payments owed by the FHA to such lender. FHA Regulations permit the FHA
to disallow an insurance claim with respect to any loan that does not qualify
for insurance for a period of up
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to two years after the claim is made and to require the Title I Lender that has
submitted the insurance claim to repurchase the loan. Pursuant to a letter
ruling issued by the FHA in October 1994, the FHA has stated that, as a policy,
the FHA will strive to review all insurance claim submissions in a timely
manner and limit the period of time within which it will request the repurchase
of a loan to a period of one year after claim submission. The letter further
states, however, that the FHA may find it necessary with respect to some claim
submissions to apply the foregoing two-year incontestability provision
strictly.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or lot
(or cooperative interest therein) on which to place such home or the purchase
of both a manufactured home loan and the lot (or cooperative interest therein)
on which such home is placed. Title I Program loans may be made directly to
the owners of the property to be improved or purchased ("direct loans") or with
the assistance of a dealer or home improvement contractor that will have an
interest in the proceeds of the loan ("dealer loans").
Subject to certain limitations described below, eligible Title I loans
are insured by the FHA for 90% of an amount equal to the sum of (i) the net
unpaid principal amount and the uncollected interest earned to the date of
default, (ii) interest on the unpaid loan obligation from the date of default
to the date of the initial submission of the insurance claim, plus 15 calendar
days (the total period not to exceed nine months) at a rate of 7% per annum,
(iii) uncollected court costs, (iv) title examination costs, (v) fees for
required inspections by the lenders or its agents, up to $75, and (vi)
origination fees up to a maximum of 5% of the loan amount. However, the
insurance coverage provided by the FHA is limited to the extent of the balance
in the Title I Lender's FHA Reserve maintained by the FHA. Accordingly if
sufficient insurance coverage is available in such FHA Reserve, then the Title
I Lender bears the risk of losses on a Title I loan for which a claim for
reimbursement is paid by the FHA of at least 10% of the unpaid principal,
uncollected interest earned to the date of default, interest from the date of
default to the date of the initial claim submission and certain expenses.
Under the Title I Program, the FHA maintains an FHA insurance coverage
reserve account (a "FHA Reserve") for each Title I Lender. The amount in each
Title I Lender's FHA Reserve is a maximum of 10% of the amounts disbursed,
advanced or expended by a Title I Lender in originating or purchasing eligible
loans registered with the FHA for Title I Insurance, with certain adjustments
permitted or required by FHA Regulations. The balance of such FHA Reserve is
the maximum amount of insurance claims the FHA is required to pay to the
related Title I Lender. Mortgage loans to be insured under the Title I Program
will be registered for insurance by the FHA, and the increase in Title I
insurance coverage to which the Title I Lender is entitled by reason of the
reporting of such loans under the Title I Lender's contract of insurance will
be included in the FHA Reserve for the originating Title I Lender following
the receipt and acknowledgment by the FHA of a transfer of note report on the
prescribed form (the "Transfer Report") pursuant to FHA Regulations.
Under the Title I Program the FHA will reduce the insurance coverage
available in a Title I Lender's FHA Reserve with the respect to loans insured
under such Title I Lender's contract of insurance by (i) the amount of FHA
Insurance claims approved for payment related to such loans, (ii) prior to
October 1, 1995, after a Title I Lender has held its Title I contract of
insurance for five years, the amount of the annual reduction (the "Annual
Reduction") equal to 10% of the amount of insurance coverage contained in the
related FHA Reserve as of that date, and (iii) the amount of reduction of the
Title I Lender's FHA Reserve by reason of the sale, assignment or transfer of
loans registered under the Title I Lender's contract of insurance. Such
insurance coverage also may be reduced for any FHA insurance claims previously
disbursed to the Title I Lender that are subsequently rejected by the FHA. On
June 5, 1995, the FHA announced the elimination of Annual Reductions, effective
as of October 1, 1995.
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Upon the receipt and acknowledgment by the FHA of a Transfer Report,
originations of new loans will increase a Title I Lender's insurance coverage
reserve account balance by 10% of the amount disbursed, advanced or expended in
originating such loans registered with the FHA for insurance under the Title I
Program. A Title I Lender is permitted to sell or otherwise transfer loans
reported for insurance under the Title I Program only to another Title I
Lender. Upon any such transfer, except a transfer with recourse or under a
guaranty or repurchase Agreement, the seller is required to file a Transfer
Report with the FHA reporting the transfer of such loans. Upon notification
and approval of such transfer, the FHA Reserve of the selling Title I Lender is
reduced, and the FHA Reserve of the purchasing Title I Lender is increased, by
an amount equal to the lesser of 10% of the actual purchase price of the loans
or the net unpaid principal balance of the loans, up to the total amount of the
selling Title I Lender's FHA Reserve. Thus, in the event the selling Title I
Lender's FHA Reserve was less than 10% of the unpaid principal balance of its
portfolio of loans reported for insurance under the Title I Program prior to
the sale, the seller's FHA Reserve may be exhausted as the result of a sale of
only a portion of its total portfolio, with the result that its remaining Title
I Program portfolio may be ineligible for Title I Program benefits until the
lender originates or otherwise acquires additional loans reported for insurance
under the Title I Program. Accordingly, the insurance coverage reserves
transferred to the purchasing Title I Lender in such case will be less than 10%
of the lesser of the purchase price or the principal balance of the portfolio
of loans purchased, which may be the case with respect to the Transferor's
purchase of certain Title I Mortgage Loans and Title I Contracts from certain
Title I lenders and the transfer of the related insurance coverage from such
lenders' FHA Reserves. Additionally, pursuant to FHA Regulations, not more
than $5,000 in insurance coverage shall be transferred to or from a Title I
Lender's insurance coverage reserve account during any October 1 to September
30 fiscal year without the approval of the Secretary of HUD. Such HUD approval
is generally viewed as automatic, provided the formal requirements for transfer
are satisfied, but HUD does have the right under FHA Regulations to withhold
approval.
Unlike most other FHA insurance programs, the obligation of the FHA to
reimburse a Title I Lender for losses in the portfolio of insured loans held by
such Title I Lender is limited to the amount in an FHA Reserve maintained on a
lender-by-lender basis and not on a loan-by-loan basis. Except when to do so
would be in HUD's best interest, the FHA does not track or "earmark" the loans
within a Title I Lender's portfolio to determine whether a reduction in such
lender's FHA Reserve as the result of an insurance claim by such lender are, in
fact, attributable to the insured loan with respect to which the claim was
made. For this reason, if a Title I Lender is holding insured loans as a
fiduciary on behalf of multiple non-affiliated beneficiaries, in order for such
a lender to cause its FHA Reserve to be reduced only by an amount to which a
particular beneficiary is entitled by reason of the insured loans beneficially
held by it, the Title I Lender must segregate or "earmark" its FHA Reserve on
its own books and records according to which beneficiary is entitled to what
portion of the insurance coverage in the Title I Lender's FHA Reserve as if the
insurance coverage were not commingled by the FHA in such FHA Reserve. If such
Title I Lender continues to submit claims with respect to loans held on behalf
of a beneficiary whose portion of insurance coverage in its FHA Reserve has
been exhausted, the FHA will continue to honor such claims until all insurance
coverage in such Title I Lender's FHA Reserve has been exhausted, even though
such FHA Reserve may, in fact, be held by the Title I Lender for the benefit of
a different beneficiary than the beneficiary of the insured loans to which the
claims relate under a separate contractual agreement. In addition, under
certain FHA administrative offset regulations, the FHA may offset an
unsatisfied obligation of a Title I Lender to repurchase loans that are
determined to be ineligible for insurance against future insurance claim
payments owed by the FHA to such lender. In the case of a given Series, if the
related Trustee were to hold loans insured under the Seller's or Issuer's FHA
Reserve on behalf of another entity, the FHA were to determine that insurance
claims were paid in respect of loans ineligible for insurance that related to
such other entity, and the Trustee, on behalf of such other entity, was unable
or otherwise failed to repurchase the ineligible loans, then the FHA could
offset the amount of the repurchase obligation against insurance proceeds
payable with respect to one or more Title I Mortgage Loans or Title I Contracts
included in the Trust Property of such Series. If the Trustee were unable to
recover the amount of such offset from the entity, the Securityholders with
respect to such Series could experience a loss as a result.
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Accordingly, claims paid to the Trustee (or the Administrator, if any)
by the FHA with respect to Title I loans insured under FIC's FHA Reserve other
than the Title I Mortgage Loans and Title I Contracts may reduce the FHA
Insurance Amount. In the applicable Sale and Servicing Agreement or Pooling
and Servicing Agreement, FIC and the Trustee (or the Administrator, if any)
will agree not to submit claims to the FHA with respect to Title I loans other
than the Title I Mortgage Loans and Title I Contracts if the effect thereof
would be to reduce the FHA Insurance Amount. FIC has committed to use its FHA
contract of insurance under the Title I Program only to report the record
ownership of loans transferred and assigned to the Trustee pursuant to the
applicable Sale and Servicing Agreement or Pooling and Servicing Agreement and
similar such agreements that may be entered into by FIC in the future.
On the final Transfer Date, such FHA Insurance Amount will be the
maximum amount of insurance coverage in FIC's FHA Reserve that will be
available for the submission of claims on the Title I Mortgage Loans, and
thereafter, such FHA Insurance Amount will be decreased as a result of payments
by the FHA in respect of FHA Claims submitted for the Title I Mortgage Loans
and Title I Contracts after the Transfer Dates and as a result of the
repurchase or substitution of Title I Mortgage Loans and Title I Contracts by
the Transferor. Except in connection with the conveyance of any Subsequent
Mortgage Loans that are Title I Mortgage Loans and the substitution of Title I
Mortgage Loans and Title I Contracts, the FHA Insurance Amount for the Title I
Mortgage Loans and Title I Contracts will not be increased for any other Title
I loans, either previously or subsequently owned by the Seller or the Issuer
and reported for insurance in FIC's FHA Reserve.
On the final Transfer Date, the amount of FHA insurance coverage that
will have been transferred from the Transferor's FHA Reserve to FIC's FHA
Reserve may be less than the maximum amount of insurance coverage transferrable
which would otherwise equal 10% of the unpaid principal balance or the purchase
price, if less. However, if individual Title I Mortgage Loans and Title I
Contracts are repurchased from the applicable Trustee, by the Transferor, the
Servicer and/or any Subservicer, then with respect to any individual Title I
Mortgage Loan or Title I Contract the amount of FHA insurance coverage that
will be transferred from the Trustee's FHA Reserve, in all likelihood, will be
the maximum amount of insurance coverage of 10% of the unpaid principal balance
or the purchase price, if less, until such time as FIC's FHA Reserve has been
reduced to a balance which is less than such maximum amount. Accordingly, the
transfer of insurance coverage from FIC's FHA Reserve as the result of the
repurchase of Title I Mortgage Loans and Title I Contracts will cause a
disproportionately larger reduction to the FHA Insurance Amount for each
individual Title I Mortgage Loan and Title I Contract and if a significant
amount of Title I Mortgage Loans and Title I Contracts are repurchased, could
result in a substantial reduction of such FHA Insurance Amount and the relative
percentage of such FHA Insurance Amount to the principal balance of the Title I
Mortgage Loans and Title I Contracts remaining in the Trust Property.
REQUIREMENTS FOR TITLE I PROPERTY IMPROVEMENT LOANS AND CONTRACTS. The
proceeds of loans originated under the Title I Program for property
improvements may be used only for improvements that substantially protect or
improve the basic habitability or utility of an eligible property. Although
Title I loans are available for several types of properties, the Title I
Mortgage Loans will include primarily one-to four-family property improvement
loans. FHA Regulations require that the borrower have at least a one-half
interest in (i) fee simple title to the real property to be improved with the
loan proceeds ("Secured Property"), (ii) a lease on the Secured Property for a
fixed term that expires no sooner than six months after the maturity date of
the property improvement loan or (iii) a properly recorded land installment
contract for the purchase of the Secured Property. Any Title I property
improvement loan originated after August 1994 in excess of $7,500 must be
secured by a recorded lien on the improved property which is evidenced by a
mortgage or deed of trust executed by the borrower and all other owners in fee
simple. Prior to August 1994, any Title I property improvement loan in excess
of $5,000 was required to be secured by such a recorded lien.
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The maximum principal amount of an eligible loan under the Title I
Program, must not exceed the actual cost of the project plus any authorized
fees and charges under the Title I Program as provided below; provided that
such maximum principal amount does not exceed $25,000 for a single family
property improvement loan. No single borrower is permitted to have more than
an aggregate of $25,000 in unpaid principal obligations with respect to Title I
loans without prior approval of HUD. Generally, the term of a Title I loan
that is a property improvement loan may not be less than six months nor greater
than 20 years and 32 days. A borrower may obtain multiple Title I loans with
respect to multiple properties (subject to the aforementioned limit on loans to
a single borrower), and a borrower may obtain more than one Title I loan with
respect to a single property, in each case as long as the total outstanding
balance of all Title I loans on the same property does not exceed the maximum
loan amount for the type of Title I loan thereon having the highest permissible
loan amount. If a property improvement loan (or combination of loans on a
single property) exceeds $15,000, and either (i) the property is not owner
occupied or (ii) the structure on the property was completed within six months
prior to the application for the loan, the borrower is required to have equity
in the property at least equal to the loan amount. In all other cases, there
is no requirement that the owner contribute equity to the property other than
fees and costs that may not be added to the balance of the loan as described
below.
Fees and charges that may be added to the balance of property
improvement loans include (i) architectural and engineering fees, (ii) building
permit costs, (iii) credit report costs, (vi) fees for required appraisals (if
applicable), (iv) title examination costs and (v) fees for required inspections
by the lender or its agent, up to $75. The Title I Lender is entitled to
recover the following fees and charges in connection with a property
improvement loan from the borrower as part of the borrower's initial payment:
(i) an origination fee not to exceed 1% of the loan amount, (ii) discount
points, however, after July 5, 1995, only to the extent a lender can
demonstrate a clear relationship between the charging of discount points and
some tangible benefit to the borrower such as a compensating decrease in the
interest rate being charged, (iii) recording fees, recording taxes, filing fees
and documentary stamp taxes, (iv) title insurance costs, (v) current year tax
and insurance escrow payments, (vi) fees necessary to establish the validity of
the lien, (vii) appraisal fees that are not eligible to be financed, (viii)
survey costs, (ix) handling charges for refinancing or modification of an
existing loan, up to $100, (x) fees for approving assumption or preparing
assumption agreements, not to exceed 5%, (xi) certain fees of closing agents
and (xii) such other items as may be specified by the FHA. FHA Regulations
prohibit the advancement of such fees and charges to the borrower by any party
to the transaction.
FHA Regulations distinguish between "direct loans" and "dealer loans." A
loan is a "dealer loan" if an approved dealer having a direct or indirect
financial interest in the transaction assists the borrower in obtaining the
loan. A loan made by the lender to the borrower without the assistance of any
party with a financial interest in the loan transaction (other than the lender)
is a "direct loan."
With respect to dealer loans, the dealer-contractor typically enters
into a consumer credit contract or note with the borrower and, after completion
of the financed improvements, assigns the contract or note to the Title I
Lender. The dealer-contractor presents the loan application to the Title I
Lender, receives the check or money order representing the loan proceeds and
may accompany the borrower to the institution for the purpose of receiving
payment. As a condition to the disbursement of the proceeds of a dealer loan,
the Title I Lender is required to obtain a completion certificate signed by the
borrower and the dealer certifying that the improvements have been completed in
accordance with the contract and that the borrower has received no inducement
from the dealer to enter into the transaction other than discount points. The
Title I Lender may enter into an agreement under which the lender has full or
partial recourse against the dealer for a period of three years in the event
the Title I Lender sustains losses with respect to loans originated by such
dealer and such loans do not satisfy FHA Regulations. FHA Regulations require
that each dealer meet certain net worth and experience requirements and be
approved by the FHA on an annual basis. Any Title I Lender that makes dealer
loans is required to supervise and monitor the dealer's activities with respect
to loans insured under the Title I Program and to terminate a dealer's approval
if the
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dealer does not satisfactorily perform its contractual obligations or comply
with Title I Program requirements.
The note evidencing a property improvement loan insured under the Title
I Program is required to bear a genuine signature of the borrower and any
co-maker and co-signer, must be valid and enforceable, must be complete and
regular on its face and must have interest and principal stated separately.
The interest rate must be negotiated and agreed to by the borrower and the
lender and must be fixed for the term of the loan and recited in the note.
Interest on the Title I loan must accrue from the date of the loan and be
calculated according to the actuarial method, which allocates payments on the
loan between principal and interest such that a payment is applied first to
accrued interest and any remainder is subtracted from, or any deficiency is
added to, the unpaid principal balance.
Principal and interest on the note is required to be payable in equal
installments at least monthly except where the borrower has irregular cash
flow. The first and last payments may vary in amount from the regular
installment amount but may not exceed 150% of the regular installment amount.
The first payment may be due no later than two months from the date of the loan
(i.e., the date upon which proceeds are disbursed by the lender). Late charges
may be assessed only after fifteen days and cannot exceed the lesser of 5% of
the installment, up to a maximum of $10 and must be billed as an additional
charge to the borrower. In lieu of late charges, the note may provide for
interest to accrue on late installments on a daily basis at the note rate. The
note must include a provision for acceleration of maturity, at the option of
the holder, upon a default by the borrower and a provision permitting
prepayment in part or in full without penalty. The Title I Lender must assure
that the note and all other documents evidencing the loan are in compliance
with applicable Federal, state and local laws.
A written but unrecorded modification agreement executed by the borrower
may be used in lieu of refinancing a delinquent or defaulted loan to reduce or
increase the installment payment, but not to increase the term or interest
rate. A written modification agreement may also be used to refinance a loan in
order to reduce the interest rate, provided the loan is current.
Alternatively, the lender may negotiate an informal repayment plan for the
borrower to cure a temporary delinquency within a short period of time by
sending a letter to the borrower reciting the terms of the agreement. The
lender may not release any party from liability under the note or any lien
securing an insured loan without prior FHA approval.
FHA Regulations do not require that the borrower obtain title or fire
and casualty insurance as a condition to obtaining loan, except with respect to
manufactured home loans. If the property is located in a flood hazard area,
however, flood insurance in an amount at least equal to the loan amount is
required at the date of loan disbursement. The Borrower is required to
maintain flood insurance of at least the unpaid balance of the loan (or the
value of the property if state law so limits the amount of flood insurance).
REQUIREMENTS FOR TITLE I MANUFACTURED HOME CONTRACTS. The maximum
principal amount for any Title I Contract for a Manufactured Home must not
exceed the sum of certain itemized amounts, which include a specified
percentage of the purchase price of the manufactured home depending on whether
it is a new or existing home; provided that such maximum amount does not exceed
the following loan amounts: (i) $48,600 for a new or existing manufactured home
purchase loan; (ii) $16,200 for a manufactured home lot purchase; and (iii)
$64,800 for a combination loan (i.e. a loan to purchase a new or existing
manufactured home and the lot for such home). Generally, the term of a Title I
Contract for a Manufactured Home may not be less than six months nor greater
than 20 years and 32 days, except that the maximum term of a manufactured home
lot loan is limited to 15 years and 32 days and the maximum term of a
multimodule manufactured home and lot in combination is limited to 25 years and
32 days.
Borrower eligibility for a Title I Contract for a Manufactured Home
requires that the borrower become the owner of the property to be financed with
such loan and occupy the manufactured home as the
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borrower's principal residence, except for a manufactured home lot loan which
allows six months from the date of the loan to occupy the home as the
borrower's principal residence. If a manufactured home is classified as realty,
then ownership of the home must be in fee simple, and also, the ownership of
the manufactured home lot must be in fee simple, except for a lot which
consists of a share in a cooperative association that owns and operates a
manufactured home park. The borrower's minimum cash down payment requirement to
obtain financing through a Title I Contract for a Manufactured Home is as
follows: (i) at least 5% of the first $5,000 and 10% of the balance of the
purchase price of a new manufactured home and at least 10% of the purchase
price of an existing manufactured home for a manufactured home purchase loan,
or in lieu of a full or partial cash down payment, the trade-in of the
borrower's equity in an existing manufactured home; (ii) at least 10% of the
purchase price and development costs of a lot for a manufactured home lot loan;
and (iii) at least 5% of the first $5,000 and 10% of the balance of the
purchase price of the manufactured home and lot for a combination loan.
Any manufactured home financed by a Title I Contract must be certified
by the manufacturer to have been constructed in compliance with the National
Manufactured Housing Construction and Safety Standards Act of 1974 (42 U.S.C.
Sections 5401-5426), so as to conform to all applicable Federal construction
and safety standards, and with respect to the purchase of a new manufactured
home, the manufacturer must furnish the borrower with a one year written
warranty on a HUD approved form which obligates the manufacturer to correct any
nonconformity with all applicable Federal construction and safety standards or
any defects in materials or workmanship which become evident within one year
after the date of delivery. The regulations under the Title I Program set forth
certain additional requirements relating to the construction, transportation
and installation of any manufactured home and standards for the manufactured
homesite financed by any Title I Contract. The proceeds from a Title I Contract
for a Manufactured Home may be used as follows: the purchase or refinancing of
a manufactured home, a suitably developed lot for a manufactured home already
owned by the borrower or a manufactured home and suitably developed lot for the
home in combination; or the refinancing of an existing manufactured home
already owned by the borrower in connection with the purchase of a manufactured
home lot or an existing lot already owned by the borrower in connection with
the purchase of a manufactured home. In addition, the proceeds for a Title I
Contract for a Manufactured Home which is a manufactured home purchase loan may
be used for the purchase, construction or installation of a garage, carport,
patio or other comparable appurtenance to the manufactured home, and the
proceeds for a Title I Contract for a Manufactured Home which is a combination
loan may be used for the purchase, construction or installation of a
foundation, garage, carport, patio or other comparable appurtenance to the
manufactured home. The proceeds from a Title I Contract for a Manufactured
Home cannot be used for the purchase of furniture or the financing of any items
and activities which are set forth on the list published by the Secretary of
HUD as amended from time to time.
Any Title I Contract for a Manufactured Home must be secured by a
recorded lien on the manufactured home (or lot or home and lot, as
appropriate), its furnishings, equipment, accessories and appurtenance, which
lien must be a first lien, superior to any other lien on the property which is
evidenced by a properly recorded financing statement, a properly recorded
security instrument executed by the borrower and any other owner of the
property or other acceptable instrument. With respect to any Title I Contract
involving a manufactured home purchase loan or combination loan and the sale of
the manufactured home by a dealer, the lender or its agent (other than a
manufactured home dealer) must conduct a site-of-placement inspection within 60
days after the date of the loan to verify that the terms and conditions of the
purchase contract have been met, the manufactured home and any options and
appurtenances included in the purchase price or financed with the loan have
been delivered and installed and the placement certificate executed by the
borrower and the dealer is in order.
TITLE I UNDERWRITING REQUIREMENTS. FHA Regulations require that, before
making a loan insured under the Title I Program, a Title I Lender exercise
prudence and diligence in determining whether the borrower and any co-maker or
co-signer is solvent and an acceptable credit risk with a reasonable ability
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to make payments on the loan obligation. Prior to loan approval, the Title I
Lender is required to satisfy specified credit underwriting requirements and to
keep documentation supporting its credit determination. As part of its credit
underwriting, the Title I Lender must obtain the following: (i) a dated credit
application executed by the borrower, any co-maker and any co-signer, (ii)
written verification of current employment and current income of the borrower
and any co-maker or co-signer, (iii) a consumer credit report stating the
credit accounts and payment history of the borrower and any co-maker or co-
signer, (iv) on loans in excess of $5,000, written evidence that the borrower
is not over 30 days delinquent on any senior lien instruments encumbering the
improved property, (v) verification whether the borrower is in default on any
obligation owed to or insured or guaranteed by the Federal Government and (vi)
written verification of the source of funds for any initial payment required of
the borrower if such payment is in excess of 5% of the loan. Before making a
final credit determination, the lender is required to conduct a face-to-face or
telephone interview with the borrower and any co-maker or co-signer to resolve
any discrepancies in the information on the credit application and to assure
that the information is accurate and complete. The Title I Lender's files must
contain, among other things, the note or other debt instrument, the lien
instrument and a copy of the property improvement contract (in the case of a
dealer loan) or a detailed written description of the work to be performed, the
materials to be furnished and the estimated cost (for a loan not involving a
dealer or contractor).
The Title I Lender is required to satisfy itself that the borrower's
income is adequate to make the payments required under the loan and to pay the
borrower's housing and other recurring expenses. The borrower's housing and
other recurring expenses generally may not exceed a maximum percentage of gross
income as published from time to time in the Federal Register. The Title I
Lender is required to document any compensating factors that support the
approval of the loan if such expense-to-income ratios are not satisfied. A
Title I Lender is prohibited from approving a loan under the Title I Program
without the approval of the FHA if the lender has knowledge that the borrower
is past due more than 30 days under the original terms of an obligation owed to
or insured or guaranteed by the Federal Government or the borrower has made
material misstatements of fact on applications for loans or other assistance.
UNDER THE TITLE I PROGRAM, THE FHA DOES NOT REVIEW OR APPROVE FOR
QUALIFICATION FOR INSURANCE THE INDIVIDUAL LOAN INSURED THEREUNDER AT THE TIME
OF APPROVAL BY THE LENDING INSTITUTION (AS IS TYPICALLY THE CASE WITH OTHER
FEDERAL LOAN INSURANCE PROGRAMS). If, after a loan has been made and reported
for insurance under the Title I Program, a Title I Lender discovers any
material misstatement of fact or that the loan proceeds have been misused by
the borrower, dealer or any other party, such Title I Lender is required
promptly to report such finding to the FHA. In such case, provided that the
validity of any lien on the property has not been impaired, the insurance of
the loan under the Title I Program will not be affected unless such material
misstatement of facts or misuse of loan proceeds was caused by (or was
knowingly sanctioned by) such Title I Lender or its employees.
CLAIMS PROCEDURES UNDER TITLE I. The term "default" is defined under
FHA Regulations as the failure of the borrower to make any payment due under
the note for a period of 30 days after such payment is due. The "date of
default" is considered to be the date 30 days after the borrower's first
failure to make an installment payment on the note that is not covered by
subsequent payments applied to overdue installments in the order they became
due. When a loan reported for insurance under the Title I Program goes into
default, a Title I Lender is required to contact the borrower and any co-maker
and co-signer by telephone or in person to determine the reasons for the
default and to seek a cure. If such Title I Lender is not able to effect a
cure after diligent efforts, it may provide the borrower with a notice of
default stating that the loan will be accelerated in 30 days if the loan is not
brought current or the borrower does not enter into a loan modification
agreement or repayment plan. The notice of default must meet certain
requirements set forth in the FHA Regulations and must conform to applicable
state law provisions. Such Title I Lender is permitted to rescind the
acceleration of maturity of the loan only if the borrower brings the loan
current, executes a modification agreement or agrees to an acceptable repayment
plan.
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Following acceleration of maturity of a secured property improvement
loan, a Title I Lender has the option to proceed against the security or make a
claim under its contract of insurance. If a Title I Lender chooses to proceed
against the Secured Property under a security instrument (or if it accepts a
voluntary conveyance or surrender of the Secured Property), (i) the Title I
Lender must proceed against the loan security by foreclosure and acquire good,
marketable title to the property securing the loan and (ii) the Title I Lender
must take all actions necessary under applicable law to preserve its rights, if
any, to obtain a deficiency judgment against the borrower, provided however,
the Title I Lender may still file an FHA Insurance claim, but only with the
prior approval of the Secretary of HUD.
If a Title I Lender files an insurance claim with the FHA under the
Title I Program, the FHA reviews the claim, the complete loan file,
certification of compliance with applicable state and local laws in carrying
out any foreclosure or repossession, and where the borrower is in bankruptcy or
deceased, evidence that the lender has properly filed proofs of claims.
Generally, a Title I Lender must file its claim of insurance with the FHA not
later than nine months after the date of default. Concurrently with filing the
insurance claim, such Title I Lender is required to assign to the United States
of America it's entire interest in the note (or a judgment in lieu of the
note), in any securities held and in any claims filed in any legal proceedings.
If, at the time the note is assigned to the United States, the Secretary of HUD
has reason to believe that the note is not valid or enforceable against the
borrower, the FHA may deny the claim and reassign the note to the Title I
Lender. If either such defect is discovered after the FHA has paid a claim,
the FHA may require the Title I Lender to repurchase the paid claim and to
accept an assignment of the loan note. If the Title I Lender subsequently
obtains a valid and enforceable judgment against the borrower, it may resubmit
a new insurance claim with an assignment of the judgment. The FHA may contest
any insurance claim previously paid by it and make a demand for repurchase of
the loan with respect to which the claim was paid at any time up to two years
from the date the claim was certified for payment and may do so thereafter in
the event of fraud or misrepresentation on the part of the Title I Lender.
A claim for reimbursement of loss with respect to a loan eligible for
insurance under the Title I Program is required to be made on an FHA-approved
form executed by a duly qualified officer of the Title I Lender and must be
accompanied by copies of certain relevant documents and documentation specified
in the FHA Regulations to support the claim. The Title I Lender is required,
among other things, to document its efforts to effect recourse against any
dealer in accordance with any recourse agreement with such dealer. If the loan
is subject to an unsatisfied dealer recourse agreement claim, the Title I
Lender is also required to assign its rights under such recourse agreement.
The FHA has the right to deny any claim for insurance in whole or in part based
upon a violation of the FHA Regulations unless a waiver of compliance is
granted. The Title I Lender is permitted to appeal any such claim denial and
resubmit the claim within six months of the date of the claim denial, subject
to a reprocessing fee. The applicable Sale and Servicing Agreement or Pooling
and Servicing Agreement provides that the Trustee (or the Administrator) shall
submit an FHA Claim with respect to any Title I Mortgage Loan or Title I
Contract that goes into default if the default cannot be cured.
If, as a result of the delay in the transfer of the FHA Insurance
described above, FHA Insurance is not available with respect to any defaulted
Title I Mortgage Loan or Title I Contract at the time it goes into default,
then the amount required to make interest payments to the Securityholders with
respect to the principal amount thereof, until such FHA Insurance becomes
available and a claim for insurance can be made, if at all, will be paid from
other amounts, if any, available in the Distribution Account.
NO RIGHTS OF SECURITYHOLDERS AGAINST FHA. Because the Trust and the
Securityholders will not hold an FHA contract of insurance, the FHA will not
recognize the Trust or the Securityholders as the owners of the Title I
Mortgage Loans, Title I Contracts or any portion thereof, entitled to submit
FHA Claims to the FHA. Accordingly, the Trust and the Securityholders will
have no direct right to receive insurance payments from the FHA. In the event
the Trustee (or the Administrator, if any) submits an FHA
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Claim to the FHA and the FHA approves payment of such FHA Claim, the related
FHA Insurance Proceeds will be payable only to the Trustee or to the
Administrator, if any, as agent and attorney-in-fact for the Trustee. The
Securityholders' rights relating to the receipt of payment from and the
administration, processing and submissions of FHA Claims by the Trustee or the
Administrator, if any, are limited and governed by the related Sale and
Servicing Agreement or Pooling and Servicing Agreement and FHA Claims
Administration Agreement and these functions are obligations of the Trustee and
the Administrator, if any, not the FHA.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the Notes
and the Certificates of any Series, to the extent it relates to matters of law
or legal conclusions with respect thereto, represents the opinion of tax
counsel to each Trust with respect to the related Series on the material
matters associated with such consequences, subject to the qualifications set
forth herein. "Tax Counsel" with respect to each Issuer will be Andrews & Kurth
L.L.P. The summary does not purport to deal with federal income tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. For example, it does not discuss the tax treatment
of Noteholders or Certificateholders that are insurance companies, regulated
investment companies or dealers in securities. Moreover, there are no cases or
Internal Revenue Service ("IRS") rulings on similar transactions involving both
debt and equity interests issued by a trust with terms similar to those of the
Notes and the Certificates. As a result, the IRS may disagree with all or a
part of the discussion below. Prospective investors are urged to consult their
own tax advisors in determining the federal, state, local, foreign and any
other tax consequences to them of the purchase, ownership and disposition of
the Notes and the Certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. Each Issuer will be
provided with an opinion of Tax Counsel regarding certain federal income tax
matters discussed below. An opinion of Tax Counsel, however, is not binding on
the IRS or the courts. No ruling on any of the issues discussed below will be
sought from the IRS. For purposes of the following summary, references to the
Issuer shall be deemed to refer to either FIC or the related Trust for the
applicable Series and references to the Trust, the Notes, the Certificates and
related terms, parties and documents shall be deemed to refer, unless otherwise
specified herein, to each Trust, if any, and the Notes, Certificates and
related terms, parties and documents applicable to the related Series. The
federal income tax consequences to Certificateholders will vary depending on
whether an election is made to treat the Trust as a partnership under the Code
or whether the Trust will be treated as a grantor trust. The Prospectus
Supplement for each Series of Securities will specify whether a partnership
election will be made or the Trust will be treated as a grantor trust.
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
The following general discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of the Notes and the
Certificates of a Trust for which a partnership election will be made, to the
extent it relates to matters of law or legal conclusions with respect thereto,
represents the opinion of Tax Counsel to each Trust with respect to the related
Series on the material matters associated with such consequences, subject to
the qualifications set forth herein. In addition, Tax Counsel has prepared or
reviewed the statements in the Prospectus under the heading "Trusts for Which
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a Partnership Election is Made", and is of the opinion that such statements are
correct in all material respects. Such statements are intended as an
explanatory discussion of the related tax matters affecting investors
generally, but do not purport to furnish information in the level of detail or
with the attention to an investor's specific tax circumstances that would be
provided by an investor's own tax advisor. Accordingly, each investor is
advised to consult its own tax advisors with regard to the tax consequences to
it of investing in Notes or Certificates.
Tax Counsel will deliver its opinion that a Trust for which a
partnership election is made will not be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes. This
opinion will be based on the assumption that the terms of the Trust Agreement
and related documents will be complied with, and on counsel's conclusions that
(1) the Trust will not have certain characteristics necessary for a business
trust to be classified as an association taxable as a corporation and (2) the
nature of the income of the Trust will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations.
If the Trust were taxable as a corporation for federal income tax
purposes, the Trust would be subject to corporate income tax on its taxable
income. The Trust's taxable income would include all its income on the Loan
Assets, possibly reduced by its interest expense on the Notes. Any such
corporate income tax could materially reduce cash available to make payments on
the Notes and distributions on the Certificates, and Securityholders could be
liable for any such tax that is unpaid by the Trust.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Seller will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Tax Counsel will, except as otherwise
provided in the related Prospectus Supplement, advise the Trust that the Notes
will be classified as debt for federal income tax purposes. The discussion
below assumes this characterization of the Notes is correct.
OID, INDEXED SECURITIES, ETC. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities, Interest Only Securities or Principal Only Securities.
Moreover, the discussion assumes that the interest formula for the Notes meets
the requirements for "qualified stated interest" under Treasury regulations
(the "OID regulations") relating to original issue discount ("OID"), and that
any OID on the Notes (i.e., any excess of the principal amount of the Notes
over their issue price) does not exceed a de minimis amount (i.e., 1/4% of
their principal amount multiplied by the number of full years included in their
term), all within the meaning of the OID regulations. If these conditions are
not satisfied with respect to any given Series of Notes, additional tax
considerations with respect to such Notes will be disclosed in the applicable
Prospectus Supplement.
INTEREST INCOME ON THE NOTES. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of
a Note issued with a de minimis amount of OID must include such OID in income,
on a pro rata basis, as principal payments are made on the Note. A purchaser
who buys a Note for more or less than its principal amount will generally be
subject, respectively, to the premium amortization or market discount rules of
the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain cash
method holders, including regulated investment companies, as set forth in
Section 1281 of the Code) generally would be required to report interest income
as interest accrues on
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a straight-line basis over the term of each interest period. Other cash basis
holders of a Short-Term Note would, in general, be required to report interest
income as interest is paid (or, if earlier, upon the taxable disposition of the
Short-Term Note). However, a cash basis holder of a Short-Term Note reporting
interest income as it is paid may be required to defer a portion of any
interest expense otherwise deductible on indebtedness incurred to purchase or
carry the Short-Term Note until the taxable disposition of the Short-Term Note.
A cash basis taxpayer may elect under Section 1281 of the Code to accrue
interest income on all nongovernment debt obligations with a term of one year
or less, in which case the taxpayer would include interest on the Short-Term
Note in income as it accrues, but would not be subject to the interest expense
deferral rule referred to in the preceding sentence. Certain special rules
apply if a Short-Term Note is purchased for more or less than its principal
amount.
SALE OR OTHER DISPOSITION. If a Noteholder sells a Note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Note.
The adjusted tax basis of a Note to a particular Noteholder will equal the
holder's cost for the Note, increased by any market discount, acquisition
discount, OID and gain previously included by such Noteholder in income with
respect to the Note and decreased by the amount of bond premium, if any,
previously amortized and by the amount of principal payments previously
received by such Noteholder with respect to such Note. Any such gain or loss
will be capital gain or loss if the Note was held as a capital asset, except
for gain representing accrued interest and accrued market discount not
previously included in income. Capital losses generally may be used only to
offset capital gains.
FOREIGN HOLDERS. Interest payments made (or accrued) to a Noteholder
who is a nonresident alien, foreign corporation or other non-United States
person (a "foreign person") generally will be considered "portfolio interest",
and generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent shareholder"
of the Trust or the Seller (including a holder of 10% of the outstanding
Securities) or a "controlled foreign corporation" with respect to which the
Trust or the Seller is a "related person" within the meaning of the Code and
(ii) provides the Owner Trustee or other person who is otherwise required to
withhold U.S. tax with respect to the Notes with an appropriate statement (on
Form W-8 or a similar form), signed under penalties of perjury, certifying that
the beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide the relevant signed statement to the withholding agent;
in that case, however, the signed statement must be accompanied by a Form W-8
or substitute form provided by the foreign person that owns the Note. If such
interest is not portfolio interest, then it will be subject to United States
federal income and withholding tax at a rate of 30 percent, unless reduced or
eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
BACKUP WITHHOLDING. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Trust will be
required to withhold 31
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percent of the amount otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax
liability.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the
opinion of Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might
be treated as equity interests in the Trust. If so treated, the Trust might be
taxable as a corporation with the adverse consequences described above (and the
taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on Notes recharacterized as equity).
Alternatively, and most likely in the view of Tax Counsel, the Trust might be
treated as a publicly traded partnership that would not be taxable as a
corporation because it would meet certain qualifying income tests. Nonetheless,
treatment of the Notes as equity interests in such a publicly traded
partnership could have adverse tax consequences to certain holders. For
example, income to certain tax-exempt entities (including pension funds) would
be "unrelated business taxable income", income to foreign holders generally
would be subject to U.S. tax and U.S. tax return filing and withholding
requirements, and individual holders might be subject to certain limitations on
their ability to deduct their share of Trust expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
TREATMENT OF THE TRUST AS A PARTNERSHIP. The Seller and the Servicer
will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
Trust, the partners of the partnership being the Certificateholders (including
the Seller in its capacity as recipient of distributions from the Reserve
Fund), and the Notes being debt of the partnership. However, the proper
characterization of the arrangement involving the Trust, the Certificates, the
Notes, the Seller and the Servicer is not clear because there is no authority
on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Seller or the Trust. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
INDEXED SECURITIES, ETC. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities, Principal Only Securities or Interest Only
Securities, and that a Series of Securities includes a single Class of
Certificates. If these conditions are not satisfied with respect to any given
Series of Certificates, additional tax considerations with respect to such
Certificates will be disclosed in the applicable Prospectus Supplement.
PARTNERSHIP TAXATION. As a partnership, the Trust will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest earned on the Loan Assets (including appropriate
adjustments for market discount, OID and bond premium) and any gain upon
foreclosure of Loan Assets. The Trust's deductions will consist primarily of
interest accruing with respect to the Notes, servicing and other fees, and
losses or deductions upon foreclosure of the Loan Assets.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificateholders will be allocated taxable
income of the Trust
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for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust
income attributable to discount on the Loan Assets that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the
Trust of premium on Loan Assets that corresponds to any excess of the issue
price of Certificates over their principal amount. All remaining taxable
income of the Trust will be allocated to the Seller. Based on the economic
arrangement of the parties, this approach for allocating Trust income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of
allocation, Certificateholders may be allocated income equal to the entire Pass
Through Rate plus the other items described above even though the Trust might
not have sufficient cash to make current cash distributions of such amount.
Thus, cash basis holders will in effect be required to report income from the
Certificates on the accrual basis and Certificateholders may become liable for
taxes on Trust income even if they have not received cash from the Trust to pay
such taxes. In addition, because tax allocations and tax reporting will be
done on a uniform basis for all Certificateholders but Certificateholders may
be purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable
income that is greater or less than the amount reported to them by the Trust.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated
business taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust (including fees
to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or
in part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Receivable, the
Trust might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Loan Assets were not
issued with OID, and, therefore, the Trust should not have OID income.
However, the purchase price paid by the Trust for the Loan Assets may be
greater or less than the remaining principal balance of the Loan Assets at the
time of purchase. If so, the Loan Assets will have been acquired at a premium
or discount, as the case may be. (As indicated above, the Trust will make this
calculation on an aggregate basis, but might be required to recompute it on an
asset-by-asset basis.)
If the Trust acquires the Loan Assets at a market discount or premium,
the Trust will elect to include any such discount in income currently as it
accrues over the life of the Loan Assets or to offset any such premium against
interest income on the Loan Assets. As indicated above, a portion of such
market discount income or premium deduction may be allocated to
Certificateholders.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the Trust will be considered to
distribute its assets to the partners, who would then be treated as
recontributing those assets to the Trust,
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as a new partnership. The Trust will not comply with certain technical
requirements that might apply when such a constructive termination occurs. As
a result, the Trust may be subject to certain tax penalties and may incur
additional expenses if it is required to comply with those requirements.
Furthermore, the Trust might not be able to comply due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates
sold. A Certificateholder's tax basis in a Certificate will generally equal
the holder's cost increased by the holder's share of Trust income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the
amount realized on a sale of a Certificate would include the holder's share of
the Notes and other liabilities of the Trust. A holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's share
of unrecognized accrued market discount on the Loan Assets would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust will elect to include market
discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the
Trust's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates owned
by them as of the close of the last day of such month. As a result, a holder
purchasing Certificates may be allocated tax items (which will affect its tax
liability and tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. The Seller is
authorized to revise the Trust's method of allocation between transferors and
transferees to conform to a method permitted by future regulations.
SECTION 754 ELECTION. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under Section
754 of the Code. In order to avoid the administrative complexities that would
be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust will not make such
election. As a result, Certificateholders might be allocated a greater or
lesser amount of Trust income than would be appropriate based on their own
purchase price for Certificates.
ADMINISTRATIVE MATTERS. The Owner Trustee is required to keep or have
kept complete and accurate books of the Trust. Such books will be maintained
for financial reporting and tax purposes on an accrual basis and the fiscal
year of the Trust will be set forth in the related Prospectus Supplement. The
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Trustee will file a partnership information return (IRS Form 1065) with the IRS
for each taxable year of the Trust and will report each Certificateholder's
allocable share of items of Trust income and expense to holders and the IRS on
Schedule K-1. The Trust will provide the Schedule K-1 information to nominees
that fail to provide the Trust with the information statement described below
and such nominees will be required to forward such information to the
beneficial owners of the Certificates. Generally, holders must file tax
returns that are consistent with the information return filed by the Trust or
be subject to penalties unless the holder notifies the IRS of all such
inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such
person, (y) whether such person is a United States person, a tax-exempt entity
or a foreign government, an international organization, or any wholly owned
agency or instrumentality of either of the foregoing, and (z) certain
information on Certificates that were held, bought or sold on behalf of such
person throughout the year. In addition, brokers and financial institutions
that hold Certificates through a nominee are required to furnish directly to
the Trust information as to themselves and their ownership of Certificates. A
clearing agency registered under Section 17A of the Exchange Act is not
required to furnish any such information statement to the Trust. The
information referred to above for any calendar year must be furnished to the
Trust on or before the following January 31. Nominees, brokers and financial
institutions that fail to provide the Trust with the information described
above may be subject to penalties.
The Seller will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may
be precluded from separately litigating a proposed adjustment to the items of
the Trust. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the income
and losses of the Trust.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear whether
the Trust would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is
not expected that the Trust would be engaged in a trade or business in the
United States for such purposes, the Trust will withhold as if it were so
engaged in order to protect the Trust from possible adverse consequences of a
failure to withhold. The Trust expects to withhold on the portion of its
taxable income that is allocable to foreign Certificateholders pursuant to
Section 1446 of the Code, as if such income were effectively connected to a
U.S. trade or business, at a rate of 35% for foreign holders that are taxable
as corporations and 39.6% for all other foreign holders. Subsequent adoption
of Treasury regulations or the issuance of other administrative pronouncements
may require the Trust to change its withholding procedures. In determining a
holder's withholding status, the Trust may rely on IRS Form W-8, IRS Form W-9
or the holder's certification of nonforeign status signed under penalties of
perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust's income. Each foreign holder
must obtain a taxpayer identification number from the IRS and submit that
number to the Trust on Form W-8 in order to assure appropriate crediting of the
taxes withheld. A foreign holder
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generally would be entitled to file with the IRS a claim for refund with
respect to taxes withheld by the Trust, taking the position that no taxes were
due because the Trust was not engaged in a U.S. trade or business. However,
interest payments made (or accrued) to a Certificateholder who is a foreign
person generally will be considered guaranteed payments to the extent such
payments are determined without regard to the income of the Trust. If these
interest payments are properly characterized as guaranteed payments, then the
interest will not be considered "portfolio interest." As a result,
Certificateholders will be subject to United States federal income tax and
withholding tax at a rate of 30 percent, unless reduced or eliminated pursuant
to an applicable treaty. In such case, a foreign holder would only be entitled
to claim a refund for that portion of the taxes in excess of the taxes that
should be withheld with respect to the guaranteed payments.
BACKUP WITHHOLDING. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
TRUSTS TREATED AS GRANTOR TRUSTS
TAX CHARACTERIZATION OF THE TRUST AS A GRANTOR TRUST
The following general discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of the Notes and the
Certificates of a Trust for which a partnership election will not be made, to
the extent it relates to matters of law or legal conclusions with respect
thereto, represents the opinion of Tax Counsel to each Trust with respect to
the related Series on the material matters associated with such consequences,
subject to the qualifications set forth herein. In addition, Tax Counsel has
prepared or reviewed the statements in the Prospectus under the heading "Trusts
Treated as Grantor Trusts", and is of the opinion that such statements are
correct in all material respects. Such statements are intended as an
explanatory discussion of the possible effects of the classification of any
Trust as a grantor trust for federal income tax purposes on investors generally
and of related tax matters affecting investors generally, but do not purport to
furnish information in the level of detail or with the attention to an
investor's specific tax circumstances that would be provided by an investor's
own tax advisor. Accordingly, each investor is advised to consult its own tax
advisors with regard to the tax consequences to it of investing in Notes or
Certificates.
If a partnership election is not made, Tax Counsel will deliver its
opinion that the Trust will not be classified as an association taxable as a
corporation and that such Trust will be classified as a grantor trust under
subpart E, Part I of subchapter J of Chapter 1 of Subtitle A of the Code. In
this case, owners of Certificates (referred to herein as "Grantor Trust
Certificateholders") will be treated for federal income tax purposes as owners
of a portion of the Trust's assets as described below. The Certificates issued
by a Trust that is treated as a grantor trust are referred to herein as
"Grantor Trust Certificates".
CHARACTERIZATION. Each Grantor Trust Certificateholder will be treated
as the owner of a pro rata undivided interest in the interest and principal
portions of the Trust represented by the Grantor Trust Certificates and will be
considered the equitable owner of a pro rata undivided interest in each of the
Loan Assets in the Trust. Any amounts received by a Grantor Trust
Certificateholder in lieu of amounts due with respect to any Loan Asset because
of a default or delinquency in payment will be treated for federal income tax
purposes as having the same character as the payments they replace.
Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire
income from the Loan Assets in the Trust represented by Grantor Trust
Certificates, including interest,
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OID, if any, prepayment fees, assumption fees, any gain recognized upon an
assumption and late payment charges received by the Servicer. Under Sections
162 or 212 each Grantor Trust Certificateholder will be entitled to deduct its
pro rata share of servicing fees, prepayment fees, assumption fees, any loss
recognized upon an assumption and late payment charges retained by the
Servicer, provided that such amounts are reasonable compensation for services
rendered to the Trust. Grantor Trust Certificateholders that are individuals,
estates or trusts will be entitled to deduct their share of expenses only to
the extent such expenses plus all other Section 212 expenses exceed two percent
of its adjusted gross income. A Grantor Trust Certificateholder using the cash
method of accounting must take into account its pro rata share of income and
deductions as and when collected by or paid to the Servicer. A Grantor Trust
Certificateholder using an accrual method of accounting must take into account
its pro rata share of income and deductions as they become due or are paid to
the Servicer, whichever is earlier. If the servicing fees paid to the Servicer
are deemed to exceed reasonable servicing compensation, the amount of such
excess could be considered as an ownership interest retained by the Servicer
(or any person to whom the Servicer assigned for value all or a portion of the
servicing fees) in a portion of the interest payments on the Loan Assets. The
Loan Assets would then be subject to the "coupon stripping" rules of the Code
discussed below.
PREMIUM. The price paid for a Grantor Trust Certificate by a holder
will be allocated to such holder's undivided interest in each Loan Asset based
on each Loan Asset's relative fair market value, so that such holder's
undivided interest in each Loan Asset will have its own tax basis. A Grantor
Trust Certificateholder that acquires an interest in Loan Assets at a premium
may elect to amortize such premium under a constant interest method.
Amortizable bond premium will be treated as an offset to interest income on
such Grantor Trust Certificate. The basis for such Grantor Trust Certificate
will be reduced to the extent that amortizable premium is applied to offset
interest payments. It is not clear whether a reasonable prepayment assumption
should be used in computing amortization of premium allowable under Section
171. A Grantor Trust Certificateholder that makes this election for a Grantor
Trust Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Grantor Trust Certificateholder acquires
during the year of the election or thereafter.
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a Grantor Trust Certificate acquired at a
premium should recognize a loss if a Loan Asset prepays in full, equal to the
difference between the portion of the prepaid principal amount of such Loan
Asset that is allocable to the Grantor Trust Certificate and the portion of the
adjusted basis of the Grantor Trust Certificate that is allocable to such Loan
Asset. If a reasonable prepayment assumption is used to amortize such premium,
it appears that such a loss would be available, if at all, only if prepayments
have occurred at a rate faster than the reasonable assumed prepayment rate. It
is not clear whether any other adjustments would be required to reflect
differences between an assumed prepayment rate and the actual rate of
prepayments.
STRIPPED NOTES AND STRIPPED COUPONS
Although the tax treatment of stripped bonds is not entirely clear,
based on recent guidance by the IRS, each purchaser of a Grantor Trust
Certificate will be treated as the purchaser of a stripped bond which generally
should be treated as a single debt instrument issued on the day it is purchased
for purposes of calculating any original issue discount. Generally, under
applicable Treasury regulations (the "Section 1286 Treasury Regulations"), if
the discount on a stripped bond is larger than a de minimis amount (as
calculated for purposes of the OID rules of the Code) such stripped bond will
be considered to have been issued with OID. See "--Original Issue Discount"
below. Based on the preamble to the Section 1286 Treasury Regulations, Tax
Counsel is of the opinion that, although the matter is not entirely clear, the
interest income on the Certificates at the sum of the Pass Through Rate and the
portion of the Servicing Fee Rate that does not constitute excess servicing
will be treated as "qualified stated interest" within the
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meaning of the Section 1286 Treasury Regulations and such income will be so
treated in the Trustee's tax information reporting.
ORIGINAL ISSUE DISCOUNT. The IRS has stated in published rulings that,
in circumstances similar to those described herein, the special rules of the
Code relating to "original issue discount" (currently Sections 1271 through
1273 and 1275) will be applicable to a Grantor Trust Certificateholder's
interest in those Loan Assets meeting the conditions necessary for these
sections to apply. Generally, a Grantor Trust Certificateholder that acquires
an undivided interest in a Loan Asset issued or acquired with OID must include
in gross income the sum of the "daily portions," as defined below, of the OID
on such Loan Asset for each day on which it owns a Certificate, including the
date of purchase but excluding the date of disposition. In the case of an
original Grantor Trust Certificateholder, the daily portions of OID with
respect to a Loan Asset generally would be determined as follows. A
calculation will be made of the portion of OID that accrues on the Loan Asset
during each successive monthly accrual period (or shorter period in respect of
the date of original issue or the final Distribution Date). This will be done,
in the case of each full monthly accrual period, by adding (i) the present
value of all remaining payments to be received on the Loan Asset under the
prepayment assumption used in respect of the Loan Assets and (ii) any payments
received during such accrual period, and subtracting from that total the
"adjusted issue price" of the Loan Asset at the beginning of such accrual
period. No representation is made that the Loan Assets will prepay at any
prepayment assumption. The "adjusted issue price" of a Loan Asset at the
beginning of the first accrual period is its issue price (as determined for
purposes of the OID rules of the Code) and the "adjusted issue price" of a Loan
Asset at the beginning of a subsequent accrual period is the "adjusted issue
price" at the beginning of the immediately preceding accrual period plus the
amount of OID allocable to that accrual period and reduced by the amount of any
payment (other than "qualified stated interest") made at the end of or during
that accrual period. The OID accruing during such accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the period. With respect to an initial accrual period
shorter than a full monthly accrual period, the daily portions of OID must be
determined according to a reasonable method, provided that such method is
consistent with the method used to determine the yield to maturity of the Loan
Assets.
With respect to the Loan Assets, the method of calculating OID as
described above will cause the accrual of OID to either increase or decrease
(but never below zero) in any given accrual period to reflect the fact that
prepayments are occurring at a faster or slower rate than the prepayment
assumption used in respect of the Loan Assets. Subsequent purchasers that
purchase Loan Assets at more than a de minimis discount should consult their
tax advisors with respect to the proper method to accrue such OID.
MARKET DISCOUNT. A Grantor Trust Certificateholder that acquires an
undivided interest in Loan Assets may be subject to the market discount rules
of Sections 1276 through 1278 to the extent an undivided interest in a Loan
Asset is considered to have been purchased at a "market discount." Generally,
the amount of market discount is equal to the excess of the portion of the
principal amount of such Loan Asset allocable to such holder's undivided
interest over such holder's tax basis in such interest. Market discount with
respect to a Grantor Trust Certificate will be considered to be zero if the
amount allocable to the Grantor Trust Certificate is less than 0.25% of the
Grantor Trust Certificate's stated redemption price at maturity multiplied by
the weighted average maturity remaining after the date of purchase. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
shall be treated as ordinary income to the extent that it does not exceed the
accrued market discount at the time of such payment. The amount of accrued
market discount for purposes of determining the tax treatment of subsequent
principal payments or dispositions of the market discount bond is to be reduced
by the amount so treated as ordinary income.
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The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
While the Treasury Department has not yet issued regulations, rules described
in the relevant legislative history will apply. Under those rules, the holder
of a market discount bond may elect to accrue market discount either on the
basis of a constant interest rate or according to one of the following methods.
If a Grantor Trust Certificate is issued with OID, the amount of market
discount that accrues during any accrual period would be equal to the product
of (i) the total remaining market discount and (ii) a fraction, the numerator
of which is the OID accruing during the period and the denominator of which is
the total remaining OID at the beginning of the accrual period. For Grantor
Trust Certificates issued without OID, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount and (ii) a fraction, the numerator of which is the amount of
stated interest paid during the accrual period and the denominator of which is
the total amount of stated interest remaining to be paid at the beginning of
the accrual period. For purposes of calculating market discount under any of
the above methods in the case of instruments (such as the Grantor Trust
Certificates) that provide for payments that may be accelerated by reason of
prepayments of other obligations securing such instruments, the same prepayment
assumption applicable to calculating the accrual of OID will apply. Because the
regulations described above have not been issued, it is impossible to predict
what effect those regulations might have on the tax treatment of a Grantor
Trust Certificate purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount
also may be required to defer a portion of its interest deductions for the
taxable year attributable to any indebtedness incurred or continued to purchase
or carry such Grantor Trust Certificate purchased with market discount. For
these purposes, the de minimis rule referred above applies. Any such deferred
interest expense would not exceed the market discount that accrues during such
taxable year and is, in general, allowed as a deduction not later than the year
in which such market discount is includible in income. If such holder elects
to include market discount in income currently as it accrues on all market
discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
PREMIUM. To the extent a Grantor Trust Certificateholder is considered
to have purchased an undivided interest in a Loan Asset for an amount that is
greater than its stated redemption price at maturity of such Loan Asset, such
Grantor Trust Certificateholder will be considered to have purchased the Loan
Asset with "amortizable bond premium" equal in amount to such excess. A
Grantor Trust Certificateholder (who does not hold the Certificate for sale to
customers or in inventory) may elect under Section 171 of the Code to amortize
such premium. Under the Code, premium is allocated among the interest payments
on the Loan Assets to which it relates and is considered as an offset against
(and thus a reduction of) such interest payments. With certain exceptions,
such an election would apply to all debt instruments held or subsequently
acquired by the electing holder. Absent such an election, the premium will be
deductible as an ordinary loss only upon disposition of the Certificate or pro
rata as principal is paid on the Loan Assets.
ELECTION TO TREAT ALL INTEREST AS OID. The OID regulations permit a
Grantor Trust Certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method. If such an election were to be
made with respect to a Grantor Trust Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Grantor Trust Certificateholder acquires during the
year of the election or thereafter. Similarly, a Grantor Trust
Certificateholder that makes this election for a Grantor Trust Certificate that
is acquired at a premium will be deemed to have made an election to amortize
bond premium with respect to all debt instruments having amortizable bond
premium that such
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Grantor Trust Certificateholder owns or acquires. See "--Premium". The
election to accrue interest, discount and premium on a constant yield method
with respect to a Grantor Trust Certificate is irrevocable.
SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE. Sale or exchange of a
Grantor Trust Certificate prior to its maturity will result in gain or loss
equal to the difference, if any, between the amount received and the owner's
adjusted basis in the Grantor Trust Certificate. Such adjusted basis generally
will equal the seller's purchase price for the Grantor Trust Certificate,
increased by the OID included in the seller's gross income with respect to the
Grantor Trust Certificate, and reduced by principal payments on the Grantor
Trust Certificate previously received by the seller. Such gain or loss will be
capital gain or loss to an owner for which a Grantor Trust Certificate is a
"capital asset" within the meaning of Section 1221, and will be long-term or
short-term depending on whether the Grantor Trust Certificate has been owned
for the long-term capital gain holding period (currently more than one year).
Grantor Trust Certificates will be "evidences of indebtedness" within
the meaning of Section 582(c)(1), so that gain or loss recognized from the sale
of a Grantor Trust Certificate by a bank or a thrift institution to which such
section applies will be treated as ordinary income or loss.
NON-U.S. PERSONS. Generally, interest or OID paid by the person
required to withhold tax under Section 1441 or 1442 to (i) an owner that is not
a U.S. Person (as defined below) or (ii) a Grantor Trust Certificateholder
holding on behalf of an owner that is not a U.S. Person and accrued OID
recognized by the owner on the sale or exchange of such a Grantor Trust
Certificate will not be subject to withholding to the extent that a Grantor
Trust Certificate evidences ownership in Loan Assets issued after July 18, 1984
by natural persons if such Grantor Trust Certificateholder complies with
certain identification requirements (including delivery of a statement, signed
by the Grantor Trust Certificateholder under penalties of perjury, certifying
that such Grantor Trust Certificateholder is not a U.S. Person and providing
the name and address of such Grantor Trust Certificateholder). Additional
restrictions apply to Loan Assets where the obligor is not a natural person in
order to qualify for the exemption from withholding.
As used herein, a "U.S. Person" means a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof,
an estate, the income of which is subject to United States federal income
taxation regardless of its source or a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States fiduciaries have authority to control all
substantial decisions of the trust.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Servicer will furnish
or make available, within a reasonable time after the end of each calendar
year, to each person who was a Grantor Trust Certificateholder at any time
during such year, such information as may be deemed necessary or desirable to
assist Grantor Trust Certificateholders in preparing their federal income tax
returns, or to enable holders to make such information available to beneficial
owners or financial intermediaries that hold Grantor Trust Certificates as
nominees on behalf of beneficial owners. If a holder, beneficial owner,
financial intermediary or other recipient of a payment on behalf of a
beneficial owner fails to supply a certified taxpayer identification number or
if the Secretary of the Treasury determines that such person has not reported
all interest and dividend income required to be shown on its federal income tax
return, 31% backup withholding may be required with respect to any payments.
Any amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax liability.
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NOTES ISSUED BY FIC
Notes issued by FIC, as Issuer, will be subject to the same rules of
taxation as Notes issued by a Trust for which a partnership election is made,
as described above under the heading "Trusts for Which a Partnership Election
Is Made - Tax Consequences to Holders of the Notes."
THE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL INFORMATION
ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A SECURITYHOLDER'S PARTICULAR TAX
SITUATION. PROSPECTIVE PURCHASERS OF THE SECURITIES SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE SECURITIES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans (each a "Benefit Plan"), from
engaging in certain transactions involving "plan assets" with persons that are
"parties in interest" under ERISA or "disqualified persons" under the Code with
respect to such Benefit Plan. ERISA also imposes certain duties on persons who
are fiduciaries of Benefit Plans subject to ERISA and prohibits certain
transactions between a Benefit Plan and parties in interest with respect to
such Benefit Plans. Under ERISA, any person who exercises any authority or
control with respect to the management or disposition of the assets of a
Benefit Plan is considered to be a fiduciary of such Benefit Plan (subject to
certain exceptions not here relevant). A violation of these "prohibited
transaction" rules may result in an excise tax or other penalties and
liabilities under ERISA and the Code for such persons.
Certain transactions involving an Issuer might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit Plan
that purchased Notes or Certificates if assets of the Issuer were deemed to be
assets of the Benefit Plan. Under a regulation issued by the United States
Department of Labor (the "Plan Assets Regulation"), the assets of an Issuer
would be treated as plan assets of a Benefit Plan for the purposes of ERISA and
the Code only if the Benefit Plan acquired an "equity interest" in the Issuer
and none of the exceptions contained in the Plan Assets Regulation was
applicable. An equity interest is defined under the Plan Assets Regulation as
an interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. The likely
treatment in this context of Notes and Certificates of a given Series will be
discussed in the related Prospectus Supplement.
Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33)
of ERISA) are not subject to ERISA requirements. Due to the complexities of
the "prohibited transaction" rules and the penalties imposed upon persons
involved in prohibited transactions, it is important that the fiduciary of any
Benefit Plan considering the purchase of Securities consult with its tax and/or
legal advisors regarding whether the assets of the related Issuer would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
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<PAGE> 173
LEGAL INVESTMENT MATTERS
To the extent specified in the related Prospectus Supplement, the
Securities of a Series will not constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") because a
substantial number of the Mortgage Loans are secured by liens on real estate
that are not first liens, as required by SMMEA. Accordingly, many institutions
with legal authority to invest in "mortgage related securities" may not be
legally authorized to invest in the Offered Securities.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain Classes of the Securities. Any
financial institution which is subject to the jurisdiction of the Comptroller
of the Currency, the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation ("FDIC"), the Office of Thrift
Supervision ("OTS"), the National Credit Union Administration ("NCUA"), or
other federal or state agencies with similar authority should review any
applicable rules, guidelines and regulations prior to purchasing the
Securities. The Federal Financial Institutions Examination Council, for
example, has issued a Supervisory Policy Statement on Securities Activities
effective February 10, 1992 (the "Policy Statement"). The Policy Statement has
been adopted by the Comptroller of the Currency, the Federal Reserve Board, the
FDIC, the OTS, and the NCUA (with certain modifications), with respect to the
depository institutions that they regulate. The Policy Statement prohibits
depository institutions from investing in certain "high-risk mortgage
securities" (including securities such as certain Classes of Securities),
except under limited circumstances, and sets forth certain investment practices
deemed to be unsuitable for regulated institutions. The NCUA issued final
regulations effective December 2, 1991 that restrict and in some instances
prohibit the investment by federal credit unions in certain types of mortgage
related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying", or in securities which are issued in book-entry
form.
Investors should consult their own legal advisors in determining whether
and to what extent the Securities constitute legal investments for such
investors.
PLAN OF DISTRIBUTION
Securities are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The related
Prospectus Supplement will set forth the terms of offering of a Series of
Securities, including the public offering or purchase price of each Class of
Securities of such Series being offered thereby or the method by which such
price will be determined and the net proceeds to the Issuer from the sale of
each such Class of Securities. Such Securities will be acquired by the
Underwriters for their own account and may be resold from time to time in one
or more transactions including negotiated transactions, at fixed public
offering prices or at varying prices to be determined at the time of sale or at
the time of commitment therefor. The managing Underwriter or Underwriters with
respect to the offer and sale of a particular Series of Securities will be set
forth on the cover of the Prospectus Supplement relating to such Series and the
members of the underwriting syndicate, if any, will be named in such Prospectus
Supplement.
In connection with the sale of the Securities, Underwriters may receive
compensation from the related Issuer or from purchasers of the Securities in
the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Securities may be deemed to be
94
<PAGE> 174
Underwriters in connection with such Securities, and any discounts or
commissions received by them from the related Issuer or the Seller and any
profit on the resale of Securities by them may be deemed to be underwriting
discounts and commissions under the Securities Act. The Prospectus Supplement
will describe any such compensation paid by the related Issuer.
It is anticipated that the underwriting agreement pertaining to the sale
of any Series of Securities will provide that the obligations of the
Underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Securities if any are
purchased and that the related Issuer or the Seller will indemnify the
underwriters against certain civil liabilities, including liabilities under the
Securities Act.
USE OF PROCEEDS
To the extent specified in an applicable Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Securities will be applied to the simultaneous purchase of the Loan
Assets related to such Series or to reimburse the amounts previously used to
effect such a purchase, the costs of carrying such Loan Assets until sale of
the Securities and other expenses connected with pooling the Loan Assets and
issuing the Securities.
LEGAL OPINIONS
Certain legal matters relating to the Securities of any Series will be
passed upon for the related Issuer, the Seller and the Servicer by Andrews &
Kurth L.L.P., Dallas, Texas. In addition, certain United States federal and
Texas state tax and other matters will be passed upon for the related Issuer by
Andrews & Kurth L.L.P., Dallas, Texas.
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<PAGE> 175
INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
"Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
"Administration Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . 28
"Administration Fee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
"Administrator" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 28
"Applicable Accounting Standards" . . . . . . . . . . . . . . . . . . . . . . 58
"Assets" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, 5
"Benefit Plan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
"BIF" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
"Call Risk" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
"Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Closing Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 55
"Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
"Cooperatives" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 40
"Credit Enhancement" . . . . . . . . . . . . . . . . . . . . . 5, 7, 16, 17, 44
"Cut-off Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
"Definitive Securities" . . . . . . . . . . . . . . . . . . . . . . . . . 32, 36
"Depository" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
"Distribution Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 29
"DTC Participants" . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 33
"ERISA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Events of Default" . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 61
"Excess Spread" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
"Extension Risk" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
"FDIC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59, 97
"FHA Claims Administration Agreement" . . . . . . . . . . . . . . . . . . . . 17
"FHA Claims Administrator" . . . . . . . . . . . . . . . . . . . . . . . . . 17
"FHA Reserve" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
"FHA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
"Garn-St. Germain Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
"Guaranty Policy" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
"Indenture Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Indenture" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 2
"Indirect DTC Participants" . . . . . . . . . . . . . . . . . . . . . . . . . 33
"Interest Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"IRS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
"Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Loan Asset Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
"Loan Assets" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
"Master Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Mortgage Notes" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
"Mortgaged Properties" . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
"Mortgages" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
"NCUA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
"Notes" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"OID regulations" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
"OID" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
"OTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71, 97
</TABLE>
96
<PAGE> 176
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
"Owner Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Pass Through Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Permitted Investments" . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
"Plan Assets Regulation" . . . . . . . . . . . . . . . . . . . . . . . . . . 96
"Policy Statement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
"Pre-Funding Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
"Pre-Funding Arrangement" . . . . . . . . . . . . . . . . . . . . . . . . 7, 43
"Rating Agency" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Reigle Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
"Relief Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 63, 73
"Reserve Fund" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"SAIF" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
"Sale and Servicing Agreement" . . . . . . . . . . . . . . . . . . . . . . . ii
"Schedule of Loan Assets" . . . . . . . . . . . . . . . . . . . . . . . . . . 56
"Secured Property" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
"Seller" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 1
"Senior Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 45
"Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, ii, 1
"SMMEA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 97
"Subordinated Securities" . . . . . . . . . . . . . . . . . . . . . . . . 31, 44
"Subsequent Loan Assets" . . . . . . . . . . . . . . . . . . . . . . . . 6, 43
"Subsequent Transfer Agreement" . . . . . . . . . . . . . . . . . . . . . . . 57
"Subservicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
"TILA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
"Title V" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
"Transfer and Servicing Agreements" . . . . . . . . . . . . . . . . . . . . . 55
"Transfer Report" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
"Transferor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 39
"Trust Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 1
"Trust Property" . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, 4
"Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 1, 38
"Trust" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 1, 1
"Window Period Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
</TABLE>
97
<PAGE> 177
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT
PAGE
<S> <C>
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reports to Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Home Loan Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Transferor and Servicer . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepayment and Yield Considerations
Description of the Offered Securities . . . . . . . . . . . . . . . . . . . . .
Description of Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . .
Description of the Transfer and Servicing Agreements . . . . . . . . . . . . .
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROSPECTUS
Prospectus Supplement . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Incorporation of Certain Documents by Reference . . . . . . . . . . . . . . . v
Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi
Summary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Description of the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Description of the Certificates . . . . . . . . . . . . . . . . . . . . . . . 28
Pool Factors and Trading Information . . . . . . . . . . . . . . . . . . . . 29
Certain Information Regarding the Securities . . . . . . . . . . . . . . . . 30
The Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
The Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Description of the Trust Property . . . . . . . . . . . . . . . . . . . . . . 39
Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Servicing of the Loan Assets . . . . . . . . . . . . . . . . . . . . . . . . 48
The Seller and the Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . 52
The Servicer and the Transferor . . . . . . . . . . . . . . . . . . . . . . . 53
Description of the Transfer and Servicing Agreements . . . . . . . . . . . . 55
Certain Legal Aspects of the Loan Assets . . . . . . . . . . . . . . . . . . 62
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . 83
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Legal Investment Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Index of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
-----------
</TABLE>
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and Prospectus. This obligation 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.
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR, ANY AFFILIATE OF THE DEPOSITOR
OR ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
SHALL NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY IN ANY STATE TO ANY PERSON TO WHO IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH STATE. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DOES NOT IMPLY THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
$_________________
FIRSTPLUS HOME LOAN TRUST 199_-_
FIRSTPLUS
INVESTMENT CORPORATION
(DEPOSITOR)
FIRSTPLUS FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
___________
PROSPECTUS SUPPLEMENT
[UNDERWRITER]
____________, 199_
