<PAGE> 1
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 21, 1997)
$600,000,000
[FIRSTPLUS LOGO]
FIRSTPLUS INVESTMENT CORPORATION,
(SELLER)
FIRSTPLUS FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
FIRSTPLUS HOME LOAN OWNER TRUST 1997-1
The FIRSTPLUS HOME LOAN OWNER TRUST 1997-1 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 eight classes of Asset Backed
Notes set forth below pursuant to an Indenture dated as of February 1, 1997,
between the Trust and First Bank National Association, in its capacity as
Indenture Trustee. The Trust will also issue the Certificates consisting of a
single class of Asset Backed Certificates pursuant to the Trust Agreement. The
Offered Securities hereunder will consist of the Notes and Certificates.
It is a condition to the issuance of each Class of Notes and the
Certificates that they each be rated "AAA" by Standard & Poor's and "Aaa" by
Moody's. The Notes and the Certificates will be unconditionally and irrevocably
guaranteed to the extent described herein pursuant to the terms of a Guaranty
Policy issued by MBIA Insurance Corporation, as the Securities Insurer.
[MBIA LOGO]
BEFORE PURCHASING ANY OFFERED SECURITIES, PROSPECTIVE INVESTORS SHOULD
REVIEW THE INFORMATION SET FORTH HEREIN AND IN THE PROSPECTUS, SEE "RISK
FACTORS" AND "PREPAYMENT AND YIELD CONSIDERATIONS" HEREIN, AND SEE "RISK
FACTORS" IN THE PROSPECTUS.
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>
========================================================================================================================
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............ $139,980,000 6.05% 99.99256% 0.300% 99.69256%
- ------------------------------------------------------------------------------------------------------------------------
Class A-2 Notes............ $64,680,000 6.28% 99.99428% 0.375% 99.61928%
- ------------------------------------------------------------------------------------------------------------------------
Class A-3 Notes............ $65,160,000 6.45% 99.96394% 0.425% 99.53894%
- ------------------------------------------------------------------------------------------------------------------------
Class A-4 Notes............ $49,750,000 6.60% 99.95228% 0.475% 99.47728%
- ------------------------------------------------------------------------------------------------------------------------
Class A-5 Notes............ $49,170,000 6.70% 99.97340% 0.525% 99.44840%
- ------------------------------------------------------------------------------------------------------------------------
Class A-6 Notes............ $93,110,000 6.95% 99.95684% 0.550% 99.40684%
- ------------------------------------------------------------------------------------------------------------------------
Class A-7 Notes............ $61,330,000 7.16% 99.98416% 0.600% 99.38416%
- ------------------------------------------------------------------------------------------------------------------------
Class A-8 Notes............ $37,570,000 7.33% 99.96932% 0.650% 99.31932%
- ------------------------------------------------------------------------------------------------------------------------
Certificates(3)............ $39,250,000 7.64% 99.98092% 0.738% 99.24292%
- ------------------------------------------------------------------------------------------------------------------------
Total...................... $600,000,000.00 599,856,652.85 2,847,830.00 597,008,822.85
========================================================================================================================
</TABLE>
(1) Plus accrued interest, if any, at the applicable rate from February 1, 1997.
(2) Before deducting expenses, estimated to be $500,000.
(3) On the Closing Date, an affiliate of the Seller will purchase approximately
1% of the Original Certificate Principal Balance.
The Offered Securities are offered by the Underwriters when, as and if
issued and accepted by the Underwriters and subject to their right to reject
orders in whole or in part. It is expected that delivery of the Offered
Securities will be made in book-entry form only through the Same Day Funds
Settlement System of The Depository Trust Company on or about February 27, 1997
against payment therefor in immediately available funds.
BANC ONE CAPITAL CORPORATION
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS FEBRUARY 21, 1997.
<PAGE> 2
(Continued from preceding page)
The assets of the Trust will primarily include the Home Loan Pool
consisting 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 (which the Transferor markets as "DebtBusterTM Loans"), (iii) the
purchase or refinancing of single family residential property or (iv) a
combination of property improvements, debt consolidation, cash-out refinancings
and/or other consumer purposes (which the Transferor markets as "BusterPlusTM
Loans"). 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 therein 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.
Distributions on the Offered Securities will be made to the holders of
the Offered Securities on each Distribution 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 March 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 Distribution Date, the Noteholders will be entitled to receive, from
and to the extent that funds are available therefor in the Note Distribution
Account, distributions with respect to interest and principal calculated as
described herein. See "Description of the Offered Securities -- Distributions
on the Notes" herein. The Certificates will represent undivided ownership
interests in the Trust. Interest on the Certificates will accrue at the fixed
per annum interest rate specified on the cover hereof. On each Distribution
Date, the Certificateholders will be entitled to receive, from and to the
extent that funds are available therefor in the Certificate Distribution
Account, distributions with respect to interest and principal calculated as
described herein. See "Description of the Offered Securities -- Distributions
on the Certificates" herein. Distributions of principal and interest on the
Certificates will be subordinated in priority to payments due on the Notes as
described herein.
The yield to maturity on the Offered Securities will depend on (i) the
rate and timing of principal reductions of the outstanding principal balances
of the Offered Securities 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 Offered Securities from amounts
remaining on deposit in the Pre-Funding Account after the termination of the
Funding Period, and (iii) the price paid for the Offered Securities by the
holders thereof. Because 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.
PROCEEDS OF THE ASSETS IN THE TRUST ARE THE SOLE SOURCE OF PAYMENTS ON
THE OFFERED SECURITIES. THE NOTES REPRESENT OBLIGATIONS OF, AND THE
CERTIFICATES REPRESENT UNDIVIDED OWNERSHIP INTERESTS IN, THE TRUST ONLY AND DO
NOT REPRESENT OBLIGATIONS OF OR INTERESTS IN THE SELLER, THE TRANSFEROR, THE
SERVICER, THE INDENTURE TRUSTEE, THE OWNER TRUSTEE, THE CO-OWNER TRUSTEE, THE
SECURITIES INSURER OR ANY OF THEIR RESPECTIVE AFFILIATES. NONE OF THE NOTES,
THE CERTIFICATES OR THE HOME LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SELLER OR THE TRANSFEROR OR
ANY OF THEIR RESPECTIVE AFFILIATES OR ANY OTHER PERSON, EXCEPT THAT THE NOTES
AND THE CERTIFICATES WILL BE INSURED BY THE SECURITIES INSURER UNDER THE
GUARANTY POLICY.
-------------------------------------------
ii
<PAGE> 3
This Prospectus Supplement does not contain complete information about
the offering of the Offered Securities. Additional information is contained in
the Prospectus and prospective investors are urged to read the Prospectus and
this Prospectus Supplement in full. Sales of the Offered Securities may not be
consummated unless the purchaser has received both this Prospectus Supplement
and the Prospectus.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE
OFFERED SECURITIES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
-----------------------------
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission"), on behalf of the Trust, a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended. This Prospectus
Supplement and the related Prospectus, which form a part of the Registration
Statement, omit certain information contained in such Registration Statement in
accordance with the rules and regulations of the Commission. The Registration
Statement can be inspected and copied at the Public Reference Room of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center,
Suite 1300, New York, New York 10048. Copies of such information can be
obtained at prescribed rates from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Commission maintains a web site on the Internet that contains reports,
proxy and information statements and other information regarding the Seller.
The address of such web site is http://www.sec.gov.
REPORTS TO SECURITYHOLDERS
Unaudited monthly and annual reports concerning the Notes and
Certificates will be sent by the Indenture Trustee and Owner Trustee,
respectively, to the Beneficial Owners of the Notes and Certificates, as
applicable. So long as any Note or Certificate is in book-entry form, such
reports will be sent to Cede & Co., as the nominee of DTC and as the registered
owner of such Notes pursuant to the Indenture or such Certificates pursuant to
the Trust Agreement, respectively. DTC will supply such reports to Security
Owners of any such Notes or Certificates in accordance with its procedures.
iii
<PAGE> 4
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the accompanying
Prospectus. Certain capitalized terms used herein may be defined elsewhere in
this Prospectus Supplement or in the Prospectus. See "Index of Terms" included
as an Appendix A to both this Prospectus Supplement and the Prospectus.
Capitalized terms that are used but not defined herein, will have the meanings
assigned to such terms in the Prospectus.
Issuer . . . . . . . . . . . FIRSTPLUS Home Loan Owner Trust 1997-1 (the
"Trust" or the "Issuer"), a Delaware business
trust, established pursuant to a trust
agreement dated as of February 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 RAC Financial Group, Inc.
("RAC"), 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 February 1, 1997 by and between the
Owner Trustee, the Indenture Trustee and the
Custodian.
Closing Date . . . . . . . . On or about February 27, 1997.
Cut-Off Date . . . . . . . . January 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").
Distribution Date . . . . . . The 10th day of each month or, if such day is
not a Business Day, then the next succeeding
Business Day, commencing in March 1997 (each, a
"Distribution Date").
Due Period . . . . . . . . . With respect to a Distribution Date, the
calendar month immediately preceding such
Distribution Date (each, a "Due Period").
Determination Date . . . . . The 4th Business Day prior to each Distribution
Date (each, a "Determination Date").
Record Date . . . . . . . . . With respect to each Distribution Date, the
close of business on the last Business Day of
the month immediately preceding the month in
which such Distribution Date occurs (each, a
"Record Date").
S-1
<PAGE> 5
The Notes . . . . . . . . . . The Trust will issue Asset Backed Notes
(collectively, the "Notes") pursuant to an
Indenture dated as of February 1, 1997 (as
amended and supplemented from time to time, the
"Indenture"), between the Issuer and the
Indenture Trustee, consisting of: (1) Class A-1
Asset Backed Notes ("Class A-1 Notes") in the
aggregate principal amount of $139,980,000; (2)
Class A-2 Asset Backed Notes ("Class A-2
Notes") in the aggregate principal amount of
$64,680,000; (3) Class A-3 Asset Backed Notes
("Class A-3 Notes") in the aggregate principal
amount of $65,160,000; (4) Class A-4 Asset
Backed Notes ("Class A-4 Notes") in the
aggregate principal amount of $49,750,000; (5)
Class A-5 Asset Backed Notes ("Class A-5
Notes") in the aggregate principal amount of
$49,170,000; (6) Class A-6 Asset Backed Notes
("Class A-6 Notes") in the aggregate principal
amount of $93,110,000; (7) Class A-7 Asset
Backed Notes ("Class A-7 Notes") in the
aggregate principal amount of $61,330,000; and
(8) Class A-8 Asset Backed Notes ("Class A-8
Notes") in the aggregate principal amount of
$37,570,000. The foregoing initial aggregate
principal balances of each of the respective
Classes of Notes being the "Original Class
Principal Balance" for each such Class. The
Notes will be secured by the assets of the
Trust pursuant to the Indenture. The Notes
will be senior in right of payment to the
Certificates and the Residual Interest.
Interest will accrue on each Class of Notes at
the respective rates set forth below (as to
each Class, a "Note Interest Rate").
Class A-1 Rate . . . . . . The "Class A-1 Rate" will be 6.05% per annum.
Class A-2 Rate . . . . . . The "Class A-2 Rate" will be 6.28% per annum.
Class A-3 Rate . . . . . . The "Class A-3 Rate" will be 6.45% per annum.
Class A-4 Rate . . . . . . The "Class A-4 Rate" will be 6.60% per annum.
Class A-5 Rate . . . . . . The "Class A-5 Rate" will be 6.70% per annum.
Class A-6 Rate . . . . . . The "Class A-6 Rate" will be 6.95% per annum.
Class A-7 Rate . . . . . . The "Class A-7 Rate" will be 7.16% per annum.
Class A-8 Rate . . . . . . The "Class A-8 Rate" will be 7.33% per annum.
Interest . . . . . . . . . The Noteholders' Monthly Interest Distributable
Amount for each Class of Notes on each
Distribution Date will be equal to thirty days'
accrued interest at the applicable Note
Interest Rate on the outstanding Class
Principal Balance of such Class of Notes
immediately preceding such Distribution Date.
Interest on the Notes will accrue on the basis
of a 360-day year consisting of twelve 30-day
months. See "Description of the Offered
Securities -- Distributions on the Notes"
herein.
Principal . . . . . . . . On each Distribution Date (except as described
herein), the Regular Principal Distribution
Amount for such Distribution Date will be
distributed to each Class of Notes in ascending
order of their numerical designations, such
that no amounts will be distributed to a Class
of Notes until the Class Principal Balance of
each Class having a lower numerical designation
has been reduced to zero. In addition, on any
Distribution Date if the related Due Period
ends before the Funding Period ends and
thereafter if the Overcollateralization Amount
is less than the Required Overcollateralization
Amount, the Notes will be entitled to receive
distributions of Excess Spread, in reduction of
their respective Class Principal Balances, in
the sequential order described above. On each
Distribution Date, "Excess Spread" will equal
the excess, if any, of the Available Collection
Amount over the sum of (a) the Servicing
Compensation, the Guaranty Insurance Premium,
the Indenture Trustee Fee and the Owner Trustee
Fee (collectively, the
S-2
<PAGE> 6
"Trust Fees and Expenses"), (b) the
Noteholders' Interest Distributable Amount, (c)
the Regular Principal Distribution Amount, (d)
the Certificateholders' Interest Distributable
Amount, (e) any Securities Insurer
Reimbursement Amount, and (f) the Servicing
Advance Reimbursement Amount. As described
herein, on certain Distribution Dates on which
the Overcollateralization Amount equals or
exceeds the Required Overcollateralization
Amount, Excess Spread will be distributed to
the holders of the Residual Interest. In
addition, if an Overcollateralization Stepdown
Date occurs and the Excess
Overcollateralization Amount is greater than
zero, amounts in respect of the Regular
Principal Distribution Amount otherwise
distributable on the Notes will instead be
distributable to the holders of the Residual
Interest. Except as otherwise described
herein, additional amounts from funds remaining
in the Pre-Funding Account upon termination of
the Funding Period may also be distributed to
reduce, on a pro rata basis, the outstanding
Class Principal Balances of each Class of Notes
and the outstanding Certificate Principal
Balance. See "Description of the Offered
Securities -- Distributions on the Notes"
herein.
Final Scheduled
Distribution Dates . . . The outstanding principal amount of each Class
of Notes, to the extent not previously paid,
will be payable in full on the Final Scheduled
Distribution Dates set forth below (as to each
Class of Notes, the "Final Scheduled
Distribution Date"), although it is anticipated
that the actual final Distribution Date for
each Class of Notes may occur significantly
earlier than the related Final Scheduled
Distribution Date.
<TABLE>
<CAPTION>
Final Scheduled
Distribution Date
-----------------
<S> <C>
Class A-1 Notes January 10, 2004
Class A-2 Notes September 10, 2006
Class A-3 Notes February 10, 2009
Class A-4 Notes July 10, 2010
Class A-5 Notes November 10, 2011
Class A-6 Notes December 10, 2015
Class A-7 Notes September 10, 2018
Class A-8 Notes August 10, 2020
</TABLE>
The Certificates . . . . . . The Trust will issue Asset Backed Certificates
(the "Certificates" and, together with the
Notes, the "Offered Securities") with an
aggregate initial certificate principal balance
(the "Original Certificate Principal Balance")
of $39,250,000. 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 Certificates will
represent undivided ownership interests in the
Trust and will be issued pursuant to the Trust
Agreement. The Certificates will be
subordinate in right of payment to the Notes to
the extent described herein but will be senior
in right of payment to the Residual Interest.
On the Closing Date, an affiliate of the Seller
(the "Affiliated Holder") will purchase
approximately 1% of the Original Certificate
Principal Balance of the Certificates.
Interest . . . . . . . . . The Certificateholders' Monthly Interest
Distributable Amount that the
Certificateholders will be entitled to receive
on each Distribution Date
S-3
<PAGE> 7
will be equal to thirty days' accrued interest
at the Pass Through Rate on the outstanding
Certificate Principal Balance immediately
preceding such Distribution Date. Interest in
respect of the Certificates will accrue on the
basis of a 360-day year consisting of twelve
30- day months. See "Description of the
Offered Securities -- Distributions on the
Certificates" herein.
Interest on the Certificates will accrue at a
rate equal to 7.64% per annum (the "Pass
Through Rate").
Principal . . . . . . . . On each Distribution Date after the Notes have
been paid in full (except as described herein),
the Regular Principal Distribution Amount for
such Distribution Date will be distributable to
the Certificateholders. In addition, on any
Distribution Date if the related Due Period
ends before the Funding Period ends and
thereafter if the Overcollateralization Amount
is less than the Required Overcollateralization
Amount, the Certificateholders will be entitled
to receive distributions of Excess Spread in
reduction of their Certificate Principal
Balance after the Notes have been paid in full.
As described herein, on certain Distribution
Dates on which the Overcollateralization Amount
equals or exceeds the Required
Overcollateralization Amount, Excess Spread
will be distributed to the holders of the
Residual Interest. In addition, if an
Overcollateralization Stepdown Date occurs and
the Excess Overcollateralization Amount is
greater than zero, amounts in respect of the
Regular Principal Distribution Amount otherwise
distributable on the Certificates will instead
be distributable to the holders of the Residual
Interest. Except as otherwise described
herein, additional amounts from funds remaining
in the Pre-Funding Account upon termination of
the Funding Period may also be distributed to
reduce, on a pro rata basis, the outstanding
Class Principal Balances of each Class of Notes
and the outstanding Certificate Principal
Balance. See "Description of the Offered
Securities -- Distributions on the
Certificates" herein.
Final Scheduled Distribution
Date . . . . . . . . . The final scheduled distribution in respect of
the Certificates has been calculated to occur
on July 10, 2022 (the "Certificate Final
Scheduled Distribution Date"), although it is
anticipated that the actual final Distribution
Date for the Certificates may occur
significantly earlier than the Certificate
Final Scheduled Distribution Date.
Form and Registration of the
Offered Securities . . . . The Offered Securities will initially be issued
only in book-entry form. Persons acquiring
beneficial ownership interests in the Offered
Securities ("Security Owners") will hold such
Offered Securities through the book-entry
facilities of The Depository Trust Company
("DTC"). Transfers within DTC will be in
accordance with the usual rules and operating
procedures of DTC. So long as each Class of
Offered Securities is in book-entry form, each
such Class of Offered Securities will be
evidenced by one or more certificates
registered in the name of the nominee of DTC.
The interests of such Security Owners will be
represented by book-entries on the records of
DTC and participating members thereof. No
Security Owner will be entitled to receive a
definitive certificate representing such
person's interest, except in the event that
Definitive Securities are issued under the
limited circumstances described herein. All
references in this Prospectus
S-4
<PAGE> 8
Supplement to any Class of Offered Securities
reflect the rights of the Security Owners of
such Class only as such rights may be exercised
through DTC and its participating members so
long as such Class of Offered Securities is
held by DTC. See "Certain Information
Regarding the Securities -- Book-Entry
Registration" in the Prospectus. The Security
Owners' interests in each Class of Offered
Securities will be held only in minimum
denominations of $100,000 and integral
multiples of $1,000 in excess thereof.
Assets of the Trust . . . . . On the Closing Date, the Trust will purchase
Home Loans (the "Initial Home Loans") having an
aggregate principal balance of approximately
$400,550,748 (the "Initial Pool Principal
Balance") as of the January 31, 1997 Cut-Off
Date from the Seller pursuant to a Sale and
Servicing Agreement to be dated as of February
1, 1997 (the "Sale and Servicing Agreement")
among the Trust, as Issuer, the Seller, as
Seller, FFI, as 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 $199,449,252 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
$600,000,000 (the "Assumed Pool Principal
Balance").
The assets of the Trust will primarily include
a pool of home loans (the "Home Loan Pool")
consisting of 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) assets
on deposit in the Reserve Account, (iv) amounts
on deposit in the Collection Account, Note
Distribution Account and Certificate
Distribution Account; and (v) certain other
ancillary or incidental funds, rights and
properties related to the foregoing. See
"Description of the Trust -- General" herein.
The Trust will include the unpaid principal
balance of each Home Loan as of the related
Cut-Off Date (the "Cut-Off Date Principal
Balance"). The "Principal Balance" of a Home
Loan on any day is equal to its related Cut-Off
Date Principal Balance, minus all principal
reductions credited against the Principal
Balance of such Home Loan since such Cut-Off
Date, including any Net Loan Losses recorded by
the Servicer. With respect to any date, the
"Pool Principal Balance" will be equal to the
aggregate Principal Balances of all Home Loans
as of such date.
The Trust will also issue instruments
evidencing the "residual interest" in the
assets of the Trust (the "Residual Interest"),
which are not being offered hereby. The
Residual Interest will be subordinate in right
of payment to the Notes and the Certificates,
and will not be guaranteed or insured by the
Guaranty Policy. In addition to the purchase
of 1% of the Original Certificate Principal
Balance of the Certificates, on the Closing
Date the Affiliated Holder will purchase
approximately 1% of the Residual Interest.
S-5
<PAGE> 9
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.
The Initial Home Loans included in the Home
Loan Pool will consist of approximately 13,030
loans, having an Initial Pool Principal Balance
of approximately $400,550,748. See "The Home
Loan Pool" herein. The statistical information
presented in this Prospectus Supplement
regarding the Home Loan Pool is based only on
the Initial Home Loans proposed to be included
in the Home Loan Pool as of the date of this
Prospectus Supplement, and does not take into
account any Subsequent Home Loans that may be
added to the Home Loan Pool during the Funding
Period through application of amounts in the
Pre-Funding Account. In addition, prior to the
Closing Date, the Transferor may remove any of
the Initial Home Loans in the Home Loan Pool,
substitute comparable loans therefor, or add
comparable loans thereto; however, the
aggregate principal balance of Initial Home
Loans so replaced, added or removed may not
exceed 5.0% of the Initial Pool Principal
Balance. If, prior to the Closing Date, loans
are removed from (or added to) the Home Loan
Pool as described herein, an amount equal to
the aggregate principal balances of such loans
will be added to (or deducted from) the
Pre-Funding Account Deposit on the Closing
Date. As a result of the foregoing, the
statistical information presented herein
regarding the Initial Home Loans proposed to be
included in the Home Loan Pool as of the date
of this Prospectus Supplement may vary in
certain respects from comparable information
based on the actual composition of the Home
Loan Pool at the Closing Date or any Subsequent
Transfer Date. See "Risk Factors -- Additional
Factors Affecting Delinquencies, Defaults and
Losses on Home Loans" and "The Home Loan Pool"
herein.
In addition to making additions and deletions
to the Home Loan Pool prior to the Closing Date
as described above, after the Closing Date (1)
the Seller and the Transferor each have the
option (a) during the first 90 days after the
Closing Date to remove any Home Loans and
substitute Qualified Substitute Home Loans up
to an aggregate amount of not more than 5%
without Securities Insurer approval, and 10%
with Securities Insurer approval, of the
aggregate Cut-Off Date Principal Balances of
the Home Loans and (b) thereafter to remove any
Home Loans and substitute Qualified Substitute
Home Loans up to an aggregate amount of not
more than 1% of the aggregate Cut-Off Date
Principal Balance of the Home Loans without
Securities Insurer approval and in excess of
such 1% with Securities Insurer approval; and
(2) the Transferor and the Servicer each have
the option either to repurchase any Home Loan
incident to foreclosure, default or imminent
default thereof (a "Defaulted Home Loan") or to
remove such Defaulted Home Loan and substitute
a Qualified
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Substitute Home Loan. The Transferor will be
obligated either to repurchase any Defective
Home Loan or to remove such Defective Home Loan
and substitute a Qualified Substitute Home
Loan. As used herein, a "Qualified 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. All such repurchases will result
in accelerated payments of principal
distributions on the Offered Securities. See
"The Transferor and Servicer -- Repurchase or
Substitution of Home Loans" herein.
The Pre-Funding Account . . . On the Closing Date, the Trust will direct that
a portion of the proceeds from the sale of the
Offered Securities in an amount equal to
approximately $199,449,252 (the "Pre-Funding
Account Deposit"), be deposited into the Pre-
Funding Account maintained by the Indenture
Trustee for the purpose of purchasing the
Subsequent Home Loans after the Closing Date.
The Pre-Funding Account Deposit will be
increased or decreased by an amount equal to
the aggregate of the principal balances of any
Home Loans removed from or added to,
respectively, the Home Loan Pool prior to the
Closing Date as described herein, provided that
any such increase or decrease will not exceed
5.0% of the Initial Pool Principal Balance.
See "The Home Loan Pool" herein. During the
period from the Closing Date until the earlier
of (i) the date on which the amount in the
Pre-Funding Account is reduced to $25,000 or
less and the Transferor directs that the
Funding Period end, and (ii) May 27, 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, without
deduction for any related Reserve Account
Subsequent Deposit. 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 and must be approved by the
Securities Insurer. See "The Home Loan Pool --
Conveyance of Subsequent Home Loans" herein.
Any date on which any such Subsequent Home
Loans will be conveyed by the Seller to the
Trust after the Closing Date is a "Subsequent
Transfer Date".
On the Distribution Date following the Due
Period in which such Funding Period ends, the
portion of the Pre-Funding Account Deposit that
is remaining will be applied to reduce, on a
pro rata basis, the outstanding principal
balances of each Class of Notes and the
Certificates; provided, however, that if such
remaining portion is less than or equal to
$50,000, such amount will be included in the
Noteholders' Distributable Amount and will be
distributed sequentially to each Class of Notes
in reduction of the respective Class Principal
Balances thereof; 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 (the
"Capitalized Interest Account Deposit"), as
approved by the Rating Agencies and the
Securities Insurer, to cover the projected
interest shortfall from amounts in the
Pre-Funding Account during the Funding Period,
will be deposited in an Eligible Account
maintained by and in the name of the Indenture
Trustee (the "Capitalized Interest Account")
from a portion of the
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proceeds from the sale of the Offered
Securities. Any amounts remaining in the
Capitalized Interest Account on any
Determination Date that are not required to
cover the interest shortfall for the related
Distribution Date and the anticipated interest
shortfall during the remainder of the Funding
Period as described herein will be distributed
to the holders of the Residual Interest,
including any net reinvestment income thereon
on the related Distribution Date. See
"Description of the Transfer and Servicing
Agreements -- Capitalized Interest Account"
herein.
Credit Enhancement . . . . . Credit enhancement with respect to the Notes
and the Certificates will be provided by the
Guaranty Policy. As further described herein,
credit enhancement with respect to the Notes
and the Certificates that will be utilized
prior to the Guaranty Policy will be provided
by (i) the subordination of the Certificates,
in the case of the Notes, and the Residual
Interest, in the case of the Notes and the
Certificates, (ii) the funds available in the
Reserve Account, if any, and (iii) the
overcollateralization feature described herein.
See "Risk Factors -- Additional Credit
Enhancement Limitations" herein.
The Guaranty Policy . . . The Seller will obtain a Financial Guaranty
Insurance Policy in the name of the Indenture
Trustee for the benefit of the holders of the
Offered Securities (the "Guaranty Policy") from
the Securities Insurer, the principal operating
subsidiary of MBIA, Inc., a New York Stock
Exchange-listed company. Pursuant to the
Guaranty Policy, the Securities Insurer will
irrevocably and unconditionally guaranty
payment on each Distribution Date to the
Indenture Trustee, for the benefit of the
holders of the Offered Securities, of the
related Interest Distribution Amount and the
related Regular Principal Distribution Amount
then payable on each Class of the Notes and the
Certificates. The Securities Insurer's
obligations under the Guaranty Policy will be
discharged to the extent Guaranteed Payments
are received by the Indenture Trustee, whether
or not such Guaranteed Payments are properly
applied by the Indenture Trustee. See
"Description of Credit Enhancement -- The
Guaranty Policy" herein. The Guaranty Policy
may not be cancelled for any reason. The
Guaranty Policy does not guarantee any
specified rate of prepayments, nor does the
Guaranty Policy provide funds to redeem any of
the Notes or the Certificates, as applicable.
For a description of the Securities Insurer,
See "Description of Credit Enhancement -- The
Securities Insurer" herein.
Subordination . . . . . . The rights of the holders of the Certificates
to receive distributions of interest and
principal from amounts available for
distribution on each Distribution Date will be
subordinated to such rights of the holders of
the Notes. The Original Certificate Principal
Balance will be equal to the excess of the
Assumed Pool Principal Balance over the sum of
the Original Class Principal Balances of all
Classes of the Notes. The rights of the
holders of the Residual Interest to receive any
distributions from amounts available for
distribution will be subordinated to such
rights of the holders of the Notes and the
Certificates. The subordination of the
Certificates and Residual Interest to the Notes
is intended to enhance the likelihood of
regular receipt by the holders of the Notes of
the full amount of interest and principal
distributions due to such holders and to afford
such holders protection against losses on the
Home Loans. The subordination of the Residual
Interest to the Certificates is intended to
enhance the likelihood of regular receipt by
the holders of the
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<PAGE> 12
Certificates of the full amount of interest and
principal distributions due to such holders and
to afford such holders protection against
losses on the Home Loans. See "Description of
Credit Enhancement -- Subordination and
Allocation of Losses" herein.
Reserve Account . . . . . The Offered Securities will have the benefit of
a Reserve Account that will be included as part
of the Trust and pledged to the Indenture
Trustee. On the Closing Date, the Indenture
Trustee will establish the Reserve Account and
will deposit into the Reserve Account an
aggregate amount of $14,019,276, or
approximately 3.5% of the Initial Pool
Principal Balance as of the Cut-Off Date (the
"Reserve Account Requirement"), which will
consist of cash proceeds from the sale of the
Offered Securities. On each Subsequent
Transfer Date an amount (the "Reserve Account
Subsequent Deposit") equal to 3.5% of the
aggregate of the principal balances of the
Subsequent Home Loans conveyed to the Trust on
such Subsequent Transfer Date will be deducted
from the purchase price proceeds for such
Subsequent Home Loans and will be deposited
into the Reserve Account. If all funds on
deposit in the Pre-Funding Account at the end
of the Funding Period have been used to
purchase Subsequent Home Loans, the Reserve
Account Requirement at such date will equal
approximately $21,000,000. On or after the
Closing Date, the Seller may substitute either
a limited guaranty or a letter of credit or a
combination of both for the release of an
equivalent amount of cash from the Reserve
Account to the Seller in an amount not to
exceed 50% of the Reserve Account Requirement
as of the date of such substitution; provided
that the Securities Insurer and Rating Agencies
have consented to such substitution. If on any
Distribution Date funds from the Reserve
Account are needed to make the required
distributions of principal and interest to the
Noteholders and Certificateholders, then the
balance of cash funds, if any, available in the
Reserve Account will be withdrawn prior to
drawing under any limited guaranty or letter of
credit.
As further described below, the Reserve Account
Requirement will be subject to reduction from
time to time in accordance with the provisions
of the Sale and Servicing Agreement. Any
amounts on deposit in the Reserve Account in
excess of the reduced Reserve Account
Requirement on a Distribution Date will first
cause a reduction in the amount, if any, of the
letter of credit or limited guaranty then on
deposit in the Reserve Account until such
amount is reduced to zero and, second, will
result in the release of any cash funds to the
holders of the Residual Interest until such
funds are reduced to zero.
Overcollateralization . . As of each Determination Date occurring after
termination of the Funding Period, the
"Overcollateralization Amount" will equal the
excess of the Pool Principal Balance over the
aggregate outstanding principal balances of the
Offered Securities. On the Closing Date, the
Overcollateralization Amount will be zero. As
a result of the application of Excess Spread in
reduction of the outstanding principal balances
of the Offered Securities, the
Overcollateralization Amount is expected to
increase over time until such amount is equal
to the Required Overcollateralization Amount.
In addition, assuming that sufficient amounts
of Excess Spread are distributed as an
additional reduction of the outstanding
principal balances of the Offered Securities,
the Overcollateralization Amount will
eventually replace the Reserve Account as
credit enhancement for the Notes and
Certificates.
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<PAGE> 13
This replacement of the Reserve Account will be
accomplished by an incremental reduction of the
Reserve Account Requirement for each increase
of the Overcollateralization Amount over a
certain interim level of required
overcollateralization determined by the
Securities Insurer and approved by each Rating
Agency, until the Overcollateralization Amount
is equal to the Required Overcollateralization
Amount and the Reserve Account Requirement is
reduced to zero.
The "Required Overcollateralization Amount"
will equal approximately 7.5% of the aggregate
Principal Balances of the Home Loans as of the
respective Cut-Off Dates, which would be
approximately $45,000,000 based on the Assumed
Pool Principal Balance as of the Closing Date,
and, subject to certain floors, caps and
triggers, the Required Overcollateralization
Amount may increase or decrease over time. An
increase in the Required Overcollateralization
Amount will result if the delinquency or
default experience on the Home Loans exceeds
certain levels set forth in the Sale and
Servicing Agreement. If such an increase
occurs, then to the extent that Excess Spread
is available, the principal amortization of the
Offered Securities would be accelerated by the
distribution of such Excess Spread to the
holders of the Offered Securities until the
Required Overcollateralization Amount is
achieved.
The Required Overcollateralization Amount may
also be decreased in certain circumstances,
resulting, most likely, in
overcollateralization at such time in excess of
such required amount. Excess
overcollateralization may also result from
distributions in reduction of the principal
balances of the Offered Securities. If on any
Distribution Date identified as an
"Overcollateralization Stepdown Date" the
Excess Overcollateralization Amount exceeds
zero, all or a portion of the principal (up to
the Overcollateralization Reduction Amount)
which would otherwise be distributed to the
holders of the Offered Securities will instead
be distributed to the holders of the Residual
Interest, until the Excess
Overcollateralization Amount is reduced to
zero. In such circumstances, the rate of
principal payments distributed to the holders
of the Offered Securities would be reduced
relative to the amortization of the Home Loans.
With respect to any Distribution Date, the
"Excess Overcollateralization Amount" is equal
to (but not less than zero) (x) the
Overcollateralization Amount on such
Distribution Date after taking into account all
distributions to be made on such Distribution
Date (except for any distributions of
Overcollateralization Reduction Amounts as
described herein) minus (y) the Required
Overcollateralization Amount. With respect to
any Distribution Date which is not an
Overcollateralization Stepdown Date, the
"Overcollateralization Reduction Amount" is
zero; and with respect to any Distribution Date
which is an Overcollateralization Stepdown
Date, the Overcollateralization Reduction
Amount is the lesser of (x) the Excess
Overcollateralization Amount on such
Distribution Date, and (y) the Regular
Principal Distribution Amount (as determined
without the deduction of the
Overcollateralization Reduction Amount
therefrom) on such Distribution Date. See
"Description of Credit Enhancement --
Overcollateralization" herein.
While the distribution of Excess Spread to
holders of the Offered Securities has been
designed to produce and maintain a given level
of
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<PAGE> 14
overcollateralization with respect to the
Offered Securities, there can be no assurance
that Excess Spread will be generated in
sufficient amounts to ensure that such
overcollateralization level will be achieved or
maintained at all times. After the Reserve
Account has been reduced to zero, Net Loan
Losses will be allocated to reduce the
Overcollateralization Amount. See "Description
of Credit Enhancement -- Subordination and
Allocation of Losses" and "Risk Factors --
Additional Credit Enhancement Limitations"
herein.
Servicing of the
Home Loans . . . . . . . . The Servicer will perform the loan servicing
functions with respect to the Home Loans
pursuant to the Sale and Servicing Agreement
and shall be entitled to receive a fee (the
"Servicing Fee") 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 . . . . . . . On each Distribution Date, prior to
distributions on the Offered Securities,
amounts from the Available Collection Amount
will be distributed to pay the following
periodic fees: (1) the Securities Insurer
premium payable under the Guaranty Policy (the
"Guaranty Insurance Premium"); (2) the fees of
the Indenture Trustee (the "Indenture Trustee
Fee"); and (3) 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
Distribution Date the payment of all such Trust
Fees and Expenses will be prorated for the
first Due Period from the Closing Date; and
provided, further, that on the Closing Date,
the Guaranty Insurance Premium will be prepaid
for no less than two months. See "Description
of the Transfer and Servicing Agreements --
Trust Fees and Expenses" and "Description of
the Offered Securities -- Distributions on the
Notes" herein.
Optional Termination . . . . The Affiliated Holder may, at its option,
effect an early redemption or termination of
the Offered Securities on or after any
Distribution Date on which the Pool Principal
Balance declines to 15% or less of the Pool
Principal Balance of the Initial Home Loans and
Subsequent Home Loans conveyed to the Trust as
of the respective Cut-Off Dates, in which case
the Indenture Trustee will be directed to sell
all of the Home Loans to a person that is not
affiliated with the Affiliated Holder, the
Seller or the Servicer at a price equal to or
greater than the Termination Price 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 or termination of the Offered
Securities on or after any Distribution Date on
which the Pool Principal Balance declines to
10% or less of the Pool Principal Balance of
the Initial Home Loans and Subsequent Home
Loans conveyed to the Trust as of the
respective Cut- Off Dates, by making the
payments as described herein. See "Description
of the Offered Securities -- Optional
Redemption of the Notes; Optional Prepayment of
the Certificates" herein.
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<PAGE> 15
Under certain circumstances as set forth in the
Transfer and Servicing Agreements (i.e., based
upon the default experience of the Home Loans),
the Securities Insurer may, at its option,
effect an early redemption or termination of
the Offered Securities.
Tax Status . . . . . . . . . In the opinion of Andrews & Kurth L.L.P. ("Tax
Counsel") for federal income tax purposes, the
Notes will be characterized as debt, and the
Trust will not be characterized as an
association (or a publicly traded partnership)
taxable as a corporation. Each Noteholder, by
the acceptance of a Note, will agree to treat
the Notes as indebtedness, and each
Certificateholder, by the acceptance of a
Certificate, will agree to treat the Trust as a
partnership in which the Certificateholders are
partners for federal income tax purposes.
Alternative characterizations of the Trust and
the Certificates are possible, but would not
result in materially adverse tax consequences
to Certificateholders. See "Certain Federal
Income Tax Consequences" herein and in the
Prospectus for additional information
concerning the application of federal income
tax laws to the Trust and the Offered
Securities.
Certificateholders, who are tax-exempt entities
or non-U.S. persons, will have tax consequences
that may be considered adverse by such holders.
See "Certain Federal Income Tax Consequences --
Trusts for which a Partnership Election is Made
-- Tax Consequences to Holders of the
Certificates -- Partnership Taxation" and "--
Tax Consequences to Foreign Certificateholders"
in the Prospectus.
ERISA Considerations . . . . Subject to the considerations discussed under
"ERISA Considerations" herein and in the
Prospectus, the Notes may be purchased by an
employee benefit plan or an individual
retirement account (a "Plan") subject to the
Employee Retirement Income Security Act of
1974, as amended ("ERISA") or Section 4975 of
the Internal Revenue Code of 1986, as amended
(the "Code"). A fiduciary of a Plan must
determine that the purchase of a Note is
consistent with its fiduciary duties under
ERISA and does not result in a nonexempt
prohibited transaction as defined in Section
406 of ERISA or Section 4975 of the Code.
The Certificates may not be acquired by (a) an
employee benefit plan subject to the provisions
of Title I of ERISA, (b) a Plan described in
Section 4975(e)(i) of the Code or (c) any
entity whose underlying assets include plan
assets by reason of a Plan's investment in the
entity or which uses plan assets to acquire
certificates. See "ERISA Considerations"
herein and in the Prospectus. Any benefit plan
fiduciary considering purchase of the
Certificates should, among other things,
consult with its counsel in determining whether
all required conditions have been satisfied.
Legal Investment
Considerations . . . . . . For a discussion of certain legal investment
considerations, see "Legal Investment Matters"
herein and in the Prospectus.
Ratings of the Offered
Securities . . . . . . . . It is a condition to the issuance of the Notes
that each of the Class A-1 Notes, Class A-2
Notes, Class A-3 Notes, Class A-4 Notes, Class
A-5 Notes, Class A-6 Notes, Class A-7 Notes and
Class A-8 Notes be rated "AAA" by Standard &
Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. ("Standard &
Poor's") and "Aaa" by
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<PAGE> 16
Moody's Investors Service ("Moody's" and,
together with Standard & Poor's, the "Rating
Agencies"). It is a condition to the issuance
of the Certificates that they be rated "AAA" by
Standard & Poor's and "Aaa" by Moody's. A
security rating does not address the frequency
of principal prepayments or the corresponding
effect on yield to holders of the Offered
Securities. None of the Seller, the
Transferor, the Servicer, the Indenture
Trustee, the Owner Trustee, the Securities
Insurer or any other person is obligated to
maintain the rating on any Class of Notes or
the Certificates.
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<PAGE> 17
RISK FACTORS
Prospective investors in the Offered Securities should consider the
following risk factors (as well as the factors set forth under "Risk Factors"
in the Prospectus) in connection with the purchase of Notes or Certificates.
These factors are intended to identify the significant sources of risk
affecting an investment in the Offered Securities. Unless the context
indicates otherwise, any numerical or statistical information presented is
based upon the characteristics of the Initial Home Loans proposed to be
included in the Home Loan Pool as of the date of this Prospectus Supplement.
ACQUISITION OF SUBSEQUENT HOME LOANS FROM PRE-FUNDING ACCOUNT
VARIATION IN CREDIT QUALITY AND CHARACTERISTICS OF SUBSEQUENT HOME
LOANS. Any conveyance of Subsequent Home Loans is subject to the conditions
set forth in the Sale and Servicing Agreement, which conditions include among
others: (i) each Subsequent Home Loan must satisfy the representations and
warranties specified in the Sale and Servicing Agreement; (ii) the Transferor
will not select Subsequent Home Loans in a manner that it believes is adverse
to the interests of the holders of the Offered Securities and the Securities
Insurer; and (iii) as of the related Cut-Off Date, all of the Home Loans,
including the Subsequent Home Loans to be conveyed to the Trust by the Seller
as of such Cut-Off Date, must satisfy certain aggregate statistical criteria
set forth in the Sale and Servicing Agreement. Although each Subsequent Home
Loan must satisfy the eligibility criteria referred to above at the time of its
transfer to the Trust, the Subsequent Home Loans may have been originated or
purchased by the Transferor using credit criteria different from those which
were applied to the Initial Home Loans and may be of a different credit quality
and have different loan characteristics from the Initial Home Loans. After the
transfer of the Subsequent Home Loans to the Trust, the aggregate statistical
characteristics of the Home Loan Pool may vary from those of the Initial Home
Loans as described herein. See "The Home Loan Pool -- Characteristics of
Initial Home Loans", and "-- Conveyance of Subsequent Home Loans" herein.
EFFECT OF PREPAYMENT FROM PRE-FUNDING ACCOUNT. If the Pre-Funding
Account Deposit has not been fully applied to purchase Subsequent Home Loans by
the end of the Funding Period, and the amount remaining in the Pre-Funding
Account (net of reinvestment income which will be transferred to the
Capitalized Interest Account) is in excess of $50,000, then such amount will be
applied to reduce, on a pro rata basis, the outstanding Class Principal Balance
of each Class of the Notes and (except if an event of default has occurred
under the Indenture) the outstanding Certificate Principal Balance. 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 distributed to the holders of
the Notes and the Certificates from the amount remaining in the Pre-Funding
Account at the termination of the Funding Period.
ADDITIONAL EFFECT OF PREPAYMENTS ON YIELD
The extent to which the yield to maturity of an Offered Security may
vary from the anticipated yield will depend upon the degree to which it is
purchased at a premium or discount, and the degree to which the timing of
distributions to holders thereof is sensitive to scheduled payments,
prepayments, liquidations, defaults, delinquencies, substitutions,
modifications and repurchases of Home Loans and to the distribution of Excess
Spread and amounts remaining in the Pre-Funding Account after the Funding
Period ends. In the case of any Offered Security purchased at a discount, an
investor should consider the risk that a slower than anticipated rate of
principal distributions to the holders of the Offered Securities (including,
without limitation, principal prepayments on the Home Loans) could result in an
actual yield to such investor that is lower than the anticipated yield and, in
the case of any Offered Security purchased at a premium, the risk that a faster
than anticipated rate of principal distributions to the holders of the Offered
Securities (including, without limitation, principal prepayments on the Home
Loans) could result in an actual yield to such investor that is lower than the
anticipated yield. On each Distribution Date, until the Excess
Overcollateralization Amount equals or exceeds zero, the allocation of the
Excess Spread for such Distribution Date as an additional distribution of
principal on the Offered Securities will accelerate the amortization of the
Offered Securities relative to the amortization of the Home Loans; however, on
any Overcollateralization Stepdown Date, the distribution of any
Overcollateralization Reduction Amount to the holders of the Residual Interest,
as described herein, can be expected to result in a slower amortization of the
Offered Securities and may delay principal distributions to the holders of the
Offered Securities on a Distribution Date. Further, in the event that
significant prepayments of principal distributions are made to holders of the
Offered Securities as a result of prepayments, liquidations, repurchases and
purchases of the Home Loans or distributions of Excess Spread and amounts
remaining in the Pre-Funding Account, there can be no assurance that holders of
the Offered
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<PAGE> 18
Securities will be able to reinvest such distributions in a comparable
alternative investment having a comparable yield. See "Prepayment and Yield
Considerations" herein.
ADDITIONAL CREDIT ENHANCEMENT LIMITATIONS
ADEQUACY OF CREDIT ENHANCEMENT. Credit enhancement with respect to the
Notes and the Certificates will be provided by the Guaranty Policy. Additional
credit enhancement with respect to the Notes and the Certificates that will be
utilized prior to the Guaranty Policy will be provided by (i) the subordination
of the Certificates, in the case of the Notes, and the subordination of the
Residual Interest in the case of the Notes and the Certificates, (ii) the funds
available in the Reserve Account, if any, and (iii) the overcollateralization
feature which results from the limited acceleration of the principal
amortization of the Offered Securities by the application of Excess Spread, as
described herein. If the Home Loans experience higher rates of delinquencies,
defaults and losses (see "-- Additional Factors Affecting Delinquencies,
Defaults and Losses on Home Loans" below) than initially anticipated in
connection with the rating of the Offered Securities, there can be no assurance
that the amounts available from the additional credit enhancement will be
adequate to cover the delays or shortfalls in distributions to the holders of
the Offered Securities that result from such higher delinquencies, defaults and
losses. If the amounts available from the additional credit enhancement are
inadequate, the holders of the Offered Securities will bear the risk of any
delays and losses resulting from the delinquencies, defaults and losses on the
Home Loans, unless such delays or losses with respect to the Offered Securities
are covered by the Guaranty Policy and paid by the Securities Insurer as
described herein.
While the distribution of Excess Spread to the holders of the Offered
Securities in the manner specified herein has been designed to produce and
maintain a given level of overcollateralization with respect to the Offered
Securities, there can be no assurance that Excess Spread will be generated in
sufficient amounts to ensure that such overcollateralization level will be
achieved or maintained at all times. While the funding and maintenance of the
Reserve Account is intended to enhance the likelihood of timely payment of
distributions to the holders of the Notes and the Certificates and to decrease
the likelihood that such holders of the Notes and the Certificates will
experience losses, under certain circumstances as described herein, the Reserve
Account could be depleted and shortfalls could result. The holders of the
Residual Interest will not be required to refund any amounts previously
distributed to such holders pursuant to the Transfer and Servicing Agreements,
including any distributions of Excess Spread and Excess Reserve Amount,
regardless of whether there are sufficient funds on a subsequent Distribution
Date to make a full distribution to holders of the Notes and the Certificates.
SUBORDINATION OF CERTIFICATES. Distributions of interest and principal
on the Certificates will be subordinated in priority of payment to interest and
principal due on the Notes. Consequently, the Certificateholders will not
receive any distributions on any Distribution Date unless the full amount of
interest and principal on the Notes has been distributed to the Noteholders on
such Distribution Date. In the event of any default by the Securities Insurer,
the Certificates will be more sensitive to delinquencies, defaults and losses
experienced on the Home Loans. See "Description of Credit Enhancement --
Subordination and Allocation of Losses" herein.
RATINGS OF SECURITIES INSURER. The respective ratings of each Class of
Notes and the Certificates depends primarily on an assessment by the Rating
Agencies of the claims-paying ability of the Securities Insurer. Any reduction
in a rating assigned to the claims-paying ability of the Securities Insurer
below the rating initially given to the Offered Securities may result in a
reduction in the rating of any Class of Notes or the Certificates. There can
be no assurance that future adverse economic events will not cause a reduction
in the rating of the Securities Insurer or otherwise impair the ability of the
Securities Insurer to make any Guaranteed Payments pursuant to the Guaranty
Policy to cover any shortfall in the amount of principal and interest
distributable to the holders of the Offered Securities. See "Description of
Credit Enhancement -- The Guaranty Policy" herein.
LIMITATIONS ON RIGHTS OF SECURITYHOLDERS
Prior to a Securities Insurer Default, the Securities Insurer will have
the right to exercise all rights, including voting rights, which the holders of
the Offered Securities are entitled to exercise under the Transfer and
Servicing Agreements (the "Offered Securityholder Rights"), without any consent
of such holders; provided, however, that without the consent of each holder of
an Offered Security affected thereby, the Securities Insurer shall not exercise
such Offered Securityholder Rights to amend the Transfer and Servicing
Agreements in any manner that would (i) reduce the amount of, or delay the
timing of, collections of payments on Home Loans or distributions which are
required to be made on any Offered Security, (ii) adversely affect in any
material respect the interests of the holders of any Class of Notes or the
Certificates, or (iii) alter the rights of any such Noteholder or
Certificateholder to consent to any such amendment. While
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the interests of the Securities Insurer will generally be aligned with the
holders of the Offered Securities, in certain instances the Securities Insurer
could exercise the Offered Securityholder Rights, or consent to the exercise of
certain Offered Securityholder Rights, in a manner that is adverse to the
interests of one or more Noteholders or Certificateholders. For example, under
certain circumstances the Securities Insurer could exercise certain Offered
Securityholder Rights, or refuse its consent to the exercise of certain Offered
Securityholder Rights, in a manner that results in an unanticipated prepayment
of principal to the Noteholders or the Certificateholders when the prevailing
market interest rates at which such principal can be reinvested have declined.
See "Prepayment and Yield Considerations" herein.
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 January 31, 1997,
however, approximately 23.50% of the Initial Pool Principal Balance consists of
Initial Home Loans that have a first scheduled monthly payment due date
occurring on or after January 31, 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 January 31, 1997. See "-- Additional Factors
Affecting Delinquencies, Defaults and Losses on Home Loans -- Limited
Historical Delinquency, Loss and Prepayment Information" below.
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. In general, the credit quality of the Home Loans is lower
than that of mortgage loans conforming to the FNMA or FHLMC underwriting
guidelines for first-lien, single family mortgage loans. Accordingly, the Home
Loans are likely to experience higher rates of delinquencies, defaults and
losses (which rates could be substantially higher) than those rates that would
be experienced by similar types of loans underwritten in conformity with the
FNMA or FHLMC underwriting guidelines for first-lien, single family mortgage
loans. In addition, the losses sustained from Defaulted Home Loans are likely
to be more severe (and could be total losses) in relation to the outstanding
principal balance of such Defaulted Home Loans, because the costs incurred in
the collection and liquidation of Defaulted Home Loans in relation to the
smaller principal balances thereof are proportionately higher than first-lien,
single family mortgage loans, and because substantially all of the Home Loans
are secured by junior liens on Mortgaged Properties in which the borrowers have
little or no equity therein 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 "-- Additional
Credit Enhancement Limitations -- Adequacy of Credit Enhancement" above.
Although the creditworthiness of the related borrower is the primary
consideration in the underwriting of the Home Loans, no assurance can be given
that such creditworthiness of the borrower will not deteriorate as a result of
future economic and social factors, which deterioration may result in a
delinquency or default by such borrower on the related Home Loan. Furthermore,
because the adequacy of the value of the related Mortgaged Property is given
less 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 related Mortgaged Property from 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
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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.
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 decide or are obliged to
relocate, these borrowers will be unable to discharge the Home Loans in full
from the sales 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 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 these borrowers to service their debts, which in
turn could result in higher rates of 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, including correspondent lenders having
delegated underwriting authority ("delegated underwriting correspondents").
See "The Home Loan Pool -- General" herein. All of the Home Loans that consist
of acquisitions from delegated underwriting correspondents will have been re-
underwritten and reviewed only on a limited sample basis for compliance with
the Transferor's underwriting guidelines. These Home Loans acquired by the
Transferor may have been originated by the originator thereof through the
application of the underwriting guidelines of the Transferor in a manner that
is different from the Transferor's application and such loans may be of a
lesser credit quality. In addition, the Transferor may have acquired certain
Home Loans which were originated by an originator that, at the time of
origination thereof, was not an approved FHA lender or an approved FNMA or
FHLMC seller/servicer, and therefore, did not have an internal quality control
program substantially similar to the FNMA or FHLMC required quality control
programs with respect to the underwriting and origination of such Home Loans.
With respect to those Home Loans acquired by the Transferor that have not been
re-underwritten or reviewed, the Transferor has primarily relied upon the
applicable representations and warranties made by the related seller or
originator in determining whether such Home Loans satisfy the representations
and warranties under the Sale and Servicing Agreement with respect thereto.
Accordingly, the Home Loans that were (i) acquired by the Transferor from
delegated underwriting correspondents or (ii) not subject to an internal
quality control program at the time of origination, may subsequently be
determined to be in breach of the applicable representations and warranties
under the Sale and Servicing Agreement, and if such breach materially and
adversely affects the interests of the holders of the Offered Securities or the
Securities Insurer and cannot be cured within the cure period, then such Home
Loans will be deemed to be "Defective Home Loans ," and, unless waived by the
Securities Insurer, the Transferor will be required to substitute or repurchase
such Defective Home Loans. Any such repurchase of a Home Loan will result in
an unanticipated prepayment of principal to the holders of the Offered
Securities. See "-- Limitations on Repurchase or Replacement of Defective Home
Loans by Transferor" below and "Prepayment and Yield Considerations" herein.
LIMITED HISTORICAL DELINQUENCY, LOSS AND PREPAYMENT INFORMATION. Since
January 1995, the Servicer has substantially increased the volume of
conventional home loans, including additional types of home loans (i.e., its
DebtBusterTM Loans and BusterPlusTM Loans) that it has originated, purchased,
sold and/or serviced, and thus, it has limited historical experience with
respect to the performance, including the delinquency and loss experience and
the rate of prepayments of these conventional home loans, with respect to its
entire portfolio of loans and in particular with respect to such increased
volume and additional types of loans. Accordingly, neither the delinquency
experience and loan loss and liquidation experience set forth under "The
Transferor and Servicer -- Servicing Experience" herein nor the prepayment
scenarios set forth under "Prepayment and Yield Considerations -- Weighted
Average Life of the Offered Securities" 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 49.28%, 6.58%, 4.46% and 4.42%
of the Initial Pool Principal Balance will consist of Home Loans that either
are secured by Mortgaged Properties located or have the related borrowers
residing in the States of California, Florida, Arizona and Colorado,
respectively. Because of the relative geographic concentration of the Home
Loans within these States, delinquencies and losses on the Home Loans may be
higher than would be the case if the Home Loans were more geographically
diversified. Adverse economic conditions, including a recession, in these
States or geographic regions (which may or may not affect real property values)
may affect the ability of the related borrowers to make timely payments of
their scheduled monthly payments of principal and interest and, accordingly,
the actual rates of delinquencies, defaults and losses on such Home Loans could
be higher than
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those currently experienced in the home lending and consumer finance industry
for similar types of loans. In addition, with respect to the Home Loans in
these States, certain of the Mortgaged Properties may be more susceptible to
certain types of special hazards that are not covered by any casualty
insurance, such as earthquakes, floods and other natural disasters and major
civil disturbances, than residential properties located in other parts of the
country. With respect to those Home Loans secured by Mortgaged Properties
located in the State of California, the California residential real estate
market has experienced a sustained decline over the last several years. In
general, declines in the California residential real estate market may
adversely affect the values of the Mortgaged Properties securing such Home
Loans such that the outstanding principal balances of such Home Loans, together
with the outstanding principal amount of any senior mortgage loans on such
Mortgaged Properties, will equal or exceed the value of such Mortgaged
Properties. Accordingly, the actual rates of defaults and losses on such Home
Loans secured by Mortgaged Properties in California could be higher than those
currently experienced in the home lending and consumer finance industry in
general.
NO SERVICING ADVANCES. In the event of a delinquency or a default with
respect to a Home Loan, neither the Servicer nor any Subservicer will have an
obligation to advance scheduled monthly payments of principal and interest with
respect to such Home Loan. 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.
DEPENDENCE ON SERVICER FOR SERVICING HOME LOANS. Pursuant to the Sale
and Servicing Agreement, the Servicer, or each Subservicer on behalf of the
Servicer, will perform the daily loan servicing functions for the Home Loans
that include, without limitation, the collection of payments from the Home
Loans, the remittance of funds from such collections for distribution to the
holders of the Offered Securities, the bookkeeping and accounting for such
collections and distributions, all other servicing activities relating to the
Home Loans, the preparation of the monthly servicing and remittance reports
pursuant to the Sale and Servicing Agreement and the maintenance of all records
and files pertaining to such servicing activities. Upon the Servicer's failure
to remedy an Event of Default under the Sale and Servicing Agreement, a
majority of the holders of the Offered Securities or the Indenture Trustee or
the Owner Trustee, with the consent of the Securities Insurer, or the
Securities Insurer may remove the Servicer and appoint a successor servicer
pursuant to the terms of the Sale and Servicing Agreement. Absent such a
replacement, the holders of the Offered Securities will be dependent upon the
Servicer to adequately and timely perform its servicing obligations and remit
to the Indenture Trustee the funds from the payments of principal and interest
received on the Home Loans, and with respect to Home Loans being serviced by a
Subservicer, the Servicer will be dependent upon such Subservicer to adequately
and timely perform its servicing obligations and remit to the Servicer the
funds from the payments of principal and interest received on such Home Loans.
The manner in which the Servicer, and each Subservicer, as applicable, performs
its servicing obligations will affect the amount and timing of the principal
and interest payments received on the Home Loans. The principal and interest
payments received on the Home Loans are the primary source of funds for the
distributions due to the holders of the Offered Securities under the Sale and
Servicing Agreement. Accordingly, the holders of the Offered Securities will
be dependent upon the Servicer, and each Subservicer, as applicable, to
adequately and timely perform its servicing obligations and such performance
will affect the amount and timing of distributions to the holders of the
Offered Securities. See "The Transferor and Servicer -- Servicing Experience"
herein.
REALIZATION UPON DEFAULTED 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 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,
holders of the Offered Securities should not expect that any senior mortgage(s)
will be kept current by the Trust for the purpose of protecting any junior lien
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 liquidating Defaulted
Home Loans to realize proceeds therefrom, including without limitation, the
whole loan sale of Defaulted Home Loans and the
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modification of Defaulted Home Loans, which, among other things, may include
the abatement of accrued interest or the reduction of a portion of the
outstanding Principal Balance of such Defaulted 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 could be total losses)
in relation to the outstanding principal balance of such Defaulted Home Loans.
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 title or fire and casualty insurance as a condition to
approving the Home Loan. Accordingly, if the related Mortgaged Property for a
Home Loan suffers any uninsured hazard or casualty losses, holders of any
Offered Securities 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 the Offered Securities, including the
Guaranty Policy.
NON-RECORDATION OF ASSIGNMENTS. Subject to confirmation by the Rating
Agencies and to the approval of the Securities Insurer, with respect to the
Home Loans from 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 Indenture Trustee and the holders of the Offered Securities. 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 holders of the Offered Securities 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 the Offered Securities, including the Guaranty Policy.
OTHER LEGAL CONSIDERATIONS. The underwriting, origination, servicing
and collection of the Home Loans are subject to a variety of state and federal
laws, public policies and principles of equity. See "Risk Factors -- Certain
Factors Affecting Delinquencies, Defaults and Losses on Loan Assets -- Certain
Legal Considerations of the Loan Assets" in the Prospectus. 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. See "-- Limitations on Repurchase or Replacement of
Defective Home Loans by Transferor" below. Depending on the provisions of
applicable law and the specific facts and circumstances involved, violations of
these laws, policies or principles may limit the ability of the Servicer or any
Subservicer to collect all or part of the principal or interest on the Home
Loans, may entitle the borrower to a refund of amounts previously paid, and, in
addition, could subject the Servicer or any Subservicer to damages and
administrative sanctions. If the Servicer or any Subservicer is unable to
collect all or part of the principal or interest on any Home Loans because of a
violation of the aforementioned laws, public policies or general principles of
equity, then the Trust may be delayed or unable to make all distributions owed
to the holders of the Offered Securities to the extent any related delays or
losses are not otherwise covered by amounts available from the credit
enhancement provided for the Offered Securities, including the Guaranty Policy.
Furthermore, depending upon whether damages and sanctions are assessed against
the Servicer, any Subservicer or the Transferor, such violations may materially
impact (i) the financial ability of the Servicer or Subservicer to continue to
act in such capacity or (ii) the ability of the Transferor to repurchase or
replace Defective Home Loans if such violation breaches a representation or
warranty contained in the Sale and Servicing Agreement.
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LIMITATIONS ON REPURCHASE OR REPLACEMENT OF DEFECTIVE HOME LOANS BY TRANSFEROR
Pursuant to the Sale and Servicing Agreement, the Transferor has agreed
to cure in all material respects any breach of the Transferor's representations
and warranties set forth in the Sale and Servicing Agreement with respect to
Defective Home Loans. If the Transferor cannot cure such breach within a
specified period of time, the Transferor is required to repurchase such
Defective Home Loans from the Trust or substitute other loans for such
Defective Home Loans and to indemnify the Trust and the Securities Insurer for
any losses incurred in excess of the proceeds received from the repurchase or
substitution of such Defective Home Loans. Although a significant portion of
the Home Loans will have been acquired from unaffiliated correspondent lenders,
the Transferor will make the representations and warranties for all such Home
Loans. To the extent that the Transferor has obtained any representations and
warranties from such unaffiliated correspondent lenders, the Transferor, and
the Trust, on behalf of the holders of the Offered Securities and the
Securities Insurer, as the successors to the Transferor's rights with respect
thereto, will have an additional party that is liable for the repurchase of any
Home Loan in breach of the applicable representations and warranties made by
such party. For a summary description of the Transferor's representations and
warranties, See "Description of the Transfer and Servicing Agreements -- Sale
and Assignment of Loan Assets" in the Prospectus.
No assurance can be given that, at any particular time, the Transferor
will be capable, financially or otherwise, of repurchasing or replacing
Defective Home Loans in the manner described above, or that, at any particular
time, any unaffiliated lender from whom the Transferor obtained the Defective
Home Loans will be capable, financially or otherwise, of repurchasing any
Defective Home Loans from the Transferor. If the Transferor repurchases, or is
obligated to repurchase, defective home loans from any other series of asset
backed securities, the financial ability of the Transferor to repurchase
Defective Home Loans from the Trust may be adversely affected. In addition,
other events relating to the Transferor and its home lending and consumer
finance operations can occur that would adversely affect the financial ability
of the Transferor to repurchase Defective Home Loans from the Trust, including
without limitation, the 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, such
unaffiliated lender is unable to repurchase or replace a Defective Home Loan it
sold to the Transferor, then the Servicer, on behalf of the Trust, will pursue
other customary and reasonable efforts, if any, to recover the maximum amount
possible with respect to such Defective Home Loan, and any resulting delay or
loss will be borne by the holders of the Offered Securities to the extent that
such delay or loss is not otherwise covered by amounts available from the
credit enhancement provided for the Offered Securities, including the Guaranty
Policy. See "-- Additional Credit Enhancement Limitations -- Adequacy of
Credit Enhancement" above and "The Transferor and Servicer" herein.
LIMITATIONS ON LIQUIDITY OF TRANSFEROR AND SERVICER
As a result of the Transferor's increasing volume of loan originations
and purchases, and its expanding securitization activities, the Transferor
requires substantial capital to fund its operations and has operated, and
expects to continue to operate, on a negative operating cash flow basis.
Currently, the Transferor funds substantially all of its operations, including
its loan originations and purchases, from the capital contributed by RAC, its
parent, and from borrowings under the Transferor's lending arrangements with
certain third parties, including warehouse and term credit facilities. See
"The Transferor and Servicer" herein. There can be no assurance that RAC will
be able to contribute additional capital or that, as the Transferor's existing
lending arrangements mature, the Transferor will have access to the financing
necessary for its operations or that such financing will be available to the
Transferor on favorable terms. To the extent that RAC and the Transferor are
unable to arrange new or alternative methods of financing on favorable terms,
the Transferor may have to curtail its loan origination and purchasing
activities, which could have a material adverse effect on the Transferor's
financial condition and, in turn, its ability to service the Home Loans and to
repurchase any Defective Home Loans.
DISSOLUTION OF TRUST FROM INSOLVENCY OF AFFILIATED HOLDER
On the Closing Date, the Affiliated Holder will be an affiliate of the
Seller and will purchase approximately 1% of the Original Certificate Principal
Balance and approximately 1% of the Residual Interest. The Trust Agreement
will provide that if an Insolvency Event with respect to the Affiliated Holder
occurs, subject to certain conditions, the Trust will dissolve. The Seller has
taken certain steps in structuring the transactions contemplated hereby that
are intended to help insure that an Insolvency Event with respect to the
Affiliated Holder will not occur. These steps include the formation of the
Affiliated Holder as a separate limited-purpose entity pursuant to formation
documents that contain certain limitations (including restrictions on the
nature of the Affiliated Holder's business and restriction on the Affiliated
Holder's ability to commence a voluntary case or proceeding under the United
States Bankruptcy Code or similar
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applicable state laws ("Insolvency Laws")). However, there can be no assurance
that the activities of the Affiliated Holder would not result in an Insolvency
Event. If an Insolvency Event with respect to the Affiliated Holder occurs,
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 distributed to the holders of the Offered Securities in accordance
with the terms and priority of payment described herein.
USE OF PROCEEDS
The proceeds from the sale of the Offered Securities, net of certain
expenses, will be used by the Trust as consideration for the purchase of the
Initial Home Loans from the Seller and to fund the Pre-Funding Account Deposit,
the Capitalized Interest Account Deposit and the Reserve 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 in the form of one or more warehouse financing arrangements, which
have been utilized to finance the acquisition of such Initial Home Loans and
are secured by such Initial Home Loans, and to replenish its working capital
funds that were previously used to originate, acquire or hold the Home Loans
not pledged under a warehouse financing arrangement. See "Underwriting"
herein.
DESCRIPTION OF THE TRUST
GENERAL
The Issuer, FIRSTPLUS Home Loan Owner Trust 1997-1, is a business trust
formed under the laws of the State of Delaware pursuant to the Trust Agreement
for the transactions described in this Prospectus Supplement. After its
formation, the Trust will not engage in any activity other than (i) acquiring,
holding and managing the Home Loans and the other assets of the Trust and
proceeds therefrom, (ii) issuing the Offered Securities, (iii) making payments
on the Offered Securities and (iv) engaging in other activities that are
necessary, suitable or convenient to accomplish the foregoing or are incidental
thereto or connected therewith.
The Certificates represent an undivided ownership interest in the Trust.
The Residual Interest will represent the residual interest in the assets of the
Trust. It is expected that the Certificates will be sold to third party
investors that are expected to be unaffiliated with the Seller and the
Transferor, the Servicer or the Trust, except that on the Closing Date
approximately 1% of the Original Certificate Principal Balance will be
purchased by the Affiliated Holder. In addition, on the Closing Date, such
Affiliated Holder will purchase approximately 1% of the Residual Interest. The
Trust will initially be capitalized with equity equal to the Certificate
Principal Balance of $39,250,000, excluding amounts deposited in the Reserve
Account. After the Closing Date, the Affiliated Holder may sell the
Certificates and Residual Interest acquired by it to another entity that
satisfies the special purpose entity requirements of the Rating Agencies, with
the prior written consent of the Securities Insurer, and certain other
requirements set forth in the Trust Agreement. The equity of the Trust,
together with the net proceeds from the sale of the Offered Securities, will be
used by the Trust to purchase the Initial Home Loans from the Seller pursuant
to the Sale and Servicing Agreement and to fund the Pre-Funding Account, the
Capitalized Interest Account and the Reserve Account.
On the Closing Date, the Trust will purchase Home Loans (the "Initial
Home Loans") having an aggregate principal balance of approximately
$400,550,748 (the "Initial Pool Principal Balance") as of the January 31, 1997
Cut-Off Date from the Seller pursuant to a Sale and Servicing Agreement to be
dated as of February 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 $199,449,252 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 $600,000,000 (the "Assumed Pool Principal Balance").
The assets of the Trust will primarily include the Home Loan Pool
consisting 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) assets
S-21
<PAGE> 25
on deposit in the Reserve Account, (iv) amounts on deposit in the Collection
Account, Note Distribution Account and Certificate Distribution Account; and
(v) certain other ancillary or incidental funds, rights and properties related
to the foregoing. The Trust will include the unpaid principal balance of each
Home Loan as of the related Cut-Off Date (the "Cut-Off Date Principal
Balance"). The "Principal Balance"of a Home Loan on any day is equal to its
related Cut-Off Date Principal Balance, minus all principal reductions credited
against the Principal Balance of such Home Loan since such Cut-Off Date,
including any Net Loan Losses recorded by the Servicer. With respect to any
date, the "Pool Principal Balance" will be equal to the aggregate Principal
Balances of all Home Loans as of such date.
The Servicer will service the Home Loans pursuant to the Sale and
Servicing Agreement (collectively, with the Indenture, the Administration
Agreement and the Trust Agreement, the "Transfer and Servicing 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".
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of
the Closing Date, as if the issuance and sale of the Offered Securities had
taken place on such date:
<TABLE>
<S> <C>
Class A-1 Notes . . . . . . . . . . . . . . . . . . . $139,980,000
Class A-2 Notes . . . . . . . . . . . . . . . . . . . $ 64,680,000
Class A-3 Notes . . . . . . . . . . . . . . . . . . . $ 65,160,000
Class A-4 Notes . . . . . . . . . . . . . . . . . . . $ 49,750,000
Class A-5 Notes . . . . . . . . . . . . . . . . . . . $ 49,170,000
Class A-6 Notes . . . . . . . . . . . . . . . . . . . $ 93,110,000
Class A-7 Notes . . . . . . . . . . . . . . . . . . . $ 61,330,000
Class A-8 Notes . . . . . . . . . . . . . . . . . . . $ 37,570,000
Certificates . . . . . . . . . . . . . . . . . . . . $ 39,250,000
Total . . . . . . . . . . . . . . . . . . . . . . . $600,000,000
============
</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. However, upon the
occurrence and continuation of a Securities Insurer Default, the Co-Owner
Trustee will resign and the Owner Trustee will assume the duties of the Co-
Owner Trustee under the Trust Agreement and the Sale and Servicing Agreement.
THE HOME LOAN POOL
GENERAL
The Home Loan Pool will consist of the collective pool of the Initial
Home Loans together with any Subsequent Home Loans conveyed to the Trust after
the Closing Date. All of the Home Loans will be Conventional Loans (i.e., not
insured or guaranteed by a governmental agency). The Home Loans will consist
of loans for which the related net proceeds were used to finance (i) property
improvements, (ii) debt consolidation, which the Transferor markets as
DebtBusterTM Loans, (iii) the purchase or refinancing of single family
residential property, or (iv) a combination of property improvements, debt
consolidation, cash-out refinancings and other consumer purposes, which the
Transferor markets as BusterPlusTM Loans. 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
S-22
<PAGE> 26
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 therein (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 contracts from a
network of independent contractors or dealers that professionally install the
related property improvements ("indirect originations"); or (iv) the purchase,
on a bulk basis, of loan portfolios originated by other unaffiliated lenders
("portfolio acquisitions"). Except with respect to the Home Loans acquired
from the delegated underwriting correspondents and through portfolio
acquisitions, a substantial percentage of the Home Loans will have been
underwritten or re-underwritten to determine whether such Home Loans comply
with the underwriting standards of the Transferor.
For a description of the underwriting criteria applicable to the Home
Loans see "The Transferor and Servicer -- Underwriting Criteria" herein. All
of the Home Loans will be acquired by the Transferor and sold by the Transferor
to the Seller and, pursuant to the Sale and Servicing Agreement, the Seller
will sell, convey, transfer and assign the Home Loans to the Trust. Pursuant
to the Indenture, the Trust will pledge and assign the Home Loans to the
Indenture Trustee for the benefit of the holders of the Offered Securities and
the Securities Insurer. The Trust will be entitled to all payments of interest
and principal and all proceeds received in respect of the Home Loans after (i)
the January 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" or "date of payment" method. No Home Loan provides for
deferred interest or negative amortization.
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day of each month which is fixed at the time
of origination, and payments received after a grace period following such
scheduled day are subject to late charges. For example, a Scheduled Payment on
a Home Loan received either earlier or later (other than delinquent) than the
scheduled due date thereof will not affect the amortization schedule or the
relative application of such payment to principal and interest in respect of
such Home Loan.
The simple interest method provides for the amortization of the amount
of a Home Loan over a series of equal Scheduled Payments. However, unlike the
monthly actuarial interest method, each Scheduled Payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of the related Home Loan at the stated Home Loan Rate and
based upon the period elapsed since the preceding payment of principal was
made, using the method permitted by applicable law. As payments are received
under the Home Loan, the amount received is applied first to interest accrued
to the date of payment and the balance, if any, is applied to reduce the unpaid
principal balance. Accordingly, if a borrower pays a fixed monthly installment
on such a Home Loan before its scheduled monthly due date, the portion of the
payment allocable to interest for the period since the preceding payment was
made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly greater. Conversely, if a borrower
pays a fixed monthly installment on such a Home Loan after its scheduled
monthly due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would be
had the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly lowered. In
addition, in certain states a late charge may be imposed with respect to the
past due amount.
With respect to a Home Loan for which interest accrues pursuant to the
simple interest method, if a payment is received on such Home Loan before its
scheduled monthly due date, more of such payment will be used on the related
Distribution Date to pay principal on the Offered Securities than if such
payment was received on such scheduled monthly due date. Conversely, if a
payment is received on such Home Loan after its scheduled monthly due date,
less of such payment will be used on the related Distribution Date to pay
principal on the Offered Securities than if such
S-23
<PAGE> 27
payment was received on its scheduled due date. This will not affect the total
amount of principal to be received by the Offered Securities over the life of
the transaction, but it may affect the weighted average lives of the Offered
Securities. See "Prepayment and Yield Considerations" herein.
CHARACTERISTICS OF INITIAL HOME LOANS
The following is a brief description of certain terms of the Initial
Home Loans proposed to be included in the Home Loan Pool as of the date of this
Prospectus Supplement. Unless otherwise indicated, this description does not
take into account any Subsequent Home Loans that may be added to the Home Loan
Pool during the Funding Period through the application of amounts on deposit in
the Pre-Funding Account. Prior to the Closing Date, the Transferor may remove
any of the Initial Home Loans intended for inclusion in the Home Loan Pool,
substitute comparable loans therefor, or add comparable loans thereto; however,
the aggregate principal balance of Initial Home Loans so replaced, added or
removed cannot exceed 5.0% of the Initial Pool Principal Balance and any such
Initial Home Loans so added must be approved by the Securities Insurer. To the
extent that, prior to the Closing Date, home loans are removed from or added to
the Home Loan Pool, an amount equal to the aggregate principal balances of such
home loans will be added to or deducted from, respectively, the Pre-Funding
Account Deposit on the Closing Date. As a result, the statistical information
presented below regarding the Initial Home Loans proposed to be included in the
Home Loan Pool as of the date of this Prospectus Supplement may vary in certain
respects from comparable information based on the actual composition of the
Home Loan Pool at the Closing Date. In addition, after the January 31, 1997
Cut-Off Date, the actual Home Loan Pool may vary from the description below due
to a number of factors, including prepayments after the January 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 delivered to the Indenture Trustee
upon delivery of the Offered Securities. A current report on Form 8-K
containing a description of the Home Loans included in the final Home Loan Pool
as of the end of the Funding Period will be filed with the Commission.
The Initial Home Loans included in the initial Home Loan Pool will
consist of approximately 13,030 loans having an Initial Pool Principal Balance
of approximately $400,550,747.62. Subject 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.
HOME LOAN RATE
<TABLE>
<CAPTION>
RANGE OF NUMBER PERCENT OF TOTAL
HOME LOAN OF INITIAL AGGREGATE BY AGGREGATE
RATES (%) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------- ----------- ----------------- -----------------
<S> <C> <C> <C>
10.5000 - 10.9999 . . . . . . . . . . . . . . . 13 $ 439,856.12 0.11%
11.0000 - 11.9999 . . . . . . . . . . . . . . . 657 23,455,319.58 5.85%
12.0000 - 12.9999 . . . . . . . . . . . . . . 2,714 91,778,237.67 22.91%
13.0000 - 13.9999 . . . . . . . . . . . . . . . 3,433 109,416,929.52 27.32%
14.0000 - 14.9999 . . . . . . . . . . . . . . . 3,279 96,528,573.40 24.10%
15.0000 - 15.9999 . . . . . . . . . . . . . . . 1,813 50,043,067.80 12.49%
16.0000 - 16.9999 . . . . . . . . . . . . . . . 818 21,644,699.60 5.40%
17.0000 - 17.9999 . . . . . . . . . . . . . . . 255 6,217,351.68 1.55%
18.0000 - 18.9999 . . . . . . . . . . . . . . . 44 959,763.05 0.24%
19.0000 + . . . . . . . . . . . . . . . . . . . 4 76,949.20 0.02%
---------- ----------------- --------
Total . . . . . . . . . . . . . 13,030 $ 400,550,747.62 100.00%
========== ================= =======
</TABLE>
The weighted average Home Loan Rate of the Initial Home Loans as of the January
31, 1997 Cut-Off Date was approximately 14.10% per annum.
S-24
<PAGE> 28
CURRENT PRINCIPAL BALANCE DISTRIBUTION
<TABLE>
<CAPTION>
RANGE OF NUMBER OF PERCENT OF TOTAL
CUT-OFF DATE INITIAL AGGREGATE BY AGGREGATE
PRINCIPAL BALANCE ($) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
Up to 10,000,00 . . . . . . . . . . . . 66 $ 641,275.77 0.16%
10,000.01 to 20,000.00 . . . . . . . . . . . . 1,838 30,989,937.34 7.74%
20,000.01 to 30,000.00 . . . . . . . . . . . . 5,705 145,351,292.12 36.29%
30,000.01 to 40,000.00 . . . . . . . . . . . . 3,260 116,220,842.12 29.02%
40,000.01 to 50,000.00 . . . . . . . . . . . . 1,677 78,281,387.16 19.54%
50,000.01 to 60,000.00 . . . . . . . . . . . . 343 19,349,437.35 4.83%
60,000.01 to 70,000.00 . . . . . . . . . . . . 108 7,158,894.26 1.79%
70,000.01 to 80,000.00 . . . . . . . . . . . . 33 2,557,681.50 0.64%
--------- ------------------ --------
Total . . . . . . . . . . . . . . . . 13,030 $ 400,550,747.62 100.00%
========= ================== ========
</TABLE>
The average principal balance of the Initial Home Loans as of the January 31,
1997 Cut-Off Date was approximately $30,741.
ORIGINAL LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
RANGE OF NUMBER OF PERCENT OF TOTAL
PRINCIPAL BALANCE INITIAL AGGREGATE BY AGGREGATE
AT ORIGINATION ($) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ ---------- ----------------- -----------------
<S> <C> <C> <C>
Up to 10,000.00 . . . . . . . . . . 65 $ 631,292.71 0.16%
10,000.01 to 20,000.00 . . . . . . . . . . 1,832 30,861,922.93 7.70%
20,000.01 to 30,000.00 . . . . . . . . . . 5,707 145,339,882.03 36.29%
30,000.01 to 40,000.00 . . . . . . . . . . 3,262 116,254,727.99 29.02%
40,000.01 to 50,000.00 . . . . . . . . . . 1,680 78,396,908.85 19.57%
50,000.01 to 60,000.00 . . . . . . . . . . 343 19,349,437.35 4.83%
60,000.01 to 70,000.00 . . . . . . . . . . 107 7,088,903.25 1.77%
70,000.01 to 80,000.00 . . . . . . . . . . 34 2,627,672.51 0.66%
-------- ----------------- --------
Total . . . . . . . . . . . . . . 13,030 $ 400,550,747.62 100.00%
======== ================= ========
</TABLE>
The average principal balance of the Initial Home Loans at origination was
approximately $30,819.
REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
RANGE OF NUMBER OF PERCENT OF TOTAL
REMAINING TERM INITIAL AGGREGATE BY AGGREGATE
TO MATURITY (MONTHS) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Up to 60 . . . . . . . . . . . . . . . . . 133 $ 2,800,730.91 0.70%
61 to 90 . . . . . . . . . . . . . . . . . 75 1,749,622.94 0.44%
91 to 120 . . . . . . . . . . . . . . . . 1,081 26,466,160.62 6.61%
121 to 150 . . . . . . . . . . . . . . . . 38 949,365.84 0.24%
151 to 180 . . . . . . . . . . . . . . . . 3,798 111,982,480.76 27.96%
181 to 210 . . . . . . . . . . . . . . . . 5 86,898.99 0.02%
211 to 240 . . . . . . . . . . . . . . . . 3,289 100,375,867.83 25.06%
241 to 270 . . . . . . . . . . . . . . . . 5 131,401.32 0.03%
271 to 300 . . . . . . . . . . . . . . . . 4,606 156,008,218.41 38.95%
------- ---------------- -------
13,030 $ 400,550,747.62 100.00%
======== ================ =======
</TABLE>
The weighted average remaining term to maturity of the Initial Home
Loans as of the January 31, 1997 Cut-Off Date was approximately 235 months.
S-25
<PAGE> 29
MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
AGE INITIAL AGGREGATE BY AGGREGATE
(IN MONTHS) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C>
Up to 12 . . . . . . . . . . . . . . . . . 13,029 $ 400,525,962.61 99.99%
13 to 24 . . . . . . . . . . . . . . . . . 1 24,785.01 0.01%
---------- -------------------- --------
Total . . . . . . . . . . . . . . 13,030 $ 400,550,747.62 100.00%
========== ==================== ========
</TABLE>
The weighted average age of the Initial Home Loans as of the January 31, 1997
Cut-Off Date was approximately two months.
S-26
<PAGE> 30
GEOGRAPHIC CONCENTRATION
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
INITIAL AGGREGATE BY AGGREGATE
STATE HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- ---------- ----------------- -----------------
<S> <C> <C> <C>
Alabama . . . . . . . . . . . . . . . . . . . 19 $ 583,243.59 0.15%
Arkansas . . . . . . . . . . . . . . . . . . 8 212,247.56 0.05%
Arizona . . . . . . . . . . . . . . . . . . . 628 17,857,651.23 4.46%
California . . . . . . . . . . . . . . . . . 6,008 197,391,173.14 49.28%
Colorado . . . . . . . . . . . . . . . . . . 600 17,715,616.90 4.42%
Connecticut . . . . . . . . . . . . . . . . . 29 769,477.72 0.19%
District of Columbia . . . . . . . . . . . . 4 153,635.96 0.04%
Delaware . . . . . . . . . . . . . . . . . . 2 62,684.36 0.02%
Florida . . . . . . . . . . . . . . . . . . . 950 26,354,235.10 6.58%
Georgia . . . . . . . . . . . . . . . . . . . 532 15,313,907.60 3.82%
Hawaii . . . . . . . . . . . . . . . . . . . 2 67,183.24 0.02%
Iowa . . . . . . . . . . . . . . . . . . . . 6 188,647.33 0.05%
Idaho . . . . . . . . . . . . . . . . . . . . 118 3,297,325.94 0.82%
Illinois . . . . . . . . . . . . . . . . . . 177 4,983,510.99 1.24%
Indiana . . . . . . . . . . . . . . . . . . . 99 2,752,051.63 0.69%
Kansas . . . . . . . . . . . . . . . . . . . 21 544,755.88 0.14%
Kentucky . . . . . . . . . . . . . . . . . . 42 1,115,667.52 0.28%
Louisiana . . . . . . . . . . . . . . . . . . 32 846,185.38 0.21%
Massachusettes . . . . . . . . . . . . . . . 57 1,953,220.95 0.49%
Maryland . . . . . . . . . . . . . . . . . . 315 9,421,716.55 2.35%
Michigan . . . . . . . . . . . . . . . . . . 104 2,769,656.19 0.69%
Minnesota . . . . . . . . . . . . . . . . . . 213 6,077,034.61 1.52%
Missouri . . . . . . . . . . . . . . . . . . 75 2,098,715.77 0.52%
Mississippi . . . . . . . . . . . . . . . . . 39 1,120,239.79 0.28%
Montana . . . . . . . . . . . . . . . . . . . 8 170,324.11 0.04%
North Carolina . . . . . . . . . . . . . . . 245 7,166,030.85 1.79%
North Dakota . . . . . . . . . . . . . . . . 1 33,072.15 0.01%
Nebraska . . . . . . . . . . . . . . . . . . 9 231,951.64 0.06%
New Hampshire . . . . . . . . . . . . . . . . 7 202,885.76 0.05%
New Jersey . . . . . . . . . . . . . . . . . 64 1,965,300.31 0.49%
New Mexico . . . . . . . . . . . . . . . . . 86 2,742,839.61 0.68%
Nevada . . . . . . . . . . . . . . . . . . . 473 14,850,043.55 3.71%
New York . . . . . . . . . . . . . . . . . . 40 1,206,604.21 0.30%
Ohio . . . . . . . . . . . . . . . . . . . . 236 6,356,946.54 1.59%
Oklahoma . . . . . . . . . . . . . . . . . . 93 2,498,326.11 0.62%
Oregon . . . . . . . . . . . . . . . . . . . 160 5,091,467.03 1.27%
Pennsylvania . . . . . . . . . . . . . . . . 19 518,569.49 0.13%
Rhode Island . . . . . . . . . . . . . . . . 11 344,530.16 0.09%
South Carolina . . . . . . . . . . . . . . . 182 4,673,460.85 1.17%
South Dakota . . . . . . . . . . . . . . . . 1 35,000.00 0.01%
Tennessee 165 4,389,310.52 1.10%
Texas . . . . . . . . . . . . . . . . . . . . 2 38,117.68 0.01%
Utah . . . . . . . . . . . . . . . . . . . . 230 6,650,419.97 1.66%
Virginia . . . . . . . . . . . . . . . . . . 374 11,011,749.74 2.75%
Vermont . . . . . . . . . . . . . . . . . . . 2 66,532.39 0.02%
Washington . . . . . . . . . . . . . . . . . 489 15,260,634.17 3.81%
Wisconsin . . . . . . . . . . . . . . . . . . 42 1,067,688.74 0.27%
West Virginia . . . . . . . . . . . . . . . . 1 24,878.20 0.01%
Wyoming . . . . . . . . . . . . . . . . . . . 10 304,278.91 0.08%
-------- ------------------- --------
13,030 $ 400,550,747.62 100.00%
======== =================== ========
</TABLE>
S-27
<PAGE> 31
CONVEYANCE OF SUBSEQUENT HOME LOANS
Under the Sale and Servicing Agreement the obligation of the Trust to
purchase Subsequent Home Loans on a Subsequent Transfer Date for assignment to
the Home Loan Pool is subject to the requirements described under "Description
of the Transfer and Servicing Agreements -- Conveyance of Subsequent Loan
Assets" in the Prospectus, as well as the following additional requirements:
(i) generally, such Subsequent Home Loans may not be 30 or more days
contractually delinquent as of the related Cut-Off Date, (ii) the original term
to stated maturity of such Subsequent Home Loans may not exceed 25 years, and a
scheduled maturity no later than June 30, 2022; (iii) generally, each such
Subsequent Home Loan will have an interest rate of not less than 8.99%; (iv)
such Subsequent Home Loans will be underwritten, re-underwritten or reviewed,
as applicable, in accordance with the underwriting guidelines of the Transferor
(see "The Transferor and Servicer -- Underwriting Criteria") or originated in a
manner similar to the Initial Home Loans; and (v) following the purchase of
such Subsequent Home Loans by the Trust, the Home Loans included in the Home
Loan Pool (including the Subsequent Home Loans purchased by the Trust after the
Closing Date) will have a weighted average interest rate and a weighted average
remaining term to maturity as of each respective Cut-Off Date comparable to the
Initial Home Loans included in the Initial Home Loan Pool. Following the
transfer of such Subsequent Home Loans to the Home Loan Pool, the aggregate
statistical characteristics of the Home Loans then held in the Home Loan Pool
may, and likely will, vary from those of the Initial Home Loans included in the
Initial Home Loan Pool. See "Risk Factors -- Acquisition of Subsequent Home
Loans from Pre-Funding Account" herein.
THE SELLER
FIRSTPLUS INVESTMENT CORPORATION (the "Seller") is a Nevada corporation,
formerly known as Remodelers Investment Corporation, organized in 1995 and is a
wholly owned subsidiary of RAC. The Seller was formed as a limited purpose
finance company to effect the securitization of conventional property
improvement, debt consolidation combination and other consumer loans, property
improvement and manufactured housing loans partially insured by the FHA under
the Title I Program, and other types of assets.
The Seller will acquire from the Transferor all of its right, title and
interest in and to the Home Loans. In turn, the Seller will sell, convey,
transfer and assign the Home Loans to the Trust pursuant to the Sale and
Servicing Agreement for the benefit of the Offered Securities and the
Securities Insurer.
THE TRANSFEROR AND SERVICER
GENERAL
FIRSTPLUS FINANCIAL, INC., formerly known as Remodelers National Funding
Corp., a Texas corporation, was organized in 1986 and received its Title I
contract of insurance in October of 1986. FFI, 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 RAC and is primarily engaged in the business of
originating, purchasing, underwriting, selling and/or servicing loans including
property improvement, debt consolidation loans and other consumer loans. As of
December 31, 1996, the Transferor employed 1,178 persons, including 133 persons
who work in loan servicing. As of December 31, 1996, FFI administered and
serviced approximately $1,882.2 million in principal balance of property
improvement, debt consolidation and other consumer loans (including loans
subserviced by others).
RAC is a publicly held, NASDAQ listed company that completed an initial
public offering of its common stock in February 1996 and an additional public
offering of its common stock in January 1997. As of December 31, 1996, the RAC
Consolidated Financial Statements, as unaudited, which included RAC and its
principal subsidiary, FFI, set forth total assets of $1,083,141,000, total
liabilities of $936,235,000 and total stockholders' equity of $146,906,000, and
for the three months ended December 31, 1996 set forth net income of
$18,713,000. Additionally, as of September 30, 1996, the RAC Consolidated
Financial Statements, as audited, which included RAC 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. Additionally, 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 RAC
and its affiliates may be of limited relevance to an investor seeking to
predict the future financial condition of RAC and its affiliates. See "Risk
Factors -- Limitations on Liquidity of Transferor and Servicer" herein.
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<PAGE> 32
FFI, as the Servicer, will service the Home Loans pursuant to the Sale
and Servicing Agreement and be entitled to the Servicing Fee and additional
servicing compensation for serving as the Servicer. See "-- Servicing
Experience" below and "Description of the Transfer and Servicing Agreements --
Servicing" herein.
UNDERWRITING CRITERIA
The Transferor believes that all 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.
Generally, the Home Loans originated or purchased by the Transferor will
have been made to borrowers that typically have limited access to consumer
financing for a variety of reasons, such as high levels of debt service-to-
income, unfavorable past credit experience, insufficient home equity value,
lower income or a limited credit history. With respect to the loans originated
or purchased by the Transferor, the collection of loan payments from the
related borrowers is subject to various risks from these borrowers, including,
without limitation, the risk that a borrower will not satisfy its debt service
payments, including payments of interest and principal on the loan and that, in
the case of a secured loan the realizable value of the related mortgaged
property will not be sufficient to repay the outstanding interest and principal
owed on the loan. The Transferor uses its own credit evaluation criteria to
classify the borrowers of loans by risk class. Loans are classified by the
Transferor into seven graduations of quality from "A+" through "D" credits.
These criteria include, as a significant component, the credit evaluation score
methodology (the "FICO Score") developed by Fair, Issac and Company, a
consulting firm specializing in creating default predictive models through
scoring mechanisms. Additional criteria includes the borrower's debt-to-income
ratio, mortgage credit history, consumer credit history, bankruptcies,
foreclosures, notice of defaults, deeds in lieu and repossessions. The
Transferor believes that the most important credit characteristics are the
borrower's FICO Score and debt-to-income ratio, the latter of which, generally
may not exceed 50% of the borrower's gross income and may not exceed 45% of the
applicant's income for B or lower credits.
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 service-to-income ratio of the applicant.
Income is verified through various means, including without limitation
applicant interviews, written verifications with employers, review of pay stubs
or tax returns. The borrower must demonstrate sufficient levels of disposable
income to satisfy debt repayment requirements.
In response to changes and developments in the consumer finance area as
well as the refinement of the 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.
The following table summarizes the underlying borrower characteristics
for each classification used by the Transferor.
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<PAGE> 33
<TABLE>
<CAPTION>
Debt Service-to
Classification(1) Existing Mortgage FICO Score Bankruptcy Filings Income Ratio (2)
----------------- ----------------- ---------- ------------------ ----------------
<S> <C> <C> <C> <C>
"A+" Credit No 30-day late payments in 700+ Discharged for at least Generally 50% or
last 12 months and no 60- 3 years with less
day late payments reestablished credit
prior to closing
"A" Credit Max of one 30-day late 680-699 Discharged for at least Generally 50% or
payment in last 12 months 3 years with less
and no 60-day late reestablished credit
payments prior to closing
"B+" Credit Max of two 30-day late 660-679 Discharged for at least Generally 50% or
payments in last 12 months 3 years with less
and no 60-day late reestablished credit
payments prior to closing
"B" Credit Max of two 30-day late 640-659 Discharged for at least Generally 45% or
payments in last 12 months 3 years with less
and no 60-day late reestablished credit
payments prior to closing
"C+" Credit Max of three 30-day late 620-639 Discharged for at least Generally 45% or
payments in last 12 months 3 years with less
and no 60-day late reestablished credit
payments prior to closing
</TABLE>
- ---------------------
(1) The Transferor does not currently originate Conventional Loans to
borrowers it classifies as "D" credits.
(2) Calculated by dividing the borrower's debt obligations (after any debt
consolidation) by their monthly gross earnings.
REPURCHASE OR SUBSTITUTION OF HOME LOANS
After the Closing Date, (1) the Seller and the Transferor each have the
option (a) during the first 90 days after the Closing Date to remove any Home
Loans and substitute Qualified Substitute Home Loans up to an aggregate amount
of not more than 5% without Securities Insurer approval, and 10% with
Securities Insurer approval, of the aggregate Cut-Off Date Principal Balances
of the Home Loans and (b) thereafter to remove any Home Loans and substitute
Qualified Substitute Home Loans up to an aggregate amount of not more than 1%
(by principal balance as of the Cut-Off Date) without Securities Insurer
approval and in excess of such 1% with Securities Insurer Approval; and (2) the
Transferor and the Servicer each have the option either to repurchase any Home
Loan incident to foreclosure, default or imminent default thereof (a "Defaulted
Home Loan") or to remove such Defaulted Home Loan and substitute a Qualified
Substitute Home Loan. The Transferor will be obligated either to repurchase
any Defective Home Loan or to remove such Defective Home Loan and substitute a
Qualified Substitute Home Loan. See "Description of the Trust Property --
Additions, Substitution and Withdrawal of Assets" in the Prospectus.
Unless waived by the Securities Insurer, the Transferor is required (i)
within 60 days after discovery or notice thereof to cure in all material
respects any breach of the representations or warranties made with respect to a
Defective Home Loan, or (ii) on or before the Determination Date next
succeeding the end of such 60 day period, to repurchase such Defective Home
Loan at a price (the "Purchase Price") equal to the Principal Balance of such
Defective Home Loan as of the date of repurchase, plus all accrued and unpaid
interest on such Defective Home Loan to and including the date of repurchase
computed at the Home Loan Rate. In lieu of repurchasing a Defective Home Loan,
the Transferor may replace such Defective Home Loan with one or more Qualified
Substitute Home Loans. If the aggregate outstanding principal balance of the
Qualified Substitute Home Loan(s) plus accrued interest is less than the
outstanding principal balance of the Defective Home Loan(s) plus accrued
interest thereon, the Transferor will also remit for distribution to the
holders of the Offered Securities an amount equal to such shortfall, which will
result in a prepayment of principal on the Offered 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 than 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.
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<PAGE> 34
No assurance can be given that, at any particular time, the Transferor
will be capable, financially or otherwise, of repurchasing Defective Home Loans
or substituting Qualified Substitute Home Loans for Defective Home Loans in the
manner described above. If the Transferor repurchases, or is obligated to
repurchase, Defective Home Loans from any additional series of asset backed
securities (each, an "Additional Series"), the financial ability of the
Transferor to repurchase Defective Home Loans from the Trust may be adversely
affected. In addition, other events relating to the Transferor and its
mortgage lending and consumer finance operations can occur that would adversely
affect the financial ability of the Transferor to repurchase Defective Home
Loans from the Trust, including without limitation the sale or other
disposition of all or any significant portion of its assets. If the Transferor
is unable to repurchase or replace a Defective Home Loan, the Servicer, on
behalf of the Trust, will pursue other customary and reasonable efforts, if
any, to recover the maximum amount possible with respect to such Defective Home
Loan. If the Servicer is unable to collect all amounts due to the Trust with
respect to such Defective Home Loan, the resulting loss will be borne by the
holders of the Offered Securities to the extent that such loss is not otherwise
covered by amounts available from the credit enhancement provided for the
Offered Securities, including the Guaranty Policy. See "Risk Factors --
Additional Credit Enhancement Limitations" and "-- Limitations on Repurchase or
Replacement of Defective Home Loans by Transferor" herein.
SERVICING EXPERIENCE
Since January 1995, the Servicer has substantially increased the volume
of conventional home loans, including additional types of home loans (i.e., its
DebtBusterTM Loans and BusterPlusTM Loans), that it has originated, purchased,
sold and/or serviced, and thus, the Servicer has limited historical experience
with respect to the performance, including the delinquency and loss experience
and the rate of prepayments of these conventional home loans, with respect to
its entire portfolio of loans and in particular with respect to such increased
volume and these additional types 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 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 December 31, 1996, no servicing rights have
been terminated under the related pooling and servicing agreements. However,
there can be no assurance that the future loan delinquency and loss experience
for any of these trusts will not exceed the applicable standard in the future,
and if such standard is exceeded that the servicing rights of the Servicer will
not be terminated with respect to such trusts.
DESCRIPTION OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Notes and the Certificates will
be provided by the Guaranty Policy. Additional credit enhancement with respect
to the Notes and the Certificates that will be utilized prior to the Guaranty
Policy will be provided by (i) the subordination of the Certificates in the
case of the Notes, and the Residual Interest in the case of the Notes and the
Certificates, (ii) the funds available in the Reserve Account, if any, and
(iii) the overcollateralization feature described herein.
The information set forth below under the section entitled "The Guaranty
Policy" has been supplied by MBIA Insurance Corporation (the "Securities
Insurer") for inclusion in this Prospectus Supplement and has not been reviewed
or verified by the Transferor, the Servicer, the Seller, the Indenture Trustee,
the Owner Trustee, the Co-Owner Trustee, the Underwriters or any of their
respective affiliates.
THE GUARANTY POLICY
The Securities Insurer, in consideration of the payment of the premium
and subject to the terms of the Guaranty Policy, thereby unconditionally and
irrevocably guarantees to any Owner (as defined below) that an amount equal to
each full and complete Guaranteed Payment will be received by the Indenture
Trustee, or its successors, as trustee for the Owners, on behalf of the Owners
from the Securities Insurer, for distribution by the Indenture Trustee, to each
Owner of each Owner's proportionate share of the Guaranteed Payment. The
Securities Insurer's obligations under the Guaranty
S-31
<PAGE> 35
Policy with respect to a particular Guaranteed Payment will be discharged to
the extent funds equal to the applicable Guaranteed Payment are received by the
Indenture Trustee, whether or not such funds are properly applied by the
Indenture Trustee. Guaranteed Payments will be made only at the time set forth
in the Guaranty Policy and no accelerated Guaranteed Payments will be made
regardless of any acceleration of the Securities, unless such acceleration is
at the sole option of the Securities Insurer.
Notwithstanding the foregoing paragraph, the Guaranty Policy does not
cover shortfalls, if any, attributable to the liability of the Trust or the
Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
The Securities Insurer will pay any Guaranteed Payment that is a
Preference Amount (as defined below) on the Business Day following receipt on a
Business Day by the Fiscal Agent (as defined below) of (i) a certified copy of
the order requiring the return of a preference payment, (ii) an opinion of
counsel satisfactory to the Securities Insurer that such order is final and not
subject to appeal, (iii) an assignment in such form as is reasonably required
by the Securities Insurer, irrevocably assigning to the Securities Insurer all
rights and claims of each Owner relating to or arising under the Securities
against the debtor which made such preference payment or otherwise with respect
to such preference payment and (iv) appropriate instruments to effect the
appointment of the Securities Insurer as agent for such Owner in any legal
proceeding related to such preference payment, such instruments being in a form
satisfactory to the Securities Insurer, provided that if such documents are
received after 12:00 noon New York City time on such Business Day, they will be
deemed to be received on the following Business Day. Such payments will be
disbursed to the receiver or trustee in bankruptcy named in the final order of
the court exercising jurisdiction on behalf of the Owner and not to any Owner
directly unless such Owner has returned principal or interest paid on such
Securities to such receiver or trustee in bankruptcy, in which case such
payment will be disbursed to such Owner.
The Securities Insurer will pay any other amount payable under the
Guaranty Policy no later than 12:00 noon New York City time on the later of the
Distribution Date on which the related Interest Distribution Amount or Regular
Principal Distribution Amount is due or the second Business Day following
receipt in New York, New York on a Business Day by State Street Bank and Trust
Company, N.A., as Fiscal Agent for the Securities Insurer or any successor
fiscal agent appointed by the Securities Insurer (the "Fiscal Agent"), of a
Notice (as defined below); provided that if such Notice is received after 12:00
noon New York City time on such Business Day, it will be deemed to be received
on the following Business Day. If any such Notice received by the Fiscal Agent
is not in proper form or is otherwise insufficient for the purpose of making a
claim under the Guaranty Policy it will be deemed not to have been received by
the Fiscal Agent for purposes of this paragraph, and the Securities Insurer or
the Fiscal Agent, as the case may be, will promptly so advise the Indenture
Trustee and the Indenture Trustee may submit an amended Notice.
Guaranteed Payments due under the Guaranty Policy, unless otherwise
stated therein, will be disbursed by the Fiscal Agent to the Indenture Trustee
on behalf of the Owners by wire transfer of immediately available funds in the
amount of the Guaranteed Payment less, in respect of Guaranteed Payments
related to Preference Amounts, any amount held by the Indenture Trustee for the
payment of such Guaranteed Payment and legally available therefor.
The Fiscal Agent is the agent of the Securities Insurer only and the
Fiscal Agent will in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Securities Insurer to deposit or cause to be
deposited sufficient funds to make payments due under the Guaranty Policy.
Subject to the terms of the Indenture, the Securities Insurer shall be
subrogated to the rights of each Owner to receive payments under the Securities
to the extent of any payment by the Securities Insurer under the Policy.
As used in the Guaranty Policy, the following terms will have the
following meanings:
"Business Day" means any day other than a Saturday, a Sunday or a day on
which the Securities Insurer and banking institutions in New York, New York, or
the city in which the corporate trust office of the Indenture Trustee under the
Indenture is located are authorized or obligated by law or executive order to
close.
"Deficiency Amount" means as of any Distribution Date, the amount by
which the sum of the Interest Distribution Amount for the Notes and
Certificates and Regular Principal Distribution Amount payable on the related
Security on such Distribution Date exceeds the Available Collection Amount
(less Trust Fees and Expenses), plus all amounts on deposit in the Reserve
Account.
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<PAGE> 36
"Guaranteed Payment" means (i) as of any Distribution Date, any
Deficiency Amount and (ii) any Preference Amount.
"Indenture" means the Indenture dated as of February 1, 1997 between the
Trust and the Indenture Trustee, without regard to any amendment or supplement
thereto.
"Notice" means the telephonic or telegraphic notice, promptly confirmed
in writing by telecopy, substantially in the form of Exhibit A attached to the
Guaranty Policy, the original of which is subsequently delivered by registered
or certified mail, from the Indenture Trustee specifying the Guaranteed Payment
which will be due and owing on the applicable Distribution Date.
"Owner" means (i) each Noteholder (as defined in the Indenture and other
than the Trust, the Seller, the Affiliated Holder or the Servicer) who, on the
applicable Distribution Date is entitled under the terms of the related Note to
distribution thereunder and (ii) each Certificateholder (as defined in the
Trust Agreement and other than the Trust, the Seller, the Affiliated Holder or
the Servicer) who, on the applicable Distribution Date is entitled under the
terms of the related Certificate to distribution thereunder.
"Preference Amount" means any amount previously distributed to an Owner
in respect of the Securities that is recoverable and sought to be recovered as
a voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance with a
final nonappealable order of a court having competent jurisdiction.
"Securities" means the Notes issued pursuant to the Indenture and the
Certificates issued pursuant to the Trust Agreement.
"Trust Agreement" means the Trust Agreement dated as of February 1,
1997 among FIRSTPLUS RESIDUAL HOLDINGS, INC., as the Affiliated Holder, the Co-
Owner Trustee, the Seller and the Owner Trustee, without regard to any
amendment or supplement thereto.
Capitalized terms used in the Guaranty Policy and not otherwise defined
in the Guaranty Policy will have the respective meanings set forth in the
Indenture as of the date of execution of the Guaranty Policy, without giving
effect to any subsequent amendment or modification to the Indenture, unless
such amendment or modification has been approved in writing by the Securities
Insurer.
Any notice under the Guaranty Policy or service of process on the Fiscal
Agent of the Securities Insurer may be made at the address listed below for the
Fiscal Agent of the Securities Insurer or such other address as the Securities
Insurer shall specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
The Guaranty Policy is being issued under and pursuant to, and shall be
construed under, the laws of the State of New York, without giving effect to
the conflict of laws principles thereof.
The insurance provided by the Guaranty Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Guaranty Policy is not cancelable for any reason. The premium on
the Guaranty Policy is not refundable for any reason including payment, or
provision being made for payment, prior to the latest Final Scheduled
Distribution Date of the Securities.
THE SECURITIES INSURER
The Securities Insurer is the principal operating subsidiary of MBIA,
Inc., a New York Stock Exchange listed company. MBIA Inc. is not obligated to
pay the debts of or claims against the Securities Insurer. The Securities
Insurer is domiciled in the State of New York and is licensed to do business in
and is subject to regulation under the laws of all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of Northern Marina
Islands,
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<PAGE> 37
the Virgin Islands of the United States and the Territory of Guam. The
Securities Insurer has two European branches, one in the Republic of France and
the other in the Kingdom of Spain. New York has laws prescribing minimum
capital requirements, limiting classes and concentrations of investments and
requiring the approval of policy rates and forms. State laws also regulate the
amount of both the aggregate and individual risks that may be insured, the
payment of dividends by the Securities Insurer, changes in control and
transactions among affiliates. Additionally, the Securities Insurer is
required to maintain contingency reserves on its liabilities in certain amounts
and for certain periods of time.
The consolidated financial statements of the Securities Insurer, a
wholly owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1995 and December 31, 1994 and for the three years ended December 31, 1995
prepared in accordance with generally accepted accounting principles, included
in the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31,
1995 and the consolidated financial statements of the Securities Insurer and
its subsidiaries for the nine-months ended September 30, 1996 and for the
periods ending September 30, 1996 and September 30, 1995 included in the
Quarterly Report on Form 10-Q of MBIA Inc. for the period ending September 30,
1996, are hereby incorporated by reference into this Prospectus Supplement and
shall be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes
of this Prospectus Supplement to the extent that a statement contained herein
or in any subsequently filed document which also is incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of the Securities Insurer and its subsidiaries
included in documents filed by MBIA Inc. 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 Supplement and prior to the termination of the offering
of the Notes and Certificates shall be deemed to be incorporated by reference
into this Prospectus Supplement and to be a part hereof from the respective
dates of filing such documents.
The tables below present selected financial information of the
Securities Insurer for the periods ended December 31, 1995 and September 30,
1996, respectively, determined in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory authorities ("SAP")
and generally accepted accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP GAAP
----------------------------- ----------------------------
December 31, September 30, December 31, September 30,
1995 1996 1995 1996
---- ---- ---- ----
(Audited) (Unaudited) (Audited) (Unaudited)
(In Millions) (In Millions)
<S> <C> <C> <C> <C> <C>
Admitted Assets . $3,814 $4,348 Assets . . . . . $4,463 $4,861
Liabilities . . . $2,540 $2,911 Liabilities . . . $1,937 $2,161
Capital and $1,274 $1,437 Shareholder's $2,526 $2,700
Surplus . . . . . Equity . . . . .
</TABLE>
Copies of the financial statements of the Securities Insurer
incorporated by reference herein and copies of the Securities Insurer's 1995
year-end audited financial statements prepared in accordance with statutory
accounting practices are available, without charge, from the Securities
Insurer. The address of the Securities Insurer is 113 King Street, Armonk, New
York 10504. The telephone number of the Securities Insurer is (914) 273-4545.
The Securities Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to
the accuracy of the information regarding the Guaranty Policy and the
Securities Insurer set forth under the heading "The Guaranty Policy".
Additionally, the Securities Insurer makes no representation regarding the
Securities or the advisability of investing in the Securities.
Moody's Investors Service rates the claims paying ability of the
Securities Insurer "Aaa".
Standard & Poor's Ratings Service, a division of The McGraw-Hill
Companies, Inc. rates the claims paying ability of the Securities Insurer
"AAA".
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<PAGE> 38
Fitch Investors Service, L.P. rates the claims paying ability of the
Securities Insurer "AAA".
Each rating of the Securities Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Securities Insurer and its ability to pay claims on its
policies of insurance. Any further explanation of the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold any Class
of the Notes or the Certificates, and such ratings may be subject to revision
or withdrawal at any time by the rating agencies. Any downward revision or
withdrawal of any of the above ratings may have an adverse effect on the market
price of any Notes or Certificates. The Securities Insurer does not guaranty
the market price of any Notes or Certificates nor does it guaranty that the
ratings on any Notes or Certificates will not be reversed or withdrawn.
SUBORDINATION AND ALLOCATION OF LOSSES
The rights of the holders of the Certificates to receive distributions
of interest and principal from amounts available in the Certificate
Distribution Account on each Distribution Date will be subordinated to the
rights of the holders of the Notes to receive distributions of interest and
principal from amounts available in the Note Distribution Account on each
Distribution Date. On the Closing Date, the initial Certificate Principal
Balance of $39,250,000 will be the excess of the Assumed Pool Principal Balance
over the sum of the Class Principal Balances of all Classes of Notes as of the
Closing Date. The rights of the holders of the Residual Interest to receive
any distributions from amounts available for distribution will be subordinated
to such rights of the holders of the Notes and the Certificates. The
subordination of the Certificates and the Residual Interest to the Notes is
intended to enhance the likelihood of regular receipt by the holders of the
Notes of the full amount of interest and principal distributions due to such
holders and to afford such holders protection against losses on the Home Loans.
The subordination of the Residual Interest to the Certificates is intended to
enhance the likelihood of regular receipt by the holders of the Certificates of
the full amount of interest and principal distributions due to such holders and
to afford such holders protection against losses on the Home Loans. See "Risk
Factors -- Additional Credit Enhancement Limitations" herein.
On each Distribution Date "Net Loan Losses" will be equal to the sum of
(A) with respect to any Home Loans that became Liquidated Home Loans during the
immediately preceding Due Period, an amount (not less than zero) determined as
of the related Determination Date equal to (i) the aggregate uncollected
Principal Balances of such Liquidated Home Loans as of the last day of such Due
Period and without the application of any amounts included in (ii) below, minus
(ii) the aggregate amount of any recoveries with respect to such Liquidated
Home Loans from whatever source, including without limitation any Net
Liquidation Proceeds, any Insurance Proceeds, any Released Mortgaged Property
Proceeds, any payments from the related borrower and any payments made to
purchase such Liquidated Home Loans pursuant to the Sale and Servicing
Agreement, less the amount of any expenses incurred in connection with such
recoveries and liquidation; and (B) with respect to any Defaulted Home Loan
that is subject to a modification by the Servicer, an amount equal to the
portion of the Principal Balance, if any, released in connection with such
modification. If on any Distribution Date Net Loan Losses occur, such Net Loan
Losses will be allocated as follows: (a) if amounts are on deposit in the
Reserve Account, then the principal portion of such Net Loan Losses will be
included in the calculation of the Regular Principal Distribution Amount (but
only to the extent of such amounts on deposit); and (b) if no amounts are on
deposit in the Reserve Account, then the principal portion of such Net Loan
Losses (i) until the Overcollateralization Amount is reduced to zero, will be
allocated in reduction of the Overcollateralization Amount and (ii)
thereafter, will be included in the calculation of the Regular Principal
Distribution Amount.
THE RESERVE ACCOUNT
On the Closing Date, the Seller will establish or will cause to be
established a Reserve Account for the benefit of the holders of the Offered
Securities. On the Closing Date, cash proceeds from the sale of the Offered
Securities in the amount of $14,019,276 or approximately 3.5% of the Initial
Pool Principal Balance (the "Reserve Account Requirement") will be deposited
into the Reserve Account. On each Subsequent Transfer Date, the Reserve
Account Subsequent Deposit, which will be equal to 3.5% of the aggregate of the
principal balances of the Subsequent Home Loans conveyed to the Trust on such
Subsequent Transfer Date, will be deducted from the purchase price proceeds for
such Subsequent Home Loans and will be deposited into the Reserve Account. If
all funds on deposit in the Pre-Funding Account at the end of the Funding
Period have been used to purchase Subsequent Home Loans, the Reserve Account
Requirement at such date will equal approximately $21,000,000. On or after the
Closing Date, the Seller may substitute a limited guaranty or a letter of
credit, or a combination of both for the release of the equivalent amount of
cash from
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the Reserve Account to the Seller in an amount not to exceed 50% of the Reserve
Account Requirement as of the date of such substitution; provided that the
Securities Insurer and Rating Agencies have consented to such substitution.
Assets on deposit in the Reserve Account will be available to the Indenture
Trustee and the Owner Trustee for distribution to the holders of the Notes and
the Certificates on each Distribution Date. If on any Distribution Date funds
from the Reserve Account are needed to make the required distributions of
principal and interest to the Noteholders and the Certificateholders, then the
balance of cash funds, if any, available in the Reserve Account will be
withdrawn prior to drawing under any limited guaranty or letter of credit that
is subsequently substituted into the Reserve Account. Upon the prior approval
of the Securities Insurer and the Rating Agencies, after the Closing Date the
Transfer and Servicing Agreements may be amended to distribute Excess Spread to
the provider (a "Reserve Credit Provider") of a limited guaranty or letter of
credit included in the Reserve Account following their substitution therein
(the "Substituted Reserve Credit"), as reimbursement for amounts withdrawn from
such Substituted Reserve Credit, until the amounts available therefrom,
together with any cash on deposit in the Reserve Account equal the Reserve
Account Requirement. Under certain circumstances, such an application of
Excess Spread to reimburse a Reserve Credit Provider will be prior to the
distribution of such Excess Spread to the holders of the Offered Securities,
and accordingly, any distribution of Excess Spread to the Reserve Credit
Provider would have the effect of slowing or temporarily ceasing the
accelerated principal amortization of the Offered Securities from the
distribution of Excess Spread. See "Prepayment and Yield Considerations"
herein.
After the Overcollateralization Amount reaches a certain level (which
will equal approximately 4.0% of the aggregate Principal Balances of the Home
Loans as of the respective Cut-Off Dates and would be approximately $24,000,000
based on the Assumed Pool Principal Balance) (the "Interim Required
Overcollateralization") then, assuming that sufficient amounts of Excess Spread
are distributed as an additional reduction of the outstanding principal
balances of the Offered Securities, each incremental increase in the
Overcollateralization Amount in excess of the Interim Required
Overcollateralization will cause a corresponding reduction in the Reserve
Account Requirement, until the Reserve Account Requirement is reduced to zero.
If the amount on deposit in the Reserve Account on any Distribution Date
(after giving effect to all deposits or withdrawals therefrom on such
Distribution Date) is greater than the Reserve Account Requirement for such
Distribution Date (such amount, the "Excess Reserve Account Amount"), except as
described below and subject to certain limitations, the Servicer will first
cause a reduction in the amount, if any, of the letter of credit or limited
guaranty then on deposit in the Reserve Account until such amount is reduced to
zero, and second, instruct the Indenture Trustee to distribute any remaining
Excess Reserve Account Amount (less any reduction made in the amount of the
letter of credit or limited guaranty) to the holders of the Residual Interest
until the Excess Reserve Account Amount is reduced to zero. Neither the
Noteholders nor the Certificateholders will have any rights in, or claims to,
such Excess Reserve Account Amounts.
Amounts held from time to time in the Reserve Account will continue to
be held for the benefit of Noteholders and Certificateholders. On each
Distribution Date, funds will be withdrawn from amounts on deposit in the
Reserve Account to the extent that the Available Collection Amount (after the
payment of the Trust Fees and Expenses) with respect to any Distribution Date
is less than the Noteholders' Distributable Amount and will be deposited in the
Note Distribution Account for distribution to the Noteholders. In addition,
after giving effect to such withdrawal, further funds will be withdrawn from
the Reserve Account (as reduced by any withdrawal pursuant to the preceding
sentence) to the extent that the portion of the Available Collection Amount
remaining after the payment of the Trust Fees and Expenses and the deposit of
the Noteholders' Distributable Amount into the Note Distribution Account is
less than the Certificateholders' Distributable Amount and will be deposited in
the Certificate Distribution Account for distribution to the
Certificateholders.
After the payment in full, or the provision for such payment, of (i) all
accrued and unpaid interest on the Offered Securities and (ii) the outstanding
principal balance of the Offered Securities, any funds remaining on deposit in
the Reserve Account, subject to certain limitations, will be paid to the holder
of the Residual Interest.
The Reserve Account is intended to enhance the likelihood of receipt by
the holders of the Offered Securities of the full amount of principal and
interest due them and to decrease the likelihood that the holders of the
Offered Securities will experience distribution delays or losses from
delinquent and Defaulted Home Loans. However, as described above, the Reserve
Account will be depleted to the extent that amounts are withdrawn therefrom and
applied to the Noteholders' Distributable Amount and the Certificateholders'
Distributable Amount and to the extent that the Reserve Account Requirement is
reduced incrementally as the Overcollateralization Amount exceeds the Interim
Required Overcollateralization. If the amount required to be withdrawn from
the Reserve Account to cover shortfalls in collections on the Home Loans
exceeds the amount of funds on deposit in the Reserve Account, the holders of
the
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Offered Securities will bear the risk of any delays and losses resulting from
such shortfalls in collections on the Home Loans, unless such delays or losses
are covered by any amounts available from the other credit enhancement
supporting the Offered Securities including the Guaranty Policy.
OVERCOLLATERALIZATION
As of each Determination Date occurring after termination of the Funding
Period, the "Overcollateralization Amount" will equal the excess of the Pool
Principal Balance over the aggregate of the sum of the Class Principal Balances
of all Classes of Notes and the Certificate Principal Balance. On the Closing
Date, the Overcollateralization Amount will be equal to zero. A limited
acceleration of the principal amortization of the Offered Securities relative
to the principal amortization of the Home Loans has been designed to increase
the Overcollateralization Amount over time by making additional sequential
distributions of principal to the holders of the Offered Securities from the
distribution of Excess Spread, until the Overcollateralization Amount is equal
to the Required Overcollateralization Amount. The "Required
Overcollateralization Amount" will equal approximately 7.5% of the aggregate
Principal Balances of the Home Loans as of the respective Cut-Off Dates, which
would be approximately $45,000,000 based on the Assumed Pool Principal Balance
as of the Closing Date, and, subject to certain floors, caps and triggers, the
Required Overcollateralization Amount may increase or decrease over time.
Assuming that sufficient amounts of Excess Spread are distributed as an
additional reduction of the outstanding principal balances of the Offered
Securities, the Overcollateralization Amount will eventually replace the
Reserve Account as credit enhancement for the Notes and the Certificates.
Amounts on deposit in the Reserve Account will be reduced to zero by a
proportionate reduction of the Reserve Account Requirement for each increase of
the Overcollateralization Amount over the Interim Required
Overcollateralization (which will be determined by the Securities Insurer and
approved by each Rating Agency), until the Overcollateralization Amount is
equal to the Required Overcollateralization Amount and the Reserve Account
Requirement is reduced to zero.
If on any Distribution Date, the Required Overcollateralization Amount
exceeds the Overcollateralization Amount, distributions of Excess Spread, if
any, will be made as an additional distribution of principal to the holders of
the Offered Securities, sequentially among the Classes of Notes and the
Certificates in order of their respective priorities as set forth under
"Description of the Offered Securities -- Distributions on the Notes" and "--
Distributions on the Certificates" herein. Such distributions of such Excess
Spread are intended to accelerate the amortization of the Class Principal
Balances of all Classes of Notes and the Certificate Principal Balance, thereby
increasing the Overcollateralization Amount. The relative percentage of the
sum of the Class Principal Balances of Notes and the Certificate Principal
Balance to the Pool Principal Balance will decrease as a result of the
application of such Excess Spread to reduce the Class Principal Balance of the
Notes and the Certificate Principal Balance.
On any Distribution Date with respect to which the Excess
Overcollateralization Amount is greater than zero, all or a portion of the
Excess Spread may be distributed to the holders of the Residual Interest and
not to the holders of the Offered Securities thereby ceasing the acceleration
of the principal amortization of the Offered Securities in relation to the
principal amortization of the Home Loan Pool, until such time as the Excess
Overcollateralization Amount is reduced to zero.
On any Distribution Date occurring on an Overcollateralization Stepdown
Date, the holders of the Residual Interest will be entitled to distributions of
all or a portion of the Noteholders' Principal Distributable Amount and
Certificateholders' Principal Distributable Amount that would otherwise be
distributed to such holders of the Offered Securities as described below. Such
amount, the "Overcollateralization Reduction Amount", with respect to any
Distribution Date occurring on an Overcollateralization Stepdown Date will
equal the lesser of (x) the Excess Overcollateralization Amount for such
Distribution Date (after giving effect to all other distributions on such
Distribution Date), and (y) the Regular Principal Distribution Amount (as
determined without the deduction of the Overcollateralization Reduction Amount
therefrom) on such Distribution Date. Prior to the occurrence of an
Overcollateralization Stepdown Date, the Overcollateralization Reduction Amount
will equal zero. An "Overcollateralization Stepdown Date" is any Distribution
Date with respect to which the Required Overcollateralization Amount is
permitted to decrease or "step down" pursuant to the terms of the Transfer and
Servicing Agreements, generally as a result of the delinquency and default
experience of the Home Loan Pool being lower than certain levels established by
the Securities Insurer and set forth in the Transfer and Servicing Agreements
and the amortization of the Pool Principal Balance. The "Excess
Overcollateralization Amount" for any Distribution Date will equal the
Overcollateralization Amount for such Distribution Date minus the Required
Overcollateralization Amount for such Distribution Date (after all
distributions for such Distribution Date have been made).
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While the distribution of Excess Spread to the holders of the Offered
Securities and the distribution of any Overcollateralization Reduction Amount
to the holders of the Residual Interest in the manner specified 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. After the Reserve Account has been reduced to zero, Net Loan
Losses will reduce the Overcollateralization Amount. See "Risk Factors --
Additional Credit Enhancement Limitations -- Adequacy of Credit Enhancement"
herein.
If on any Determination Date the delinquency or default experience on
the Home Loan Pool exceeds certain levels as established by the Securities
Insurer and confirmed by the Rating Agencies and as set forth in the Transfer
and Servicing Agreements, then the Required Overcollateralization Amount will
increase. Likewise, if on any Determination Date the delinquency and default
experience on the Home Loan Pool is lower than certain levels as established by
the Securities Insurer and confirmed by the Rating Agencies and as set forth in
the Transfer and Servicing Agreements, then under certain circumstances the
Required Overcollateralization Amount will decrease and an
Overcollateralization Stepdown Date will occur on the related Distribution
Date.
Pursuant to the Transfer and Servicing Agreements, as of each
Determination Date, the Required Overcollateralization Amount will be based on
a calculation reviewed and approved by the Securities Insurer and each Rating
Agency. Following the termination of the Funding Period, the Required
Overcollateralization Amount will be calculated based on certain percentages of
the Cut-Off Date Principal Balances of the Home Loans, until the Credit Support
Reduction Date, and thereafter, will be calculated based on the lesser of
certain percentages of the Cut-Off Date Principal Balances of the Home Loans
and the outstanding Principal Balances of the Home Loans. The percentages used
in calculating the Required Overcollateralization Amount will be determined
based on the delinquency and default experience of the Home Loans. The "Credit
Support Reduction Date" will occur on the Distribution Date determined pursuant
to the criteria reviewed and approved by the Securities Insurer and each Rating
Agency.
DESCRIPTION OF THE OFFERED SECURITIES
GENERAL
The FIRSTPLUS Home Loan Owner Trust 1997-1, the Trust, will issue asset
backed notes (collectively, the "Notes") consisting of: $139,980,000 aggregate
principal amount of Class A-1 Notes; $64,680,000 aggregate principal amount of
Class A-2 Notes; $65,160,000 aggregate principal amount of Class A-3 Notes;
$49,750,000 aggregate principal amount of Class A-4 Notes; $49,170,000
aggregate principal amount of Class A-5 Notes; $93,110,000 aggregate principal
amount of Class A-6 Notes; $61,330,000 aggregate principal amount of Class A-7
Notes; and $37,570,000 aggregate principal amount of Class A-8 Notes pursuant
to the Indenture dated as of February 1, 1997, between the Trust and the
Indenture Trustee. The Trust will also issue $39,250,000 aggregate principal
amount of 7.64% Asset Backed Certificates ("Certificates" and, together with
the Notes, the "Offered Securities") pursuant to the terms of a Trust Agreement
dated as of February 1, 1997, 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 March 1997, (each
such date, a "Distribution Date"), the Indenture Trustee or its designee and
the Owner Trustee or its designee will distribute to the persons in whose names
the Notes and Certificates, respectively, are registered on the last day of the
month immediately preceding the month of the related Distribution Date (the
"Record Date"), the portion of the aggregate distribution to be made to each
Noteholder and each Certificateholder as described below. Prior to Book-Entry
Termination, distributions on the Book-Entry Certificates will be made to
Beneficial Owners only through DTC and its DTC Participants. See "Certain
Information Regarding the Securities -- Book-Entry Registration" in the
Prospectus.
Beneficial ownership interests in each Class of Notes will be held in
minimum denominations of $100,000 and integral multiples of $1,000 in excess
thereof. Beneficial ownership interests in the Certificates will also be held
in minimum denominations of $100,000 and integral multiples of $1,000 in excess
thereof.
DISTRIBUTIONS ON THE NOTES
For the definitions of certain of the defined terms used in the
following subsection, See "Description of the Transfer and Servicing Agreements
- -- Distributions on the Offered Securities; Related Definitions" below.
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Payments of Interest . Interest on the principal balances of each Class
of the Notes will accrue at the respective per annum Note Interest Rate for
such Class set forth below and will be payable to the Noteholders monthly on
each Distribution Date commencing in March, 1997. Interest on each Class of
Notes will be calculated on the basis of a 360-day year of twelve 30-day
months.
The Class A-1 Rate will be 6.05% per annum.
The Class A-2 Rate will be 6.28% per annum.
The Class A-3 Rate will be 6.45% per annum.
The Class A-4 Rate will be 6.60% per annum.
The Class A-5 Rate will be 6.70% per annum.
The Class A-6 Rate will be 6.95% per annum.
The Class A-7 Rate will be 7.16% per annum.
The Class A-8 Rate will be 7.33% per annum.
Interest distributions on the Notes will generally be made from the
Available Collection Amount remaining after the payment of the Trust Fees and
Expenses. Interest payments to all Classes of Noteholders will have the same
priority. Under certain circumstances, the amount available for interest
payments could be less than the amount of interest payable on the Notes on any
Distribution Date, in which case the holder of each Class of Notes will receive
their ratable share (based upon the aggregate amount of interest due to the
holders of each Class of Notes) of the aggregate amount available to be
distributed in respect of interest on the Notes.
Payments of Principal. Principal payments will be made to the
Noteholders on each Distribution Date in an amount generally equal to the sum
of (i) the Regular Principal Distribution Amount plus (ii) if the related Due
Period occurs before the Funding Period ends and thereafter if the
Overcollateralization Amount is less than or equal to the Required
Overcollateralization Amount, any Excess Spread for such Distribution Date. On
each Distribution Date that the Overcollateralization Amount equals or exceeds
the Required Overcollateralization Amount, the Excess Spread will be
distributed to the holders of the Residual Interest. In addition, if on any
Overcollateralization Stepdown Date the Excess Overcollateralization Amount
exceeds zero, all or a portion of the principal (up to the
Overcollateralization Reduction Amount) which would otherwise be distributed to
the Notes and the Certificates will instead be distributed to the holders of
the Residual Interest, until the Excess Overcollateralization Amount is reduced
to zero. Furthermore, in the case of the Distribution Date following the Due
Period in which the Funding Period ends and except as provided below, 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. 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 outstanding Class Principal Balances
thereof. If an event of default has occurred under the Indenture, such amount
will be distributed in reduction, on a pro rata basis, of the Class Principal
Balances of each Class of Notes. Principal distributions on the Notes
generally will be made from the Available Collection Amount remaining after the
payment of the Trust Fees and Expenses and the distribution of the Noteholders'
Interest Distributable Amount.
On each Distribution Date (after payment of the Guaranty Insurance
Premiums and the Trust Fees and Expenses payable on such Distribution Date),
all amounts on deposit in the Note Distribution Account will be paid in the
following order of priority:
(i) pro rata to the Noteholders in reduction of their Class
Principal Balances, any amounts remaining from the Pre-Funding Account
Deposit at the end of the Funding Period less the pro rata portion of
such amount deposited in the Certificate Distribution Account based on
the Certificate Principal Balance; provided that such remaining amount
is greater than $50,000 and that no event of default has occurred under
the Indenture;
(ii) pro rata to the Noteholders, the Noteholders' Interest
Distributable Amount;
(iii) the Noteholders' Principal Distributable Amount in the
following order of priority:
(1) to the Class A-1 Noteholders in reduction of the
Class Principal Balance of the Class A-1 Notes, until such Class
Principal Balance has been reduced to zero;
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(2) to the Class A-2 Noteholders in reduction of the
Class Principal Balance of the Class A-2 Notes, until such Class
Principal Balance has been reduced to zero;
(3) to the Class A-3 Noteholders in reduction of the
Class Principal Balance of the Class A-3 Notes, until such Class
Principal Balance has been reduced to zero;
(4) to the Class A-4 Noteholders in reduction of the
Class Principal Balance of the Class A-4 Notes, until such Class
Principal Balance has been reduced to zero;
(5) to the Class A-5 Noteholders in reduction of the
Class Principal Balance of the Class A-5 Notes, until such Class
Principal Balance has been reduced to zero;
(6) to the Class A-6 Noteholders in reduction of the
Class Principal Balance of the Class A-6 Notes, until such Class
Principal Balance has been reduced to zero;
(7) to the Class A-7 Noteholders in reduction of the
Class Principal Balance of the Class A-7 Notes, until such Class
Principal Balance has been reduced to zero; and
(8) to the Class A-8 Noteholders in reduction of the
Class Principal Balance of the Class A-8 Notes, until such Class
Principal Balance has been reduced to zero.
All distributions made to the Class A-1 Noteholders, the Class A-2
Noteholders, the Class A-3 Noteholders, the Class A-4 Noteholders, the Class
A-5 Noteholders, the Class A-6 Noteholders, the Class A-7 Noteholders and the
Class A-8 Noteholders on each Distribution Date will be made on a pro rata
basis among the Noteholders of record of the respective Class on the next
preceding Record Date based on the percentage interest represented by their
respective Notes, and except as otherwise provided herein, will be made through
the book-entry system maintained by DTC.
The Class Principal Balance of each Class of Notes, to the extent not
previously paid, will be due on the following respective dates: the Class A-1
Final Scheduled Distribution Date for the Class A-1 Notes, the Class A-2 Final
Scheduled Distribution Date for the Class A-2 Notes, the Class A-3 Final
Scheduled Distribution Date for the Class A-3 Notes, the Class A-4 Final
Scheduled Distribution Date for the Class A-4 Notes, the Class A-5 Final
Scheduled Distribution Date for the Class A-5 Notes, the Class A-6 Final
Scheduled Distribution Date for the Class A-6 Notes, the Class A-7 Final
Scheduled Distribution Date for the Class A-7 Notes and the Class A-8 Final
Scheduled Distribution Date for the Class A-8 Notes. The actual date on which
the Class Principal Balance of any Class of Notes is reduced to zero may be
earlier than the respective Final Scheduled Distribution Dates set forth herein
based on a variety of factors, including those described under "Prepayment and
Yield Considerations -- Weighted Average Life of the Offered Securities"
herein.
If, on any Distribution Date, the Available Collection Amount, after
payment of the applicable Trust Fees and Expenses, is insufficient to
distribute the Noteholders' Distributable Amount, the Indenture Trustee will,
first, withdraw the amount of such insufficiency from the Reserve Account to
the extent amounts are available therein, and, second, make a claim under the
Guaranty Policy for the remaining amount of such insufficiency in accordance
with the terms thereof. As described in the preceding sentence, Guaranteed
Payments, if any, for any Notes under the Guaranty Policy will be available
only for distribution to holders of the Notes, as appropriate, to compensate
for any shortfalls in respect of the Noteholders' Distributable Amount.
If, on a particular Distribution Date, the Available Collection Amount,
the amount withdrawn from the Reserve Account and any Guaranteed Payment
applied in the order described above are not sufficient to make a full
distribution of the Noteholders' Interest Distributable Amount on any Class of
Notes, then any such unpaid Noteholders' Interest Distributable Amount will be
carried forward as a Noteholders' Interest Carry-Forward Amount and will be
distributed to holders of each such Class of Notes on the next Distribution
Date to the extent that sufficient funds are available. Such an interest
shortfall could occur, for example, if losses realized on the Home Loans were
high or were concentrated in a particular month, the Reserve Account was
reduced to zero and Guaranteed Payments were not timely received under the
Guaranty Policy. No interest will accrue on any Noteholders' Interest Carry-
Forward Amount or any Noteholders' Principal Carry-Forward Amount.
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DISTRIBUTIONS ON THE CERTIFICATES
For the definitions of certain of the defined terms used in the
following subsection, See "Description of the Transfer and Servicing Agreements
- -- Distributions on the Offered Securities; Related Definitions" below.
Distributions of Interest. On each Distribution Date, commencing in
March, 1997, the Certificateholders will be entitled to distributions in an
amount equal to the amount of interest that would accrue on the Certificate
Principal Balance during the preceding Due Period at the Pass Through Rate.
Interest on the Certificates will be calculated on the basis of a 360-day year
of twelve 30-day months. Interest distributions with respect to the
Certificates will generally be made from the portion of the Available
Collection Amount remaining after the payment of the Trust Fees and Expenses
and the Noteholders' Distributable Amount.
Distributions of Principal Payments. Certificateholders will be
entitled to the following principal distributions: (i) on the Distribution Date
following the end of the Funding Period, any amount remaining from the Pre-
Funding Account Deposit less the pro rata portion of such amount deposited into
the Note Distribution Account based on the Class Principal Balances of the
Notes; provided that such remaining amount is greater than $50,000 and,
provided further that no event of default has occurred under the Indenture; and
(ii) on each Distribution Date commencing on the Distribution Date on which the
Notes are paid in full, in an amount generally equal to the sum of (A) the
Regular Principal Distribution Amount (less, on the Distribution Date on which
the Notes are paid in full, the portion thereof payable on the Notes) and (B)
if the related Due Period ends before the Funding Period ends and thereafter if
the Overcollateralization Amount is less than or equal to the Required
Overcollateralization Amount, then any Excess Spread for such Distribution
Date. On each Distribution Date that the Overcollateralization Amount equals
or exceeds the Required Overcollateralization Amount, any Excess Spread will be
distributed to the holders of the Residual Interest. In addition, if on any
Overcollateralization Stepdown Date the Excess Overcollateralization Amount
exceeds zero, all or a portion of the principal (up to the
Overcollateralization Reduction Amount) which would otherwise be distributed to
the holders of the Certificates will instead be distributed to the holders of
the Residual Interest, until the Excess Overcollateralization Amount is reduced
to zero. Principal distributions on the Certificates will generally be made
from the portion of the Available Collection Amount remaining after the payment
of the Trust Fees and Expenses and after distribution of the Noteholders'
Distributable Amount (on the Distribution Date on which the Notes are paid in
full) and the Certificateholders' Interest Distributable Amount.
If, on any Distribution Date, the Available Collection Amount, after
payment of the applicable Trust Fees and Expenses and the Noteholders'
Distributable Amount, is insufficient to distribute the Certificateholders'
Distributable Amount, the Indenture Trustee will first, withdraw the amount of
such insufficiency from the Reserve Account to the extent amounts are available
therein, and second, make a claim under the Guaranty Policy for the remaining
amount of such insufficiency in accordance with the terms thereof. As
described in the preceding sentence, Guaranteed Payments, if any, for any
Certificates under the Guaranty Policy will be available only for distribution
to holders of the Certificates, as appropriate, to compensate for any
shortfalls in respect of the Certificateholders' Distributable Amount after
giving effect to withdrawals for deficiencies in respect of the Noteholders'
Distributable Amount.
If, on a particular Distribution Date, the Available Collection Amount,
the amount withdrawn from the Reserve Account and any Guaranteed Payment
applied in the order described above are not sufficient to make a full
distribution of the Certificateholders' Interest Distributable Amount on the
Certificates, then any such unpaid Certificateholders' Interest Distributable
Amount will be carried forward as a Certificateholders' Interest Carry-Forward
Amount and will be distributed to the Certificateholders on the next
Distribution Date to the extent that sufficient funds are available. Such an
interest shortfall could occur, for example, if losses realized on the Home
Loans were high or were concentrated in a particular month, the Reserve Account
were reduced to zero and Guaranteed Payments were not timely received under the
Guaranty Policy. No interest will accrue on any Certificateholders' Interest
Carry-Forward Amount or any Certificateholders' Principal Carry-Forward Amount.
SECURITIES INSURER REIMBURSEMENT AMOUNT
On each Distribution Date, after the holders of the Notes and the
Certificates have been paid all amounts to which they are entitled and prior to
any distributions to the holders of the Residual Interest, the Securities
Insurer will be entitled to be reimbursed for any unreimbursed Guaranteed
Payments in respect of the Offered Securities not previously reimbursed and any
other amounts owed to the Securities Insurer under the Insurance Agreement
together with interest thereon at the rate specified in the Insurance Agreement
(the "Securities Insurer Reimbursement Amount") and any accrued and unpaid
Guaranty Insurance Premiums. The "Insurance Agreement" means the Insurance and
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Indemnification Agreement dated as of the Closing Date among the Securities
Insurer, the Seller, FFI, as the Servicer and Transferor, the Affiliated
Holder, the Trust, RAC and the Indenture Trustee. In connection with each
Guaranteed Payment, the Indenture Trustee, as attorney-in-fact for the holder
thereof, will be required to assign to the Securities Insurer the rights of the
Noteholders with respect to the Notes and the rights of the Certificateholders
with respect to the Certificates, to the extent of such Guaranteed Payments,
including, without limitation, in respect of any amounts due to the Noteholders
or the Certificateholders as a result of a securities law violation arising
from the offer and sale of the Notes or the Certificates. In the event that
any Securities Insurer Reimbursement Amount is outstanding, the holders of the
Residual Interest will not be entitled to receive distributions of any amounts
attributable to Excess Spread until the Securities Insurer has been distributed
such Securities Insurer Reimbursement Amount in full.
OPTIONAL REDEMPTION OF THE NOTES; OPTIONAL PREPAYMENT OF THE CERTIFICATES
The Affiliated Holder may, at its option, effect an early redemption or
termination of the Offered Securities on or after any Distribution Date on
which the Pool Principal Balance declines to 15% or less of the Pool Principal
Balance of the Initial Home Loans and Subsequent Home Loans conveyed to the
Trust as of the respective Cut-Off Dates, in which case the Indenture Trustee
will be directed to sell all of the Home Loans to a person that is not
affiliated with the Affiliated Holder, the Seller or the Servicer at a price
equal to or greater than the Termination Price and the proceeds from such sale
will be distributed, (i) first, to the Noteholders in an amount equal to the
then outstanding Class Principal Balance of the Notes plus accrued interest
thereon at the applicable Note Interest Rate, (ii) second, to the
Certificateholders in an amount equal to the then outstanding Certificate
Principal Balance plus accrued interest thereon at the Pass Through Rate, (iii)
third, to the Securities Insurer, in an amount equal to any amounts owed to the
Securities Insurer under the Insurance Agreement, and (iv) to the holders of
the Residual Interest, in an amount equal to the amount of proceeds remaining,
if any, after the distributions pursuant to items (i), (ii) and (iii) above.
In addition, the Affiliated Holder may, at its option, effect an early
redemption or termination of the Offered Securities on or after any
Distribution Date on which the Pool Principal Balance declines to 10% or less
of the Pool Principal Balance of the Initial Home Loans and Subsequent Home
Loans conveyed to the Trust as of the respective Cut-Off Dates, by paying (i)
first, to the Noteholders, an amount in respect the Notes equal to the then
outstanding aggregate Class Principal Balance of the Notes, plus accrued
interest thereon at the applicable Note Interest Rate, (ii) second, to the
Certificateholders, an amount in respect of the Certificates equal to the then
outstanding Certificate Principal Balance of the Certificates, plus accrued
interest at the Pass Through Rate, and (iii) third, to the Securities Insurer,
an amount equal to any amounts owed to the Securities Insurer under the
Insurance Agreement. In connection with any such optional termination, to the
extent that sufficient proceeds are not available from the sale of the Home
Loans or the termination of the Trust, the Affiliated Holder will pay the
outstanding fees and expenses, if any, of the Indenture Trustee, the Owner
Trustee, the Custodian, and the Servicer. Under certain circumstances as set
forth in the Indenture (i.e., based upon the default experience of the Home
Loans), the Securities Insurer may, at its option, effect an early redemption
or termination of the Offered Securities.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Indenture, Sale and
Servicing Agreement, the Administration Agreement and the Trust Agreement
(collectively, the "Transfer and Servicing Agreements"). Forms of the Transfer
and Servicing Agreements have been filed as exhibits to the Registration
Statement. Copies of the Transfer and Servicing Agreements will be filed with
the Commission following the issuance of the Offered Securities. The summary
does not purport to be complete and is subject to, and qualified in its
entirety by reference to, all the provisions of the Transfer and Servicing
Agreements. The following summary supplements, and to the extent inconsistent
therewith replaces, the description of the general terms and provisions of the
Transfer and Servicing Agreements set forth under the headings "Description of
the Transfer and Servicing Agreements" in the Prospectus, to which description
reference is hereby made.
SALE AND ASSIGNMENT OF THE HOME LOANS
On the Closing Date, the Transferor will sell, convey, transfer and
assign all of its right, title and interest in and to the Initial Home Loans to
the Seller, and the Seller will sell, convey, transfer and assign the Initial
Home Loans to the Trust. The Trust will, concurrently with the sale,
conveyance, transfer and assignment of the Initial Home Loans and the deposit
of funds in the Pre-Funding Account, Capitalized Interest Account and Reserve
Account, deliver or cause to be delivered the Offered Securities to the Seller
in exchange for the Initial Home Loans, the Pre-Funding Account Deposit,
Capitalized Interest Account Deposit and Reserve Account Deposit. The Trust
will pledge and assign the Initial Home Loans, Pre-Funding Account, Capitalized
Interest Account and Reserve Account to the Indenture Trustee in
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exchange for the Notes. Each Initial Home Loan will be identified in a
schedule appearing as an exhibit to the Sale and Servicing Agreement delivered
to the Indenture Trustee (the "Home Loan Schedule").
Following the Closing Date, the funds in the Pre-Funding Account will be
used to purchase from the Seller, from time to time prior to the end of the
Funding Period, subject to the availability thereof, Subsequent Home Loans
consisting of the same types of loans as 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 not more
than 100% of the principal balance thereof; the Trust may pay a cash purchase
price of less than 100% of the principal balance thereof for the purpose of
increasing the amounts available for distribution. The relevant Reserve
Account Subsequent Deposit will be deducted from the purchase price proceeds
for such Subsequent Home Loans and will be transferred from the Pre-Funding
Account to the Reserve Account. See "Description of Credit Enhancement -- The
Reserve Account" herein. In connection with any purchase of Subsequent Home
Loans by the Trust after the Closing Date, the Transferor will assign to the
Seller all of its right, title and interest in and to such Subsequent Home
Loans, and the Seller in turn will sell, convey, transfer and assign to the
Trust all of its right, title and interest in and to such Subsequent Home
Loans. The Owner Trustee, on behalf of the Trust, will pledge and assign such
Subsequent Home Loans to the Indenture Trustee.
In addition, the Seller will, as to each Home Loan, deliver to the
Indenture Trustee or the Custodian the related Note endorsed to the order of
the Indenture Trustee or the Custodian without recourse, any assumption and
modification agreements and the Mortgage with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording
office), an assignment of the Mortgage in the name of the Indenture Trustee in
recordable form, and any intervening assignments of the Mortgage (each, a
"Indenture Trustee's Home Loan File"). Subject to confirmation by the Rating
Agencies and to the approval of the Securities Insurer, with respect to the
Home Loans from 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 Indenture Trustee the assignments
of the Mortgages in the name of the Indenture Trustee and in recordable form,
and the Transferor, in its capacity as the Servicer, will retain the record
title to such Mortgages under the applicable real property records, on behalf
of the Trust, the Indenture Trustee and the holders of the Offered Securities.
In all other circumstances with respect to the Home Loans, pursuant to the
direction of the Rating Agencies or Securities Insurer, assignments to the
Indenture Trustee of the Mortgages will be recorded in the real property
records for those states in which such recording is deemed necessary to protect
the Trust and the Indenture Trustee's interest in the Home Loans against the
claims of certain creditors of the Transferor or subsequent purchasers. In
these circumstances, the Transferor and the Seller will deliver to the
Indenture Trustee after recordation the assignments to the Indenture Trustee of
the Mortgages. In the event that, with respect to any Home Loan as to which
recordation of the related assignment is recorded, the Seller cannot deliver
the Mortgage or any assignment with evidence of recording thereon concurrently
with the conveyance thereof under the Sale and Servicing Agreement because they
have not yet been returned by the public recording office, the Seller will
deliver or cause to be delivered to the Indenture Trustee or the Custodian a
certified true photocopy of such Mortgage or assignment. The Seller will
deliver or cause to be delivered to the Indenture Trustee or the Custodian any
such Mortgage or assignment with evidence of recording indicated thereon upon
receipt thereof from the public recording office. The Indenture Trustee or the
Custodian will agree, for the benefit of the holders of the Offered Securities,
to review (or cause to be reviewed) each Indenture Trustee's Home Loan File
within 45 days after the conveyance of the related Home Loan to the Trust to
ascertain that all required documents have been executed and received, subject
to the applicable cure period in the Transfer and Servicing Agreements.
PRE-FUNDING ACCOUNT
On the Closing Date, cash in the aggregate amount of approximately
$199,449,252 (the "Pre-Funding Account Deposit") will be deposited in an
Eligible Account (the "Pre-Funding Account"), which account will be part of the
Trust and will be maintained as an Eligible Account with the Indenture Trustee,
in its corporate trust department for the purchase of Subsequent Home Loans.
The Pre-Funding Account Deposit will be increased or decreased by an amount
equal to the aggregate of the principal balances of any home loans removed from
or added to, respectively, the Home Loan Pool prior to the Closing Date,
provided that any such increase or decrease will not exceed 5.0% of the Initial
Pool Principal Balance. During the period (the "Funding Period") from the
Closing Date until the earlier of (i) the date on which the amount on deposit
in the Pre-Funding Account is reduced to $25,000 or less, and (ii) May 27,
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, without deduction for any
related
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Reserve Account Subsequent Deposit; provided that the Funding Period will be
subject to an earlier termination if insufficient funds are on deposit in the
Capitalized Interest Account on any Determination Date to cover any interest
shortfall for distributions to the holders of the Offered Securities on the
immediately following Distribution Date. Subsequent Home Loans purchased by
and added to the Trust on any Subsequent Transfer Date must satisfy the
criteria set forth in the Sale and Servicing Agreement and must be approved by
the Securities Insurer. See "The Home Loan Pool -- Conveyance of Subsequent
Home Loans" herein.
On the Distribution Date following the Due Period in which such Funding
Period ends, if the amount of the Pre-Funding Account Deposit that is remaining
at the end of the Funding Period (net of reinvestment income which is required
to be transferred to the Capitalized Interest Account) is greater than $50,000,
such amount will be applied to reduce on a pro rata basis, the outstanding
Class Principal Balances of the Notes and (except if the Securities Insurer is
in default under the Guaranty Policy) the Certificate Principal Balance of the
Certificates and thus reducing the weighted average lives of the Notes and the
Certificates. If such remaining amount is less than or equal to $50,000, such
amount will be included in the Noteholders Monthly Principal Distributable
Amount and will be distributed sequentially to each Class of Notes in reduction
of the respective Class Principal Balances thereof. If the Securities Insurer
is in default under the Guaranty Policy, then such remaining amount will be
applied to reduce, on a pro rata basis, the Class Principal Balance of each
Class of the Notes. See "Prepayment and Yield Considerations" herein.
Amounts on deposit in the Pre-Funding Account will be invested in
Permitted Investments. The Sale and Servicing Agreement requires that no
Permitted Investment shall evidence either the right to receive (a) only
interest with respect to the obligations underlying such Permitted Investment
or (b) both principal and interest payments derived from obligations underlying
such Permitted Investment where the interest and principal payments with
respect to such Permitted Investment provide a yield to maturity at par greater
than 120% of the yield to maturity at par of the underlying obligations.
Further, no Permitted Investment may be purchased at a price greater than par
if such Permitted Investment may be prepaid or called at a price less than its
purchase price prior to stated maturity. Permitted Investments are required to
mature as may be necessary for the purchase of Subsequent Home Loans on any
Subsequent Transfer Date no later than the Business Day prior to the related
Subsequent Transfer Date, and in any case, no later than the Business Day prior
to the applicable Distribution Date. All interest and any other investment
earnings on amounts on deposit in the Pre-Funding Account will be transferred
to the Capitalized Interest Account.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, at the direction of the Seller, an amount (the
"Capitalized Interest Account Deposit"), as approved by the Securities Insurer
and the Rating Agencies, to cover the projected interest shortfall during the
Funding Period will be deposited in an Eligible Account maintained by and in
the name of the Indenture Trustee (the "Capitalized Interest Account") from a
portion of the sales proceeds from the Offered Securities. The amount on
deposit in the Capitalized Interest Account will be specifically allocated to
cover shortfalls in interest (the "Interest Shortfall") on the Offered
Securities that may arise as a result of the utilization of the Pre-Funding
Account for the purchase by the Trust of Subsequent Home Loans after the
Closing Date and will be so applied by the Indenture Trustee for the
distribution of interest to holders of the Offered Securities. Any amounts
remaining in the Capitalized Interest Account on any Determination Date, that
are not required to cover the anticipated interest shortfall described above,
will be distributed to the holders of the Residual Interest, including any net
reinvestment income thereon, and such amounts will not thereafter be available
for distribution to the holders of the Offered Securities.
Amounts on deposit in the Capitalized Interest Account will be invested
in Permitted Investments as defined in the Sale and Servicing Agreement. All
such Permitted Investments are required to mature no later than the Business
Day prior to the applicable Distribution Date as specified in the Sale and
Servicing Agreement. All interest and any other investment earnings on amounts
on deposit in the Capitalized Interest Account will be available to cover any
Interest Shortfall.
TRUST FEES AND EXPENSES
As compensation for their services pursuant to the applicable Transfer
and Servicing Agreements, the Indenture Trustee is entitled to the Indenture
Trustee Fee, and the Owner Trustee is entitled to the Owner Trustee Fee. As
compensation for its services pursuant to the Sale and Servicing Agreement, the
Servicer is entitled to the Servicing Fee and additional servicing compensation
and reimbursement as described under the "Servicing" subheading below. As
compensation for issuing the Guaranty Policy, the Securities Insurer is
entitled to the Guaranty Insurance Premium.
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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 adjusted for Liquidated Home
Loans) 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, 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. But, the Servicer or any Subservicer will make reasonable and customary
expense advances with respect to the Home Loans (each, a "Servicing Advance")
in accordance with their servicing obligations under the Sale and Servicing
Agreement and will be entitled to receive the Servicing Advance Reimbursement
Amount for such Servicing Advances as described herein. For example, such
Servicing Advances may include costs and expenses advanced for the
preservation, restoration and protection of any Mortgaged Property, including
advances to pay delinquent real estate taxes and assessments. Any Servicing
Advances by the Servicer or any Subservicer will be reimbursable from the
Available Collection Amount after all prior distributions as described under
"-- Collection Account, Note Distribution Account and Certificate Distribution
Account" below or with respect to any Liquidated Home Loan from the Liquidation
Proceeds received therefrom.
COLLECTION ACCOUNT, NOTE DISTRIBUTION ACCOUNT AND CERTIFICATE DISTRIBUTION
ACCOUNT
The Servicer is required to use its best efforts to deposit in an
Eligible Account (the "Collection Account"), within one Business Day and in any
event to deposit within two Business Days of receipt, all payments received
after each Cut-Off Date on account of principal and interest on the related
Home Loans, all Net Liquidation Proceeds, Insurance Proceeds, Released
Mortgaged Property Proceeds, any amounts payable in connection with the
repurchase or substitution of any Home Loan and any amount required to be
deposited in the Collection Account in connection with the termination of the
Offered Securities. The foregoing requirements for deposit in the Collection
Account will be exclusive of payments on account of principal and interest
collected on the Home Loans on or before the applicable Cut-Off Date.
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 Bank One,
Texas, N.A., an affiliate of Banc One Capital Corporation, one of the
Underwriters.
Any Subservicer will also maintain a collection account to deposit all
payments received with respect to the Home Loans being serviced by such
Subservicer. Such Subservicer's collection account will be an Eligible Account
and will satisfy requirements that are substantially similar to the
requirements for the Collection Account set forth in the Sale and Servicing
Agreement.
AVAILABLE COLLECTION AMOUNT. Distributions on the Offered Securities on
each Distribution Date will be made from the Available Collection Amount. The
Servicer will calculate the Available Collection Amount on the 4th Business Day
prior to each Distribution Date (each such day, a "Determination Date"). With
respect to each Distribution Date, the "Available Collection Amount" is the sum
of (i) all amounts received on the Home Loans or required to be paid by the
Servicer, the Transferor or the Seller (exclusive of amounts not required to be
deposited in the Collection Account), during the related Due Period (or, in the
case of amounts paid by the Transferor, in connection with the purchase or
substitution of a Defective Home Loan) as reduced by any portion thereof that
may not be withdrawn therefrom pursuant to an order of a United States
bankruptcy court of competent jurisdiction imposing a stay pursuant to Section
362 of the United States Bankruptcy Code, (ii) in the case of a Distribution
Date relating to a Due Period that ends prior to the end of the Funding Period,
an amount from the Capitalized Interest Account sufficient to fund any
shortfall in the Interest Distribution Amount attributable to the amounts in
the Pre-Funding Account, (iii) in the case of the Distribution Date following
the Due Period in which the Funding Period ends, amounts, if any, remaining in
the Pre-Funding Account at the end of the Funding Period (net of reinvestment
income which must be transferred to the Capitalized Interest Account),
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(iv) with respect to the final Distribution Date, an early retirement of the
Offered Securities by the Affiliated Holder or the Securities Insurer, the
Termination Price, and (v) any and all income or gain from investments in the
Collection Account. The "Termination Price" shall be an amount equal to the
sum of (i) the then outstanding Class Principal Balance of the Notes plus
accrued interest thereon at the applicable Note Interest Rate, (ii) the then
outstanding Certificate Principal Balance of the Certificates plus accrued
interest thereon at the Pass Through Rate and (iii) any amounts owed to the
Securities Insurer under the Insurance Agreement.
The Servicer will establish and maintain with the Indenture Trustee an
account, in the name of the Indenture Trustee on behalf of the Noteholders,
into which amounts released from the Collection Account, the Pre-Funding
Account, the Reserve Account and any proceeds from the Guaranty Policy for
distribution to the Noteholders will be deposited and from which all
distributions to the Noteholders will be made (the "Note Distribution
Account"). The Servicer will also establish and maintain with the Indenture
Trustee an account, in the name of the Co-Owner Trustee on behalf of the
Certificateholders, into which amounts released from the Collection Account,
the Pre-Funding Account, the Reserve Account and any proceeds from the Guaranty
Policy for distribution to the Certificateholders will be deposited and from
which all distributions to the Certificateholders will be made (the
"Certificate Distribution Account").
On the third Business Day prior to each Distribution Date, the Indenture
Trustee will deposit into the Note Distribution Account the sum of the
Available Collection Amount and the Reserve Account Withdrawal Amount, if any,
(the "Available Distribution Amount") by making the appropriate withdrawals
from the Collection Account, the Pre-Funding Account, the Capitalized Interest
Account and the Reserve Account, as applicable. No later than the second
Business Day prior to each Distribution Date, the following amounts will either
be retained in the Note Distribution Account or withdrawn from the Note
Distribution Account and deposited into the Certificate Distribution Account,
in either case for distribution on such Distribution Date, in the following
order of priority:
(i) to be retained in the Note Distribution Account 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
Securities Insurer, an amount equal to the Guaranty Insurance Premium
and all unpaid Guaranty Insurance Premiums from prior Due Periods, (c)
to the Indenture Trustee, an amount equal to the Indenture Trustee Fee
and all unpaid Indenture Trustee Fees from prior Due Periods, and (d) to
the Owner Trustee, an amount equal to the Owner Trustee Fee and all
unpaid Owner Trustee Fees from prior Due Periods;
(ii) to be retained in the Note Distribution Account and the
Certificate Distribution Account, pro rata, any amounts remaining from
the Pre-Funding Account Deposit at the end of the Funding Period (net of
reinvestment income), which will be distributed in reduction, on a pro
rata basis, of the Class Principal Balances of each Class of Notes and
the Certificate Principal Balance; provided, however, that if such
remaining amount is less than or equal to $50,000, such amount will be
included in the Noteholders' Monthly Principal Distributable Amount and
distributed only to the Note Distribution Account, or if an event of
default has occurred under the Indenture, such remaining amount will be
distributed in reduction of the Class Principal Balances of each Class
of Notes;
(iii) to be retained in the Note Distribution Account, from the
Available Distribution Amount remaining after the application of clause
(i) through (ii), the Noteholders' Interest Distributable Amount;
(iv) to be retained in the Note Distribution Account, from the
Available Distribution Amount remaining after the application of clauses
(i) through (iii) above, the Noteholders' Principal Distributable
Amount;
(v) to be deposited into the Certificate Distribution Account,
from the Available Distribution Amount remaining after the application
of clauses (i) through (iv) above, the Certificateholders' Interest
Distributable Amount;
(vi) to be deposited into the Certificate Distribution Account,
from the Available Distribution Amount remaining after the application
of clauses (i) through (v) above, the Certificateholders' Principal
Distributable Amount;
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(vii) to be deposited into the Certificate Distribution Account
for distribution to the Securities Insurer, from the Available
Distribution Amount remaining after the application of clauses (i)
through (vi) above, the Securities Insurer Reimbursement Amount;
(viii) on an Overcollateralization Stepdown Date, to be deposited
into the Certificate Distribution Account for distribution to the
holders of the Residual Interest, from the Available Distribution Amount
remaining after the application of clauses (i) through (vii) above, the
Overcollateralization Reduction Amount;
(ix) to be deposited into the Certificate Distribution Account
for distribution to the Servicer, from the Available Distribution Amount
remaining after the application of clauses (i) through (viii) above, an
amount equal to any voluntary Servicing Advances previously made by the
Servicer and not previously reimbursed (the "Servicing Advance
Reimbursement Amount"); and
(x) if the Excess Overcollateralization Amount equals or exceeds
zero, to be deposited into the Certificate Distribution Account for
distribution to the holders of the Residual Interest, from the Available
Distribution Amount remaining after the application of clauses (i)
through (ix) above, the Excess Spread, if any.
Notwithstanding the preceding description regarding priority of
distributions, as described herein (See "Description of Credit Enhancement --
The Reserve Account" herein), under certain circumstances on any Distribution
Date following the withdrawal of amounts from a Substituted Reserve Credit
included in the Reserve Account, Excess Spread otherwise available for
inclusion in the Noteholders Principal Distributable Amount and
Certificateholders' Principal Distributable Amount will instead be distributed
to reimburse the Reserve Credit Provider to restore the amounts available in
the Reserve Account up to the Reserve Account Requirement.
INCOME FROM ACCOUNTS
So long as no Event of Default will have occurred and be continuing,
amounts on deposit in the Note Distribution Account, Certificate Distribution
Account (sometimes referred to herein, together with the Collection Account, as
an "Account") will be invested by the Indenture Trustee, as directed by the
Affiliated Holder, in one or more Permitted Investments (as defined in the Sale
and Servicing Agreement) bearing interest or sold at a discount. So long as no
Event of Default will have occurred and be continuing, amounts on 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 Distribution Date. All income or
other gain from investments in any Account will be deposited in such Account
immediately on receipt, unless otherwise specified herein.
DISTRIBUTIONS ON THE OFFERED SECURITIES; RELATED DEFINITIONS
Distributions on the Offered Securities on each Distribution Date will
be made from the sum of the Available Collection Amount, any funds withdrawn
from the Reserve Account and any Guaranteed Payments. The Servicer will
calculate the Available Collection Amount on each Determination Date. With
respect to each Distribution Date, the "Required Distribution Amount" is the
sum of the Interest Distribution Amount, the Regular Principal Distribution
Amount, the Noteholders, Carry-Forward Amount and the Certificateholders'
Principal Carry-Forward Amount, in each case, for such Distribution Date.
The "Interest Distribution Amount" on any Distribution Date the sum of
the Noteholders' Interest Distributable Amount and the Certificateholders'
Interest Distributable Amount for such Distribution Date.
The "Regular Principal Distribution Amount" on each Distribution Date
will be an amount equal to the lesser of:
(A) the sum of the aggregate Class Principal Balance of the
Notes and the Certificate Principal Balance of the Certificates
immediately prior to such Distribution Date; and
(B) the greater of (1) the sum of (i) each scheduled payment
of principal collected by the Servicer in the related Due Period, (ii)
all partial and full principal prepayments applied by the Servicer
during such related Due Period, (iii) the principal portion of all Net
Liquidation Proceeds, Insurance Proceeds and Released Mortgaged Property
Proceeds received during the related Due Period, (iv) (a) that portion
of the purchase price
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of any repurchased Home Loan which represents principal and (b) the
principal portion of any Substitution Adjustments required to be
deposited in the Collection Account as of the related Determination
Date, (v) the amount of any Net Loan Losses for the preceding Due Period
equal to the amount on deposit in the Reserve Account until such amount
is reduced to zero, and (vi) if the Overcollateralization Amount is
zero, the amount of any Net Loan Losses for the preceding Due Period
minus the sum of (a) the amount included in clause (v) above for such
Distribution Date and (b) the amount of Net Loan Losses for the
preceding Due Period allocated to reduce the Overcollateralization
Amount to zero on such Distribution Date and (2) the amount by which
(i) the aggregate principal balance of the Offered Securities as of the
preceding Distribution Date (after giving effect to all payments of
principal on such preceding Distribution Date) exceeds (ii) the Pool
Principal Balance plus funds on deposit in the Pre-Funding Account, each
as of the immediately preceding Determination Date; provided, however,
that if such Distribution Date is an Overcollateralization Stepdown
Date, then with respect to the distribution of principal to the
Noteholders and Certificateholders the foregoing amount in each case,
will be reduced (to an amount not less than zero) by the
Overcollateralization Reduction Amount, if any, for such Distribution
Date.
Notwithstanding clauses (B)(1)(v) and (vi) or (B)(2) of the definition
of Regular Principal Distribution Amount, if on the final Distribution Date the
funds available for distribution are not sufficient to provide for the
distribution of the Regular Principal Distribution Amount and the applicable
Noteholders' Principal Carry-Forward Amount or Certificateholders' Principal
Carry-Forward Amount, in full, then the holders of the Notes or the
Certificates, as applicable, will not be distributed such portion of the
Regular Principal Distribution Amount and Noteholders' Principal Carry-Forward
Amount or Certificateholders' Principal Carry-Forward Amount attributable to
such insufficiency, in which event the amount of such insufficiency will be
written-off and the corresponding principal balances of all Classes of the
Notes and the Certificates will be reduced to zero without the distribution of
funds to fully pay the Notes and the Certificates. If prior to the final
Distribution Date the Overcollateralization Amount is reduced to zero and no
amounts are on deposit in the Reserve Account, then the principal portion of
any Net Loan Losses will be included within the Regular Principal Distribution
Amount for the related Distribution Date. However, no corresponding proceeds
of principal from the Home Loans will be included in the Regular Principal
Distribution Amount to provide funds for the distribution of the portion of the
Regular Principal Distribution Amount attributable to such Net Loan Losses, and
the distribution of this portion of the Regular Principal Distribution Amount
to the holders of the Offered Securities will be dependent upon the receipt of
funds from, first, the Excess Spread, if any, and second, if such Excess Spread
does not provide sufficient funds, then any Guaranteed Payment received by the
Indenture Trustee. If sufficient funds for the distribution of this portion of
the Regular Principal Distribution Amount are not provided from the Excess
Spread and the Guaranteed Payment on the applicable Distribution Date, then the
amount of such insufficiency would become a Noteholders' Principal Carry-
Forward Amount or Certificateholders' Principal Carry-Forward Amount, as
applicable, which would ultimately be subject to the write-off on the final
Distribution Date to the extent that sufficient funds are not available for
distribution on such final Distribution Date, including funds distributable to
pay such Noteholders' Principal Carry-Forward Amount or Certificateholders'
Principal Carry-Forward Amount from the receipt of Excess Spread and Guaranteed
Payments on or before such final Distribution Date.
For purposes hereof, the following terms shall have the following
meanings:
"Insurance Proceeds" on each Distribution Date will be equal to, with
respect to any Home Loan, the proceeds paid to the Indenture Trustee or the
Servicer by any insurer pursuant to any insurance policy covering a Home Loan,
Mortgaged Property or REO Property or any other insurance policy that relates
to a Home Loan, net of any expenses which are incurred by the Indenture Trustee
or the Servicer in connection with the collection of such proceeds and not
otherwise reimbursed to the Indenture Trustee or the Servicer, but excluding
any Guaranty Policy Proceeds and proceeds of any insurance policy that are to
be applied to the restoration or repair of the Mortgaged Property or released
to the borrower in accordance with customary loan servicing procedures.
A "Liquidated Home Loan" is a Defaulted Home Loan as to which the
Servicer has determined that all recoverable liquidation and insurance proceeds
have been received, which will be deemed to occur upon the earlier of: (a) 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 300 days past due.
"Net Liquidation Proceeds" on each Distribution Date will be equal to
any cash amounts received from Liquidated Home Loans, whether through trustee's
sale, foreclosure sale, disposition of REO, whole loan sales or
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otherwise (other than Insurance Proceeds and Released Mortgaged Property
Proceeds), and any other cash amounts received in connection with the
management of the Mortgaged Properties from Defaulted Home Loans, in each case,
net of any reimbursements to the Servicer made from such amounts for any
unreimbursed Servicing Advances made and any other fees and expenses paid in
connection with the foreclosure, conservation and liquidation of the related
Liquidated Home Loan or Mortgaged Properties.
"Released Mortgaged Property Proceeds" on each Distribution Date will be
equal to, with respect to any Home Loan, the proceeds received by the Servicer
in connection with (i) a taking of an entire Mortgaged Property by exercise of
the power of eminent domain or condemnation or (ii) any release of part of the
Mortgaged Property from the lien of the related Mortgage, whether by partial
condemnation, sale or otherwise, which in either case are not released to the
borrower in accordance with applicable law, customary mortgage servicing
procedures and the Sale and Servicing Agreement.
"Excess Spread" with respect to any Distribution Date will equal the
portion, if any, of the Available Collection Amount for the related Due Period
that remains after payment of the following amounts: (a) the Trust Fees and
Expenses; (b) the Noteholders' Interest Distributable Amount; (c) the Regular
Principal Distribution Amount; (d) the Certificateholders' Interest
Distributable Amount; (e) the Securities Insurer Reimbursement Amount; and (f)
the Servicing Advance Reimbursement Amount.
"Noteholders' Distributable Amount" means, with respect to any
Distribution Date, the sum of the Noteholders' Principal Distributable Amount
and the Noteholders' Interest Distributable Amount.
"Noteholders' Interest Distributable Amount" means, with respect to any
Distribution Date, the sum of the Noteholders' Monthly Interest Distributable
Amount for such Distribution Date and the Noteholders' Interest Carry-Forward
Amount for such Distribution Date.
"Noteholders' Monthly Interest Distributable Amount" means, with respect
to each Distribution Date and each Class of Notes, the aggregate amount of
thirty (30) days' accrued interest at the respective Interest Rate for such
Class of Notes on the Class Principal Balance of such Class immediately
preceding such Distribution Date (or, in the case of the first Distribution
Date, on the Closing Date) after giving effect to all payments of principal to
the Noteholders of such Class on or prior to the immediately preceding
Distribution Date.
"Noteholders' Interest Carry-Forward Amount" means, with respect to any
Distribution Date, the excess of the Noteholders' Monthly Interest
Distributable Amount for the preceding Distribution Date and any outstanding
Noteholders' Interest Carry-Forward Amount on such preceding Distribution Date,
over the amount in respect of interest that is actually deposited in the Note
Distribution Account on such preceding Distribution Date.
"Noteholders' Principal Distributable Amount" means, with respect to any
Distribution Date, the sum of the Noteholders' Monthly Principal Distributable
Amount for such Distribution Date and the Noteholders' Principal Carry-Forward
Amount as of the close of the preceding Distribution Date; provided, however,
that the Noteholders' Principal Distributable Amount shall not exceed the
outstanding Class Principal Balance of the Notes; and provided, further, that
(i) the Noteholders' Principal Distributable Amount on the Class A-1 Final
Scheduled Distribution Date shall not be less than the amount that is necessary
(after giving effect to other amounts to be deposited in the Note Distribution
Account on such Distribution Date and allocable to principal) to reduce the
outstanding Class Principal Balance of the Class A-1 Notes to zero; (ii) the
Noteholders' Principal Distributable Amount on the Class A-2 Final Scheduled
Distribution Date shall not be less than the amount that is necessary (after
giving effect to other amounts to be deposited in the Note Distribution Account
on such Distribution Date and allocable to principal) to reduce the outstanding
Class Principal Balance of the Class A-2 Notes to zero; (iii) the Noteholders'
Principal Distributable Amount on the Class A-3 Final Scheduled Distribution
Date shall not be less than the amount that is necessary (after giving effect
to other amounts to be deposited in the Note Distribution Account on such
Distribution Date and allocable to principal) to reduce the outstanding Class
Principal Balance of the Class A-3 Notes to zero; (iv) the Noteholders'
Principal Distributable Amount on the Class A-4 Final Scheduled Distribution
Date shall not be less than the amount that is necessary (after giving effect
to other amounts to be deposited in the Note Distribution Account on such
Distribution Date and allocable to principal) to reduce the outstanding Class
Principal Balance of the Class A-4 Notes to zero; (v) the Noteholders'
Principal Distributable Amount on the Class A-5 Final Scheduled Distribution
Date shall not be less than the amount that is necessary (after giving effect
to other amounts to be deposited in the Note Distribution Account on such
Distribution Date and allocable to principal) to reduce the outstanding Class
Principal Balance of the Class A-5 Notes to zero; (vi) the Noteholders'
Principal Distributable Amount on the Class A-6 Final Scheduled Distribution
Date shall not be less
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than the amount that is necessary (after giving effect to other amounts to be
deposited in the Note Distribution Account on such Distribution Date and
allocable to principal) to reduce the outstanding Class Principal Balance of
the Class A-6 Notes to zero; (vii) the Noteholders' Principal Distributable
Amount on the Class A-7 Final Scheduled Distribution Date shall not be less
than the amount that is necessary (after giving effect to other amounts to be
deposited in the Note Distribution Account on such Distribution Date and
allocable to principal) to reduce the outstanding Class Principal Balance of
the Class A-7 Notes to zero; and (viii) the Noteholders' Principal
Distributable Amount on the Class A-8 Final Scheduled Distribution Date shall
not be less than the amount that is necessary (after giving effect to other
amounts to be deposited in the Note Distribution Account on such Distribution
Date and allocable to principal) to reduce the outstanding Class Principal
Balance of the Class A-8 Notes to zero.
"Noteholders' Monthly Principal Distributable Amount" means, with
respect to each Distribution Date, the sum of (i) the Regular Principal
Distribution Amount, and (ii) until the related Due Period in which the Funding
Period ends and thereafter if the Overcollateralization Amount is less than the
Required Overcollateralization Amount, then the Excess Spread, if any, and
(iii) if no event of default has occurred under the Indenture and the remaining
amount in the Pre-Funding Account at the end of the Funding Period is less than
or equal to $50,000, then such remaining amount.
"Noteholders' Principal Carry-Forward Amount" means, as of the close of
any Distribution Date, the excess of the Noteholders' Monthly Principal
Distributable Amount and any outstanding Noteholders' Principal Carry-Forward
Amount from the preceding Distribution Date over the amount in respect of
principal that is actually deposited in the Note Distribution Account.
"Certificateholders' Distributable Amount" means, with respect to any
Distribution Date, the sum of the Certificateholders' Principal Distributable
Amount and the Certificateholders' Interest Distributable Amount.
"Certificateholders' Interest Distributable Amount" means, with respect
to any Distribution Date, the sum of the Certificateholders' Monthly Interest
Distributable Amount for such Distribution Date and the Certificateholders'
Interest Carry-Forward Amount for such Distribution Date.
"Certificateholders' Monthly Interest Distributable Amount" means, with
respect to any Distribution Date, thirty (30) days' accrued interest at the
Pass Through Rate on the Certificate Principal Balance immediately preceding
such Distribution Date (or, in the case of the first Distribution Date, on the
Closing Date), after giving effect to all payments allocable to the reduction
of the Certificate Principal Balance made on or prior to the immediately
preceding Distribution Date.
"Certificateholders' Interest Carry-Forward Amount" means, with respect
to any Distribution Date, the excess of the Certificateholders' Monthly
Interest Distributable Amount for the preceding Distribution Date and any
outstanding Certificateholders' Interest Carry-Forward Amount on such preceding
Distribution Date, over the amount in respect of interest that is actually
deposited in the Certificate Distribution Account on such preceding
Distribution Date.
"Certificateholders' Principal Distributable Amount" means, with respect
to any Distribution Date, the sum of the Certificateholders' Monthly Principal
Distributable Amount for such Distribution Date and the Certificateholders'
Principal Carry-Forward Amount as of the close of the preceding Distribution
Date; provided, however, that the Certificateholders' Principal Distributable
Amount shall not exceed the Certificate Principal Balance. In addition, on the
Final Scheduled Distribution Date, the principal required to be distributed to
Certificateholders will include the lesser of (a) any scheduled payments of
principal due and remaining unpaid on each Home Loan in the Trust as of the
Final Scheduled Maturity Date or (b) the portion of the amount required to be
advanced under clause (a) above that is necessary (after giving effect to the
other amounts to be deposited in the Certificate Distribution Account on such
Distribution Date and allocable to principal) to reduce the Certificate
Principal Balance to zero, and, in the case of clauses (a) and (b), remaining
after any required distribution in respect of the Notes.
"Certificateholders' Monthly Principal Distributable Amount" means, with
respect to any Distribution Date prior to the Distribution Date on which the
Notes are paid in full, zero; and with respect to any Distribution Date
commencing on the Distribution Date on which the Notes are paid in full, the
sum of (i) the Regular Principal Distribution Amount (less, on the Distribution
Date on which the Notes are paid in full, the portion thereof payable on the
Notes), plus (ii) until the related Due Period in which the Funding Period ends
and thereafter if the Overcollateralization Amount is less than the Required
Overcollateralization Amount, the Excess Spread, if any.
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"Certificateholders' Principal Carry-Forward Amount" means, as of the
close of any Distribution Date, the excess of the Certificateholders' Monthly
Principal Distributable Amount and any outstanding Certificateholders'
Principal Carry-Forward Amount from the preceding Distribution Date, over the
amount in respect of principal that is actually deposited in the Certificate
Distribution Account.
"Reserve Account Withdrawal Amount" means, with respect to any
Distribution Date, an amount equal to the lesser of (i) the total amount on
deposit in the Reserve Account as of related Determination Date, and (ii) the
excess of (A) the sum of the Trust Fees and Expenses and the Required
Distribution Amount, over (B) the Available Collection Amount.
RESTRICTIONS ON SECURITYHOLDER RIGHTS
So long as (i) there does not exist a continuing failure by the
Securities Insurer to make a required payment under the Guaranty Policy and
(ii) certain bankruptcy-related events specified in the Sale and Servicing
Agreement have not occurred with respect to the Securities Insurer (any of the
events described in (i) and (ii), a "Securities Insurer Default"), the
Securities Insurer will have the right to exercise all rights, including voting
rights, which the Offered Securityholders are entitled to exercise pursuant to
the Indenture and the Trust Agreement (the "Offered Securityholder Rights"),
without any consent of such Offered Securityholders; provided, however, that
without the consent of each holder of a Class of Notes or Certificates affected
thereby, the Securities Insurer shall not exercise such Offered Securityholder
Rights to amend the Indenture in any manner that would (i) reduce the amount
of, or delay the timing of, collections of payments on Home Loans or
distributions which are required to be made on any Offered Security, (ii)
adversely affect in any material respect the interests of the holders of any
Class of Notes or the Certificates, or (iii) alter the rights of any such
Offered Securityholder to consent to any such amendment.
INSOLVENCY EVENT
If any of certain events of voluntary corporate dissolution or
insolvency, readjustment of debt, marshalling of assets and liabilities,
commencement of bankruptcy proceedings under an Insolvency Law or similar
proceedings with respect to such person indicating its insolvency or inability
to pay its obligations (each, an "Insolvency Event") occurs with respect to the
Affiliated Holder, the 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. With respect to the exercise
of certain rights by the Securities Insurer in lieu of the Certificateholders,
including the right to object to the termination of the Trust as described
above, See "Restrictions on Securityholder Rights" above. 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
Trust Accounts and the Certificate Distribution 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 holders of the Offered Securities in accordance with the
terms and priority of payment described herein. See "Description of the
Offered Securities" herein.
THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Offered Securities in their own names or as pledgees. For
the purpose of meeting the legal requirements of certain jurisdictions, the
Servicer, the Owner Trustee and the Indenture Trustee acting jointly (or in
some instances, the Owner Trustee or the Indenture Trustee acting alone) will
have the power to appoint co-trustees or separate trustees of all or any part
of the Trust with the prior written consent of the Securities Insurer. In the
event of such an appointment, all rights, powers, duties and obligations
conferred or imposed upon the Owner Trustee by the Sale and Servicing Agreement
and the Trust Agreement and the Indenture Trustee by the Indenture will be
conferred or imposed upon the Owner Trustee and the Indenture Trustee,
respectively, and in each such case such separate trustee or co-trustee
jointly, or, in any jurisdiction in which the Owner Trustee or Indenture
Trustee will be incompetent or unqualified to perform certain acts, singly upon
such
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separate trustee or co-trustee who will exercise and perform such rights,
powers, duties and obligations solely at the direction of the Owner Trustee or
the Indenture Trustee, respectively.
The Owner Trustee and the Indenture Trustee may resign at any time, in
which event the Servicer will be obligated to appoint a successor thereto. The
Servicer, with the prior written consent of the Securities Insurer, or the
Securities Insurer may also remove the Owner Trustee or the Indenture Trustee
if either ceases to be eligible to continue as such under the Trust Agreement
or the Indenture, as the case may be, becomes legally unable to act or becomes
insolvent. In such circumstances, the Servicer will be obligated to appoint a
successor Owner Trustee or a successor Indenture Trustee, as applicable, that
is acceptable to the Securities Insurer. Any resignation or removal of the
Owner Trustee or Indenture Trustee and appointment of a successor thereto will
not become effective until acceptance of the appointment by such successor and
approval by the Securities Insurer.
The Trust Agreement will provide that the Servicer will pay or cause to
be paid the fees and expenses of the Owner Trustee and the Indenture will
provide that the Servicer will pay or cause to be paid the fees and expenses of
the Indenture Trustee in connection with their duties under the Trust Agreement
and Indenture, respectively. The Trust Agreement and Indenture will further
provide that the Owner Trustee and Indenture Trustee will be entitled to
indemnification by the Transferor and the Seller for, and will be held harmless
against, any loss, liability or expense incurred by the Owner Trustee or
Indenture Trustee not resulting from its own willful misfeasance, bad faith or
negligence (other than by reason of a breach of any of its representations or
warranties to be set forth in the Trust Agreement or Indenture, as the case may
be).
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Certificates (other than the execution
and authentication thereof), the Notes or of any Home Loans or related
documents, and will not be accountable for the use or application by the Seller
or the Servicer of any funds paid to the Seller or the Servicer in respect of
the Notes, the Certificates or the Home Loans, or the investment of any monies
by the Servicer before such monies are deposited into the Collection Account,
the Noteholders' Distribution Account or the Certificateholders' Distribution
Account. So long as no Event of Default has occurred and is continuing, the
Owner Trustee will be required to perform only those duties specifically
required of it under the Trust Agreement. Generally, those duties will be
limited to the receipt of the various certificates, reports or other
instruments required to be furnished to the Owner Trustee under the Trust
Agreement, in which case it will only be required to examine them to determine
whether they conform to the requirements of the Trust Agreement. The Owner
Trustee will not be charged with knowledge of a failure by the Servicer to
perform its duties under the Trust Agreement or Sale and Servicing Agreement
which failure constitutes an Event of Default unless the Owner Trustee obtains
actual knowledge of such failure as will be specified in the Trust Agreement.
The Owner Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Trust Agreement or to make any
investigation of matters arising thereunder or to institute, conduct or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the Certificateholders, unless such Certificateholders have
offered to the Owner Trustee reasonable security or indemnity against the
costs, expenses and liabilities that may be incurred therein or thereby.
Subject to the rights or consent of the Noteholders, Securities Insurer and
Indenture Trustee, no Certificateholder will have any right under the Trust
Agreement to institute any proceeding with respect to the Trust Agreement,
unless such holder previously has given to the Owner Trustee written notice of
the occurrence of an Event of Default and (i) the Event of Default arises from
the Servicer's failure to remit payments when due or (ii) the holders of
Certificates evidencing not less than 25% of the voting interests of the
Certificates have made written request upon the Owner Trustee to institute such
proceeding in its own name as the Owner Trustee thereunder and have offered to
the Owner Trustee reasonable indemnity and the Owner Trustee for 30 days has
neglected or refused to institute any such proceedings.
The Indenture Trustee will make no representations as to the validity or
sufficiency of the Indenture, the Certificates, the Notes (other than the
execution and authentication thereof) or of any Home Loans or related
documents, and will not be accountable for the use or application by the Seller
or the Servicer of any funds paid to the Seller or the Servicer in respect of
the Notes, the Certificates or the Home Loans, or the investment of any monies
by the Servicer before such monies are deposited into the Collection Account or
the Distribution Account. So long as no Indenture Event of Default has
occurred and is continuing, the Indenture Trustee will be required to perform
only those duties specifically required of it under the Indenture. Generally,
those duties will be limited to the receipt of the various certificates,
reports or other instruments required to be furnished to the Indenture Trustee
under the Indenture, in which case it will only be
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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. Subject to the rights or consent of
the Securities Insurer, no Noteholder will have any right under the Indenture
to institute any proceeding with respect to the Indenture, unless such holder
previously has given to the Indenture Trustee written notice of the occurrence
of an Event of Default and (i) the Event of Default arises from the Servicer's
failure to remit payments when due or (ii) the holders of Class A-1 Notes,
Class A-2 Notes, Class A-3 Notes, Class A-4 Notes, Class A-5 Notes, Class A-6
Notes, Class A-7 Notes and Class A-8 Notes evidencing not less than 25% of the
voting interests of each such Class of Notes, acting together as a single
class, have made written request upon the Indenture Trustee to institute such
proceeding in its own name as the Indenture Trustee thereunder and have offered
to the Indenture Trustee reasonable indemnity and the Indenture Trustee for 30
days has neglected or refused to institute any such proceedings.
PREPAYMENT AND YIELD CONSIDERATIONS
Except as otherwise provided herein, no principal payments will be made
on the Class A-2 Notes until the Class A-1 Notes have been paid in full, no
principal payments will be made on the Class A-3 Notes until the Class A-2
Notes have been paid in full, no principal payments will be made on the Class
A-4 Notes until the Class A-3 Notes have been paid in full, no principal
payments will be made on the Class A-5 Notes until the Class A-4 Notes have
been paid in full, no principal payments will be made on the Class A-6 Notes
until the Class A-5 Notes have been paid in full, no principal payments will be
made on the Class A-7 Notes until the Class A-6 Notes have been paid in full,
and no principal payments will be made on the Class A-8 Notes until the Class
A-7 Notes have been paid in full. In addition, except as otherwise provided,
no distributions of principal with respect to the Certificates will be made
until the Class A-8 Notes have been paid in full. See "Description of the
Offered Securities -- Distributions on the Notes" and "-- Distributions on the
Certificates" herein. As the rate of payment of principal of each Class of
Notes and the Certificates depends primarily on the rate of payment (including
prepayments) of the principal balance of the Home Loans, final payment of any
class of Notes and the final distribution in respect of the Certificates could
occur significantly earlier than their respective final scheduled Distribution
Dates. Holders of the Offered Securities will bear the risk of being able to
reinvest principal payments on the Offered Securities at yields at least equal
to the yield on their respective Offered Securities. No prediction can be made
as to the rate of prepayments on the Home Loans in either stable or changing
interest rate environments. Any reinvestment risk resulting from the rate of
prepayment of the Home Loans and the distribution of such payments to the
holders of the Offered Securities will be borne entirely by the holders of the
Offered Securities.
The subordination of the Certificates to the Notes will provide limited
protection to the Noteholders against losses on the Home Loans. Accordingly,
the yield on the Certificates will be extremely sensitive to the loss
experience of the Home Loans and the timing of any such losses. If the actual
rate and amount of losses experienced by the Home Loans exceed the rate and
amount of such losses assumed by an investor, the yield to maturity on the
Certificates may be lower than anticipated.
The Home Loans are either (i) "simple interest" or "date-of-payment
loans" or (ii) "actuarial method" loans. With respect to a Home Loan that is a
"simple interest" loan, if a payment is received after the scheduled monthly
due date, a smaller portion of such payment will be applied to principal and a
greater portion will be applied to interest than would have been the case had
the payment been received on the scheduled monthly due date, resulting in such
Home Loan having a longer weighted average life than would have been the case
had the payment been made as scheduled. Conversely, if a payment on a Home
Loan is received prior to the scheduled monthly due date, more of such payment
will be applied to principal and less to interest than would have been the case
had the payment been received on the scheduled monthly due date, resulting in
such Home Loan having a shorter weighted average life than would have been the
case had the payment been made as scheduled. See "The Home Loan Pool --
Payments on the Home Loans" herein.
The effective yield to the holders of the Offered Securities will be
lower than the yield otherwise produced by the applicable Note Interest Rate or
Pass Through Rate, because the distribution of the interest accrued during each
Due
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Period (a calendar month consisting of thirty days) will not be made until the
Distribution Date occurring in the month following such Due Period. See
"Description of the Offered Securities -- Distributions on the Notes" and "--
Distributions on the Certificates" herein. This delay will result in funds
being passed through to the holders of the Offered Securities approximately 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 distributions of principal can also affect the yield
on Offered Securities purchased at a price greater or less than par.
The rate of principal payments on the Offered Securities, the aggregate
amount of each interest payment on the Offered Securities and the yield to
maturity on the Offered Securities will be directly related to and affected by
the rate and timing of principal reductions on the Home Loans. The principal
reductions on such Home Loans may be in the form of scheduled amortization
payments or unscheduled payments or reductions, which may include prepayments,
repurchases and liquidations or write-offs due to default, casualty, insurance
or other dispositions. On or after any Distribution Date on which the Pool
Principal Balance declines to 15% or less, or 10% or less, of the Pool
Principal Balance of the Initial Home Loans and Subsequent Home Loans conveyed
to the Trust as of the respective Cut-Off Dates, the Affiliated Holder may
effect a redemption of the Notes and prepayment of the Certificates under one
of two optional termination methods as described herein. See "Description of
the Offered Securities -- Optional Redemption of the Notes; Optional Prepayment
of the Certificates" herein. Furthermore, to the extent so provided in the
Indenture, the Securities Insurer may be entitled to exercise a similar right
to effect an optional redemption of the Notes and prepayment of the
Certificates. See "Description of the Offered Securities -- Optional
Redemption of the Notes; Optional Prepayment of the Certificates" herein.
The "weighted average life" of an Offered Security refers to the average
amount of time that will elapse from the Closing Date to the date each dollar
in respect of principal of such Offered Security is repaid. The weighted
average life of the Offered Security will be influenced by, among other
factors, the rate at which principal reductions occur on the Home Loans, the
rate at which Excess Spread is distributed to holders of the Offered Securities
as described herein, and the extent to which any Overcollateralization
Reduction Amount is paid to the holders of the Residual Interest as described
herein. If substantial principal prepayments on the Home Loans are received
from unscheduled prepayments, liquidations or repurchases, then the
distributions to the holders of the Offered Securities resulting from such
prepayments may significantly shorten the actual average life of the Offered
Securities than would otherwise be the case. If the Home Loans experience
delinquencies and defaults in the payment of principal, then the holders of the
Offered Securities will similarly experience a delay in the receipt of
principal distributions attributable to such delinquencies and defaults which
in certain instances may result in a longer actual average life of the Offered
Securities than would otherwise be the case. However, to the extent that the
Principal Balances from Liquidated Home Loans are included in the principal
distributions on the Offered Securities as a result of delinquencies and
defaults on the Home Loans (and at such time that either amounts on deposit in
the Reserve Account or the Overcollateralization Amount has been reduced to
zero), then the holders of the Offered Securities will experience an
acceleration in the receipt of principal distributions which in certain
instances may result in a shorter actual average life of the Offered Securities
than would otherwise be the case. Interest shortfalls on the Home Loans due to
principal prepayments in full and curtailments and any resulting shortfall in
amounts distributable on the Offered Securities will be covered to the extent
of amounts available from the credit enhancement provided for the Offered
Securities. See "Risk Factors -- Additional Credit Enhancement Limitations --
Adequacy of Credit Enhancement" herein.
The rate and timing of principal reductions on the Home Loans will be
influenced by a variety of economic, geographic, social and other factors.
These factors may include changes in borrowers' housing needs, job transfers,
unemployment, borrowers' net equity, if any, in the mortgaged properties,
servicing decisions, homeowner mobility, the existence and enforceability of
"due-on-sale" clauses, seasoning of loans, market interest rates for similar
types of loans and the availability of funds for such loans. Each of the Home
Loans may be assumed at the Servicer's option upon the sale of the Mortgaged
Property. 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, depending on prevailing market interest
rates, the future outlook for market interest rates and
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<PAGE> 58
economic conditions generally, some borrowers may sell or refinance mortgaged
properties in order to realize their equity in the mortgaged properties, to
meet cash flow needs or to make other investments. In addition, any future
limitations on the rights of borrowers to deduct interest payments on mortgage
loans for Federal income tax purposes may result in a higher rate of prepayment
on the 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.
Distributions of principal to holders of the Offered Securities at a
faster rate than anticipated will increase the yield on Offered Securities
purchased at a discount but will decrease the yield on Offered Securities
purchased at a premium, which distributions of principal may be attributable to
scheduled payments and prepayments of principal on the Home Loans, to Excess
Spread and to amounts remaining on deposit in the Pre-Funding Account at the
expiration of the Funding Period. The effect on an investor's yield due to
distributions of principal to the holders of the Offered Securities (including
without limitation prepayments on the Home Loans) occurring at a rate that is
faster (or slower) than the rate anticipated by the investor during any period
following the issuance of the Offered Securities will not be entirely offset by
a subsequent like reduction (or increase) in the rate of such distributions of
principal during any subsequent period.
The rate of delinquencies and defaults on the Home Loans, and the
recoveries, if any, on Defaulted Home Loans and foreclosed properties, will
also affect the rate and timing of principal payments on the Home Loans, and
accordingly, the weighted average life of the Offered Securities, and could
cause a delay in the payment of principal or a slower rate of principal
amortization to the holders of Offered Securities. Alternatively, the
occurrence of delinquencies and defaults on the Home Loans could result in an
increase in principal payments or more rapid rate of principal amortization of
the Offered Securities as a result of the inclusion of Net Loan Losses from
Liquidated Home Loans in the amounts distributable to the holders of the
Offered Securities as described herein. Certain factors may influence such
delinquencies and defaults, including origination and underwriting standards,
loan-to-value ratios and delinquency history. In general, defaults on home
loans are expected to occur with greater frequency in their early years,
although little data is available with respect to the rate of default on
similar types of home loans. The rate of default on Home Loans with high loan-
to-value ratios, secured by junior liens, may be higher than that of home loans
with lower loan-to-value ratios or secured by first liens on comparable
properties. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Home Loans will be affected by the general economic
condition of the region of the country in which the related Mortgaged
Properties are located or the related borrower is residing. See "The Home Loan
Pool" herein. The risk of delinquencies and loss is greater and voluntary
principal prepayments are less likely in regions where a weak or deteriorating
economy exists, as may be evidenced by, among other factors, increasing
unemployment or falling property values.
Because principal distributions are paid to certain Classes of Notes
before other Classes, holders of the Classes of Notes or the Certificates
having a later priority of principal distribution bear a greater risk of losses
from delinquencies and defaults on the Home Loans than holders of the Classes
of Notes having earlier priorities for payment of principal. In addition,
because principal distributions are paid to the Noteholders before the
Certificateholders, the Certificateholders will bear a greater risk of such
losses than holders of the Notes. See "Description of Credit Enhancement --
Subordination and Allocation of Losses" herein. Nevertheless, even if losses
are allocated to any Class of Notes, the holders of such Class will be
distributed the full amount of the interest and principal distributions due
such holders to the extent that Guaranteed Payments therefor are made under the
Guaranty Policy.
Although certain data have been published with respect to the historical
prepayment experience of certain residential mortgage loans, such mortgage
loans may differ in material respects from the Home Loans and such data may not
be reflective of conditions applicable to the Home Loans. No 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
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<PAGE> 59
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 from the Home Loan
Pool than for a pool of mortgage (including first or junior lien) loans that
have combined loan-to-value ratios less than 100%. Given these
characteristics, the Home Loans may experience a higher or lower rate of
prepayment than first-lien mortgage loans.
EXCESS SPREAD AND OVERCOLLATERALIZATION REDUCTION AMOUNT DISTRIBUTIONS
An overcollateralization feature has been designed to accelerate the
principal amortization of the Offered Securities relative to the principal
amortization of the Home Loans. If on any Distribution Date, the Required
Overcollateralization Amount exceeds the Overcollateralization Amount, any
Excess Spread will be distributed sequentially to the holders of each Class of
Notes until the principal of the Class A-8 Notes has been paid in full and then
to the holders of the Certificates as an amount attributable to principal.
Once the Overcollateralization Amount equals the Required Overcollateralization
Amount for such Distribution Date (i.e., the Excess Overcollateralization
Amount equals or exceeds zero), distributions of Excess Spread otherwise
distributable to the holders of the Offered Securities as described above will
instead be distributed to the holders of the Residual Interest, thereby
reducing the rate of the principal amortization with respect to the Offered
Securities, and under certain circumstances delaying such principal
amortization until the Excess Overcollateralization Amount is reduced to zero.
If purchased at a premium or a discount, the yield to maturity on an Offered
Security will be affected by the extent to which any Excess Spread is
distributed (a) as principal to the holders of the Offered Securities or (b) to
the holders of the Residual Interest in lieu of distribution of principal to
the holders of the Offered Securities. If the actual rate of such Excess
Spread distributions on the Offered Securities is slower than the rate
anticipated by an investor who purchases an Offered Security at a discount, the
actual yield to such investor will be lower than such investor's anticipated
yield. If the actual rate of Excess Spread distributions is faster than the
rate anticipated by an investor who purchases an Offered Security at a premium,
the actual yield to such investor will be lower than such investor's
anticipated yield. The amount of Excess Spread on any Distribution Date will
be affected by the actual amount of interest received, collected or recovered
in respect of the Home Loans during the related Due Period.
An additional overcollateralization feature has been designed to limit
the accelerated amortization of the Offered Securities as described in the
preceding paragraph. On each Distribution Date that is an
Overcollateralization Stepdown Date and on which the Excess
Overcollateralization Amount is, or, after taking into account all other
distributions to be made on such Distribution Date would be, greater than zero,
amounts which would otherwise be distributed as principal to the holders of the
Notes or the Certificates on such Distribution Date shall instead be
distributed to the holders of the Residual Interest, thereby reducing the rate
of and under certain circumstances delaying the principal amortization with
respect to the Offered Securities, until the Excess Overcollateralization
Amount is reduced to zero. Again, if purchased at a premium or a discount, the
yield to maturity on an Offered Security will be affected by the extent to
which any Overcollateralization Reduction Amount is paid to the holders of the
Residual Interest in lieu of payment of principal to the holders of the Offered
Securities. If the actual distributions of any Overcollateralization Reduction
Amount to the holders of the Residual Interest occurs sooner than anticipated
by an investor who purchases an Offered Security at a discount, the actual
yield to such investor may be lower than such investor's anticipated yield. If
the actual distributions of any Overcollateralization Reduction Amount to the
holders of the Residual Interest occurs later than anticipated by an investor
who purchases an Offered Security at a premium, the actual yield to such
investor may be lower than such investor's anticipated yield. The amount of
the Overcollateralization Reduction Amount, if any, distributable on any
Distribution Date will be affected by the Required Overcollateralization
Amount, which is affected by the actual default and delinquency experience of
the Home Loan Pool and the principal amortization of the Home Loan Pool.
REINVESTMENT RISK
The reinvestment risk with respect to an investment in the Offered
Securities will be affected by the rate and timing of principal payments
(including prepayments) in relation to the prevailing interest rates at the
time of receipt of such principal payments. For example, during periods of
falling interest rates, holders of the Offered Securities are likely to receive
an increased amount of principal payments from the Home Loans at a time when
such holders may be unable
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<PAGE> 60
to reinvest such payments in investments having a yield and rating comparable
to the Offered Securities. Conversely, during periods of rising interest
rates, holders of the Offered Securities are likely to receive a decreased
amount of principal prepayments from the Home Loans at a time when such holders
may have an opportunity to reinvest such payments in investments having a
higher yield than, and a comparable rating to, the Offered Securities.
FINAL SCHEDULED DISTRIBUTION DATES
The "Final Scheduled Distribution Dates" for each Class of Notes and the
Certificates as set forth in the "Summary of Terms" herein have been calculated
generally in accordance with the Modeling Assumptions below and the additional
assumption that no prepayments, delinquencies, liquidations, substitutions or
repurchases are experienced on the Home Loans. The actual maturity of any
Class of Notes or the Certificates may be substantially earlier, and in certain
instances could be later, than the Final Scheduled Distribution Dates set forth
herein under "Summary of Terms".
WEIGHTED AVERAGE LIFE OF THE OFFERED SECURITIES
The following information is given solely to illustrate the effect of
prepayments of the Home Loans on the weighted average lives of the Offered
Securities under certain stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Home Loans. Weighted
average life refers to the average amount of time that will elapse from the
date of delivery of a security until each dollar of principal of such security
will be repaid to the investor. The weighted average life of the Offered
Securities will be influenced by the rate at which principal of the Home Loans
is paid, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes reductions of principal, 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 holders of the Offered Securities as described herein, the
extent to which any amounts remaining in the Pre-Funding Account at the
expiration of the Funding Period are distributed to the holders of the Offered
Securities as described herein, and the extent to which any
Overcollateralization Reduction Amount is distributed to the 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 approximate 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 make any
representations about the appropriateness of the Prepayment Assumption or the
CPR model.
MODELING ASSUMPTIONS. For purposes of preparing the tables below, the
following assumptions (the "Modeling Assumptions") have been made.
(i) all scheduled principal payments on such the Home Loans
are timely received on the first day of a Due Period, which will begin
on the first day of each month and end on the thirtieth day of the
month, with the first Due Period commencing on February 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 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;
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<PAGE> 61
(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 Offered 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 Offered Securities is February
27, 1997 and each year will consist of 360 days;
(vii) cash distributions are received by the holders of the
Offered Certificates on the 10th day of each month, commencing in March
1997;
(viii) the Required Overcollateralization Amount will equal
$45,000,000 and will be reduced in accordance with the terms of the
Indenture;
(ix) the Note Interest Rate for each Class of Notes and the
Pass Through Rate for the Certificates are as set forth on the cover
page hereof;
(x) the additional fees deducted from the interest collections
in respect of the Home Loans include the Guaranty Insurance Premium,
Indenture Trustee Fee, the Owner Trustee Fee and the Servicing Fee;
(xi) no optional termination of the Offered Securities occurs;
(xii) 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 6.944% per annum;
(xiii) no reinvestment income from any Trust account is earned
and available for distribution; and
(xiv) the Home Loan Pool consists of Home Loans having the
following characteristics:
<TABLE>
<CAPTION>
Initial Home Net Home Remaining Original Term
Home Loan Loan Term of
Loan Interest Interest to Maturity Amortization Assumed Delivery
Number Principal Balance Rate Rate (in months) (in months) of Home Loans
------ ----------------- ---------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 6,775,170.20 14.629% 13.879% 95 97 Closing Date
2 25,792,501.78 14.405% 13.655% 118 120 Closing Date
3 111,957,775.22 14.173% 13.423% 178 180 Closing Date
4 100,234,171.03 13.861% 13.111% 238 240 Closing Date
5 155,791,129.39 14.122% 13.372% 298 300 Closing Date
6 841,073.96 14.629% 13.879% 97 97 March 1997
7 3,201,897.68 14.405% 13.655% 120 120 March 1997
8 13,898,509.87 14.173% 13.423% 180 180 March 1997
9 12,443,134.17 13.861% 13.111% 240 240 March 1997
10 19,340,010.52 14.122% 13.372% 300 300 March 1997
11 2,532,537.58 14.629% 13.879% 97 97 April 1997
12 9,641,157.11 14.405% 13.655% 120 120 April 1997
13 41,849,468.85 14.173% 13.423% 180 180 April 1997
14 37,467,222.07 13.861% 13.111% 240 240 April 1997
15 58,234,240.57 14.122% 13.372% 300 300 April 1997
</TABLE>
The tables on the following pages indicate at the specified percentages of the
Prepayment Assumption the corresponding weighted average life of each Class of
Notes and the Certificates.
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<PAGE> 62
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-1 NOTES CLASS A-2 NOTES
-------------------------------------------------- --------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
----------------- -- --- --- ---- ---- ---- -- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance . . . . . . . 100 100 100 100 100 100 100 100 100 100 100 100
February 1998 . . . . . 67 52 44 36 28 21 100 100 100 100 100 100
February 1999 . . . . . 55 15 0 0 0 0 100 100 91 51 11 0
February 2000 . . . . . 46 0 0 0 0 0 100 69 8 0 0 0
February 2001 . . . . . 37 0 0 0 0 0 100 7 0 0 0 0
February 2002 . . . . . 26 0 0 0 0 0 100 0 0 0 0 0
February 2003 . . . . . 13 0 0 0 0 0 100 0 0 0 0 0
February 2004 . . . . . 0 0 0 0 0 0 97 0 0 0 0 0
February 2005 . . . . . 0 0 0 0 0 0 61 0 0 0 0 0
February 2006 . . . . . 0 0 0 0 0 0 22 0 0 0 0 0
February 2007 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2008 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2009 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2010 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2011 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2012 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2013 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2014 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2015 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2016 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2017 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2018 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2019 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2020 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2021 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2022 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life(2):
No Optional Termination . 2.9 1.1 0.9 0.8 0.7 0.7 8.3 3.3 2.5 2.0 1.7 1.5
</TABLE>
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class of Notes is determined by (a)
multiplying the amount of each distribution of principal thereof by the
number of years from the date of issuance to the related Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a) and rounding to 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> 63
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-3 NOTES CLASS A-4 NOTES
-----------------------------------------------------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
----------------- -- --- --- ---- ---- ---- -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance . . . . . . . . 100 100 100 100 100 100 100 100 100 100 100 100
February 1998 . . . . . . 100 100 100 100 100 100 100 100 100 100 100 100
February 1999 . . . . . . 100 100 100 100 100 73 100 100 100 100 100 100
February 2000 . . . . . . 100 100 100 51 0 0 100 100 100 100 96 29
February 2001 . . . . . . 100 100 32 0 0 0 100 100 100 51 0 0
February 2002 . . . . . . 100 48 0 0 0 0 100 100 50 0 0 0
February 2003 . . . . . . 100 0 0 0 0 0 100 89 0 0 0 0
February 2004 . . . . . . 100 0 0 0 0 0 100 17 0 0 0 0
February 2005 . . . . . . 100 0 0 0 0 0 100 0 0 0 0 0
February 2006 . . . . . . 100 0 0 0 0 0 100 0 0 0 0 0
February 2007 . . . . . . 79 0 0 0 0 0 100 0 0 0 0 0
February 2008 . . . . . . 41 0 0 0 0 0 100 0 0 0 0 0
February 2009 . . . . . . 0 0 0 0 0 0 96 0 0 0 0 0
February 2010 . . . . . . 0 0 0 0 0 0 29 0 0 0 0 0
February 2011 . . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2012 . . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2013 . . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2014 . . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2015 . . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2016 . . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2017 . . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2018 . . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2019 . . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2020 . . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2021 . . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2022 . . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life(2):
No Optional Termination . . 10.7 5.0 3.8 3.0 2.5 2.2 12.7 6.5 5.0 4.0 3.3 2.9
</TABLE>
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class of Notes is determined by (a)
multiplying the amount of each distribution of principal thereof by the
number of years from the date of issuance to the related Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a) and rounding to 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> 64
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-5 NOTES CLASS A-6 NOTE
---------------------------------------------------------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
----------------- -- --- --- ---- ---- ---- -- ---- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance . . . . . 100 100 100 100 100 100 100 100 100 100 100 100
February 1998 . . . 100 100 100 100 100 100 100 100 100 100 100 100
February 1999 . . . 100 100 100 100 100 100 100 100 100 100 100 100
February 2000 . . . 100 100 100 100 100 100 100 100 100 100 100 100
February 2001 . . . 100 100 100 100 68 * 100 100 100 100 100 100
February 2002 . . . 100 100 100 49 0 0 100 100 100 100 85 50
February 2003 . . . 100 100 65 0 0 0 100 100 100 85 44 9
February 2004 . . . 100 100 0 0 0 0 100 100 98 49 9 0
February 2005 . . . 100 47 0 0 0 0 100 100 65 17 0 0
February 2006 . . . 100 0 0 0 0 0 100 95 36 0 0 0
February 2007 . . . 100 0 0 0 0 0 100 67 9 0 0 0
February 2008 . . . 100 0 0 0 0 0 100 42 0 0 0 0
February 2009 . . . 100 0 0 0 0 0 100 18 0 0 0 0
February 2010 . . . 100 0 0 0 0 0 100 0 0 0 0 0
February 2011 . . . 53 0 0 0 0 0 100 0 0 0 0 0
February 2012 . . . 0 0 0 0 0 0 90 0 0 0 0 0
February 2013 . . . 0 0 0 0 0 0 70 0 0 0 0 0
February 2014 . . . 0 0 0 0 0 0 48 0 0 0 0 0
February 2015 . . . 0 0 0 0 0 0 23 0 0 0 0 0
February 2016 . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2017 . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2018 . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2019 . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2020 . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2021 . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2022 . . . 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life(2):
No Optional 14.0 8.0 6.2 5.0 4.2 3.6 16.8 10.7 8.5 7.0 5.9 5.0
Termination . . . . . . .
</TABLE>
- --------------------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class of Notes is determined by (a)
multiplying the amount of each distribution of principal thereof by the
number of years from the date of issuance to the related Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a) and rounding to 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.
S-61
<PAGE> 65
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-7 NOTES CLASS A-8 NOTES
---------------------------------------------------------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
----------------- -- --- --- ---- ---- ---- -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance . . . . . . . 100 100 100 100 100 100 100 100 100 100 100 100
February 1998 . . . . . 100 100 100 100 100 100 100 100 100 100 100 100
February 1999 . . . . . 100 100 100 100 100 100 100 100 100 100 100 100
February 2000 . . . . . 100 100 100 100 100 100 100 100 100 100 100 100
February 2001 . . . . . 100 100 100 100 100 100 100 100 100 100 100 100
February 2002 . . . . . 100 100 100 100 100 100 100 100 100 100 100 100
February 2003 . . . . . 100 100 100 100 100 100 100 100 100 100 100 100
February 2004 . . . . . 100 100 100 100 100 63 100 100 100 100 100 100
February 2005 . . . . . 100 100 100 100 68 22 100 100 100 100 100 100
February 2006 . . . . . 100 100 100 84 30 0 100 100 100 100 100 82
February 2007 . . . . . 100 100 100 48 0 0 100 100 100 100 98 39
February 2008 . . . . . 100 100 79 18 0 0 100 100 100 100 58 6
February 2009 . . . . . 100 100 48 0 0 0 100 100 100 87 23 0
February 2010 . . . . . 100 91 18 0 0 0 100 100 100 49 0 0
February 2011 . . . . . 100 55 0 0 0 0 100 100 85 16 0 0
February 2012 . . . . . 100 21 0 0 0 0 100 100 45 0 0 0
February 2013 . . . . . 100 1 0 0 0 0 100 100 20 0 0 0
February 2014 . . . . . 100 0 0 0 0 0 100 70 0 0 0 0
February 2015 . . . . . 100 0 0 0 0 0 100 38 0 0 0 0
February 2016 . . . . . 90 0 0 0 0 0 100 7 0 0 0 0
February 2017 . . . . . 43 0 0 0 0 0 100 0 0 0 0 0
February 2018 . . . . . 16 0 0 0 0 0 100 0 0 0 0 0
February 2019 . . . . . 0 0 0 0 0 0 79 0 0 0 0 0
February 2020 . . . . . 0 0 0 0 0 0 25 0 0 0 0 0
February 2021 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
February 2022 . . . . . 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life(2):
No Optional Termination . 20.0 14.2 11.9 10.0 8.5 7.3 22.5 17.6 15.0 13.0 11.3 9.8
</TABLE>
- --------------------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class of Notes is determined by (a)
multiplying the amount of each distribution of principal thereof by the
number of years from the date of issuance to the related Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a) and rounding to 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.
S-62
<PAGE> 66
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CERTIFICATES
---------------------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150%
----------------- -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Balance . . . . . . . . . . . . . . . . . . . . . . . 100 100 100 100 100 100
February 1998 . . . . . . . . . . . . . . . . . . . . . 100 100 100 100 100 100
February 1999 . . . . . . . . . . . . . . . . . . . . . 100 100 100 100 100 100
February 2000 . . . . . . . . . . . . . . . . . . . . . 100 100 100 100 100 100
February 2001 . . . . . . . . . . . . . . . . . . . . . 100 100 100 100 100 100
February 2002 . . . . . . . . . . . . . . . . . . . . . 100 100 100 100 100 100
February 2003 . . . . . . . . . . . . . . . . . . . . . 100 100 100 100 100 100
February 2004 . . . . . . . . . . . . . . . . . . . . . 100 100 100 100 100 100
February 2005 . . . . . . . . . . . . . . . . . . . . . 100 100 100 100 100 100
February 2006 . . . . . . . . . . . . . . . . . . . . . 100 100 100 100 100 100
February 2007 . . . . . . . . . . . . . . . . . . . . . 100 100 100 100 100 100
February 2008 . . . . . . . . . . . . . . . . . . . . . 100 100 100 100 100 100
February 2009 . . . . . . . . . . . . . . . . . . . . . 100 100 100 100 100 80
February 2010 . . . . . . . . . . . . . . . . . . . . . 100 100 100 100 95 56
February 2011 . . . . . . . . . . . . . . . . . . . . . 100 100 100 100 69 36
February 2012 . . . . . . . . . . . . . . . . . . . . . 100 100 100 87 47 21
February 2013 . . . . . . . . . . . . . . . . . . . . . 100 100 100 68 33 12
February 2014 . . . . . . . . . . . . . . . . . . . . . 100 100 97 50 22 5
February 2015 . . . . . . . . . . . . . . . . . . . . . 100 100 75 35 12 0
February 2016 . . . . . . . . . . . . . . . . . . . . . 100 100 53 21 4 0
February 2017 . . . . . . . . . . . . . . . . . . . . . 100 77 33 10 0 0
February 2018 . . . . . . . . . . . . . . . . . . . . . 100 57 22 3 0 0
February 2019 . . . . . . . . . . . . . . . . . . . . . 100 39 12 0 0 0
February 2020 . . . . . . . . . . . . . . . . . . . . . 100 21 2 0 0 0
February 2021 . . . . . . . . . . . . . . . . . . . . . 60 2 0 0 0 0
February 2022 . . . . . . . . . . . . . . . . . . . . . 0 0 0 0 0 0
Weighted Average Life (2):
No Optional Termination . . . . . . . . . . . . . . . . . 24.1 21.5 19.4 17.3 15.3 13.6
</TABLE>
- --------------------------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of the Certificates is determined by (a)
multiplying the amount of each distribution of principal thereof by the
number of years from the date of issuance to the related Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a) and rounding to 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.
S-63
<PAGE> 67
The paydown scenarios for the Offered Securities 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 Offered Securities
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
distributions on the Offered Securities 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 Offered Securities 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 Offered
Securities 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, and each Certificateholder, by the
acceptance of a Certificate, will agree to treat the Trust as a partnership in
which the Certificateholders are partners for federal income tax purposes.
Alternative characterizations of the Trust and the Certificates are possible,
but would not result in materially adverse tax consequences to
Certificateholders. See "Certain Federal Income Tax Consequences" in the
Prospectus for additional information concerning the application of federal
income tax laws to the Trust and the Offered Securities.
Certificateholders, who are tax-exempt entities or non-U.S. persons,
will have tax consequences that may be considered adverse by such holders. See
"Certain Federal Income Tax Consequences -- Trusts for Which a Partnership
Election is Made -- Tax Consequences to Holders of the Certificates --
Partnership Taxation" and "-- Tax Consequences to Foreign Certificateholders"
in the Prospectus.
The Offered Securities may be treated as having been issued with
original issue discount. As a result, holders of the Offered Securities may be
required to recognize income with respect to the Offered Securities 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 100% of the Prepayment Assumption.
ERISA CONSIDERATIONS
THE NOTES
The Notes may be purchased by an employee benefit plan or an individual
retirement account (a "Plan") subject to ERISA or Section 4975 of the Internal
Revenue Code of 1986, as amended (the "Code"). A fiduciary of a Plan must
determine that the purchase of a Note is consistent with its fiduciary duties
under ERISA and does not result in a nonexempt prohibited transaction as
defined in Section 406 of ERISA or Section 4975 of the Code. For additional
information regarding treatment of the Notes under ERISA, See "ERISA
Considerations" in the Prospectus.
The Notes may not be purchased with the assets of a Plan if the Seller,
the Servicer, the Indenture Trustee, the Owner Trustee or any of their
affiliates (a) has investment or administrative discretion with respect to such
Plan assets; (b) has authority or responsibility to give, or regularly gives,
investment advice with respect to such Plan assets, for a fee and pursuant to
an agreement or understanding that such advice (i) will serve as a primary
basis for investment
S-64
<PAGE> 68
decisions with respect to such Plan assets and (ii) will be based on the
particular investment needs for such Plan; or (c) is an employer maintaining or
contributing to such Plan.
THE CERTIFICATES
The Certificates may not be acquired by (a) an employee benefit plan (as
defined in Section 3(3) of ERISA) that is subject to the provisions of Title I
of ERISA, (b) a plan described in Section 4975(e)(1) of the Code or (c) any
entity whose underlying assets include plan assets by reason of a plan's
investment in the entity or which uses plan assets to acquire Certificates. By
its acceptance of a Certificate, each holder of such Certificate will be deemed
to have represented and warranted that it is not subject to the foregoing
limitation. In this regard, purchasers that are insurance companies should
consult with their counsel with respect to the United States Supreme Court case
interpreting the fiduciary responsibility rules of ERISA, John Hancock Mutual
Life Insurance Co. v. Harris Bank and Trust (decided December 12, 1993). In
John Hancock, the Supreme Court ruled that assets held in an insurance
company's general account may be deemed to be "plan assets" for ERISA purposes
under certain circumstances. Prospective purchasers should determine whether
the decision affects their ability to make purchases of the Certificates. For
additional information regarding treatment of the Certificates under ERISA, See
"ERISA Considerations" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting
Agreement (the "Underwriting Agreement"), the Seller has agreed to cause the
Trust to sell to each of the Note Underwriters named below (collectively, the
"Note Underwriters"), and each of the Note Underwriters has severally agreed to
purchase, the principal amount of Notes set forth opposite its name below:
PRINCIPAL AMOUNT OF:
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 CLASS A-6 CLASS A-7 CLASS A-8
UNDERWRITER NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES
----------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Banc One Capital
Corporation . . $ 58,000,000 $24,320,000 $30,500,000 $ 18,560,000 $23,140,000 $44,000,000 $34,830,000 $27,000,000
Bear, Stearns &
Co. Inc. . . . 26,000,000 29,360,000 19,660,000 21,190,000 9,000,000 19,560,000 17,500,000 10,570,000
PaineWebber
Incorporated . 55,980,000 11,000,000 15,000,000 10,000,000 17,030,000 29,550,000 9,000,000 0
------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total . . . . . $139,980,000 $64,680,000 $65,160,000 $49,750,000 $49,170,000 $93,110,000 $61,330,000 $37,570,000
============ =========== =========== =========== =========== =========== =========== ===========
</TABLE>
The Seller has been advised by the Note Underwriters that they propose
initially to offer the Notes to the public at the prices set forth herein, and
to certain dealers at such price less the initial concession not in excess of
0.180% of the denominations of the Notes per Class A-1 Note, 0.225% per Class
A-2 Note, 0.255% per Class A-3 Note, 0.285% per Class A-4 Note, 0.315% per
Class A-5 Note, 0.330% per Class A-6 Note, 0.360% per Class A-7 Note and 0.390%
per Class A-8 Note. The Note Underwriters may allow, and such dealers may
reallow, a concession not in excess of 0.100% per Class A-1 Note, 0.150% per
Class A-2 Note, 0.175% per Class A-3 Note, 0.200% per Class A-4 Note, 0.200%
per Class A-5 Note, 0.200% per Class A-6 Note, 0.200% per Class A-7 Note and
0.200% per Class A-8 Note. After the initial public offering of the Notes, the
public offering price and such concessions may be changed.
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Seller has agreed to cause the Trust to sell to each of the
Certificate Underwriters named below (the "Certificate Underwriters" and,
together with the Note Underwriters, the "Underwriters"), and each of the
Certificate Underwriters has severally agreed to purchase, the principal amount
of Certificates set forth opposite its name below:
S-65
<PAGE> 69
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF CERTIFICATES
------------ -------------------
<S> <C>
Banc One Capital Corporation. . . . . . . . . . . . . . . . . . . . . . $28,000,000
Bear, Stearns & Co. Inc.. . . . . . . . . . . . . . . . . . . . . . . . $ 6,000,000
PaineWebber Incorporated . . . . . . . . . . . . . . . . . . . . . . . . $ 5,250,000
-----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,250,000
===========
</TABLE>
The Seller has been advised by the Certificate Underwriters that they
propose initially to offer the Certificates to the public at the price set
forth herein, and to certain dealers at such price less the initial concession
not in excess of 0.443% per Certificate. The Certificate Underwriters may
allow, and such dealers may reallow, a concession not in excess of 0.200% per
Certificate. After the initial public offering of the Certificates, the public
offering price and such concessions may be changed.
In addition to the purchase of the Notes and the Certificates pursuant
to the Underwriting Agreement, the Underwriters and their affiliates have
several business relationships with the Transferor and Servicer and its
affiliates, including its parent RAC. Affiliates of the Underwriters provide
warehouse financing and repurchase arrangements to the Transferor for its
consumer and mortgage loans, including property improvement, 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 RAC and its subsidiaries, and these affiliates hold a
majority of RAC's outstanding shares of non-voting common stock and a
significant portion of RAC's outstanding shares of voting and non-voting common
stock, combined. The Underwriters, or affiliates of the Underwriters, also
render certain services to RAC in connection with the public offering of RAC's
debt and equity securities from time to time. Daniel J. Jessee, a Vice
Chairman of Banc One Capital Corporation, and Sheldon I. Stein, a Senior
Managing Director of Bear, Stearns & Co. Inc., are each a director of RAC.
LEGAL INVESTMENT MATTERS
The Offered Securities will not constitute "mortgage related
securities"under the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") because a substantial number of the Home Loans are secured by liens
on real estate that are not first liens. Accordingly, many institutions with
legal authority to invest in "mortgage related securities" may not be legally
authorized to invest in the Offered Securities.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Offered Securities or to
purchase Offered Securities representing more than a specified percentage of
the investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Offered Securities constitute legal
investments for such investors.
RATINGS
It is a condition to the issuance of the Notes that each of the Class
A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes, Class A-5 Notes,
Class A-6 Notes, Class A-7 Notes and Class A-8 Notes be rated "AAA" by Standard
& Poor's and "Aaa" by Moody's. It is a condition to the issuance of the
Certificates that they be rated "AAA" by Standard & Poor's and "Aaa" by
Moody's. The ratings assigned to the Notes and the Certificates will be based
primarily on the claims-paying ability of the Securities Insurer.
The ratings on the Offered Securities address the likelihood of the
receipt by the holders of the Offered Securities of all distributions on the
Home Loans to which they are entitled. The ratings on the Offered Securities
also address the structural, legal and issuer-related aspects associated with
the Offered Securities, including the nature of the Home Loans. In general,
the ratings on the Offered Securities address credit risk and not prepayment
risk. The ratings on the Offered Securities do not represent any assessment of
the likelihood that principal prepayments of the Home Loans will be made by
borrowers or the degree to which the rate of such prepayments might differ from
that originally anticipated. As a result, the initial ratings assigned to the
Offered Securities do not address the possibility that holders of the Offered
Securities might suffer a lower than anticipated yield in the event of
principal payments on the Offered
S-66
<PAGE> 70
Securities resulting from funds remaining in the Pre-Funding Account at the end
of the Funding Period or rapid prepayments of the Home Loans, or in the event
that the Trust is terminated prior to the Scheduled Final Distribution Dates of
each Class of Notes and the Certificates.
The Seller has not solicited ratings on the Offered Securities with any
rating agency other than the Rating Agencies. However, there can be no
assurance as to whether any other rating agency will rate the Offered
Securities, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Offered Securities by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Offered
Securities by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the Offered Securities by the Rating Agencies are
subsequently lowered for any reason, no person or entity is obligated to
provide any additional support or credit enhancement with respect to such
Offered Securities.
EXPERTS
The consolidated financial statements of MBIA Insurance Corporation and
its subsidiaries as of December 31, 1995 and 1994 and for the three years ended
December 31, 1995 incorporated by reference into this Prospectus Supplement
have been audited by Coopers & Lybrand L.L.P., independent accountants, as set
forth in their report thereon, incorporated by reference herein in reliance
upon the authority of such firm as experts in accounting and auditing.
LEGAL OPINIONS
In addition to the legal opinions described in the Prospectus, certain
legal matters relating to the issuance of the Offered Securities will be passed
upon for the Seller, the Transferor and the Servicer by Andrews & Kurth L.L.P.,
Dallas, Texas and for the Underwriters by Brown & Wood LLP, Washington, D.C.
Andrews & Kurth L.L.P., Dallas, Texas, will also pass on certain federal income
tax and other legal matters for the Trust. Certain legal matters will be
passed upon for the Securities Insurer by Kutak Rock, Omaha, Nebraska.
S-67
<PAGE> 71
INDEX OF TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
"Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-48
"Additional Series" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-31
"Affiliated Holder" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
"Assumed Pool Principal Balance" . . . . . . . . . . . . . . . . . . S-5, S-22
"Available Collection Amount" . . . . . . . . . . . . . . . . . . . . . . . S-46
"Available Distribution Amount" . . . . . . . . . . . . . . . . . . . . . . S-46
"Business Day" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
"Capitalized Interest Account" . . . . . . . . . . . . . . . . . . . S-8, S-45
"Capitalized Interest Account Deposit" . . . . . . . . . . . . . . . S-8, S-45
"Certificate Distribution Account" . . . . . . . . . . . . . . . . . . . . S-46
"Certificate Final Scheduled Distribution Date" . . . . . . . . . . . . S-4, S-4
"Certificateholders' Distributable Amount" . . . . . . . . . . . . . . . . S-51
"Certificateholders' Interest Carry-Forward Amount" . . . . . . . . . . . . S-51
"Certificateholders' Interest Distributable Amount" . . . . . . . . . . . . S-51
"Certificateholders' Monthly Interest Distributable Amount" . . . . . . . . S-51
"Certificateholders' Monthly Principal Distributable Amount" . . . . . . . S-51
"Certificateholders' Principal Carry-Forward Amount" . . . . . . . . . . . S-51
"Certificateholders' Principal Distributable Amount" . . . . . . . . . . . S-51
"Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-39
"Class A-1 Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Class A-2 Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Class A-3 Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Class A-4 Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Class A-5 Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Class A-6 Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Class A-7 Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Class A-8 Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-12, S-66
"Collection Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
"Commission" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-iii
"Conventional Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
"Co-Owner Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Credit Support Reduction Date" . . . . . . . . . . . . . . . . . . . . . . S-38
"Custodian" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Cut-Off Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Defaulted Home Loan" . . . . . . . . . . . . . . . . . . . . . . . . S-6, S-30
"Deficiency Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
"Deleted Home Loan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-30
"Determination Date" . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-46
"Distribution Date" . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-39
"DTC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
"Due Period" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Excess Overcollateralization Amount" . . . . . . . . . . . . . . . . S-10, S-38
"Excess Reserve Account Amount" . . . . . . . . . . . . . . . . . . . . . . S-36
"Excess Spread" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-50
"FFI" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"FICO Score" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
"Final Scheduled Distribution Date" . . . . . . . . . . . . . . . . . . . . S-3
"Funding Period" . . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-44
"Guaranteed Payment" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
"Guaranty Insurance Premium" . . . . . . . . . . . . . . . . . . . . . . . S-11
"Guaranty Policy" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
"Home Loan Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
</TABLE>
S-68
<PAGE> 72
<TABLE>
<S> <C>
"Home Loan Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-23
"Home Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
"Indenture" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-33
"Indenture Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Indenture Trustee Fee" . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
"Indenture Trustee's Home Loan File" . . . . . . . . . . . . . . . . . . . S-44
"Initial Home Loans" . . . . . . . . . . . . . . . . . . . . . . . . S-5, S-22
"Initial Pool Principal Balance" . . . . . . . . . . . . . . . . . . S-5, S-22
"Insolvency Event" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-52
"Insolvency Laws" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
"Insurance Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
"Insurance Proceeds" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
"Interest Shortfall" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
"Interim Required Overcollateralization" . . . . . . . . . . . . . . . . . S-36
"Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Liquidated Home Loan" . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
"Moody's" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
"Mortgaged Properties" . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
"Mortgages" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
"Net Liquidation Proceeds" . . . . . . . . . . . . . . . . . . . . . . . . S-49
"Net Loan Losses" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
"Note Interest Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Noteholders' Distributable Amount" . . . . . . . . . . . . . . . . . . . . S-50
"Noteholders' Interest Carry-Forward Amount" . . . . . . . . . . . . . . . S-50
"Noteholders' Interest Distributable Amount" . . . . . . . . . . . . . . . S-50
"Noteholders' Monthly Interest Distributable Amount" . . . . . . . . . . . S-50
"Noteholders' Monthly Principal Distributable Amount" . . . . . . . . . . . S-51
"Noteholders' Principal Carry-Forward Amount" . . . . . . . . . . . . . . . S-51
"Noteholders' Principal Distributable Amount" . . . . . . . . . . . . . . . S-50
"Notes" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-38
"Notice" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
"Offered Securities" . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-39
"Offered Securityholder Rights" . . . . . . . . . . . . . . . . . . . S-15, S-52
"Original Certificate Principal Balance" . . . . . . . . . . . . . . . . . S-3
"Original Class Principal Balance" . . . . . . . . . . . . . . . . . . . . S-2
"Overcollateralization Amount" . . . . . . . . . . . . . . . . . . . S-9, S-37
"Overcollateralization Reduction Amount" . . . . . . . . . . . . . . S-11, S-38
"Overcollateralization Stepdown Date" . . . . . . . . . . . . . . . . S-10, S-38
"Owner" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
"Owner Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Owner Trustee Fee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
"Pass Through Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
"Plan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-12, S-66
"Pool Principal Balance" . . . . . . . . . . . . . . . . . . . . . . S-5, S-22
"Preference Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
"Prepayment Assumption" . . . . . . . . . . . . . . . . . . . . . . . . . . S-58
"Pre-Funding Account" . . . . . . . . . . . . . . . . . . . . . . . . S-5, S-44
"Pre-Funding Account Deposit" . . . . . . . . . . . . . . . . . . . . S-7, S-44
"Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
"Purchase Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-30
"Qualified Substitute Home Loan" . . . . . . . . . . . . . . . . . . S-7, S-30
"RAC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Rating Agencies" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
"Record Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-39
"Regular Principal Distribution Amount" . . . . . . . . . . . . . . . . . . S-48
"Released Mortgaged Property Proceeds" . . . . . . . . . . . . . . . . . . S-49
</TABLE>
S-69
<PAGE> 73
<TABLE>
<S> <C>
"Required Distribution Amount" . . . . . . . . . . . . . . . . . . . . . . S-48
"Required Overcollateralization Amount" . . . . . . . . . . . . . . . S-10, S-37
"Reserve Account Requirement" . . . . . . . . . . . . . . . . . . . . S-9, S-36
"Reserve Account Subsequent Deposit" . . . . . . . . . . . . . . . . . . . S-9
"Reserve Account Withdrawal Amount" . . . . . . . . . . . . . . . . . . . . S-51
"Reserve Credit Provider" . . . . . . . . . . . . . . . . . . . . . . . . . S-36
"Residual Interest" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
"Sale and Servicing Agreement" . . . . . . . . . . . . . . . . . . . S-5, S-22
"Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
"Securities Insurer" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-31
"Securities Insurer Default" . . . . . . . . . . . . . . . . . . . . . . . S-52
"Securities Insurer Reimbursement Amount" . . . . . . . . . . . . . . . . . S-42
"Security Owners" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
"Seller" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-28
"Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Servicing Advance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
"Servicing Advance Reimbursement Amount" . . . . . . . . . . . . . . . . . S-47
"Servicing Compensation" . . . . . . . . . . . . . . . . . . . . . . S-11, S-45
"Servicing Fee" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11, S-45
"Servicing Fee Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
"SMMEA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-68
"Standard & Poor's" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
"Subsequent Home Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
"Subsequent Transfer Date" . . . . . . . . . . . . . . . . . . . . . . . . S-7
"Subservicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
"Substituted Reserve Credit" . . . . . . . . . . . . . . . . . . . . . . . S-36
"Tax Counsel" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-12, S-66
"Termination Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
"Transfer and Servicing Agreements" . . . . . . . . . . . . . . . . . S-22, S-43
"Transferor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Trust" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Trust Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-33
"Trust Fees and Expenses" . . . . . . . . . . . . . . . . . . . . . . S-3, S-11
"Underwriters" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-67
</TABLE>
S-70
<PAGE> 74
PROSPECTUS
FIRSTPLUS HOME LOAN TRUSTS
ASSET BACKED NOTES
ASSET BACKED CERTIFICATES
FIRSTPLUS INVESTMENT CORPORATION
SELLER
FIRSTPLUS FINANCIAL, INC.
TRANSFEROR AND SERVICER
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 a trust to be formed with respect
to such Series (each, a "Trust"). Each Trust will be formed pursuant to either a
Trust Agreement (each, a "Trust Agreement") to be entered into among FIRSTPLUS
INVESTMENT CORPORATION, as Seller (the "Seller") and the owner trustee specified
in the related Prospectus Supplement (the "Owner Trustee") or 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 between the Trust and the Indenture Trustee
specified in the related Prospectus Supplement (the "Indenture Trustee") and
will represent indebtedness of the related Trust. 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.
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.
(Continued on next page)
EXCEPT AS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, ANY NOTES OF
A SERIES REPRESENT OBLIGATIONS OF, AND THE CERTIFICATES OF A SERIES REPRESENT
BENEFICIAL INTERESTS IN, THE RELATED TRUST ONLY AND DO NOT REPRESENT OBLIGATIONS
OF OR INTERESTS IN, AND ARE NOT GUARANTEED OR INSURED BY, THE SELLER OR THE
SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES.
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 February 21, 1997
<PAGE> 75
(Continued from prior page)
The property of each Trust (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."
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."
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.
-ii-
<PAGE> 76
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.
AVAILABLE INFORMATION
The Seller, as originator of each Trust, 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.
-iii-
<PAGE> 77
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Seller 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.
The Seller 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, on behalf of FIRSTPLUS INVESTMENT CORPORATION, to
Jeffrey Luth at Morgan Walke, 380 Lexington Avenue, 50th Floor, New York, New
York 10168 (212) 850-5600.
-iv-
<PAGE> 78
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INTRODUCTORY NOTE...........................................
PROSPECTUS SUPPLEMENT....................................... -iii-
AVAILABLE INFORMATION....................................... -iii-
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. -iv-
SUMMARY OF TERMS............................................ 1
RISK FACTORS................................................ 8
Limited Liquidity and Fluctuation in Value from Market
Conditions............................................. 8
Limited Assets of the Trust............................... 9
Effect of Prepayments on Average Life..................... 10
Effect of Prepayments on Yield............................ 11
Limitations of Credit Enhancement......................... 11
Limited Nature of Ratings................................. 13
Adverse Tax Consequences.................................. 13
Certain Factors Affecting Delinquencies, Foreclosures and
Losses on Loan Assets.................................. 14
Risks Associated with Certain Loan Assets................. 15
Recharacterization of Sale of Loan Assets as Borrowing.... 17
Risks Relating to Indexed Securities...................... 17
DESCRIPTION OF THE NOTES.................................... 18
General................................................... 18
Principal and Interest on the Notes....................... 18
The Indenture............................................. 19
The Indenture Trustee..................................... 22
Administration Agreement.................................. 22
DESCRIPTION OF THE CERTIFICATES............................. 22
General................................................... 22
Distributions of Principal and Interest................... 23
POOL FACTORS AND TRADING INFORMATION........................ 23
CERTAIN INFORMATION REGARDING THE SECURITIES................ 24
General................................................... 24
Fixed Rate Securities and Floating Rate Securities........ 25
Indexed Securities........................................ 25
Book-Entry Registration................................... 26
Definitive Securities..................................... 29
THE TRUSTS.................................................. 30
THE TRUSTEE................................................. 30
DESCRIPTION OF THE TRUST PROPERTY........................... 31
General................................................... 31
Mortgage Loans............................................ 32
Contracts................................................. 33
Additions, Substitution and Withdrawal of Assets.......... 34
Pre-Funding Arrangements.................................. 34
CREDIT ENHANCEMENT.......................................... 36
General................................................... 36
Subordination............................................. 36
Overcollateralization and Cross-Support................... 37
Guaranty Policy........................................... 37
</TABLE>
-v-
<PAGE> 79
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Mortgage Pool Insurance and FHA Insurance................. 38
Special Hazard Insurance.................................. 38
Reserve Funds............................................. 39
SERVICING OF THE LOAN ASSETS................................ 39
Enforcement of Due-on-Sale Clauses........................ 39
Realization Upon Defaulted Loan Assets.................... 40
Waivers and Deferments of Certain Payments................ 40
Subservicers.............................................. 40
Removal and Resignation of Servicer....................... 41
Advances.................................................. 41
Servicing Procedures...................................... 41
Administration and Servicing Compensation and Payment of
Expenses............................................... 42
THE SELLER.................................................. 43
THE SERVICER AND THE TRANSFEROR............................. 43
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS........ 44
Sale and Assignment of Loan Assets........................ 44
Conveyance of Subsequent Loan Assets...................... 46
Repurchase or Substitution of Loan Assets................. 46
Evidence as to Compliance................................. 47
List of Securityholders................................... 47
Administration of the Collection Account.................. 47
Reports to Securityholders................................ 48
Events of Default......................................... 49
Rights Upon Event of Default.............................. 49
Amendment................................................. 49
CERTAIN LEGAL ASPECTS OF THE LOAN ASSETS.................... 50
General Legal Considerations.............................. 50
Foreclosure............................................... 52
Truth in Lending Act...................................... 58
Applicability of Usury Laws............................... 59
Soldiers' and Sailors' Civil Relief Act................... 59
The Title I Program....................................... 60
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................... 68
Trusts for Which a Partnership Election is Made........... 68
Tax Characterization of the Trust as a Partnership..... 68
Tax Consequences to Holders of the Notes............... 69
Tax Consequences to Holders of the Certificates........ 70
Trusts Treated as Grantor Trusts.......................... 74
Tax Characterization of the Trust as a Grantor Trust... 74
Stripped Notes and Stripped Coupons.................... 75
ERISA CONSIDERATIONS........................................ 78
LEGAL INVESTMENT MATTERS.................................... 79
PLAN OF DISTRIBUTION........................................ 80
USE OF PROCEEDS............................................. 80
LEGAL OPINIONS.............................................. 80
INDEX OF TERMS.............................................. 81
</TABLE>
-vi-
<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, the
Trust to be formed pursuant to either a Trust
Agreement (as amended and supplemented from
time to time, a "Trust Agreement") among the
Seller and the applicable Owner Trustee for
such Trust (the "Trust" or the "Issuer") 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........................ FIRSTPLUS INVESTMENT CORPORATION (the
"Seller").
TRANSFEROR AND SERVICER....... FIRSTPLUS FINANCIAL, INC.("FFI" or the
"Transferor" or the "Servicer").
TRUSTEE....................... With respect to each Series of Securities that
is issued by a grantor trust, the 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.
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 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 Trust
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
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<PAGE> 81
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 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 forego-
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<PAGE> 82
ing. 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 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 of each Trust (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").
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
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<PAGE> 83
ultimate or timely 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 property of each Trust 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 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 and will
specify certain information regarding the
payment terms of such Mortgage Loans. See
"Description of the Trust
Property -- Mortgage Loans."
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<PAGE> 84
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. See
"Description of the Trust
Property -- Contracts."
C. 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 to
subsequently purchase additional Loan Assets
("Subsequent Loan Assets") from the Seller
following the date on which the related
Securities are issued (a "Pre-Funding
Arrangement"). 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 Seller will sell or transfer Loan
Assets having an aggregate principal balance
specified in the related Prospectus
Supplement as of the dates specified therein
(the "Cut-off Date") to a Trust pursuant to,
if the Trust is to be treated as an owner
trust, the related Sale and Servicing
Agreement among the Seller, the Servicer and
the Trust (as amended and supplemented from
time to time, the "Sale and Servicing
Agreement") or, if the Trust is to be treated
as a grantor trust for federal income tax
purposes, the related Pooling and Servicing
Agreement among the Seller, the Servicer and
the Trustee (as amended from time to time,
the "Pooling and Servicing Agreement").
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 sold by the Transferor to the Seller
and resold by the Seller to a Trust will be
selected based on the underwriting criteria
specified in the 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 Trust or any Class or
Classes of Securities may include any one or
more of the
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<PAGE> 85
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."
TRANSFER AND SERVICING
AGREEMENTS.................... With respect to each Trust that will be treated
as an owner trust, the Seller will sell the
related Assets to such Trust pursuant to a
Sale and Servicing Agreement or a Pooling and
Servicing Agreement. The rights and benefits
of any Trust 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 Trust 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 Trust that has
issued Notes.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES.................. Unless 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
Securities, Tax Counsel to such Trust 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 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 Trust as a
partnership in which such Certificateholder
is a partner for federal income tax purposes.
Alternative characterizations of such Trust
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.
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<PAGE> 86
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 the Seller 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 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.
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 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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<PAGE> 87
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.
Beneficial owners of Securities may experience some delay in their receipt
of 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
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
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<PAGE> 88
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. The Seller is not aware of
any source through which price information about the Offered Securities will be
generally available on an ongoing basis.
LIMITED ASSETS OF THE TRUST
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 will be guaranteed or insured by 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 for any other
Series. Accordingly, if the related Trust has 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
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 Prospectus Supplement, a deficiency
that arises after Securities of a Class of any such Series having higher
priority in payment 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 may, subsequent to
the issuance of such a Series, deliver additional Assets or withdraw Assets
previously included in the Trust 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
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<PAGE> 89
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 in any Trust 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 in a Trust 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 a Trust, 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 a
Trust, 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.
Accordingly, there can be no assurance as to the actual rate of prepayment
on the Loan Assets in any Trust 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 in any
Trust, the retirement of any Class of Securities of the related 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, the Seller 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 any Trust
ultimately affect the average life of any Class of Securities of the related
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 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
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of the prepayments on the Loan Assets included in the related Trust 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 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 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 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 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 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 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 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 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 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 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
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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 payments. 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 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 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.
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, the Seller,
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 the
Seller'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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Because the Trust is not eligible to hold an FHA contract of insurance
under the Title I Program, the FHA will not recognize the Trust or the
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 Trust nor the Securityholders will have a direct right to receive
insurance payments from the FHA. The Seller 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 the Seller.
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 the Seller 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 the Seller 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."
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
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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. 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.
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."
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 Trust, 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 both 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 Trust, as the junior lienholder, will bear
(i) the risk of delay in 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
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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 the Seller, 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 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 Trust 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
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
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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 applicable Trustee and will not
deliver any certificate of title to such Trustee or note thereon such Trustee's
interest. Consequently, in some states, in the absence of such an amendment, the
assignment to such 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 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 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 Trust, as
the owner of 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 Trust 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 a 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 Trust 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. The Seller 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
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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.
RECHARACTERIZATION OF SALE OF LOAN ASSETS AS BORROWING
The Seller will agree in the Sale and Servicing Agreement or the Pooling
and Servicing Agreement that the transfer of the Loan Assets to the Trust is
intended as a valid sale and transfer of the Loan Assets to the applicable
Trustee for the benefit of the Securityholders. However, if the Loan Assets are
held to be property of the Seller or if for any reason the applicable Sale and
Servicing Agreement or Pooling and Servicing Agreement is held to create a
security interest in the related Loan Assets, the Seller will agree in such Sale
and Servicing Agreement or such Pooling and Servicing Agreement that such
transfer shall be treated as the grant of a security interest in the Loan Assets
to the applicable Trustee for the benefit of the Securityholders. Also, the
Seller will warrant that if the transfer of the Loan Assets by it is deemed to
be a grant of a security interest in the Loan Assets, the applicable Trustee
will have a perfected first-priority security interest therein. The Seller is
required to take all actions that are required under law to protect the Trust's
security interest in the Loan Assets. If the transfer of the Loan Assets to the
Trust is deemed to create a security interest therein, a tax or government lien
on property of the Seller arising before the Loan Assets came into existence may
have priority over the Trust's interest in such Loan Assets.
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 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.
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DESCRIPTION OF THE NOTES
GENERAL
With respect to each Trust that issues Notes, one or more Classes of Notes
of the related Series will 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 Trust, 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. 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 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 distributions, notices,
reports and statements to DTC or its nominee, as the registered holder of the
Notes, for 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 right 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 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 distributed in respect of
interest on the Notes of such Series.
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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. With respect to each Trust that has issued Notes
pursuant to an Indenture, the Trust and the Indenture Trustee may, with the
consent of the holders of a majority of the outstanding Notes of the related
Series, execute a supplemental indenture to add provisions to, change in any
manner or eliminate any provisions of, the related Indenture, or modify (except
as provided below) in any manner the rights of the related Noteholders.
Unless otherwise specified in the related Prospectus Supplement with
respect to a Series of Notes, without the consent of the holder of each such
outstanding Note affected thereby no supplemental indenture will: (i) change the
due date of any installment of principal of or interest on any such Note or
reduce the principal amount thereof, the interest rate specified thereon or the
redemption price with respect thereto or change any place of payment where or
the coin or currency in which any such Note or any interest thereon is payable;
(ii) impair the right to institute suit for the enforcement of certain
provisions of the related Indenture regarding payment; (iii) reduce the
percentage of the aggregate 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 or of certain defaults
thereunder and their consequences as provided for in such Indenture; (iv) modify
or alter the provisions of the related Indenture regarding the voting of Notes
held by the applicable Trust, any other obligor on such Notes, the Seller or an
affiliate of any of them; (v) reduce the percentage of the aggregate outstanding
amount of such Notes, 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; (vi)
decrease the percentage of the aggregate principal amount of such Notes required
to amend the sections of the related Indenture which specify the applicable
percentage of aggregate principal amount of the Notes of such Series necessary
to amend such Indenture or certain other related agreements; 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 of the collateral for such Notes or,
except as otherwise permitted or contemplated in such Indenture, terminate the
lien of such Indenture on any such collateral or deprive the holder of any such
Note of the security afforded by the lien of such Indenture.
To the extent provided in the applicable Prospectus Supplement, the Trust
and the applicable Indenture Trustee may also enter into supplemental
indentures, without obtaining 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 of modifying in any manner the rights of such Noteholders; provided
that such action will not materially and adversely affect the interest of any
such 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 for five days or more in the payment of any interest on any such Note;
(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 Trust made in the related Indenture and the continuation of any such
default for a period of 90 days after notice thereof is given to such Trust by
the applicable Indenture Trustee or to such Trust and such Indenture Trustee by
the holders of at least 25% in principal amount of such Notes then outstanding
acting together as a single class; (iv) any representation or warranty made by
such Trust in the related Indenture or in any certificate delivered pursuant
thereto or in connection therewith having been incorrect in a material respect
as of the time made, and such breach not having been cured within 30 days after
notice
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thereof is given to such Trust by the applicable Indenture Trustee or to such
Trust and such Indenture Trustee by the holders of at least 25% in principal
amount of such Notes then outstanding acting together as a single class; or (v)
certain events of bankruptcy, insolvency, receivership or liquidation of the
applicable Trust. 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.
If the Notes of any Series are due and payable following an Event of
Default with respect thereto, the related Indenture Trustee may institute
proceedings to collect amounts due or foreclose on Trust property, exercise
remedies as a secured party, sell the related Loan Assets or elect to have the
applicable Trust maintain possession of such Loan Assets and continue to apply
collections on such Loan Assets as if there had been no declaration of
acceleration. 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, other than a default in the payment of any
principal of or a default for five days or more in the payment of any interest
on any Note of such Series, unless (i) the holders of all such outstanding Notes
consent to such sale, (ii) the proceeds of such sale are sufficient to pay in
full the principal of and the accrued interest on such outstanding Notes at the
date of such sale or (iii) such Indenture Trustee determines that the proceeds
of Loan Assets would not be sufficient on an ongoing basis to make all payments
on such Notes as such payments would have become due if such obligations had not
been declared due and payable, and such Indenture Trustee obtains the consent of
the holders of 66 2/3% of the aggregate outstanding amount of such Notes.
Subject to the provisions of the applicable Indenture relating to the
duties of the related Indenture Trustee, if an Event of Default occurs and is
continuing with respect to a Series of Notes, such Indenture Trustee will be
under no obligation to exercise any of the rights or powers under such Indenture
at the request or direction of any of the holders of such Notes, if such
Indenture Trustee reasonably believes it will not be adequately indemnified
against the costs, expenses and liabilities which might be incurred by it in
complying with such request. Subject to the provisions for indemnification and
certain limitations contained in the related Indenture, the holders of a
majority in 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
or any remedy available to the applicable Indenture Trustee, and the holders of
a majority in principal amount of such Notes then outstanding may, in certain
cases, waive any default with respect thereto, except a default in the payment
of principal or interest or a default in respect of a covenant or provision of
such Indenture that cannot be modified without the waiver or consent of all the
holders of such outstanding Notes.
Unless otherwise specified in the related Prospectus Supplement, no holder
of a Note of any Series will have the right to institute any proceeding with
respect to the related Indenture, unless (i) such holder previously has given to
the applicable Indenture Trustee written notice of a continuing Event of
Default, (ii) the holders of not less than 25% in principal amount of the
outstanding Notes of such Series have made written request to such Indenture
Trustee to institute such proceeding in its own name as Indenture Trustee, (iii)
such holder or holders have offered such Indenture Trustee reasonable indemnity,
(iv) such Indenture Trustee has for 60 days 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 in
principal amount of such outstanding Notes.
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In addition, each Indenture Trustee and the related Noteholders, by
accepting the related Notes, will covenant that they will not at any time
institute against the applicable Trust any bankruptcy, reorganization or other
proceeding under any federal or state bankruptcy or similar law.
With respect to any Trust, neither the related Indenture Trustee nor the
related Trustee in its individual capacity, nor any holder of a Certificate
representing an ownership interest in such Trust nor any of their respective
owners, beneficiaries, agents, officers, directors, employees, affiliates,
successors or assigns will, in the absence of an express agreement to the
contrary, be personally liable for the payment of the principal of or interest
on the related Notes or for the agreements of such Trust contained in the
applicable Indenture.
Certain Covenants. Each Indenture will provide that the related Trust may
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 Trust'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 such Trust under the Indenture, (iii) no Event of
Default shall have occurred and be continuing immediately after such merger or
consolidation, (iv) such Trust has been advised that the rating of the Notes or
the Certificates of such Series then in effect would not be reduced or withdrawn
by the Rating Agencies as a result of such merger or consolidation and (v) such
Trust has received an opinion of counsel to the effect that such consolidation
or merger would have no material adverse tax consequence to the Trust or to any
related Noteholder or Certificateholder.
Each Trust will not, among other things, (i) except as expressly permitted
by the applicable Indenture, the applicable Transfer and Servicing Agreements or
certain related documents with respect to such Trust (collectively, the "Related
Documents"), sell, transfer, exchange or otherwise dispose of any of the assets
of such Trust, (ii) claim any credit on or make any deduction from the principal
and interest payable in respect of the Notes of the related Series (other than
amounts withheld under the Code or applicable state law) or assert any claim
against any present or former holder of such Notes because of the payment of
taxes levied or assessed upon such Trust, (iii) dissolve or liquidate in whole
or in part, (iv) permit the validity or effectiveness of the related Indenture
to be impaired 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 to be created on or extend to
or otherwise arise upon or burden the assets of such Trust or any part thereof,
or any interest therein or the proceeds thereof.
No Trust may engage in any activity other than as specified under the
section of the related Prospectus Supplement entitled "The Trust." No Trust will
incur, assume or guarantee any indebtedness other than indebtedness incurred
pursuant to the related Notes and the related Indenture, pursuant to any
Advances made to it by the Servicer or otherwise in accordance with the Related
Documents.
Annual Compliance Statement. Each Trust will be required to file annually
with the related Indenture Trustee a written statement as to the fulfillment of
its obligations under the Indenture.
Indenture Trustee's Annual Report. The Indenture Trustee for each Trust
will be required to mail each year to all related Noteholders a brief report
relating to its eligibility and qualification to continue as Indenture Trustee
under the related Indenture, any amounts advanced by it under the Indenture, the
amount, interest rate and maturity date of certain indebtedness owing by such
Trust to the applicable Indenture Trustee in its individual capacity, the
property and funds physically held by such Indenture Trustee as such and any
action taken by it that materially affects the related Notes and that has not
been previously reported.
Satisfaction and Discharge of Indenture. An Indenture will be discharged
with respect to the collateral securing the related Notes upon the delivery to
the related Indenture Trustee for cancellation of all such Notes or, with
certain limitations, upon deposit with such Indenture Trustee of funds
sufficient for the payment in full of all such Notes.
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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 Issuer or Administrator may also remove any such
Indenture Trustee if such Indenture Trustee ceases to be eligible to continue as
such under the related Indenture or if such Indenture Trustee becomes insolvent.
In such circumstances, the Issuer will be obligated to appoint a successor
thereto for the applicable Series of Notes. Any resignation or removal of the
Indenture Trustee and appointment of a successor thereto for any Series of Notes
will not become effective until acceptance of the 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 Trust 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 with respect to any such Trust,
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 Trust, one or more Classes of Certificates of the
related Series will 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 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
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have given any request, demand, authorization, direction, notice, consent or
other action under the Related Documents.
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 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 with respect
to each Trust, the Noteholders, if any, and the Certificateholders will receive
reports on or about each Distribution Date concerning (i) with respect to the
Due Period (as defined in the related Prospectus Supplement) immediately
preceding such Distribution Date, payments received on the Loan Assets, the Pool
Principal Balance (as defined in the related Prospectus Supplement), each
Certificate Pool Factor or Note Pool Factor, as applicable, and various other
items of information, and (ii) with respect to the Due Period second preceding
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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 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 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 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
distributions of all or a portion of any funds available on a given Distribution
Date which are in excess of amounts required to be applied to distributions on
Scheduled Amortization Securities on such Distribution Date. Because of the
manner of application of 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 in the
related Trust 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
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 may be disproportionately borne by one or more Classes of such
Series, and the proceeds 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 are 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 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
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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 distributions of principal or interest from
Assets included in the related Trust 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 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."
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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 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,
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
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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.
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 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.
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
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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 the Seller 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 the Seller 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 bookentry 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 (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.
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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.
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 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 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 Seller or the
Administrator or 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
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.
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 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 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
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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 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 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, 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.
The Servicer will service the Loan Assets held by each Trust 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 and each
Trustee will authorize the Servicer to retain physical possession of the Loan
Assets held by each Trust and other documents relating thereto as custodian for
each such Trust.
The principal offices of each Trust that is not a grantor trust and the
related Owner Trustee 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 Trustee under the
applicable Pooling and Servicing Agreement with respect to a Series of
Certificates. The Trustee for each Trust 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. A Trustee may resign at any time, in
which event the Servicer, or its successor, will be obligated to appoint a
successor thereto. The Administrator of a Trust that is not a grantor trust and
the Servicer in respect of a Trust that is a grantor trust may also remove a
Trustee that ceases to be eligible to continue in such capacity under the
related Trust Agreement or Pooling and Servicing Agreement, as applicable, or
becomes insolvent. In such circumstances, the Servicer or, in the case of a
Series that includes Notes, the Administrator, as the case may be, will be
obligated to appoint a successor thereto. Any resignation or removal of a
Trustee and appointment of a successor trustee will not become effective until
acceptance of the appointment by such successor.
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with 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 relating to a particular
Series of Securities. 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 shall 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
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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 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.
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 and 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 cotrustees, 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 and the Trustee may
consider necessary or desirable.
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) with
respect to a Trust that includes Mortgage Loans or Secured Contracts, all
property acquired by foreclosure or deed in lieu of foreclosure with respect to
any such Mortgage Loan or Secured Contract 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 of each Trust will consist primarily of Loan Assets.
With respect to a Series, the Seller 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 the Seller 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 the Seller. 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, the Seller 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
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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 the Seller has any
obligation to repurchase or replace any Loan Assets for a material breach of any
representations or warranties made by the Seller, the Seller is not expected to
have the financial capability to repurchase or replace such defective Loan
Assets, but rather the Seller 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 Trusts 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 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 a Trust for a
Series or 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.
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(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.
(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 Seller.
With respect to a Series for which the related Trust 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 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.
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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 requires 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 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 or the Seller may, subsequent to the issuance
of a Series, (i) deliver additional Assets to the related Trust, (ii) withdraw
Assets previously included in a Trust 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 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 in the Trust 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 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 to subsequently purchase
additional Loan Assets ("Subsequent Loan Assets") from the Seller following the
date on which the Trust is established and 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 transferred to
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the Trust 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 Trust will acquire Subsequent Loan Assets from the Seller
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 transferred to the
Trust 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 Trust for a Series to be
registered as an "investment company" under the Investment Company Act of 1940,
as amended. Permitted Investments 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 Trust 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 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.
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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 with respect to a Series, the establishment
of one or more Reserve Funds, the use of a cross-support or
overcollateralization feature, the use of a Guaranty Policy, Mortgage Pool
Insurance Policy, FHA Insurance Amount, Special Hazard Insurance Policy or
bankruptcy bond, or another 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.
If specified in the Prospectus Supplement with respect to a Series, the
related Trust may also include, or the Securities of such Series may also have
the benefits of, assets such as insurance, guarantees, surety bonds, letters of
credit, guaranteed investment contracts, swap agreements, option agreements or
similar arrangements for the purpose of (i) maintaining timely payments or
providing additional protection against losses on the Loan Assets included in
such Trust, (ii) paying administrative expenses, (iii) establishing a minimum
reinvestment rate on the distributions made in respect of such Loan Assets, (iv)
guaranteeing timely distribution of principal and interest on the Securities of
such Series, or (v) for such other purpose as is specified in such Prospectus
Supplement. Such arrangements may include agreements under which the
Securityholders of a Series are entitled to receive amounts deposited in various
accounts held by the related Trustee upon the terms specified in the related
Prospectus Supplement. Such arrangements may be in lieu of any obligation of the
Servicer or the Administrator, if any, to advance delinquent installments in
respect of the Loan Assets. See "Servicing of the Loan Assets -- Advances."
SUBORDINATION
If specified in the related Prospectus Supplement, 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 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 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 distributions otherwise
distributable to the
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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 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 distributions otherwise
distributable 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 Depositor 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 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, 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, 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 AND CROSS-SUPPORT
If provided in the related Prospectus Supplement, the aggregate principal
balance of the Loan Assets included in the Trust 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, caps and
triggers, as set forth in the related Prospectus Supplement and the related
Indenture, Sale and Servicing Agreement or Pooling and Servicing Agreement.
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 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 distributions be made with respect to Securities evidencing beneficial
ownership of or secured by one or more groups of Assets prior to distributions
to Subordinated Securities evidencing a beneficial ownership interest in or
secured by other groups of Assets within the same Trust. 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 POLICY
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
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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 AND FHA INSURANCE
With respect to a Series for which the related Trust includes Mortgage
Loans (and, if specified in the related Prospectus Supplement, a Series for
which the related Trust 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.
With respect to a Series for which the related Trust includes Title I
Mortgage Loans or Title I Contracts, if specified in the related Prospectus
Supplement the FHA Insurance Amount will be available to provide partial
reimbursement for losses incurred by reason of default in payments on such Title
I Mortgage Loans or Title I Contracts in the manner and up to the amounts
specified herein and in the related Prospectus Supplement. See "Risk
Factors -- Limitations of Credit Enhancement -- Limitations on FHA Insurance for
Title I Loans" and "Certain Legal Aspects of the Loan Assets -- The Title I
Program."
SPECIAL HAZARD INSURANCE
With respect to a Series for which the related Trust includes Mortgage
Loans (and, if specified in the related Prospectus Supplement, each Series for
which the related Trust 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 (i) loss 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)
loss caused by reason of 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.
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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 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 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 in the related Trust, to pay
the expenses of the related Trust or for such other purposes specified in such
Prospectus Supplement. Whether or not the Seller 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 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.
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 with respect to a Series of Securities.
To the extent provided in the related Prospectus Supplement, the Loan
Assets included in the Trust for a Series of Securities will be serviced either
(i) by the related Servicer as sole servicer, (ii) by the related Master
Servicer as administrator or master servicer, (iii) by 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. If the Servicer is not an affiliate of the Seller,
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
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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, to the extent that a
sufficient FHA Insurance Amount is available or (ii) in the case of Mortgage
Loans and Contracts, and in the case of Title I Mortgage Loans and Title I
Contracts for which a sufficient FHA Insurance Amount is no longer available,
take such other action as the Servicer deems to be in the best interests of the
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 was
economically justified. Generally, the Servicer will assess the economic
viability of recovery from defaulted loans comparable to these Loan Assets, and
based upon this assessment, in certain instances the Servicer may pursue
foreclosure proceedings against the related Mortgaged Property or a judgment
claim against the related borrower. With respect to Loan Assets secured by
junior liens, typically the Servicer has chosen not to pursue foreclosures of
defaulted loans comparable to these 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
Seller's representations and warranties in the applicable Sale and Servicing
Agreement or Pooling and Servicing Agreement, the Seller 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
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<PAGE> 120
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 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 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 and
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
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 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.
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<PAGE> 121
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 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 a Trust 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.
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.
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<PAGE> 122
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
FIRSTPLUS INVESTMENT CORPORATION (the "Seller"), a Nevada corporation, was
incorporated in 1995 as a limited purpose finance corporation. All of the
outstanding capital stock of the Depositor 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 the Seller 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. The Seller does not
have, and is not expected in the future to have, any significant assets. If the
Seller were required to repurchase a Loan Asset included in the Trust 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 the Seller 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 of the Trust."
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 the Seller. In addition, to the extent specified in the
related Prospectus Supplement for a Series, the related Transferor of the Loan
Assets to the Seller for such Series may also be FFI. See "Description of the
Trust Property -- General."
With respect to those loans serviced by FFI that conform to its
securitization parameters, 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.
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
1995
DEC. 31 ----------------------------------------
1994 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
DELINQUENCY DATA:
Delinquencies in Serviced Loan Portfolio
(at period end)(1):
31-60 days............................... 3.7% 2.3% 1.7% 1.8% 1.6%
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 2.0
------- ------- -------- -------- --------
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>
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
1996 1996 1996 1996
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Delinquencies in Serviced Loan Portfolio
(at period end)(1):
31-60 days....................................... 1.4% 1.1% 0.8% 1.0%
61-90 days....................................... 0.6 0.5 0.4 0.4
91 days and over................................. 2.2 1.9 1.5 1.3
-------- -------- ---------- ----------
Total.................................... 4.2% 3.5% 2.7% 2.7%
Serviced Loan Portfolio
at period end (dollars in thousands)............. $506,287 $750,529 $1,267,147 $1,882,187
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR
DECEMBER 31, ENDED
------------ SEPT. 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.
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 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
defaults. There is no assurance that the delinquency, default 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 borrower, the actual rates of delinquencies, defaults 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."
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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 a Trust will
purchase Loan Assets from the Seller 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 Trust
in the related Prospectus Supplement (the "Closing Date"), the Transferor will
sell and assign to the Seller, 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 received by the Seller 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
will transfer and assign to the applicable Trustee, without recourse, pursuant
to a Sale and Servicing Agreement or a Pooling and Servicing Agreement, 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 received by the Seller 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 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 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 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 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 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 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 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 to such Trustee. Therefore, if a subsequent purchaser were able
to take physical possession of the Contracts without notice of such assignment,
the
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<PAGE> 125
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 or Pooling and Servicing Agreement, the
Seller 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 has good and marketable title to the Loan Assets included in the Trust
and such other items comprising the corpus of the Trust 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, 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 has acquired the Loan Assets for a Series, if
specified in the related Prospectus Supplement, the Seller 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 the Seller's title to the Loan Assets, which will in
all events be made by the Seller), 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
Trust 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 (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. 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 cannot deliver such document or
cure such defect within 60 days after notice
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<PAGE> 126
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 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 and
substitute one or more other Loan Assets therefor or (b) repurchase the Loan
Asset from the applicable Trustee for a price equal to 100% of its principal
balance plus interest thereon as 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 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 may obtain such an agreement from the entity which sold such Loan
Assets to the Seller, 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 of
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 COLLECTION ACCOUNT
The applicable Sale and Servicing Agreement or Pooling and Servicing
Agreement with respect to a Series will require the Servicer to maintain a
Collection 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 which) have a long-term or short-term rating
acceptable to each rating agency that rated the Securities; (ii) an account or
accounts the
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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 Collection Account may be
invested are limited to Permitted Investments. To the extent specified in the
related Prospectus Supplement, a Collection 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 or the Trustee will be entitled
to receive any such interest or other income earned on funds in the Collection
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 Collection 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;
(iii) the aggregate principal balance of each Class of the Securities
after giving effect to 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 Trust in respect of the related Loan Assets;
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(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 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
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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
Seller, the Servicer and the applicable Trust or 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 Seller, the
Servicer, and the applicable Trust or 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.
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 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 Trustee, the Indenture
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
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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
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
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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 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.
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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 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.
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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 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
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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 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.
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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 (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.
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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 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 containing 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
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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.
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 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 Trust 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 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 warranties and assume no
liability with respect to the absence
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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 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.
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
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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 coinsurance program (the "Title I
Program"). Certain of the Mortgage Loans or Contracts contained in a Trust may
be loans insured under the Title I Program. The regulations, rules and
procedures promulgated by the FHA under the Title I Program (the "FHA
Regulations") contain the requirements under which lenders approved for
participation in the Title I Program (the "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,
subject to the amount of insurance coverage available in 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 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
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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. Title I loans to be insured under the Title I Program will be
registered for insurance by the FHA. Following either the origination or
transfer of loans eligible under the Title I Program, the Title I Lender will
submit such loans for FHA insurance coverage within its FHA Reserve by
delivering a transfer of note report or through an electronic submission to the
FHA in the form prescribed under the FHA Regulations (the "Transfer Report").
The increase in the FHA insurance coverage for such loans in the Title I
Lender's FHA Reserve will occur on the date (the "Transfer Date") following the
receipt and acknowledgement by the FHA of the Transfer Report for such loans.
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.
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
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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 the related Trust, if the Trustee were to hold
loans insured under the Depositor's FHA Reserve on behalf of another trust fund,
the FHA were to determine that insurance claims were paid in respect of loans
ineligible for insurance that related to such other trust fund and the Trustee,
on behalf of such other trust fund, 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 Contract included in the related Trust. If the
Trustee were unable to recover the amount of such offset from the other trust
fund, the Trust could experience a loss as a result.
Accordingly, FHA Claims paid to the Trustee (or the Administrator, if any)
by the FHA with respect to Title I loans insured under the Seller'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, the Seller and the Trustee (or the Administrator, if any)
will agree not to submit FHA Claims 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. The Seller 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 the Seller in the future.
With respect to a Series of Securities, the "FHA Insurance Amount" will
initially equal the final amount of FHA insurance coverage transferred to the
Seller's FHA Reserve, as acknowledged by the FHA, for the Title I Mortgage Loans
and Title I Contracts included in the related Trust. On the final Transfer Date,
such FHA Insurance Amount will be the maximum amount of insurance coverage in
the Seller's FHA Reserve that will be available for the submission of FHA Claims
on the Title I Mortgage Loans and Title I Contracts, and thereafter, such FHA
Insurance Amount will be decreased as a result of payments by the FHA in respect
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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 to the Trust of any Subsequent Loan Assets that
are Title I Mortgage Loans or Title I Contracts 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 and reported for
insurance in the Seller'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 the Seller'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, on behalf of the Trust,
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 the
Seller's FHA Reserve has been reduced to a balance which is less than such
maximum amount. Accordingly, the transfer of insurance coverage from the
Seller'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.
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.
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
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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 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.
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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
Manufacture 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 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.
sec.sec. 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
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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 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
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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.
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 its 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
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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 Amount
described above, FHA Insurance Amount 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 Amount 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 claims for
reimbursement of losses to the FHA with respect to the Title I Mortgage Loans or
Title I Contracts (the "FHA Claims"). 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
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 Trust 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 Trust 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 Trust,
the Notes, the Certificates and related terms, parties and documents shall be
deemed to refer, unless otherwise specified herein, to each Trust and the Notes,
Certificates and related terms, parties and documents applicable to such Trust.
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.
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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 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.
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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 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
percent of the amount otherwise
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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 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
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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 Mortgage Loan and
Contract, 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, 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
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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 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
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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 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
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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, 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 holds at the beginning of the
taxable year of the election or acquires thereafter.
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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 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.
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<PAGE> 156
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.
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 the excess of the interest paid or
incurred for the taxable year attributable to any indebtedness incurred or
continued to purchase or carry such Grantor Trust Certificate purchased with
market discount over the interest distributable thereon. For these purposes, the
de minimis rule referred above applies. Any such deferred excess 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. The amount of any remaining
deferred deduction is to be taken into account in the taxable year in which the
Grantor Trust Certificate matures or is disposed of in a taxable transaction. In
the case of a disposition in which gain or loss is not recognized in whole or in
part, any remaining deferred deduction will be allowed to the extent of gain
recognized on the disposition. 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
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<PAGE> 157
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
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 or a partnership organized in or under the laws of the
United States or any political subdivision thereof or an estate, the income of
which from sources outside the United States is includible in gross income for
federal income tax purposes regardless of its connection with the conduct of a
trade or business within the United States, 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
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<PAGE> 158
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.
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 a Trust 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 Trust 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 a Trust 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 Trust 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 Trust 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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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
On the terms and conditions set forth in an underwriting agreement with
respect to the Securities of a given Series (collectively, the "Underwriting
Agreements"), the Seller will agree to cause the related Trust to sell to the
underwriters named therein and in the related Prospectus Supplement, and each of
such underwriters will severally agree to purchase, the principal amount of each
Class of Securities of the related Series set forth therein and in the related
Prospectus Supplement.
In each of the Underwriting Agreements with respect to any given Series of
Securities, the several underwriters will agree, subject to the terms and
conditions set forth therein, to purchase all the Securities described therein
which are offered hereby and by the related Prospectus Supplement if any of such
Securities are purchased.
Each Prospectus Supplement will either (i) set forth the price at which
each Class of Securities being offered thereby will be offered to the public and
any concessions that may be offered to certain dealers participating in the
offering of such Securities or (ii) specify that the related Securities are to
be resold by the underwriters in negotiated transactions at varying prices to be
determined at the time of such sale. After the initial public offering of any
such Securities, such public offering prices and such concessions may be
changed.
Each Underwriting Agreement will provide that FFI and the Seller will
indemnify the underwriters against certain civil liabilities, including
liabilities under the Securities Act, or contribute to payments the several
underwriters may be required to make in respect thereof.
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Each Trust may, from time to time, invest the funds in its Trust Accounts
in Eligible Investments acquired from such underwriters or from the Seller.
Pursuant to each Underwriting Agreement with respect to a given Series of
Securities, the closing of the sale of any Class of Securities subject to such
Underwriting Agreement will be conditioned on the closing of the sale of all
other such Classes of Securities of that Series.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
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 Trust, 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 Trust by
Andrews & Kurth L.L.P., Dallas, Texas.
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INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
"Act"....................................................... 60
"Administration Agreement".................................. 22
"Administration Fee"........................................ 22
"Administrator"............................................. 1, 22
"Annual Reduction".......................................... 61
"Applicable Accounting Standards"........................... 47
"Assets".................................................... ii, 3
"Benefit Plan".............................................. 78
"Call Risk"................................................. 11
"Cedel"..................................................... 28
"Cedel Participants"........................................ 28
"Certificate Balance"....................................... 2
"Certificates".............................................. i
"Class"..................................................... i
"Closing Date".............................................. 5, 44
"Code"...................................................... 68
"Collateral Value".......................................... 34
"Commission"................................................ iii
"Companion Class"........................................... 11
"Companion Securities"...................................... 24
"Compound Interest Securities".............................. 24
"Contract Pool"............................................. ii, 3
"Contracts"................................................. ii, 3, 33
"Conventional Contracts".................................... 5, 33
"Conventional Mortgage Loans"............................... 4
"Cooperative"............................................... 28
"Cooperative Loans"......................................... 32
"Cooperatives".............................................. 4, 32
"Credit Enhancement"........................................ 4, 36
"Cut-off Date".............................................. 5
"Definitive Certificates"................................... 29
"Definitive Notes".......................................... 29
"Definitive Securities"..................................... 26, 29
"Depository"................................................ 18
"Distribution Date"......................................... 18, 23
"DTC Participants".......................................... 18, 26
"Euroclear"................................................. 28
"Euroclear Operator"........................................ 28
"Euroclear Participants".................................... 28
"Events of Default"......................................... 19, 49
"Excess Spread"............................................. 37
"Extension Risk"............................................ 11
"FFI"....................................................... 1, 43
"FHA Claims"................................................ 67
"FHA Claims Administration Agreement"....................... 13
"FHA Claims Administrator".................................. 13
"FHA Insurance Amount"...................................... 62
"FHA Regulations"........................................... 60
"FHA Reserve"............................................... 61
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
"Fixed Rate Securities"..................................... 25
"Floating Rate Securities".................................. 25
"Grantor Trust Certificateholders".......................... 74
"Grantor Trust Certificates"................................ 74
"Guaranty Policy"........................................... 37
"Indenture"................................................. 1
"Indenture Trustee"......................................... i
"Index"..................................................... 25
"Index Currencies".......................................... 25
"Indexed Principal Amount".................................. 25
"Indexed Securities"........................................ 25
"Indirect DTC Participants"................................. 27
"Interest Only Securities".................................. 24
"Interest Rate"............................................. 2
"Issuer".................................................... 1
"Loan Asset Pool"........................................... ii
"Loan Assets"............................................... ii
"Manufactured Home"......................................... 34
"Manufacturer's Invoice Price".............................. 34
"Master Servicer"........................................... 1
"Mortgage".................................................. 45
"Mortgage Loans"............................................ ii, 3
"Mortgage Note"............................................. 45
"Mortgage Notes"............................................ 32
"Mortgage Pool"............................................. ii, 3
"Mortgage Pool Insurance Policy"............................ 38
"Mortgage Rates"............................................ 33
"Mortgaged Properties"...................................... 32
"Mortgages"................................................. 32
"Non-Priority Securities"................................... 25
"Notes"..................................................... i
"Offered Securities"........................................ iii
"OID"....................................................... 69
"OID regulations"........................................... 69
"Owner Trustee"............................................. i
"Pass Through Rate"......................................... 2
"Permitted Investments"..................................... 35
"Pool Insurer".............................................. 38
"Pooling and Servicing Agreement"........................... i, 1, 5
"Pre-Funding Account"....................................... 35
"Pre-Funding Arrangement"................................... 5, 35
"Principal Only Securities"................................. 24
"Priority Securities"....................................... 25
"Prospectus Supplement"..................................... i
"Rating Agency"............................................. 7
"Registration Statement".................................... iii
"Related Documents"......................................... 21
*"Relief Act"................................................ 15, 51, 59
"Reserve Fund".............................................. 39
"Sale and Servicing Agreement".............................. 5
"Schedule of Loan Assets"................................... 45
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
"Scheduled Amortization Securities"......................... 24
"Scheduled Amortization Security"........................... 11
"Secured Contracts"......................................... ii, 3, 5, 33
"Secured Property".......................................... 63
"Securities"................................................ i
"Securities Act"............................................ iii
"Securityholders"........................................... ii
"Seller".................................................... i, 1, 43
"Senior Securities"......................................... 24, 36
"Series".................................................... i
"Servicer".................................................. i, 1
"Short Term Note"........................................... 69
"SMMEA"..................................................... 7, 79
"Special Allocation Securities"............................. 24
"Special Hazard Insurance Policy"........................... 38
"Subordinated Securities"................................... 24, 36
"Subsequent Loan Assets".................................... 5, 35
"Subsequent Transfer Agreement"............................. 46
"Subservicer"............................................... 40
"Subservicing Agreement".................................... 39
"Terms and Conditions"...................................... 29
"Title I Contracts"......................................... 5, 33
"Title I Lenders"........................................... 60
"Title I Mortgage Loans".................................... 4, 32
"Title I Program"........................................... 60
"Transfer and Servicing Agreements"......................... 44
"Transfer Date"............................................. 61
"Transfer Report"........................................... 61
"Transferor"................................................ 1, 31
"Trust"..................................................... i, 1
"Trust Agreement"........................................... i, 1
"Trust Property"............................................ ii, 3
"Trustee"................................................... i, 30
"Underwriting Agreements"................................... 80
"Unsecured Contracts"....................................... ii, 3, 5, 33
"Window Period Loans"....................................... 57
</TABLE>
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES OFFERED
HEREBY, NOR AN OFFER OF THE SECURITIES IN ANY STATE OR JURISDICTION IN WHICH, OR
TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT
PAGE
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<S> <C>
Available Information........................... (iii)
Reports to Securityholders...................... (iii)
Summary of Terms................................ S-1
Risk Factors.................................... S-14
Use of Proceeds................................. S-21
Description of the Trust........................ S-21
The Home Loan Pool.............................. S-23
The Seller...................................... S-28
The Transferor and Servicer..................... S-28
Description of Credit Enhancement............... S-31
Description of the Offered Securities........... S-39
Description of the Transfer and Servicing
Agreements.................................... S-43
Prepayment and Yield Considerations............. S-54
Certain Federal Income Tax Consequences......... S-66
ERISA Considerations............................ S-66
Underwriting.................................... S-67
Legal Investment Matters........................ S-68
Ratings......................................... S-68
Experts......................................... S-69
Legal Opinions.................................. S-69
Index of Terms.................................. S-70
PROSPECTUS
Prospectus Supplement........................... iii
Available Information........................... iii
Incorporation of Certain Documents by
Reference..................................... iv
Table of Contents............................... v
Summary of Terms................................ 1
Risk Factors.................................... 8
Description of the Notes........................ 18
Description of the Certificates................. 22
Pool Factors and Trading Information............ 23
Certain Information Regarding the Securities.... 24
The Trusts...................................... 30
The Trustee..................................... 30
Description of the Trust Property............... 31
Credit Enhancement.............................. 36
Servicing of the Loan Assets.................... 39
The Seller...................................... 43
The Servicer and the Transferor................. 43
Description of the Transfer and Servicing
Agreements.................................... 45
Certain Legal Aspects of the Loan Assets........ 50
Certain Federal Income Tax Consequences......... 68
ERISA Considerations............................ 79
Legal Investment Matters........................ 80
Plan of Distribution............................ 80
Use of Proceeds................................. 81
Legal Opinions.................................. 81
Index of Terms.................................. 82
</TABLE>
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$600,000,000
FIRSTPLUS HOME
LOAN OWNER TRUST 1997-1
[FIRSTPLUS LOGO]
FIRSTPLUS
INVESTMENT CORPORATION
(SELLER)
FIRSTPLUS FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
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PROSPECTUS SUPPLEMENT
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BANC ONE CAPITAL CORPORATION
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
FEBRUARY 21, 1997
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