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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1997
REGISTRATION NO. 333-26527
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FIRSTPLUS INVESTMENT CORPORATION
(Exact name of Registrant as specified in its charter)
NEVADA 75-2596063
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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RUSSELL D. UNGERMAN
3773 HOWARD HUGHES PARKWAY, C/O FIRSTPLUS INVESTMENT CORPORATION
SUITE 300N 3773 HOWARD HUGHES PARKWAY, SUITE 300N
LAS VEGAS, NEVADA 89109 LAS VEGAS, NEVADA 89109
(702) 892-3772 (702) 866-2236
Adress, including zip code, and telephone (Name, address, including zip code, and telephone
number, including area code, of Originator's number, including area code, of agent for service
principal executive offices) with respect to the Registrant)
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COPIES TO:
RONALD M. BENDALIN, ESQ. DAVID A. ALLEN, ESQ.
1600 VICEROY ANDREWS & KURTH L.L.P.
DALLAS, TEXAS 75235 4400 THANKSGIVING TOWER
(214) 599-6500 DALLAS, TEXAS 75201
(214) 979-4400
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time after the effective date of this Registration Statement as
determined by market conditions and pursuant to Rule 415.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box.[x]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering. [ ]
If the delivery of the Prospectus Supplement is expected to be made
pursuant to Rule 434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Amount of
Proposed Title of Amount to Be Offering Price Per Maximum Aggregate Registration
Securities to be Registered Registered (2) Unit (1) Offering Price (1) Fee (2)
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<S> <C> <C> <C> <C>
Asset Backed Securities $5,000,000,000 100% $5,000,000,000 $1,515,151.52
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(1) Estimated solely for the purpose of calculating the registration fee on
the basis of the proposed maximum offering price per unit.
(2) Pursuant to Rule 429 of the General Rules and Regulations under the
Securities Act of 1933, as amended, $700,000,000 of Asset-Backed Securities
are being carried forward from the Registrant's Registration Statement No.
333-1185. A filing fee of $241,379.31 associated with such securities was
previously paid upon the filing of said registration statement.
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THIS REGISTRATION HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
PURSUANT TO RULE 429 OF THE GENERAL RULES AND REGULATIONS OF THE
SECURITIES ACT OF 1933, AS AMENDED, THE PROSPECTUSES WHICH ARE A PART OF THIS
REGISTRATION STATEMENT ARE COMBINED PROSPECTUSES RELATING ALSO TO $700,000,000
OF SECURITIES REGISTERED UNDER REGISTRATION STATEMENT NO. 333-11855 AND
REMAINING UNISSUED AS OF THE DATE HEREOF.
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INTRODUCTORY NOTE
This Registration Statement contains (i) a form of Prospectus relating
to the offering of one or more series of Asset Backed Notes and/or Asset Backed
Certificates by FIRSTPLUS INVESTMENT CORPORATION or various trusts created from
time to time by FIRSTPLUS INVESTMENT CORPORATION, and (ii) a form of Prospectus
relating to the offering of one or more series of Asset Backed Certificates by
FIRSTPLUS INVESTMENT CORPORATION and certain trusts, all of the beneficial
ownership interest in which is owned by FIRSTPLUS INVESTMENT CORPORATION.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus Supplement and the accompanying Prospectus shall
not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any jurisdiction in which such
offer, solicitation or sale would be unlawful prior to the registration or
qualification under the securities laws of any such jurisdiction.
SUBJECT TO COMPLETION, DATED MAY 22, 1997
PROSPECTUS
ASSET BACKED NOTES
ASSET BACKED CERTIFICATES
FIRSTPLUS INVESTMENT CORPORATION,
AND CERTAIN TRUSTS, ALL OF THE BENEFICIAL
OWNERSHIP INTEREST IN WHICH IS OWNED BY
FIRSTPLUS INVESTMENT CORPORATION
The Asset Backed Notes (the "Notes") and the Asset Backed
Certificates (the "Certificates" and, together with the Notes, the
"Securities") described herein may be sold from time to time in one or more
series (each, a "Series"), in amounts, at prices and on terms to be determined
at the time of sale and to be set forth in a supplement to this Prospectus (a
"Prospectus Supplement"). Each Series of Securities, which may include one or
more classes (each, a "Class") of Notes and/or Certificates, will be issued by
either FIRSTPLUS INVESTMENT CORPORATION ("FIC") or a separate entity (each, a
"Trust") formed by FIC solely for the purpose of issuing the Notes of the
related Series (either such entity, as applicable, the "Issuer"). Each Trust
will be formed pursuant to either (i) a Trust Agreement (each, a "Trust
Agreement") to be entered into among FIC, as Seller (in its capacity as Seller,
the "Seller") and the owner trustee specified in the related Prospectus
Supplement (the "Owner Trustee") or (ii) a Pooling and Servicing Agreement
(each, a "Pooling and Servicing Agreement") to be entered into among the
Seller, FIRSTPLUS FINANCIAL, INC., as Servicer (the "Servicer") and the trustee
specified in the related Prospectus Supplement (the "Trustee"). If a Series of
Securities includes Notes, such Notes of a Series will be issued and secured
pursuant to an Indenture (each, an "Indenture") between the Issuer and the
Indenture Trustee specified in the related Prospectus Supplement (the
"Indenture Trustee") and will represent indebtedness of the related Issuer. If
a Series of Securities includes Certificates, such Certificates of a Series
will represent undivided ownership interest in the related Trust. The related
Prospectus Supplement will specify which Class or Classes of Notes, if any, and
which Class or Classes of Certificates, if any, of the related Series are being
offered thereby.
(Continued on next page)
See "ERISA Considerations" herein and in the related Prospectus
Supplement for a discussion of restrictions on the acquisition of Securities by
"plan fiduciaries."
BEFORE PURCHASING ANY OFFERED SECURITIES, PROSPECTIVE INVESTORS
SHOULD REVIEW THE INFORMATION SET FORTH HEREIN UNDER THE CAPTION "RISK FACTORS"
AND SUCH INFORMATION AS MAY BE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN
THE RELATED PROSPECTUS SUPPLEMENT.
NOTES OF A SERIES WILL CONSTITUTE NON-RECOURSE OBLIGATIONS OF THE RELATED
ISSUER. CERTIFICATES OF A SERIES WILL EVIDENCE INTERESTS ONLY IN THE RELATED
TRUST. EXCEPT AS OTHERWISE SET FORTH HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT, THE SECURITIES WILL NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE SERVICER, ANY ORIGINATOR, THE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE SECURITIES NOR THE UNDERLYING LOAN ASSETS WILL BE
GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR ANY OTHER PERSON OR ENTITY,
EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Retain this Prospectus for future reference. This Prospectus may
not be used to consummate sales of Securities offered hereby unless accompanied
by a Prospectus Supplement.
The date of this Prospectus is May __, 1997
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(Continued from prior page)
The primary assets securing or backing each Series, (the "Trust
Property") will consist primarily of a segregated pool (a "Loan Asset
Pool") of one or more of the following mortgage related assets (the "Loan
Assets"): (i) pools (each, a "Mortgage Pool") of single family (one- to
four-unit) residential mortgage loans, timeshare mortgage loans and loans
evidenced by retail installment sales or installment loan agreements that are
secured by first or junior liens on real property (the "Mortgage Loans"); and
(ii) pools (each, a "Contract Pool") of loans evidenced by retail installment
sales or installment loan agreements, including loans secured by new or used
Manufactured Homes (as defined herein) that are not considered to be interests
in real property because such Manufactured Homes are not permanently affixed to
real estate ("Secured Contracts") and loans evidenced by retail installment
sales or installment loan agreements which are not secured by any interest in
real or personal property ("Unsecured Contracts" and, together with the Secured
Contracts, the "Contracts"). To the extent specified in the related Prospectus
Supplement, the Loan Assets may include Title I Mortgage Loans and Title I
Contracts. If specified in the related Prospectus Supplement, the Trust
Property for a Series of Securities may include the rights or other ancillary
or incidental assets (together with the Loan Assets, collectively, the
"Assets") that are intended (i) to provide credit enhancement for the ultimate
or timely distributions of proceeds from the Loan Assets to holders of the
Securities ("Securityholders") or (ii) to assure the servicing of the Loan
Assets. The Loan Assets will consist of loans for which the related proceeds
were used to finance (i) property improvements, (ii) the acquisition of
personal property such as home appliances or furnishings, (iii) debt
consolidation, (iv) the purchase or refinancing of single family residential
property, or (v) a combination of property improvements, debt consolidation and
other consumer purposes, which loans are marketed by the Transferor under the
name "BusterPlus(TM) Loans". Unless otherwise provided in the related
Prospectus Supplement, the Loan Assets will be serviced by FIRSTPLUS FINANCIAL,
INC., as Servicer (the "Servicer") pursuant to a sale and servicing agreement
(each, as amended and supplemented from time to time, a "Sale and Servicing
Agreement") between (i) FIC, the Transferor, the Servicer and the related
Indenture Trustee, if FIC is the Issuer, or (ii) the Issuer, the Seller, the
Servicer and the related Indenture Trustee, if a Trust is the Issuer.
Each Class of Securities of a Series will represent the right to
receive specified payments in respect of collections of principal and interest
on the related Assets, at the rates, on the dates and in the manner described
herein and in the related Prospectus Supplement. If a Series includes multiple
Classes of Securities, the rights of one or more Classes of Securities to
receive payments may be senior or subordinate to the rights of one or more of
the other Classes of such Series. Distributions on Certificates of a Series
may be subordinated in priority to payments due on any related Notes of such
Series to the extent described herein and in the related Prospectus Supplement.
A Series may include one or more Classes of Notes and/or Certificates which
differ as to the timing and priority of payment, interest rate or amount of
distributions in respect of principal or interest or both. A Series may
include one or more Classes of Notes or Certificates entitled to distributions
in respect of principal with disproportionate, nominal or no interest
distributions, or to interest distributions, with disproportionate, nominal or
no distributions in respect of principal. The rate of payment in respect of
principal of any Class of Notes and distributions in respect of principal of
the Certificates of any Class will depend on the priority of payment of such
Class and Certificates and the rate and timing of payments (including
prepayments, defaults, liquidations and repurchases of Assets) on the related
Assets. A rate of payment lower or higher than that anticipated may affect the
weighted average life of each Class of Securities in the manner described
herein and in the related Prospectus Supplement. See "Risk Factors -- Effect
of Prepayments on Average Life".
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
ii
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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.
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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.
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AVAILABLE INFORMATION
FIC has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (together with all amendments and
exhibits thereto, referred to herein as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Securities to be offered from time to time pursuant to this Prospectus. For
further information, reference is made to the Registration Statement which may
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at the
Commission's regional offices at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, New York, New
York 10048. Copies of the Registration Statement may also be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission
maintains a Web site on the Internet that contains reports, proxy and
information statements and other information regarding the Seller. The address
of such Web site is http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by FIC pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the
date of this Prospectus and prior to the termination of the offering of the
Securities shall be deemed to be incorporated by reference in this Prospectus.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
FIC will provide without charge to each person, including any
beneficial owner of Securities, to whom a copy of this Prospectus is delivered,
on the written or oral request of any such person, a copy of any or all of the
documents incorporated herein or in any related Prospectus Supplement by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to FIC at 3773 Howard Hughes Parkway, Suite 300N, Las
Vegas, Nevada 89109 (Telephone: (702) 866-2236)), Attention: Russell D.
Ungerman.
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TABLE OF CONTENTS
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Page
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PROSPECTUS SUPPLEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
SUMMARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Limited Liquidity and Fluctuation in Value from Market Conditions . . . . . . . . . . . . . . . . . . . . . 11
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Lack of a Secondary Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Book Entry Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Limited Nature of Ongoing Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Sensitivity to Fluctuations in Prevailing Interest Rates . . . . . . . . . . . . . . . . . . . . . . 12
Limited Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Additions, Substitutions and Withdrawals of Assets . . . . . . . . . . . . . . . . . . . . . . . . . 13
Effect of Prepayments on Average Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Effect of Prepayments on Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Limitations of Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Limitations Regarding Types of Losses Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Disproportionate Benefits to Certain Classes and Series . . . . . . . . . . . . . . . . . . . . . . 15
Limitations Regarding the Amount of Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . . 16
Limitations on FHA Insurance for Title I Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Limited Nature of Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Adverse Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Original Issue Discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Certain Factors Affecting Delinquencies, Foreclosures and Losses on Loan Assets . . . . . . . . . . . . . . 18
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Geographic Concentration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Decline in Value of a Loan Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Limitations on Realizations of Junior Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Certain Legal Considerations of the Loan Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Risks Associated with Certain Loan Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
No Hazard Insurance for Title I Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Contracts Secured by Manufactured Homes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Unsecured Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Consumer Protection Laws related to Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Reliance on Management of Timeshare Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Recharacterization of Sale of Loan Assets as Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Risks Relating to Indexed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
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DESCRIPTION OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Principal and Interest on the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
The Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Modification of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Events of Default; Rights upon Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Annual Compliance Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Indenture Trustee's Annual Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
The Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Administration Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
DESCRIPTION OF THE CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Distributions of Principal and Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
POOL FACTORS AND TRADING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
CERTAIN INFORMATION REGARDING THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Fixed Rate Securities and Floating Rate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Indexed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Book-Entry Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Definitive Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
THE TRUSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
DESCRIPTION OF THE TRUST PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Additions, Substitution and Withdrawal of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Pre-Funding Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Overcollateralization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Cross-Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Guaranty Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Mortgage Pool Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Special Hazard Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Reserve Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
</TABLE>
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<TABLE>
<S> <C>
SERVICING OF THE LOAN ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Enforcement of Due-on-Sale Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Realization Upon Defaulted Loan Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Waivers and Deferments of Certain Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Subservicers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Removal and Resignation of Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Servicing Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Administration and Servicing Compensation and Payment of Expenses . . . . . . . . . . . . . . . . . . . . . 52
THE SELLER AND THE ISSUER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
THE SERVICER AND THE TRANSFEROR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Sale and Assignment of Loan Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Conveyance of Subsequent Loan Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Repurchase or Substitution of Loan Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Evidence as to Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
List of Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Administration of the Distribution Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Reports to Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Rights Upon Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
CERTAIN LEGAL ASPECTS OF THE LOAN ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
General Legal Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Cooperative Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Cooperative Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Junior Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Right of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Anti-Deficiency Legislation and Other Limitations on Lenders . . . . . . . . . . . . . . . . . . . . 68
Enforceability of Certain Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Adjustable Rate Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Environmental Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Truth in Lending Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Applicability of Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Soldiers' and Sailors' Civil Relief Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
The Title I Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Requirements for Title I Property Improvement Loans and Contracts . . . . . . . . . . . . . . . . . 77
Requirements for Title I Manufactured Home Contracts . . . . . . . . . . . . . . . . . . . . . . . . 79
</TABLE>
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<TABLE>
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Title I Underwriting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Claims Procedures Under Title I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
No Rights of Securityholders Against FHA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Tax Characterization of the Trust as a Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Tax Consequences to Holders of the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Treatment of the Notes as Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
OID, Indexed Securities, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Interest Income on the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Sale or Other Disposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Foreign Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Backup Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Possible Alternative Treatments of the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Tax Consequences to Holders of the Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Treatment of the Trust as a Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Indexed Securities, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Partnership Taxation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Discount and Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Section 708 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Disposition of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Allocations Between Transferors and Transferees . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Section 754 Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Administrative Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Tax Consequences to Foreign Certificateholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Backup Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
TRUSTS TREATED AS GRANTOR TRUSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Tax Characterization of the Trust as a Grantor Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Characterization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Stripped Notes and Stripped Coupons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Original Issue Discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Market Discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Election to Treat All Interest as OID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Sale or Exchange of a Grantor Trust Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Non-U.S. Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Information Reporting and Backup Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
NOTES ISSUED BY FIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
LEGAL INVESTMENT MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
</TABLE>
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<TABLE>
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USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
INDEX OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
</TABLE>
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<PAGE> 13
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to the Securities of any Series contained in the
related Prospectus Supplement to be prepared and delivered in connection with
the offering of such Securities. Certain capitalized terms used herein are
defined elsewhere in this Prospectus on the pages indicated in the "Index of
Terms".
ISSUER . . . . . . . . . . . . . . . . . With respect to each Series of
Securities, FIRSTPLUS INVESTMENT
CORPORATION ("FIC") or a
separate entity (each, a
"Trust") formed by FIC solely
for the purpose of issuing such
Notes. Each Trust will be
formed pursuant to either a
Trust Agreement (as amended and
supplemented from time to time,
a "Trust Agreement") between the
Seller and the applicable Owner
Trustee for such Trust (the
"Trust") or a Pooling and
Servicing Agreement (as amended
and supplemented from time to
time, the "Pooling and Servicing
Agreement") among the Seller,
the Servicer and the Trustee for
such Trust.
SELLER . . . . . . . . . . . . . . . . . With respect to each Series in
which the Issuer is a Trust,
FIRSTPLUS INVESTMENT CORPORATION
(the "Seller").
SERVICER . . . . . . . . . . . . . . . . FIRSTPLUS FINANCIAL, INC.("FFI"
or the "Transferor" or the
"Servicer").
PASS THROUGH TRUSTEE . . . . . . . . . . . With respect to each Series of
Securities that is issued by a
grantor trust, the Pass Through
Trustee specified in the related
Prospectus Supplement.
OWNER TRUSTEE . . . . . . . . . . . . . . With respect to each Series of
Securities that is issued by an
owner trust, the Owner Trustee
specified in the related
Prospectus Supplement.
INDENTURE TRUSTEE . . . . . . . . . . . With respect to any applicable
Series of Securities that
includes one or more Classes of
Notes, the Indenture Trustee
specified in the related
Prospectus Supplement.
TRUSTEE . . . . . . . . . . . . . . . . . As used herein, the term
"Trustee" shall refer to the
Indenture Trustee with respect
to a Series of Notes, the Owner
Trustee under the applicable
Trust Agreement with respect to
a Series of Certificates, or the
Pass-Through Trustee under the
applicable Pooling and Servicing
Agreement with respect to a
Series of Certificates. The
Trustees with respect to each
Series will be specified in the
related Prospectus Supplement.
ADMINISTRATOR . . . . . . . . . . . . . The entity or entities named as
Administrator, if any, in the
related Prospectus Supplement
(the "Administrator"), will act
as administrator with respect to
one or more aspects related to
any Loan Assets included as
Trust Property. The
Administrator may be an
affiliate of the Issuer, the
Seller and/or the Servicer.
MASTER SERVICER . . . . . . . . . . . . . If the related Trust Property
consists of Mortgage Loans or
Contracts, the entity or
entities, if any, named as the
master
1
<PAGE> 14
servicer in the related
Prospectus Supplement (the
"Master Servicer"), that will
act as master servicer with
respect to such Mortgage Loans or
Contracts. The Master Servicer
may be an affiliate of the
Seller and/or Servicer.
THE NOTES . . . . . . . . . . . . . . . A Series of Securities may
include one or more Classes of
Notes, which will be issued
pursuant to an Indenture between
the Issuer and the Indenture
Trustee (as amended and
supplemented from time to time,
an "Indenture"). The related
Prospectus Supplement will
specify which Class or Classes,
if any, of Notes of the related
Series are being offered
thereby.
To the extent specified in the
related Prospectus Supplement,
Notes will be available for
purchase in denominations of
$1,000 and integral multiples
thereof and will be available in
book-entry form only.
Noteholders will be able to
receive Definitive Notes only in
the limited circumstances
described herein or in the
related Prospectus Supplement.
See "Certain Information
Regarding the Securities --
Definitive Securities".
To the extent specified in the
related Prospectus Supplement,
each Class of Notes will have a
stated principal amount and will
bear interest at a specified rate
or rates (with respect to each
Class of Notes, the "Interest
Rate"). Each Class of Notes may
have a different Interest Rate,
which may be a fixed, variable or
adjustable Interest Rate, or any
combination of the foregoing. The
related Prospectus Supplement
will specify the Interest Rate
for each Class of Notes, or the
method for determining the
Interest Rate.
With respect to a Series that
includes two or more Classes of
Notes, each Class may differ as
to the timing and priority of
payments, seniority, allocations
of losses, Interest Rate or
amount of payments of principal
or interest, or payments of
principal or interest in respect
of any such Class or Classes may
or may not be made upon the
occurrence of specified 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
2
<PAGE> 15
option to purchase the Trust
Property in the manner and on the
respective terms and conditions
as set forth in the related
Prospectus Supplement.
THE CERTIFICATES . . . . . . . . . . . . A Series may include one or more
Classes of Certificates and may
or may not include any Notes.
The related Prospectus
Supplement will specify which
Class or Classes, if any, of the
Certificates are being offered
thereby.
To the extent specified in the
related Prospectus Supplement,
Certificates will be available
for purchase in a minimum
denomination of $1,000 and in
integral multiples thereof and
will be available in book-entry
form only. Certificateholders
will be able to receive
Definitive Certificates only in
the limited circumstances
described herein or in the
related Prospectus Supplement.
See "Certain Information
Regarding the
Securities--Definitive
Securities".
To the extent specified in the
related Prospectus Supplement,
each Class of Certificates will
have a stated Certificate Balance
specified in the related
Prospectus Supplement (the
"Certificate Balance") and will
accrue interest on such
Certificate Balance at a
specified rate (with respect to
each Class of Certificates, the
"Pass Through Rate"). Each Class
of Certificates may have a
different Pass Through Rate,
which may be a fixed, variable or
adjustable Pass Through Rate, or
any combination of the foregoing.
The related Prospectus Supplement
will specify the Pass Through
Rate for each Class of
Certificates or the method for
determining the Pass Through
Rate.
With respect to a Series that
includes two or more Classes of
Certificates, each Class may
differ as to timing and priority
of distributions, seniority,
allocations of losses, Pass
Through Rate or amount of
distributions in respect of
principal or interest, or
distributions in respect of
principal or interest in respect
of any such Class or Classes may
or may not be made upon the
occurrence of specified events or
on the basis of 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
3
<PAGE> 16
subordinated in priority of
payment to payments on the Notes
to the extent specified in the
related Prospectus Supplement.
To the extent specified in the
related Prospectus Supplement,
the Seller, the Servicer or a
successor thereto may have an
option to purchase the Trust
Property in the manner and on the
respective terms and conditions
as set forth in the related
Prospectus Supplement.
THE TRUST PROPERTY . . . . . . . . . . . As specified in the related
Prospectus Supplement, the
property securing or backing
each Series (the "Trust
Property") will include Loan
Assets consisting of one or more
of the following:
(i) a pool (a "Mortgage Pool")
of single family (one- to
four- unit) residential
mortgage loans, including
mortgage loans that are
secured by first or junior
liens on the related
mortgaged properties,
timeshare mortgage loans and
loans evidenced by retail
installment sales or
installment loan agreements
that are secured by first or
junior liens on real
property ("Mortgage Loans");
and
(ii) a pool (a "Contract Pool")
of loans evidenced by retail
installment sales or
installment loan agreements,
including loans secured by
new or used Manufactured
Homes (as defined herein)
that are not considered to
be interests in real
property because such
Manufactured Homes are not
permanently affixed to real
estate ("Secured Contracts")
and loans evidenced by
retail installment sales or
installment loan agreements
which are not secured by any
interest in real or personal
property ("Unsecured
Contracts" and, together
with the Secured
Contracts, the "Contracts").
The Trust Property may also
include, or the related
Securities may also have the
benefits of, certain rights and
other ancillary or incidental
assets (together with the Loan
Assets, collectively, the
"Assets"), that are intended (i)
to enhance the likelihood of
ultimate or timely payments or
distributions of proceeds from
the Loan Assets to
Securityholders, including
letters of credit, insurance
policies, guaranties, reserve
funds or other types of credit
enhancement or any combination
thereof (the "Credit
Enhancement"), or (ii) to assure
the servicing of the Loan Assets,
including interest rate
4
<PAGE> 17
exchange agreements, reinvestment
income and cash accounts. The
Loan Assets will consist of loans
for which the related proceeds
were used to finance (i) property
improvements, (ii) the
acquisition of personal property
such as home appliances or
furnishings, (iii) debt
consolidation, (iv) the purchase
or refinancing of single family
residential property, or (v) a
combination of property
improvements, debt consolidation
and other consumer purposes,
which loans are marketed by the
Transferor under the name
"BusterPlus(TM) Loans".
The Securities of any Series will
be entitled to payment only from
the Trust Property and any other
Assets pledged or otherwise
available for the benefit of the
holders of such Securities as
specified in the related
Prospectus Supplement.
The Trust Property of each Series
may also include amounts on
deposit in certain trust
accounts, including the related
Collection Account, Distribution
Account and any Yield Maintenance
Account, Reserve Fund or other
account identified in the
applicable Prospectus Supplement.
A. Mortgage Loans . . . . . . . . . . . . . As specified in the related
Prospectus Supplement for a
Series, "Mortgage Loans" may
include: (i) loans secured by
first liens on one-to-four family
residential properties; (ii)
loans secured by security
interests in shares issued by
private, non-profit, cooperative
housing corporations
("Cooperatives") and in the
related proprietary leases or
occupancy agreements granting
exclusive rights to occupy
specific dwelling units in such
Cooperatives' buildings; (iii)
loans secured by junior (i.e.,
second, third, etc.) liens on the
related mortgaged properties
(which may be evidenced by retail
installment sales contracts and
installment loan agreements);
(iv) loans secured by timeshare
estates representing an ownership
interest in 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
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<PAGE> 18
Loans that are property
improvement loans may be
partially insured by the Federal
Housing Administration under the
Title I Program ("Title I
Mortgage Loans"). The related
Prospectus Supplement for a
Series will describe any Mortgage
Loans included in the related
Trust Property and will specify
certain information regarding the
payment terms of such Mortgage
Loans. See "Description of the
Trust Property -- Mortgage
Loans."
B. Contracts . . . . . . . . . . . . . . . As specified in the related
Prospectus Supplement for a
Series, "Contracts" may include:
(i) loans evidenced by retail
installments sales or loan
agreements, including loans
secured by new or used
Manufactured Homes (as defined
herein) that are not considered
to be interests in real property
because such Manufactured Homes
are not permanently affixed to
real estate ("Secured Contracts")
and (ii) loans evidenced by
retail installment sales or
installment loan agreements which
are not secured by any interest
in real or personal property
("Unsecured Contracts"). See
"Description of the Trust
Property -- Contracts". Certain
Contracts may be conventional
(i.e., not insured or guaranteed
by a governmental agency)
contracts (the "Conventional
Contracts"), while other
Contracts may be partially
insured by the FHA under the
Title I Program (the "Title I
Contracts"). The related
Prospectus Supplement for a
Series will further describe the
type of Contracts, if any,
included in the related Trust
Property. See "Description of
the Trust Property -- Contracts."
C. Pre-Funding Arrangements . . . . . . . If so specified in the
related Prospectus Supplement,
the related Sale and Servicing
Agreement or Pooling and
Servicing Agreement will contain
provisions pursuant to which the
related Transferor will agree to
transfer additional Loan Assets
(the "Subsequent Loan Assets")
into the related Loan Asset Pool
for a specified period of time
following the date on which the
related Securities are issued
(such provisions being referred
to herein as a "Pre-Funding
Arrangement"). Any such
Pre-Funding Arrangement will
require that any Loan Assets so
transferred conform to the
requirements specified in the
related Sale and Servicing
Agreement or Pooling and
Servicing Agreement, as
applicable. See "Description of
the Trust Property -- Pre-Funding
Arrangements."
TRANSFER OF LOAN ASSETS . . . . . . . . . . . On or before the date of
initial issuance of a Series
of Securities (the related
"Closing Date"), the Loan Assets
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<PAGE> 19
having an aggregate principal
balance specified in the related
Prospectus Supplement as of the
dates specified therein (the
"Cut-off Date") will be
transferred pursuant to (i) the
related Sale and Servicing
Agreement if the Issuer is to be
treated as an owner trust, or
(ii) the related Pooling and
Servicing Agreement if the Issuer
is to be treated as a grantor
trust for federal income tax
purposes.
The Loan Assets will have been
(i) originated by the Transferor
in accordance with the
Transferor's underwriting
criteria or (ii) originated by
the Transferor's correspondents
in accordance with the
Transferor's underwriting
criteria and subsequently
purchased by the Transferor. The
Loan Assets to be included in the
Trust Property will be selected
based on the underwriting
criteria specified in the related
Sale and Servicing Agreement or
Pooling and Servicing Agreement,
as applicable, and described
herein and in the related
Prospectus Supplement.
CREDIT ENHANCEMENT . . . . . . . . . . . . If and to the extent specified
in the related Prospectus
Supplement, credit enhancement
with respect to a Series or any
Class or Classes of Securities
may include any one or more of
the following: subordination of
one or more other Classes of
Securities, a Reserve Fund, a
Yield Maintenance Account,
overcollateralization, letters of
credit, credit or liquidity
facilities, surety bonds,
guaranteed investment contracts,
swaps or other interest rate
protection agreements, repurchase
obligations, cash deposits or
other agreements or arrangements
with respect to third party
payments or other support. Any
form of credit enhancement may
have certain limitations and
exclusions from coverage
thereunder and, if so, such
limitations and exclusions from
coverage will be described in the
related Prospectus Supplement.
See "Risk Factors -- Limitations
of Credit Enhancement" and
"Credit Enhancement".
TRANSFER AND SERVICING
AGREEMENTS . . . . . . . . . . . . . . . . . The Assets for a given Series of
Securities will be transferred to
the related Issuer pursuant to a
Sale and Servicing Agreement or a
Pooling and Servicing Agreement.
The rights and benefits of any
Issuer under a Sale and Servicing
Agreement will be assigned to the
Indenture Trustee as collateral
for the Notes of the related
Series. The Servicer will agree
with such Issuer to be
responsible for servicing,
managing, maintaining custody of
and making collections on the
Assets. If and to the
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<PAGE> 20
extent set forth in the related
Prospectus Supplement, FFI will
undertake certain administrative
duties under an Administration
Agreement with respect to any
Issuer that has issued Notes.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES . . . . . . . . . . . . . . . Unless the Prospectus Supplement
specifies that the related Issuer
will be treated as a grantor
trust and, except as otherwise
provided in such Prospectus
Supplement, upon the issuance of
the related Series of Securities,
Tax Counsel to such Issuer will
deliver an opinion to the effect
that for federal income tax
purposes (a) any Notes of such
Series will be characterized as
debt and (b) such Issuer, if a
Trust, will not be characterized
as an association (or a publicly
traded partnership) taxable as a
corporation. In respect of any
such Series, each Noteholder, if
any, by the acceptance of a Note
of such Series, will agree to
treat such Note as indebtedness,
and each Certificateholder, by
the acceptance of a Certificate
of such Series, will agree to
treat such Issuer, if a Trust, as
a partnership in which such
Certificateholder is a partner
for federal income tax purposes.
Alternative characterizations of
such Trusts and such Certificates
are possible, but would not
result in materially adverse tax
consequences to
Certificateholders.
If the Prospectus Supplement
specifies that the related Trust
will be treated as a grantor
trust and except as otherwise
provided in such Prospectus
Supplement, upon the issuance of
the related Series of
Certificates, Tax Counsel to such
Trust will deliver an opinion to
the effect that such Trust will
be treated as a grantor trust for
federal income tax purposes and
will not be subject to federal
income tax.
For federal income tax purposes,
Notes generally will be treated
as debt obligations of the
related Issuer. Holders of Notes
will not be required to report
income with respect to such Notes
under an accrual method, unless
the Noteholders otherwise use the
accrual method. Notes will not
represent "real estate assets"
for purposes of Section
856(c)(5)(A) of the Code or
"[l]oans . . . principally
secured by an interest in real
property" within the meaning of
Section 7701(a)(19)(C)(v) of the
Code.
See "Certain Federal Income Tax
Consequences"for additional
information concerning the
application of federal tax laws
to the Securities.
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<PAGE> 21
ERISA CONSIDERATIONS . . . . . . . . . . . . A fiduciary of any employee
benefit plan subject to the
Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), or the Code should
carefully review with its own
legal advisors whether the
purchase or holding of Securities
could give rise to a transaction
prohibited or otherwise
impermissible under ERISA or the
Code. See "ERISA
Considerations." To the extent
described in the Prospectus
Supplement for a Series, certain
Classes of Securities of such
Series may not be transferred
unless the applicable Trustee and
FIC are furnished with a letter
of representation or an opinion
of counsel to the effect that
such transfer will not result in
a violation of the prohibited
transaction provisions of ERISA
and the Code and will not subject
the applicable Trustee, the
Issuer, the Seller, the Servicer,
the Master Servicer, if any, or
the Administrator, if any, to
additional obligations. If
specified in the related
Prospectus Supplement, the United
States Department of Labor may
have issued to the Underwriter an
administrative exemption for
certain Classes of Securities.
See "Certain Information
Regarding the Securities --
General" and "ERISA
Considerations."
LEGAL INVESTMENT MATTERS . . . . . . . . . . The Securities of each Series
will not constitute "mortgage
related securities" under the
Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA")
because, to the extent specified
in the related Prospectus
Supplement, a substantial number
of the Mortgage Loans will be
secured by liens on real estate
that are not first liens, as
required by SMMEA. Accordingly,
many institutions with legal
authority to invest in "mortgage
related securities" may not be
legally authorized to invest in
the Securities of any Series.
Investors should consult their
own legal advisors in determining
whether and to what extent the
Securities of any particular
Series constitute legal
investments for such investors.
USE OF PROCEEDS . . . . . . . . . . . . . . . Substantially all of the net
proceeds from the sale of a
Series will be applied to the
simultaneous purchase of the Loan
Assets included in the related
Trust Property or to reimburse
the amounts previously used to
effect such purchase, the costs
of carrying the Loan Assets until
sale of such Series and to pay
other expenses connected with
pooling the Loan Assets and
issuing such Series. See "Use of
Proceeds."
RATING . . . . . . . . . . . . . . . . . . . It is a condition to the
issuance of each Class of a
Series specified as being offered
by the related Prospectus
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<PAGE> 22
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> 23
RISK FACTORS
In considering an investment in the Offered Securities of any Series,
investors should consider, among other things, the following risk factors and
any other factors set forth under the heading "Risk Factors" in the related
Prospectus Supplement.
LIMITED LIQUIDITY AND FLUCTUATION IN VALUE FROM MARKET CONDITIONS
GENERAL. The Offered Securities of any Series may have limited or no
liquidity. Accordingly, an investor may be forced to bear the risk of its
investment in any Offered Securities for an indefinite period of time.
Furthermore, except to the extent described herein and in the related
Prospectus Supplement, Securityholders will have no redemption rights, and the
Offered Securities of each Series are subject to early retirement only under
certain specified circumstances described in the related Prospectus Supplement.
LACK OF A SECONDARY MARKET. There can be no assurance that a
secondary market for the Offered Securities of any Series will develop or, if
it does develop, that it will provide holders with liquidity of investment or
that it will continue for as long as such Offered Securities remain
outstanding. The Prospectus Supplement for any Series of Offered Securities
may indicate that an underwriter specified therein intends to establish a
secondary market in such Offered Securities; however, no underwriter will be
obligated to do so. Any such secondary market may provide less liquidity to
investors than any comparable market for securities that evidence interests in
single-family mortgage loans. To the extent provided in the related Prospectus
Supplement, the Securities may be listed on any securities exchange.
BOOK ENTRY REGISTRATION. To the extent specified in the related
Prospectus Supplement, persons acquiring beneficial ownership interests in the
Securities of any Series or Class will hold their Securities through DTC, in
the United States, or Cedel or Euroclear in Europe. Transfers within DTC,
Cedel or Euroclear, as the case may be, will be in accordance with the usual
rules and operating procedures of the relevant system. So long as the
Securities are Book- Entry Securities, such Securities will be evidenced by one
or more certificates registered in the name of Cede & Co., as the nominee of
DTC, or Citibank N.A. or Morgan Guaranty Trust Company of New York, the
relevant depositaries of Cedel and Euroclear, respectively, and each a
participating member of DTC. No Securityholder will be entitled to receive a
definitive certificate representing such person's interest, except in the event
that Definitive Securities are issued under the limited circumstances described
herein. See "Certain Information Regarding the Securities -- Book-Entry
Registration". Unless and until Definitive Securities for such Series are
issued, holders of such Securities will not be recognized by the Trustee or any
applicable Indenture Trustee as "Certificateholders", "Noteholders" or
"Securityholders", as the case may be (as such terms are used herein or in the
related Pooling and Servicing Agreement or related Indenture and Trust
Agreement, as applicable). Hence, until Definitive Securities are issued,
holders of such Securities will only be able to exercise the rights of
Securityholders indirectly through DTC (if in the United States) and its
participating organizations, or Cedel and Euroclear (in Europe) and their
respective participating organizations. See "Certain Information Regarding the
Securities -- Book-Entry Registration".
Since transactions in the Securities can be effected only through DTC,
Cedel, Euroclear, participating organizations, indirect participants and
certain banks, the ability of the beneficial owner thereof to pledge such
Securities to persons or entities that do not participate in the DTC, Cedel or
Euroclear system, or otherwise to take actions in respect of such Securities,
may be limited due to lack of a physical certificate representing such
Securities.
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<PAGE> 24
Beneficial owners of Securities may experience some delay in their
receipt of payments or distributions of interest of and principal since such
distributions will be forwarded by the Trustee or Indenture Trustee to DTC and
DTC will credit such payments or distributions to the accounts of its
Participants (as defined herein) which will thereafter credit them to the
accounts of the beneficial owners thereof either directly or indirectly through
indirect participants.
LIMITED NATURE OF ONGOING INFORMATION. The primary source of ongoing
information regarding the Offered Securities of any Series, including
information regarding the status of the related Loan Assets and any Credit
Enhancement for such Offered Securities, will be the periodic reports to
Securityholders to be delivered pursuant to the related Indenture or Pooling
and Servicing Agreement as described herein under the heading "Description of
the Transfer and Servicing Agreements -- Reports to Securityholders". There
can be no assurance that any additional ongoing information regarding the
Offered Securities of any Series will be available through any other source.
The limited nature of such information in respect of a Series of Offered
Securities may adversely affect the liquidity thereof, even if a secondary
market for such Offered Securities does develop.
SENSITIVITY TO FLUCTUATIONS IN PREVAILING INTEREST RATES. Insofar as
a secondary market does develop with respect to any Series of Offered
Securities or Class thereof, the market value of such Offered Securities will
be affected by several factors, including the perceived liquidity thereof, the
anticipated cash flow thereon (which may vary widely depending upon the
prepayment and default assumptions applied in respect of the underlying Loan
Assets) and prevailing interest rates. The price payable at any given time in
respect of certain Classes of Offered Securities (in particular, a Class with a
relatively long average life, or a Class of Interest Only Securities or
Principal Only Securities) may be extremely sensitive to small fluctuations in
prevailing interest rates; and the relative change in price for an Offered
Security in response to an upward or downward movement in prevailing interest
rates may not necessarily equal the relative change in price for such Offered
Security in response to an equal but opposite movement in such rates.
Accordingly, the sale of Offered Securities by a holder in any secondary market
that may develop may be at a discount from the price paid by such holder. FIC
is not aware of any source through which price information about the Offered
Securities will be generally available on an ongoing basis.
LIMITED ASSETS
The Offered Securities and Loan Assets for a Series will be guaranteed
or insured, if at all, to the extent specified in the related Prospectus
Supplement; otherwise neither the Offered Securities of any Series nor the Loan
Assets in the related Trust Property will be guaranteed or insured by, or be
recourse obligations of, the Issuer, the Seller, the Servicer or any of their
respective affiliates, by any governmental agency or instrumentality or by any
other person, and no Offered Security of any Series will represent a claim
against or security interest in the Trust Property for any other Series.
Accordingly, if the related Trust Property includes insufficient assets to make
payments on a Series of Offered Securities, no other assets will be available
for payment of the deficiency, and the holders of one or more Classes of such
Offered Securities will be required to bear the consequent loss. To the extent
provided in the related Prospectus Supplement for a Series that consists of one
or more Classes of Subordinate Securities, on any Distribution Date in respect
of which losses or shortfalls in collections on the Loan Assets have been
incurred, all or a portion of the amount of such losses or shortfalls will be
borne first by one or more Classes of the Subordinate Securities, and,
thereafter, by the remaining Classes of Securities in the priority and manner
and subject to the limitations specified in such Prospectus Supplement.
Because payments and distributions of principal on the Securities of a Series
may, if provided in the related Prospectus Supplement, be applied to
outstanding Classes of such Series in the priority specified in the related
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<PAGE> 25
Prospectus Supplement, a deficiency that arises after Securities of a Class of
any such Series having higher priority in payment or distribution have been
fully or partially repaid will have a disproportionately greater effect on the
Securities of Classes of such Series having lower priority in payment. The
disproportionate effect of any such deficiency is further increased in the case
of Classes of Compound Interest Securities of any Series because, prior to the
retirement of all Classes of such Series having higher priority in payment than
such Compound Interest Securities, interest is not payable, to the extent
provided in the related Prospectus Supplement, but is accrued and added to the
principal of such Compound Interest Securities.
ADDITIONS, SUBSTITUTIONS AND WITHDRAWALS OF ASSETS. To the extent
provided in the related Prospectus Supplement for a Series, the Seller or the
Issuer may, subsequent to the issuance of such a Series, deliver additional
Assets or withdraw Assets previously included in the Trust Property for such
Series, substituting assets therefore or depositing additional Assets or
withdrawing Assets previously deposited in a Reserve Fund for such Series. The
effect of delivery or substitution of other Assets may be to alter the
characteristics and composition of the Assets underlying such Series, either of
which may alter the timing and amount of payments or distributions on, or the
date of the final payment or distribution in respect of, the Securities of such
Series. See "Description of the Trust Property -- Additions, Substitution and
Withdrawal of Assets". Furthermore, certain amounts on deposit from time to
time in certain funds or accounts constituting part of the Trust Property for
a Series, including the Distribution Account and any accounts maintained as
Credit Enhancement, may be withdrawn under certain conditions, if and to the
extent described in the related Prospectus Supplement, for purposes other than
the payment of principal of or interest on the related Series of Securities.
EFFECT OF PREPAYMENTS ON AVERAGE LIFE
As a result of prepayments on the Loan Assets, the amount and timing
of payments or distributions of principal and/or interest on the Offered
Securities of the related Series may be highly unpredictable. Prepayments on
the Loan Assets included in the Trust Property will result in a faster rate of
principal payments on one or more Classes of the related Series of Securities
than if payments on such Loan Assets were made as scheduled. Thus, the
prepayment experience on the Loan Assets included in the Trust Property may
affect the average life of one or more Classes of Securities of the related
Series, including a Class of Offered Securities. The rate of principal
payments on pools of mortgage loans and installment loan contracts varies among
pools and from time to time is influenced by a variety of economic,
demographic, geographic, social, tax and legal factors. For example, if
prevailing interest rates fall significantly below the interest rates borne by
the Loan Assets included in the Trust Property, then, subject to the particular
terms of the Loan Assets (e.g., provisions that prohibit voluntary prepayments
during specified periods or impose penalties in connection therewith) and the
ability of borrowers to obtain new financing, principal prepayments on such
Loan Assets are likely to be higher than if prevailing interest rates remain at
or above the rates borne by those Loan Assets. Conversely, if prevailing
interest rates rise significantly above the interest rates borne by the Loan
Assets included in the Trust Property, then principal prepayments on such Loan
Assets are likely to be lower than if prevailing interest rates remain at or
below the interest rates borne by those Loan Assets. In addition to
fluctuations in prevailing interest rates, the rate of prepayments on the Loan
Assets may be influenced by changes and developments in the types and
structures of loan products being offered to consumers within the mortgage
banking and consumer finance industry and by technological developments and
innovations to the loan underwriting and origination process.
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<PAGE> 26
Accordingly, there can be no assurance as to the actual rate of
prepayment on the Loan Assets included in any given Trust Property or that such
rate of prepayment will conform to any model described herein or in any
Prospectus Supplement. As a result, depending on the anticipated rate of
prepayment for the Loan Assets included in the Trust Property with respect to a
Series, the retirement of any Class of Securities of such Series could occur
significantly earlier or later, and the average life thereof could be
significantly shorter or longer, than expected.
In comparison to first lien single family mortgage loans, FIC is not
aware of any reliable publicly available statistical information regarding the
rates of prepayment of loans such as the Loan Assets that is based upon the
historical loan performance of this segment of the mortgage banking and
consumer finance industry. In fact, this segment of the mortgage banking and
consumer finance industry has undergone significant growth and expansion,
including an increase in new loan originations, as a result of certain social
and economic factors, including recent tax law changes that limit the
deductibility of consumer interest to indebtedness secured by an individual's
principal residence and changes and developments in the types and structures of
loan products being offered to consumers. Therefore, no assurance can be given
as to the level of prepayments that the Loan Assets will experience. In fact,
a number of factors suggest that the prepayment experience of the Loan Assets
may be significantly different from that of any first lien Mortgage Loans with
equivalent interest rates and maturities.
Additional prepayment, yield and weighted average life considerations
with respect to a Series of Securities will be set forth in the related
Prospectus Supplement.
The extent to which prepayments on the Loan Assets included in the
Trust Property of any Series ultimately affect the average life of any Class of
Securities of such Series will depend on the terms and provisions of such
Securities. A Class of Securities, including a Class of Offered Securities,
may provide that on any Distribution Date the holders of such Securities are
entitled to a pro rata share of the prepayments on the Loan Assets included in
the related Trust Property that are distributable on such date, to a
disproportionately large share (which, in some cases, may be all) of such
prepayments, or to a disproportionately small share (which, in some cases, may
be none) of such prepayments. A Class of Securities that entitles the holders
thereof to a disproportionately large share of the prepayments on the Loan
Assets included in the related Trust Property increases the likelihood of early
retirement of such Class ("Call Risk") if the rate of prepayment is relatively
fast; while a Class of Securities that entitles the holders thereof to a
disproportionately small share of the prepayments on the Loan Assets included
in the related Trust Property increases the likelihood of an extended average
life of such Class ("Extension Risk") if the rate of prepayment is relatively
slow. To the extent described in the related Prospectus Supplement, the
respective entitlement of the various Classes of Securityholders of such Series
to receive payments (and, in particular, prepayments) of principal of the Loan
Assets included in the related Trust Property may vary based on the occurrence
of certain events (e.g., the retirement of one or more Classes of Securities of
such Series) or whether certain contingencies do or do not occur (e.g.,
prepayment and default rates with respect to such Loan Assets).
A Series of Securities may include one or more Classes of scheduled
amortization Securities (each, a "Scheduled Amortization Security"), which will
entitle the holders thereof to receive principal payments or distributions
according to a specified principal payment schedule. Although prepayment risk
cannot be eliminated entirely from any Class of Securities, a Class of
Scheduled Amortization Securities will generally provide a relatively stable
cash flow so long as the actual rate of prepayment on the Loan Assets included
in the related Trust Property remains relatively constant at the rate, or
within the range of rates, of prepayment used to establish the specific
principal payment schedule for such Securities. Prepayment
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<PAGE> 27
risk with respect to a given pool of Loan Assets does not disappear, however,
and the stability afforded to Scheduled Amortization Securities comes at the
expense of one or more companion Classes of the same Series (each, a "Companion
Class"), any of which Companion Classes may also be a Class of Offered
Securities. In general, and as more specifically described in the related
Prospectus Supplement, a Companion Class may entitle the holders thereof to a
disproportionately large share of prepayments on the Loan Assets included in
the related Trust Property when the rate of prepayment is relatively fast,
and/or may entitle the holders thereof to a disproportionately small share of
prepayments on the Loan Assets included in the related Trust Property when the
rate of prepayment is relatively slow. As and to the extent described in the
related Prospectus Supplement, a Companion Class absorbs some (but not all) of
the Call Risk and/or Extension Risk that would otherwise belong to the related
Scheduled Amortization Securities if all payments of principal of the Loan
Assets included in the related Trust Property were allocated on a pro rata
basis.
EFFECT OF PREPAYMENTS ON YIELD
A Series of Securities may include one or more Classes of Offered
Securities offered at a premium or discount. Yields on such Classes of
Securities will be sensitive, and in some cases extremely sensitive, to
prepayments on the Loan Assets included in the related Trust Property and,
where the amount of interest payable with respect to a Class is
disproportionately large, as compared to the amount of principal, as with a
Class of Interest Only Securities, a holder might fail to recover its original
investment under some prepayment scenarios. The extent to which the yield to
maturity of any Class of Offered Securities may vary from the anticipated yield
will depend upon the degree to which such Offered Securities are purchased at a
discount or premium and the amount and timing of distributions thereon. An
investor should consider, in the case of any Offered Security purchased at a
premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield to such investor that is lower than the
anticipated yield.
LIMITATIONS OF CREDIT ENHANCEMENT
LIMITATIONS REGARDING TYPES OF LOSSES COVERED. The related Prospectus
Supplement for a Series of Securities will describe any Credit Enhancement
provided with respect thereto. Use of Credit Enhancement will be subject to
the conditions and limitations described herein and in the related Prospectus
Supplement. Moreover, such Credit Enhancement may not cover all potential
losses or delays; for example, Credit Enhancement may or may not cover loss by
reason of fraud or negligence by a mortgage loan originator or other parties.
Any such losses or delays not covered by Credit Enhancement may, at least in
part, be allocated to, or affect payments or distributions to, one or more
Classes of Offered Securities.
DISPROPORTIONATE BENEFITS TO CERTAIN CLASSES AND SERIES. A Series of
Securities may include one or more Classes of Subordinate Securities (which may
include Offered Securities), if provided in the related Prospectus Supplement.
Although subordination is intended to reduce the likelihood of temporary
shortfalls and ultimate losses to holders of the related senior Securities, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more Classes of
Offered Securities of a Series are made in a specified order of priority, any
related Credit Enhancement may be exhausted before the principal of the later
paid Classes of Offered Securities of such Series has been repaid in full. As
a result, the impact of losses and shortfalls experienced with respect to the
Loan Assets may fall primarily upon those Classes of Offered Securities having
a later right of payment. Moreover, if a form of Credit Enhancement covers the
Offered Securities of more than one Series and losses on the related Loan
Assets exceed the amount of such Credit Enhancement, it is possible that the
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<PAGE> 28
holders of Offered Securities of one (or more) such Series will be
disproportionately benefited by such Credit Enhancement to the detriment of the
holders of Offered Securities of one (or more) other such Series.
LIMITATIONS REGARDING THE AMOUNT OF CREDIT ENHANCEMENT. The amount of
any applicable Credit Enhancement supporting one or more Classes of Offered
Securities, including the subordination of one or more other Classes of
Securities, will be determined on the basis of criteria established by each
Rating Agency rating such Classes of Securities based on an assumed level of
defaults, delinquencies and losses on the Loan Assets and certain other
factors. There can be no assurance that the default, delinquency and loss
experience on such Loan Assets will not exceed such assumed levels. See
"Credit Enhancement". If the defaults, delinquencies and losses on such Loan
Assets do exceed such assumed levels, the holders of one or more Classes of
Offered Securities will be required to bear such additional defaults,
delinquencies and losses. Regardless of the form of Credit Enhancement
provided with respect to a Series, the amount of coverage will be limited in
amount and in most cases will be subject to periodic reduction in accordance
with a schedule or formula.
LIMITATIONS ON FHA INSURANCE FOR TITLE I LOANS. The related
Prospectus Supplement will specify the number and percentage of the Title I
Mortgage Loans and/or Title I Contracts, if any, included in the related Trust
Property that are partially insured by the FHA pursuant to Title I Program.
Since the FHA Insurance Amount for the Title I Mortgage Loans and Title I
Contracts is limited as described herein and in the related Prospectus
Supplement, and since the adequacy of such FHA Insurance Amount is dependent
upon future events, including reductions for the payment of FHA claims, no
assurance can be given that the FHA Insurance Amount is or will be adequate to
cover 90% of all potential losses on the Title I Mortgage Loans and Title I
Contracts included in the related Trust Property. If the FHA Insurance Amount
for the Title I Mortgage Loans and Title I Contracts is reduced to zero, such
loans and contracts will be effectively uninsured from and after the date of
such reduction. Under the Title I Program, until a claim for insurance
reimbursement is submitted to the FHA, the FHA does not review or approve for
qualification for insurance the individual Title I Mortgage Loan or Title I
Contract insured thereunder (as is typically the case with other federal loan
insurance programs). Consequently, the FHA has not acknowledged that any of
the Title I Mortgage Loans and Title I Contracts are eligible for FHA
insurance, nor has the FHA reviewed or approved the underwriting and
qualification by the originating lenders of any individual Title I Mortgage
Loans and Title I Contracts. See "Certain Legal Aspects of the Loan Assets --
The Title I Program".
The availability of FHA Insurance reimbursement following a default on
a Title I Mortgage Loan or Title I Contract is subject to a number of
conditions, including strict compliance by the originating lender of such loan,
FIC, the FHA Claims Administrator, the Servicer and any subservicer with the
FHA Regulations in originating and servicing such Title I Mortgage Loan or
Title I Contract, and limits on the aggregate insurance coverage available in
FIC's FHA Reserve. For example, the FHA Regulations provide that, prior to
originating a Title I Mortgage Loan or Title I Contract, a Title I lender must
exercise prudence and diligence in determining whether the borrower and any
co-maker or co-signer is solvent and an acceptable credit risk with a
reasonable ability to make payments on the loan. Although the related
Transferor will represent and warrant that the Title I Mortgage Loans and Title
I Contracts have been originated and serviced in compliance with all FHA
Regulations, these regulations are susceptible to substantial interpretation.
Failure to comply with all FHA Regulations may result in a denial of FHA
Claims, and there can be no assurance that the FHA's enforcement of the FHA
Regulations will not become stricter in the future. See "Certain Legal Aspects
of the Loan Assets -- The Title I Program -- General".
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The FHA will not recognize any Issuer or any Securityholders as the
owners of the Title I Mortgage Loans or Title I Contracts, or any portion
thereof, entitled to submit FHA Claims. Accordingly, neither the Issuer nor
the Securityholders will have a direct right to receive insurance payments from
the FHA. FIC will contract with the Servicer (or another person specified in
the Prospectus Supplement) to serve as the Administrator for FHA Claims (the
"FHA Claims Administrator") pursuant to an FHA claims administration agreement
(the "FHA Claims Administration Agreement"), which will provide for the FHA
Claims Administrator to handle all aspects of administering, processing and
submitting FHA Claims with respect to the Title I Mortgage Loans or Title I
Contracts, in the name and on behalf of FIC. The Securityholders will be
dependent on the FHA Claims Administrator to (i) make claims on the Title I
Mortgage Loans or Title I Contracts in accordance with FHA Regulations and (ii)
remit all FHA Insurance proceeds received from the FHA in accordance with the
related Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable. The Securityholders' rights relating to the receipt of payment
from and the administration, processing and submission of FHA Claims by FIC or
any FHA Claims Administrator are limited and governed by the related Sale and
Servicing Agreement or Pooling and Servicing Agreement, as applicable, and the
FHA Claims Administration Agreement and these functions are obligations of FIC
and the FHA Claims Administrator, but not the FHA. See "Certain Legal Aspects
of the Loan Assets -- The Title I Program -- Claims Procedures under Title I".
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a Class of Offered
Securities will reflect only its assessment of the likelihood that holders of
such Offered Securities will receive payments or distributions to which such
Securityholders are entitled under the related Indenture, Trust Agreement or
Pooling and Servicing Agreement. Such rating will not constitute an assessment
of the likelihood that principal prepayments on the Loan Assets will be made,
the degree to which the rate of such prepayments might differ from that
originally anticipated or the likelihood of early optional redemption or
termination of the Securities. Furthermore, such rating will not address the
possibility that prepayment of the Loan Assets at a higher or lower rate than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that an investor that purchases an Offered Security at a
significant premium might fail to recover its initial investment under certain
prepayment scenarios. Hence, a rating assigned by a Rating Agency does not
guarantee or ensure the realization of any anticipated yield on a Class of
Offered Securities.
The amount, type and nature of Credit Enhancement, if any, provided
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating a Class of Securities of such
Series. Those criteria are sometimes based upon an actuarial analysis of the
behavior of similar types of loans in a larger group. However, there can be no
assurance that the historical data supporting any such actuarial analysis will
accurately reflect future experience, or that the data derived from a large
pool of similar types of loans will accurately predict the delinquency, default
or loss experience of any particular pool of Loan Assets. In other cases, such
criteria may be based upon determination of the values of the Mortgaged
Properties or other properties, if any, that provide security for the Loan
Assets. However, no assurance can be given that those values will not decline
in the future. As a result, the Credit Enhancement required in respect of the
Offered Securities of any Series may be insufficient to fully protect the
holders thereof from losses on the related Loan Assets. See "-- Limitations of
Credit Enhancement" and "Credit Enhancement".
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ADVERSE TAX CONSEQUENCES
ORIGINAL ISSUE DISCOUNT. Certain of the Offered Securities may be
issued with original issue discount for federal income tax purposes. A holder
of a Security issued with original issue discount will be required to include
original issue discount in ordinary gross income for federal income tax
purposes as it accrues, in advance of receipt of the cash, or a portion of the
cash, attributable to such income. Accrued but unpaid interest on the Compound
Interest Securities generally will be treated as original issue discount for
this purpose. At certain rapid Loan Asset prepayment rates, original issue
discount may accrue on certain Classes of Securities that may never receive
payments or distributions of cash in respect thereof, resulting in a loss to
the related Securityholder. See "Certain Federal Income Tax Consequences".
CERTAIN FACTORS AFFECTING DELINQUENCIES, FORECLOSURES AND LOSSES ON LOAN ASSETS
GENERAL. The payment performance of the Offered Securities of any
Series will be directly related to the payment performance of the Loan Assets
included as part of the related Trust Property. Set forth below is a
discussion of certain factors that will affect the full and timely payment of
the Loan Assets included as part of any Trust Property.
GEOGRAPHIC CONCENTRATION. Certain geographic regions of the United
States from time to time will experience weaker regional economic conditions
and housing markets, and, consequently, will experience higher rates of loss
and delinquency on mortgage loans generally. Any concentration of Loan Assets
in such a region may present risk considerations in addition to those generally
present for similar mortgage-backed or asset-backed securities without such
concentration.
DECLINE IN VALUE OF A LOAN ASSET. An investment in Securities secured
by or evidencing an interest in a pool of Mortgage Loans may be adversely
affected by, among other things, a decline in one-to-four family residential
property values. No assurance can be given that values of the Mortgaged
Properties have remained or will remain at the levels existing on the dates of
origination of the related Mortgage Loans. If the residential real estate
market should experience an overall decline in property values such that the
outstanding balances of the Mortgage Loans in a particular Mortgage Pool, and
any other financing on the Mortgaged Properties, become equal to or greater
than the value of the Mortgaged Properties, the actual rates of delinquencies,
defaults and losses could be higher than those now generally experienced with
respect to similar types of loans within the mortgage lending industry. To the
extent that such losses are not covered by applicable insurance policies, if
any, or by any Credit Enhancement as described in the related Prospectus
Supplement, holders of Securities secured by or evidencing interests in such
Mortgage Loans will bear all risk of loss resulting from defaults by borrowers
and will have to look primarily to the value of the related Mortgaged
Properties for recovery of the outstanding principal and unpaid interest of the
defaulted Mortgage Loans. See "Description of the Trust Property -- Mortgage
Loans".
An investment in Securities secured by or evidencing interests in
Contracts may be affected by, among other things, a downturn in regional or
local economic conditions. These regional or local economic conditions are
often volatile, and historically have affected the delinquency, loan loss and
repossession experience of Contracts. To the extent that losses on Contracts
are not covered by applicable insurance policies, if any, or by any Credit
Enhancement, holders of the Securities secured by or evidencing interests in
such Contracts will bear all risk of loss resulting from default by borrowers
and will have to look primarily to the value of the underlying asset, if any,
for recovery of the outstanding principal and unpaid interest of the defaulted
Contracts. See "Description of the Trust Property -- Contracts".
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LIMITATIONS ON REALIZATIONS OF JUNIOR LIENS. The primary risk with
respect to defaulted Mortgage Loans secured by junior liens is the possibility
that adequate funds will not be received in connection with a foreclosure of
the related Mortgaged Property to satisfy fully both the related senior lien(s)
and the Mortgage Loan and that other insurance providing for reimbursement for
losses from such default (i.e., the FHA Insurance Amount for a Title I Mortgage
Loan) is not available. The claims of the related senior lienholder(s) will be
satisfied in full out of proceeds of the liquidation of the Mortgaged Property,
if such proceeds are sufficient, before the related Issuer, as the junior
lienholder, receives any payments in respect of the defaulted Mortgage Loan.
If the Servicer or a Subservicer, if any, were to foreclose on any junior lien
Mortgage Loan, it would do so subject to any related senior lien(s). In order
for a junior lien Mortgage Loan to be paid in full at such sale, a bidder at
the foreclosure sale of such Mortgage Loan would have to bid an amount
sufficient to pay off all sums due under the Mortgage Loan and the senior
lien(s) or purchase the Mortgaged Property subject to the senior lien(s). If
proceeds from a foreclosure and liquidation of the related Mortgaged Property
are insufficient to satisfy the costs of foreclosure and liquidation and the
amounts owed under the loans secured by the senior lien(s) and the junior lien
Mortgage Loan in the aggregate, the Issuer, as the junior lienholder, will bear
(i) the risk of delay in payments and distributions while a deficiency judgment
(which may not be available in certain jurisdictions) against the borrower is
obtained and realized and (ii) the risk of loss if the deficiency judgment is
not obtained or realized. Any such delays or losses will be borne by the
Securityholders of a Series to the extent that such delays or losses are not
otherwise covered by amounts available from any Credit Enhancement provided for
the related Securities, as specified in the related Prospectus Supplement. See
"Certain Legal Aspects of the Loan Assets -- Foreclosure -- Junior Liens".
CERTAIN LEGAL CONSIDERATIONS OF THE LOAN ASSETS. Applicable state
laws generally regulate interest rates and other charges that may be assessed
on borrowers, require certain disclosures to borrowers, and may require
licensing of FIC, the Trustee, the Indenture Trustee, the Servicer, the
Administrator, if any, the Master Servicer, if any, and any Subservicer. In
addition, most states have other laws, public policies and general principles
of equity relating to the protection of consumers and the prevention of unfair
and deceptive practices which may apply to the origination, servicing and
collection of the Loan Assets. The Loan Assets may also be subject to federal
laws, including, if applicable, the following: (i) the federal
Truth-in-Lending Act and Regulation Z promulgated thereunder, which require
certain disclosures to the borrowers regarding the terms of the Loan Assets;
(ii) the Real Estate Settlement Procedures Act and Regulation X promulgated
thereunder, which require certain disclosures to the borrowers regarding the
settlement and servicing of the Mortgage Loans; (iii) the Equal Credit
Opportunity Act and Regulation B promulgated thereunder, which prohibit
discrimination on the basis of age, race, color, sex, religion, marital status,
national origin, receipt of public assistance or the exercise of any right
under the Consumer Credit Protection Act; (iv) the Fair Credit Reporting Act,
which regulates the use and reporting of information related to the borrower's
credit experience; (v) the Federal Trade Commission Preservation of Consumers'
Claims and Defenses Rule, 16 C.F.R. Part 433, regarding the preservation of a
consumer's rights; (vi) the Fair Housing Act, 42 U.S.C. 3601 et seq., relating
to the creation and governance of the Title I Program; (vii) the Home Ownership
and Equity Protection Act; and (viii) the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"). In addition, Federal and state
environmental laws and regulations may also impact the Servicer's or any
Subservicer's ability to realize value with respect to the Mortgaged
Properties. See "Certain Legal Aspects of the Loan Assets".
Depending on the provisions of applicable law and the specific facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability of the Servicer or any Subservicer to collect all or part
of the principal of or interest on the Loan Assets, may entitle the borrower to
a refund of amounts previously paid, and, in addition, could subject the
Servicer or any Subservicer to damages and
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administrative sanctions. Further, violations of state law can affect the
insurability of the Title I Mortgage Loans and Title I Contracts under FHA
Regulations. See "Certain Legal Aspects of the Loan Assets -- The Title I
Program." If the Servicer or any Subservicer is unable to collect all or part
of the principal or interest on any Loan Asset because of a violation of the
aforementioned laws, public policies or general principles of equity, payments
on or distributions in respect of the Securities may be delayed or the Trustee
may be unable to make all payments or distributions owed to the Securityholders
to the extent any related losses are not otherwise covered by amounts available
from any Credit Enhancement provided for the related Series of Securities.
Furthermore, depending upon whether damages and sanctions are assessed against
the Servicer, the Master Servicer, if any, or any Subservicer, such violations
may materially impact the financial ability of the Master Servicer, if any, the
Servicer or Subservicer to continue to act in such capacity.
To the extent specified in the related Prospectus Supplement, the
Seller or the Transferor will be required to repurchase or replace any Loan
Asset which, at the time of origination, did not comply with applicable federal
and state laws or regulations.
RISKS ASSOCIATED WITH CERTAIN LOAN ASSETS
NO HAZARD INSURANCE FOR TITLE I MORTGAGE LOANS. With respect to any
Title I Mortgage Loans, the FHA Regulations do not require that a borrower
obtain title or fire and casualty insurance as a condition to obtaining a
property improvement loan. With respect to both manufactured home contracts
that are Title I Contracts and property improvement loans that are Title I
Mortgage Loans, if the related Mortgage Property is located in a flood hazard
area, however, flood insurance in an amount at least equal to the loan amount
is required. In addition, the FHA Regulations do not require that the borrower
obtain insurance against physical damage arising from earth movement (including
earthquakes, landslides and mudflows) as a condition to obtaining a property
improvement loan insured under the Title I Program. Accordingly, if a
Mortgaged Property that secures a Title I Mortgage Loan suffers any uninsured
hazard or casualty losses, holders of any Offered Securities secured in whole
or in part by Title I Mortgage Loans may bear the risk of loss resulting from a
default by the borrower to the extent such losses are not recovered by
foreclosure on the defaulted loans or from any FHA Claims payments. Such loss
may be otherwise covered by amounts available from the Credit Enhancement
provided for the Offered Securities, as specified in the related Prospectus
Supplement.
CONTRACTS SECURED BY MANUFACTURED HOMES. The Secured Contracts will
be secured by security interests in Manufactured Homes that are not considered
to be real property because they are not permanently affixed to real estate.
Perfection of security interests in such Manufactured Homes and enforcement of
rights to realize upon the value of such Manufactured Homes as collateral for
the Secured Contracts are subject to a number of Federal and state laws,
including the Uniform Commercial Code as adopted in each state and each state's
certificate of title statutes. The steps necessary to perfect the security
interest in a Manufactured Home will vary from state to state. Because of the
expense and administrative inconvenience involved, the Servicer of a Secured
Contract will not amend any certificate of title to change the lienholder
specified therein from such Servicer to the Issuer or the applicable Trustee
and will not deliver any certificate of title to such Issuer or Trustee or note
thereon such Issuer's or Trustee's interest. Consequently, in some states, in
the absence of such an amendment, the assignment to such Issuer or Trustee of
the security interest in the Manufactured Home may not be effective or such
security interest may not be perfected and, in the absence of such notation or
delivery to such Issuer or Trustee, the assignment of the security interest in
the Manufactured Home may not be effective against creditors of the Servicer or
a trustee in bankruptcy of the Servicer. If any related Credit Enhancement is
exhausted and
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a Secured Contract is in default, then recovery of amounts due on such Secured
Contracts is dependent on repossession and resale of the Manufactured Home
securing such Secured Contract. Certain other factors may limit the ability of
the Servicer to realize upon the Manufactured Homes or may limit the amount
realized to less than the amount due.
UNSECURED CONTRACTS. The obligations of the borrower under any
Unsecured Contract included as part of the related Trust Property will not be
secured by an interest in the related real estate or otherwise, and the related
Issuer, as the owner of such Unsecured Contract and the related Indenture
Trustee, as assignee for the benefit of the Noteholders, of the Issuer's
interest in such Unsecured Contract, will be a general unsecured creditor as to
such obligations. As a consequence, in the event of a default under an
Unsecured Contract, the related Issuer or Indenture Trustee, as applicable,
will have recourse only against the borrower's assets generally, along with all
other general unsecured creditors of the borrower. In a bankruptcy or
insolvency proceeding relating to an borrower on an Unsecured Contract, the
obligations of the borrower under such Unsecured Contract may be discharged in
their entirety, notwithstanding the fact that the portion of such borrower's
assets made available to the related Trustee as a general unsecured creditor to
pay amounts due and owing thereunder are insufficient to pay all such amounts.
A borrower on an Unsecured Contract may not demonstrate the same degree of
concern over performance of its obligations under such Unsecured Contract as if
such obligations were secured by a single family residence owned by such
borrower.
CONSUMER PROTECTION LAWS RELATED TO CONTRACTS. Numerous federal and
state consumer protection laws impose requirements on lending under retail
installment sales contracts and installment loan agreements such as the
Contracts, and the failure by the lender or seller of goods to comply with such
requirements could give rise to liabilities of assignees for amounts due under
such agreements and claims by such assignees may be subject to set-off as a
result of such lender's or seller's noncompliance. These laws would apply to a
Trustee as an assignee of Contracts. FIC will warrant that each Contract
complies with all requirements of law and, with respect to any Secured
Contract, will make certain warranties relating to the validity, subsistence,
perfection and priority of the security interest in each Manufactured Home
securing such Secured Contract. A breach of any such warranty that materially
adversely affects the interests of the Securityholders in any Contract would
create an obligation of the Seller to repurchase or replace such Contract
unless such breach is cured.
RELIANCE ON MANAGEMENT OF TIMESHARE UNITS. Unlike most conventional
single-family residential properties, the value of a timeshare unit is
substantially dependent on the management of the resort property in which it is
located. Management of timeshare resort properties includes operation of a
reservation system, maintenance of the physical structure, refurbishing of
individual units, maintenance and management of common areas and recreational
facilities, and facilitating the rental of individual units on behalf of
timeshare owners. In addition, timeshare units, which are purchased for
intervals of one or more specified weeks each year, are marketed as the owner's
purchase of future vacation opportunities rather than as a primary residence, a
second home or an investment. Accordingly, while borrowers are obligated to
make payments under their Mortgage Loans irrespective of any defect in, damage
to or change in conditions (such as poor management, faulty construction or
physical, social or environmental conditions) relating to the timeshare
properties, any such defect, damage or change in conditions could result in
delays in payment or in defaults by borrowers whose timeshare units are
affected.
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RECHARACTERIZATION OF SALE OF LOAN ASSETS AS BORROWING
In the event of the bankruptcy or insolvency of an affiliate of the
Issuer it is possible that a creditor, receiver, trustee in bankruptcy or other
party in interest may claim that the transactions through which the Issuer
acquired the Loan Assets were pledges of the Loan Assets rather than true
sales, and that, accordingly, the Loan Assets should be part of such
affiliate's bankruptcy estate. The transactions have been structured applying
principles such that following the bankruptcy of such affiliate, a court, in a
proceeding considering the transfers of the Loan Assets from such affiliate to
the Issuer, should treat the transfers of the Loan Assets as a true sale and,
therefore, the Loan Assets should not be part of such affiliate's bankruptcy
estate. The Issuer and any such affiliate will treat transfers of the Loan
Assets as sales from the affiliate to the Issuer for tax and accounting
purposes, but such treatment will not preclude a creditor, receiver, trustee in
bankruptcy or other party in interest of any such affiliate from pursuing such
claim. If such transactions are determined to be sales to the Issuer, the Loan
Assets would not be part of any such affiliate's bankruptcy estate and would
not be available for distribution to any such affiliate's creditors or equity
security holders.
Additionally, in the event of the bankruptcy or insolvency of any of the
Issuer's affiliates, a creditor, receiver, trustee in bankruptcy or other
party in interest may seek a court order consolidating the assets and
liabilities of the Issuer with the estate of such affiliate ("substantive
consolidation") with the result that their combined estate will be made subject
to their combined liabilities. This transaction has been structured applying
principles such that following the bankruptcy of an affiliate of the Issuer, a
court, upon motion of a creditor, receiver, trustee in bankruptcy or other
party in interest, should not consolidate the assets and liabilities of the
Issuer and such affiliate on the basis of any legal theories regarding
substantive consolidation previously recognized by courts of competent
jurisdiction in bankruptcy proceedings. The foregoing statement is based on
and subject to a number of assumptions concerning facts and circumstances that
have been noted, cited or acknowledged by courts adjudicating similar claims in
prior cases and certain other assumptions regarding the separate corporate
identities of the Issuer and its affiliates, many of which relate to the manner
in which the Issuer and its affiliates have conducted and will conduct their
respective businesses.
If either of the foregoing positions is argued before a court, such
argument could prevent, even if ultimately unsuccessful, timely payments of
amounts due on the Securities, and could result, if ultimately successful, in
payment of reduced amounts on the Securities.
RISKS RELATING TO INDEXED SECURITIES
An investment in Securities indexed, as to principal, premium and/or
interest, to one or more values of currencies (including exchange rates and
swap indices between currencies), commodities, interest rates or other indices
entails significant risks that are not associated with similar investments in a
conventional fixed-rate debt security. If the interest rate of such a Security
is so indexed, it may result in an interest rate that is less than that payable
on a conventional fixed-rate debt security issued at the same time, including
the possibility that no interest will be paid, and, if the principal amount of
such a Security is so indexed, the principal amount payable on the related
final Distribution Date may be less than the original purchase price of such
Security if allowed pursuant to the terms of such Security, including the
possibility that no principal will be paid. The secondary market for such
Securities will be affected by a number of factors, independent of the
characteristics of the Loan Assets, structure of the cash flows and the value
of the applicable currency, commodity, interest rate or other index, including
the volatility of the applicable currency, commodity, interest rate or other
index, the time remaining to the maturity of such 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
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economic, financial and political events. Additionally, if the formula used to
determine the principal amount, premium, if any, or interest payable with
respect to such Securities contains a multiple or leverage factor, the effect
of any change in the applicable currency, commodity, interest rate or other
index may be increased. The historical experience of the relevant currencies,
commodities, interest rates or other indices should not be taken as an
indication of future performance of such currencies, commodities, interest
rates or other indices during the term of any Security. The credit ratings
assigned to any Series or Class of Securities, in no way, are reflective of the
potential impact of the factors discussed above, or any other factors, on the
market value of the Securities. Accordingly, prospective investors should
consult their own financial and legal advisors as to the risks entailed by an
investment in such Securities and the suitability of such Securities in light
of their particular circumstances.
DESCRIPTION OF THE NOTES
GENERAL
With respect to each Series, one or more Classes of Notes may be
issued pursuant to the terms of an Indenture, a form of which has been filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
The following summary does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Notes and
the Indenture.
Unless otherwise specified in the related Prospectus Supplement, each
Class of Notes will initially be represented by one or more Notes, in each case
registered in the name of the nominee of DTC (together with any successor
depository selected by the Issuer, the "Depository") except as set forth below.
Unless otherwise specified in the related Prospectus Supplement, the Notes will
be available for purchase in denominations of $1,000 and integral multiples
thereof in book-entry form only. FIC has been informed by DTC that DTC's
nominee will be Cede, unless another nominee is specified in the related
Prospectus Supplement. Accordingly, such nominee is expected to be the holder
of record of the Notes of each Class. Unless and until Definitive Notes are
issued under the limited circumstances described herein or in the related
Prospectus Supplement, no Noteholder will be entitled to receive a physical
certificate representing a Note. All references herein and in the related
Prospectus Supplement to actions by Noteholders refer to actions taken by DTC
upon instructions from its participating organizations (the "DTC Participants")
and all references herein and in the related Prospectus Supplement to
distributions, notices, reports and statements to Noteholders refer to
payments, notices, reports and statements to DTC or its nominee, as the
registered holder of the Notes, for payment or distribution to Noteholders in
accordance with DTC's procedures with respect thereto. See "Certain
Information Regarding the Securities--Book-Entry Registration" and
"--Definitive Securities".
PRINCIPAL AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of losses,
Interest Rate and amount of or method of determining payments of principal and
interest on each Class of Notes of a given Series will be described in the
related Prospectus Supplement. The rights of holders of any Class of Notes to
receive payments of principal and interest may be senior or subordinate to the
rights of holders of any other Class or Classes of Notes of such Series, as
described in the related Prospectus Supplement. See "Certain Information
Regarding the Securities -- General". Unless otherwise provided in the related
Prospectus 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
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adjustable Interest Rate (and which may be zero for Principal Only Securities),
or any combination of the foregoing. The related Prospectus Supplement will
specify the Interest Rate for each Class of Notes of a given Series or the
method for determining such Interest Rate. See "Certain Information Regarding
the Securities--Fixed Rate Securities and Floating Rate Securities". One or
more Classes of Notes of a Series may be redeemable in whole or in part under
the circumstances specified in the related Prospectus Supplement, including as
a result of the Servicer's exercising its option to purchase the related Loan
Assets Pool.
One or more Classes of Notes of a given Series may have fixed
principal payment schedules, as set forth in such Prospectus Supplement.
Holders of such Notes would be entitled to receive as payments of principal on
any given Distribution Date the applicable amounts set forth on such schedule
with respect to such Notes, in the manner and to the extent set forth in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
payments to Noteholders of all Classes within a Series in respect of interest
will have the same priority. Under certain circumstances, the amount available
for such payments could be less than the amount of interest payable on the
Notes on any of the dates specified for payments in the related Prospectus
Supplement (each, a "Distribution Date"), in which case each Class of
Noteholders will receive its ratable share (based upon the aggregate amount of
interest due to such Class of Noteholders) of the aggregate amount available to
be paid in respect of interest on the Notes of such Series.
In the case of a Series of Notes which includes two or more Classes of
Notes, the sequential order and priority of payment in respect of principal and
interest, and any schedule or formula or other provisions applicable to the
determination thereof, of each such Class will be set forth in the related
Prospectus Supplement. Payments in respect of principal and interest of any
Class of Notes will be made on a pro rata basis among all the Noteholders of
such Class.
THE INDENTURE
MODIFICATION OF INDENTURE. The related Indenture Trustee and the
Issuer may, with the consent of Noteholders of not less than a majority of the
outstanding principal amount of the Notes of the related Series, enter into a
supplemental indenture for the purpose of adding any provisions to, or changing
in any manner or eliminating any of the provisions of, the related Indenture,
or modifying in any manner the rights of the related Noteholders (except as
provided below).
Unless otherwise specified in the related Prospectus Supplement with
respect to a Series of Notes, without the consent of the holder of each
outstanding Note affected thereby no supplemental indenture will: (i) change
the date of any installment of principal of or interest on any such Note or
reduce the principal amount thereof, the interest rate thereon or the
redemption price with respect thereto or change the provisions of the related
Indenture relating to the application of collections on, or the proceeds of the
sale of, the Trust Property to payment of principal or interest on the Notes or
change any place of payment where, or the coin or currency in which, any such
Note or any interest thereon is payable or impair the right to institute suit
for the enforcement of certain provisions of the related Indenture regarding
payment; (ii) reduce the percentage of the aggregate principal amount of the
outstanding Notes of such Series, the consent of the holders of which is
required for any such supplemental indenture or the consent of the holders of
which is required for any waiver of compliance with certain provisions of the
related Indenture or certain defaults thereunder and their consequences as
provided for in such Indenture; (iii) modify or alter the provisions of the
related Indenture regarding the definition of the term "outstanding"; (iv)
reduce the
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percentage of the aggregate principal amount of the outstanding Notes of such
Series, the consent of the holders of which is required to direct the related
Indenture Trustee to sell or liquidate the Loan Assets if the proceeds of such
sale would be insufficient to pay the principal amount and accrued but unpaid
interest on the outstanding Notes of such Series; (v) modify the sections of
the related Indenture which specify the applicable percentage of the aggregate
principal amount of the outstanding Notes of such Series necessary to amend
such Indenture or certain other related agreements; (vi) modify the provisions
of the related Indenture in such a manner as to affect the calculation of the
amount of any payment of interest or principal due on any Note on any
Distribution Date or to affect the rights of the Noteholders to the benefit of
any provisions for the mandatory redemption of the Notes; or (vii) permit the
creation of any lien ranking prior to or on a parity with the lien of the
related Indenture with respect to any part of the Trust Property or, except as
otherwise permitted or contemplated in such Indenture, terminate the lien of
such Indenture on any such property or deprive the holder of any such Note of
the security provided by the lien of such Indenture.
To the extent provided in the applicable Prospectus Supplement, the
related Indenture Trustee and the Issuer may also enter into supplemental
indentures, without the consent of the Noteholders of the related Series, for
the purpose of, among other things, adding any provisions to or changing in any
manner or eliminating any of the provisions of, the related Indenture or
modifying in any manner the rights of the Noteholders; provided that such
action shall not adversely affect in any material respect the interests of any
Noteholder.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. With respect to the
Notes of a given Series, unless otherwise specified in the related Prospectus
Supplement, "Events of Default" under the related Indenture will consist of:
(i) a default in the payment of any interest on any such Note when the same
becomes due and payable, and such default shall continue for a period of five
days; (ii) a default in the payment of the principal of or any installment of
the principal of any such Note when the same becomes due and payable; (iii) a
default in the observance or performance of any covenant or agreement of the
applicable Issuer made in the related Indenture or any representation or
warranty of the Issuer made in the related Indenture or in any certificate or
other writing delivered pursuant thereto or in connection therewith having been
proven incorrect in any material respect as of the time made, and such default
shall have continued and not been cured, or the circumstance or condition in
respect of which such misrepresentation or warranty was incorrect shall not
have been eliminated or otherwise cured for a period of 30 days after notice
thereof is given to the Issuer by the applicable Indenture Trustee or to such
Issuer and such Indenture Trustee by the holders of at least 25% of the
aggregate principal amount of all Notes then outstanding; or (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the applicable
Issuer or any substantial portion of the Trust Property. However, the amount
of principal required to be paid to Noteholders of such Series under the
related Indenture will generally be limited to amounts available to be
deposited in the Collection Account. Therefore, unless otherwise specified in
the related Prospectus Supplement, the failure to pay principal on a Class of
Notes generally will not result in the occurrence of an Event of Default until
the final scheduled Distribution Date for such Class of Notes.
If an Event of Default should occur and be continuing with respect to
the Notes of any Series, the related Indenture Trustee or holders of a majority
in principal amount of such Notes then outstanding may declare the principal of
such Notes to be immediately due and payable. Unless otherwise specified in
the related Prospectus Supplement, such declaration may, under certain
circumstances, be rescinded by the holders of a majority in principal amount of
such Notes then outstanding.
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If an Event of Default shall have occurred and be continuing, the
Indenture Trustee may, and at the direction of a majority of the Noteholders
shall, do one or more of the following: (i) institute proceedings to collect
amounts due, (ii) foreclose on property included in the Trust Property; (iii)
exercise remedies as a secured party and the UCC; and (iv) sell the related
Loan Assets. Unless otherwise specified in the related Prospectus Supplement,
however, such Indenture Trustee is prohibited from selling the related Loan
Assets following an Event of Default, unless (i) the holders of all such
outstanding Notes consent to such sale, (ii) the proceeds of such sale are
sufficient to discharge in full all amounts then due and unpaid upon such Notes
for principal and interest, or (iii) such Indenture Trustee determines that the
Trust Property will not continue to provide sufficient funds for payment of
principal of and interest on the Notes as they would become due if the Notes
were not declared due and payable and the Indenture Trustee obtains the consent
of holders of 66 2/3% of the aggregate principal amount of all Notes then
outstanding. If the Notes have been declared to be due and payable following
an Event of Default, the Indenture Trustee may, but need not, elect to maintain
possession of the Trust Property.
Subject to the provisions for indemnification and certain limitations
contained in the related Indenture, the holders of a majority of the aggregate
principal amount of the outstanding Notes of a given Series will have the right
to direct the time, method and place of conducting any proceeding for any
remedy available to the applicable Indenture Trustee, and the holders of a
majority of the aggregate principal amount of such Notes then outstanding may,
in certain cases, waive any past default and its consequences, except a default
in the payment of principal of or interest on any of the Notes or in respect of
a covenant or provision of such Indenture that cannot be modified or amended
without the consent of the holders of each such outstanding Note.
Unless otherwise specified in the related Prospectus Supplement, no
holder of a Note of any Series will have the right to institute any proceeding,
judicial or otherwise, with respect to the related Indenture, unless (i) such
holder has previously given written notice to the applicable Indenture Trustee
of a continuing Event of Default, (ii) the holders of not less than 25% of the
aggregate principal amount of the outstanding Notes of such Series have made
written request to such Indenture Trustee to institute such proceeding in
respect of such Event of Default in its own name as Indenture Trustee, (iii)
such holder or holders have offered to such Indenture Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
complying with such request, (iv) such Indenture Trustee for 60 days after its
receipt of such notice, request and offer of indemnity failed to institute such
proceeding and (v) no direction inconsistent with such written request has been
given to such Indenture Trustee during such 60-day period by the holders of a
majority of the aggregate principal amount of the outstanding Notes of such
Series.
In addition, each Indenture Trustee, by entering into the related
Indenture, and the related Noteholders, by accepting the related Notes, will
covenant that they will not at any time institute against the applicable Issuer
or the Servicer, or join in any institution against the applicable Issuer or
the Servicer of any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or other proceeding under any United States federal or
state bankruptcy or similar law in connection with any obligations relating to
the Notes, the related Indenture or certain related documents.
The Notes shall be non-recourse obligations of the Issuer and shall be
limited in right of payment to amounts available from the Trust Property and
any amounts received by the Indenture Trustee under any Credit Enhancement in
respect of the Notes, as provided in the related Indenture. The Issuer shall
not otherwise be liable for payments on the Notes.
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CERTAIN COVENANTS. Each Indenture will provide that the related
Issuer will not consolidate with or merge into any other entity, unless (i) the
entity formed by or surviving such consolidation or merger is organized under
the laws of the United States, any state or the District of Columbia, (ii) such
entity expressly assumes such Issuer's obligation to make due and punctual
payments upon the Notes of the related Series and the performance or observance
of every agreement and covenant of the Issuer under the Indenture, (iii) no
Event of Default shall have occurred and be continuing immediately after such
merger or consolidation, (iv) such Issuer has been advised that the rating of
the Notes or the Certificates of such Series then outstanding would not be
reduced or withdrawn by the Rating Agencies as a result of such merger or
consolidation and (v) such Issuer has received an opinion of counsel to the
effect that such consolidation or merger would have no material adverse tax
consequence to the Issuer or to any related Noteholder or Certificateholder.
Each Issuer will not, among other things, (i) except as expressly
permitted by the applicable Indenture or the applicable Sale and Servicing
Agreements, sell, transfer, exchange or otherwise dispose of any of the
properties or assets of the Issuer, including those included in the Trust
Property unless directed to do so by the Indenture Trustee, (ii) claim any
credit on, or make any deduction from the principal or interest payable in
respect of, the Notes of the related Series (other than amounts properly
withheld under the Code or applicable state law) or assert any claim against
any present or former Noteholder by reason of the payment of taxes levied or
assessed upon any part of the Trust Property, (iii) engage in any business or
activity other than as permitted by the Issuer's charter documents, (iv) permit
the validity or effectiveness of the related Indenture to be amended,
hypothecated, subordinated, terminated or discharged or permit any person to be
released from any covenants or obligations with respect to such Notes under
such Indenture except as may be expressly permitted thereby or (v) permit any
lien, charge, excise, claim, security interest, mortgage or other encumbrance
(other than the lien of the related Indenture) to be created on or extend to or
otherwise arise upon or burden the Trust Property or any part thereof, or any
interest therein or the proceeds thereof.
ANNUAL COMPLIANCE STATEMENT. The Issuer will be required to deliver
to the Indenture Trustee, within 120 days after the end of each fiscal year of
such Issuer, an officer's certificate with respect to the fulfillment of the
Issuer's obligations under the Indenture during the immediately preceding
fiscal year.
INDENTURE TRUSTEE'S ANNUAL REPORT. If required by Section 313(a) of
the Trust Indenture Act (the "TIA"), within 60 days after each February 1, the
Indenture Trustee shall mail to each Noteholder, as required by TIA Section
313(c), a brief report dated as of such date that complies with TIA Section
313(a). The Indenture Trustee also shall comply with TIA Section 313(b).
SATISFACTION AND DISCHARGE OF INDENTURE. An Indenture will cease to
be of further effect with respect to the Notes of any Series, upon the delivery
to the related Indenture Trustee for cancellation of all Notes of such Series
or, with certain limitations, upon deposit with such Indenture Trustee of
funds sufficient for the payment in full of all such Notes.
THE INDENTURE TRUSTEE
The Indenture Trustee for a Series of Notes will be specified in the
related Prospectus Supplement. The Indenture Trustee for any Series may resign
at any time, in which event the Issuer will be obligated to appoint a successor
thereto for such Series. The holders of a majority of the aggregate principal
amount of the related Notes outstanding may remove any such Indenture Trustee
and the Issuer shall remove the Indenture Trustee if (i) such Indenture Trustee
ceases to be eligible to continue as such under the related
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Indenture; (ii) such Indenture Trustee becomes insolvent; (iii) a receiver or
other public official takes charge of such Indenture Trustee or its property;
or (iv) such Indenture Trustee otherwise becomes incapable of acting. In such
circumstances, the Issuer will be obligated to appoint a successor thereto for
the applicable Series of Notes. No resignation or removal of the Indenture
Trustee and no appointment of a successor thereto for any Series of Notes will
become effective until the acceptance of appointment by such successor.
ADMINISTRATION AGREEMENT
If and to the extent specified in the related Prospectus Supplement,
FFI, in its capacity as administrator (the "Administrator"), will enter into an
agreement (as amended and supplemented from time to time, an "Administration
Agreement") with each Issuer that issues Notes and the related Indenture
Trustee pursuant to which the Administrator will agree, to the extent provided
in such Administration Agreement, to provide the notices and to perform other
administrative obligations required by the related Indenture. To the extent
specified in the related Prospectus Supplement, as compensation for the
performance of the Administrator's obligations under the applicable
Administration Agreement and as reimbursement for its expenses related thereto,
the Administrator will be entitled to a monthly administration fee of such
amount as may be set forth in the related Prospectus Supplement (the
"Administration Fee"), which fee will be paid by the Servicer.
DESCRIPTION OF THE CERTIFICATES
GENERAL
With respect to each Series, one or more Classes of Certificates may
be issued pursuant to the terms of a Trust Agreement or a Pooling and Servicing
Agreement, a form of each of which has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The following
summary does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Certificates and the
Trust Agreement or Pooling and Servicing Agreement, as applicable.
Unless otherwise specified in the related Prospectus Supplement and
except for the Certificates, if any, of a given Series purchased by the Seller,
each Class of Certificates will initially be represented by one or more
Certificates registered in the name of the nominee for DTC, except as set forth
below. Unless otherwise specified in the related Prospectus Supplement and
except for the Certificates, if any, of a given Series purchased by the Seller,
the Certificates will be available for purchase in minimum denominations of
$1,000 and integral multiples thereof in book-entry form only. The Seller has
been informed by DTC that DTC's nominee will be Cede, unless another nominee is
specified in the related Prospectus Supplement. Accordingly, such nominee is
expected to be the holder of record of the Certificates of any Series that are
not purchased by the Seller. Unless and until Definitive Certificates are
issued under the limited circumstances described herein or in the related
Prospectus Supplement, no Certificateholder (other than the Issuer) will be
entitled to receive a physical certificate representing a Certificate. All
references herein and in the related Prospectus Supplement to actions by
Certificateholders refer to actions taken by DTC upon instructions from the
Participants and all references herein and in the related Prospectus Supplement
to distributions, notices, reports and statements to Certificateholders refer
to distributions, notices, reports and statements given, made or sent to DTC or
its nominee, as the case may be, as the registered holder of the Certificates,
for distribution to Certificateholders in accordance with DTC's procedures with
respect thereto. See "Certain Information Regarding the Securities--Book-Entry
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Registration" and "--Definitive Securities". Any Certificates of a given
Series owned by the Seller or its affiliates will be entitled to equal and
proportionate benefits under the applicable Trust Agreement or Pooling and
Servicing Agreement, except that such Certificates will be deemed not to be
outstanding for the purpose of determining whether the requisite percentage of
Certificateholders have given any request, demand, authorization, direction,
notice, consent or other action under the Related Documents (other than the
commencement by the related Trust of a voluntary proceeding in bankruptcy as
described under "Description of the Transfer and Servicing
Agreements--Insolvency Event").
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
The timing and priority of distributions, seniority, allocations of
losses, Pass Through Rate and amount of or method of determining distributions
with respect to principal and interest of each Class of Certificates will be
described in the related Prospectus Supplement. Distributions of interest on
such Certificates will be made on the dates specified in the related Prospectus
Supplement (each, a "Distribution Date") and will be made prior to
distributions with respect to principal of such Certificates.
Each Class of Certificates may have a different Pass Through Rate,
which may be a fixed, variable or adjustable Pass Through Rate (and which may
be zero for certain Classes of Certificates) or any combination of the
foregoing. The related Prospectus Supplement will specify the Pass Through
Rate for each Cass of Certificates of a given Series or the method for
determining such Pass Through Rate. See also "Certain Information Regarding
the Securities--Fixed Rate Securities Floating Rate Securities". Unless
otherwise provided in the related Prospectus Supplement, distributions in
respect of the Certificates of a given Series that includes Notes may be
subordinate to payments in respect of the Notes of such Series as more fully
described in the related Prospectus Supplement. Distributions in respect of
interest on and principal of any Class of Certificates will be made on a pro
rata basis among all the Certificateholders of such Class.
In the case of a Series of Certificates which includes two or more
Classes of Certificates, the timing, sequential order, priority of payment or
amount of distributions in respect of interest and principal, and any schedule
or formula or other provisions applicable to the determination thereof, of each
such Class shall be as set forth in the related Prospectus Supplement.
If and as provided in the related Prospectus Supplement, certain
amounts remaining on deposit in the Collection Account after all required
distributions to the related Securityholders have been made may be released to
the Seller, FFI or one or more third party credit or liquidity enhancement
providers.
POOL FACTORS AND TRADING INFORMATION
The "Note Pool Factor" for each Class of Notes will be a seven-digit
decimal which the Servicer will compute prior to each distribution with respect
to such Class of Notes indicating the remaining outstanding principal balance
of such Class of Notes, as of the applicable Distribution Date (after giving
effect to payments to be made on such Distribution Date), as a fraction of the
initial outstanding principal balance of such Class of Notes. The "Certificate
Pool Factor" for each Class of Certificates will be a seven-digit decimal which
the Servicer will compute prior to each distribution with respect to such Class
of Certificates indicating the remaining Certificate Balance of such Class of
Certificates, as of the applicable Distribution Date (after giving effect to
distributions to be made on such Distribution Date), as a fraction of the
initial Certificate Balance of such Class of Certificates. Each Note Pool
Factor and each
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Certificate Pool Factor will initially be 1.0000000 and thereafter will decline
to reflect reductions in the outstanding principal balance of the applicable
Class of Notes, or the reduction of the Certificate Balance of the applicable
Class of Certificates, as the case may be. A Noteholder's portion of the
aggregate outstanding principal balance of the related Class of Notes is the
product of (i) the original denomination of such Noteholder's Note and (ii) the
applicable Note Pool Factor. A Certificateholder's portion of the aggregate
outstanding Certificate Balance for the related Class of Certificates is the
product of (a) the original denomination of such Certificateholder's
Certificate and (b) the applicable Certificate Pool Factor.
Unless otherwise provided in the related Prospectus Supplement, the
Securityholders will receive reports on or about each Distribution Date
concerning (i) with respect to the Collection Period immediately preceding such
Distribution Date, payments received on the Loan Assets, the Pool Balance (as
such term is defined in the related Prospectus Supplement, the "Pool Balance"),
each Certificate Pool Factor or Note Pool Factor, as applicable, and various
other items of information, and (ii) with respect to the Collection Period
second preceding such Distribution Date, as applicable, amounts allocated or
distributed on the preceding Distribution Date and any reconciliation of such
amounts with information provided by the Servicer prior to such current
Distribution Date. In addition, Securityholders of record during any calendar
year will be furnished information for tax reporting purposes not later than
the latest date permitted by law. See "Description of the Transfer and
Servicing Agreements -- Reports to Securityholders".
CERTAIN INFORMATION REGARDING THE SECURITIES
GENERAL
To the extent provided in the related Prospectus Supplement, a Series
may include one or more Classes of Securities entitled only to (i) payments
allocable to interest ("Interest Only Securities"); (ii) payments allocable to
principal ("Principal Only Securities") and allocable as between scheduled
payments of principal and Principal Prepayments (as defined below); or (iii)
payments allocable to both principal (and allocable as between scheduled
payments of principal and Principal Prepayments) and interest. A Series of
Securities may include one or more Classes as to which payments or
distributions will be allocated (i) on the basis of collections from designated
portions of the Trust Property, (ii) in accordance with a schedule or formula,
(iii) in relation to the occurrence of events, or (iv) otherwise, in each case
as specified in the related Prospectus Supplement. The timing and amounts of
such payments or distributions may vary among Classes, over time or otherwise,
in each case as specified in the related Prospectus Supplement.
To the extent provided in the related Prospectus Supplement, one or
more Classes of Securities may provide for interest that accrues, but is not
currently payable ("Compound Interest Securities"). With respect to any Class
of Compound Interest Securities, if specified in the related Prospectus
Supplement, any interest that has accrued but is not paid on a given
Distribution Date will be added to the aggregate principal balance of such
Class on that Distribution Date.
To the extent provided in the related Prospectus Supplement, a Series
of Securities may include one or more Classes of Scheduled Amortization
Securities and Companion Securities. "Scheduled Amortization Securities" are
Securities with respect to which payments or distributions of principal are to
be made in specified amounts on specified Distribution Dates, to the extent of
funds available on such Distribution Date. "Companion Securities" are
Securities which receive payments or distributions of all or a portion of any
funds available on a given Distribution Date which are in excess of amounts
required
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to be applied to payments or distributions on Scheduled Amortization Securities
on such Distribution Date. Because of the manner of application of payments or
distributions of principal to Companion Securities, the weighted average lives
of Companion Securities of a Series may be expected to be more sensitive to the
actual rate of prepayments on the Loan Assets included in the related Trust
Property than will the Scheduled Amortization Securities of such Series.
To the extent provided in the related Prospectus Supplement, one or
more Series of Securities may constitute a Series of "Special Allocation
Securities" which may include Senior Securities, Subordinated Securities,
Priority Securities and Non-Priority Securities. As more fully described in
the related Prospectus Supplement for a Series of Special Allocation
Securities, Special Allocation Securities are Securities for which the timing
and/or priority of payments or distributions of principal and/or interest may
favor one or more Classes of such Securities over one or more other Classes of
such Securities. Such timing and/or priority may be modified or reordered upon
the occurrence of one or more specified events. To the extent specified in the
related Prospectus Supplement for a Series of Special Allocation Securities,
losses on the Assets included in the related Trust Property may be
disproportionately borne by one or more Classes of such Series, and the
proceeds, payments and distributions from such Assets may be applied to the
payment in full of one or more Classes of such Series before the balance, if
any, of such proceeds is applied to one or more other Classes within such
Series. For example, Special Allocation Securities in a Series may be
comprised of one or more Classes of Senior Securities ("Senior Securities")
having a priority in right to payments or distributions of principal and
interest over one or more Classes of Subordinated Securities ("Subordinated
Securities"), to the extent described in the related Prospectus Supplement, as
a form of Credit Enhancement. See "Credit Enhancement -- Subordination".
Typically, Subordinated Securities of a Series will carry a rating by the
rating agencies rating the Securities of such Series lower than that of the
Senior Securities of such Series. In addition, one or more Classes of
Securities of a Series ("Priority Securities") may be entitled to a priority of
payments or distributions of principal or interest from Assets included in the
related Trust Property over another Class of Securities of such Series ("Non-
Priority Securities"), but only after the exhaustion of other Credit
Enhancement applicable to such Series. Priority Securities and Non-Priority
Securities nonetheless may be within the same rating category.
FIXED RATE SECURITIES AND FLOATING RATE SECURITIES
Any Class of Securities (other than Principal Only Securities) may
bear interest at a fixed rate per annum ("Fixed Rate Securities") or at a
variable or adjustable rate per annum ("Floating Rate Securities"), as more
fully described in the applicable Prospectus Supplement. Each Class of Fixed
Rate Securities will bear interest at the applicable per annum Interest Rate or
Pass Through Rate, as the case may be, specified in the applicable Prospectus
Supplement. Unless otherwise set forth in the applicable Prospectus
Supplement, interest on each Class of Fixed Rate Securities will be computed on
the basis of a 360-day year of twelve 30-day months. See "Description of the
Notes--Principal and Interest on the Notes" and "Description of the
Certificates--Distributions of Principal and Interest".
INDEXED SECURITIES
To the extent so specified in any Prospectus Supplement, any Class of
Securities of a given Series may consist of Securities ("Indexed Securities")
in which the principal amount payable on the final Distribution Date for such
Class (the "Indexed Principal Amount") and/or the interest payable on any
Distribution Date is determined by reference to a measure (the "Index") which
will be related to the exchange rates of one or more currencies or composite
currencies (the "Index Currencies"); the price or prices of specified
commodities; or specified stocks, which may be based on U.S. or foreign
stocks, on
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specified dates specified in the applicable Prospectus Supplement, or such
other price, interest rate, exchange rate or other financial index or indices
as are described in the applicable Prospectus Supplement. Holders of Indexed
Securities may receive a principal amount on the related final Distribution
Date that is greater than or less than the face amount of the Indexed
Securities depending upon the relative value on the related final Distribution
Date of the specified indexed item. Information as to the method for
determining the principal amount payable on the related final Distribution
Date, if any, and, where applicable, certain historical information with
respect to the specific indexed item or items and special tax considerations
associated with investment in Indexed Securities, will be set forth in the
applicable Prospectus Supplement. Notwithstanding anything to the contrary
herein, for purposes of determining the rights of a holder of a Security
indexed as to principal in respect of voting for or against amendments to the
related Trust Agreement, Indenture or Pooling and Servicing Agreement, as the
case may be, and modifications and the waiver of rights thereunder, the
principal amount of such Indexed Security shall be deemed to be the face amount
thereof upon issuance.
If the determination of the Indexed Principal Amount of an Indexed
Security is based on an Index calculated or announced by a third party and such
third party either suspends the calculation or announcement of such Index or
changes the basis upon which such Index is calculated (other than changes
consistent with policies in effect at the time such Indexed Security was issued
and permitted changes described in the applicable Prospectus Supplement), then
such Index shall be calculated for purposes of such Indexed Security by an
independent calculation agent named in the applicable Prospectus Supplement on
the same basis, and subject to the same conditions and controls, as applied to
the original third party. If for any reason such Index cannot be calculated on
the same basis and subject to the same conditions and controls as applied to
the original third party, then the Indexed Principal Amount of such Indexed
Security shall be calculated in the manner set forth in the applicable
Prospectus Supplement. Any determination of such independent calculation agent
shall, in the absence of manifest error, be binding on all parties.
The applicable Prospectus Supplement will describe whether the
principal amount of the related Indexed Security, if any, that would be payable
upon redemption or repayment prior to the applicable final scheduled
Distribution Date will be the Face Amount of such Indexed Security, the Indexed
Principal Amount of such Indexed Security at the time of redemption or
repayment or another amount described in such Prospectus Supplement. See "Risk
Factors -- Risks Relating to Indexed Securities".
BOOK-ENTRY REGISTRATION
Unless otherwise specified in the related Prospectus Supplement, each
Class of Securities offered hereby will be represented by one or more
certificates registered in the name of Cede, as nominee of DTC. Unless
otherwise specified in the related Prospectus Supplement, Securityholders may
hold beneficial interests in Securities through DTC (in the United States) or
Cedel or Euroclear (in Europe) directly if they are participants of such
systems, or indirectly through organizations which are participants in such
systems.
No Securityholder will be entitled to receive a certificate
representing such person's interest in the Securities, except as set forth
below. Unless and until Securities of a Class are issued in fully registered
certificated form ("Definitive Securities") under the limited circumstances
described below, all references herein to actions by Noteholders,
Certificateholders or Securityholders shall refer to actions taken by DTC upon
instructions from DTC Participants, and all references herein to payments,
distributions, notices, reports and statements to Noteholders,
Certificateholders or Securityholders shall refer to distributions, notices,
reports and statements to Cede, as the registered holder of the Securities, for
distribution to Securityholders in accordance with DTC procedures. As such, it
is anticipated that the only Noteholder,
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Certificateholder or Securityholder will be Cede, as nominee of DTC.
Securityholders will not be recognized by the related Trustee as Noteholders,
Certificateholders or Securityholders as such terms will be used in the
relevant agreements, and Securityholders will only be permitted to exercise the
rights of holders of Securities of the related Class indirectly through DTC and
DTC Participants, as further described below.
Cedel and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in their respective names
on the books of their respective Depositaries which in turn will hold such
positions in customers' securities accounts in the Depositaries' names on the
books of DTC.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Cedel Participants and Euroclear Participants will
occur in accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel or
Euroclear participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by its Depositary. However, each such cross- market transaction will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines. The relevant European international
clearing system will, if the transaction meets its settlement requirements,
deliver instructions to its Depositary to take action to effect final
settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a DTC Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in
such securities settled during such processing will be reported to the relevant
Euroclear or Cedel participant on such business day. Cash received in Cedel or
Euroclear as a result of sales of Securities by or through a Cedel Participant
or a Euroclear Participant to a DTC Participant will be received with value on
the DTC settlement date but will be available in the relevant Cedel or
Euroclear cash account only as of the business day following settlement in DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York UCC and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participating members ("DTC Participants") and to facilitate
the clearance and settlement of securities transactions between DTC
Participants through electronic book-entries, thereby eliminating the need for
physical movement of certificates. DTC Participants include securities brokers
and dealers, banks, trust companies and clearing corporations which may include
underwriters, agents or dealers with respect to the Securities of any Class or
Series. Indirect access to the DTC system also is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a DTC Participant, either directly or indirectly
(the "Indirect DTC Participants"). The rules applicable to DTC and DTC
Participants are on file with the Commission.
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Unless otherwise specified in the related Prospectus Supplement,
Securityholders that are not DTC Participants or Indirect DTC Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Securities may do so only through DTC Participants and Indirect DTC
Participants. DTC Participants will receive a credit for the Securities on
DTC's records. The ownership interest of each Securityholder will in turn be
recorded on respective records of the DTC Participants and Indirect DTC
Participants. Securityholders will not receive written confirmation from DTC
of their purchase, but Securityholders are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the DTC Participant or Indirect DTC
Participant through which the Securityholder entered into the transaction.
Transfers of ownership interests in the Securities of any Class will be
accomplished by entries made on the books of DTC Participants acting on behalf
of Securityholders.
To facilitate subsequent transfers, all Securities deposited by DTC
Participants with DTC will be registered in the name of Cede, a nominee of DTC.
The deposit of Securities with DTC and their registration in the name of Cede
will effect no change in beneficial ownership. DTC will have no knowledge of
the actual Securityholders and its records will reflect only the identity of
the DTC Participants to whose accounts such Securities are credited, which may
or may not be the Securityholders. DTC Participants and Indirect DTC
Participants will remain responsible for keeping account of their holdings on
behalf of their customers. While the Securities of a Series are held in
book-entry form, Securityholders will not have access to the list of
Securityholders of such Series, which may impede the ability of Securityholders
to communicate with each other.
Conveyance of notices and other communications by DTC to DTC
Participants, by DTC Participants to Indirect DTC Participants and by DTC
Participants and Indirect DTC Participants to Securityholders will be governed
by arrangements among them, subject to any statutory or regulatory requirements
as may be in effect from time to time.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among DTC
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of and interest on
the Securities. DTC Participants and Indirect DTC Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders.
DTC's practice is to credit DTC Participants' accounts on each
Distribution Date in accordance with their respective holdings shown on its
records, unless DTC has reason to believe that it will not receive payment on
such Distribution Date. Payments by DTC Participants and Indirect DTC
Participants to Securityholders will be governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name", and will be the
responsibility of such DTC Participant and not of DTC, the related Indenture
Trustee or Trustee (or any paying agent appointed thereby), the Seller, the
Issuer or the Servicer, subject to any statutory or regulatory requirements as
may be in effect from time to time. Payment of principal of and interest on
each Class of Securities to DTC will be the responsibility of the related
Indenture Trustee or Trustee (or any paying agent), disbursement of such
payments to DTC Participants will be the responsibility of DTC and disbursement
of such payments to the related Securityholders will be the responsibility of
DTC Participants and Indirect DTC Participants. As a result, under the
book-entry format, Securityholders may experience some delay in their receipt
of payments. DTC will forward such payments to its DTC Participants which
thereafter will forward them to Indirect DTC Participants or Securityholders.
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Because DTC can only act on behalf of DTC Participants, who in turn
act on behalf of Indirect DTC Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
DTC has advised FIC that it will take any action permitted to be taken
by a Securityholder only at the direction of one or more DTC Participants to
whose account with DTC the Securities are credited. Additionally, DTC has
advised FIC that it will take such actions with respect to specified
percentages of the Securityholders' interest only at the direction of and on
behalf of DTC Participants whose holdings include undivided interests that
satisfy such specified percentages. DTC may take conflicting actions with
respect to other undivided interests to the extent that such actions are taken
on behalf of DTC Participants whose holdings include such undivided interests.
Neither DTC nor Cede will consent or vote with respect to the
Securities. Under its usual procedures, DTC will mail an "Omnibus Proxy" to
the related Indenture Trustee or Trustee as soon as possible after any
applicable Record Date for such a consent or vote. The Omnibus Proxy will
assign Cede's consenting or voting rights to those DTC Participants to whose
accounts the related Securities are credited on that record date (which record
date will be identified in a listing attached to the Omnibus Proxy).
Cedel Bank, societe anonyme ("Cedel") is incorporated under the laws
of Luxembourg as a professional depository. Cedel holds securities for its
participating organizations ("Cedel Participants") and facilitates the
clearance and settlement of securities transactions between Cedel Participants
through electronic book entry changes in accounts of Cedel Participants,
thereby eliminating the need for physical movement of certificates.
Transactions may be settled in Cedel in any of 28 currencies, including United
States dollars. Cedel provides to Cedel Participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. Cedel
interfaces with domestic markets in several countries. As a professional
depository, Cedel is subject to regulation by the Luxembourg Monetary
Institute. Cedel Participants are recognized financial institutions around the
world including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations and may
include any underwriters, agents or dealers with respect to any Class or Series
of Securities offered hereby. Indirect access to Cedel is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Cedel Participant, either directly
or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear
and settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need
for physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 27
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. The
Euroclear System is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under
contract with Euroclear Clearance System S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks
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(including central banks), securities brokers and dealers and other
professional financial intermediaries and may include any underwriters, agents
or dealers with respect to any Class or Series of Securities offered hereby.
Indirect access to the Euroclear System is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within the Euroclear System,
withdrawals of securities and cash from the Euroclear System and receipts of
payments with respect to securities in the Euroclear System. All securities in
the Euroclear System are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants, and has no record of or relationship with persons holding through
Euroclear Participants.
Payments and distributions with respect to Securities held through
Cedel or Euroclear will be credited to the cash accounts of Cedel Participants
or Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such payments and
distributions will be subject to tax withholding in accordance with relevant
United States tax laws and regulations. See "Certain Federal Income Tax
Considerations". Cedel or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a Securityholder on behalf of a
Cedel Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to its Depositary's ability to effect such
actions on its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants of
DTC, Cedel and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
DEFINITIVE SECURITIES
Unless otherwise specified in the related Prospectus Supplement, the
Notes, if any, and the Certificates, if any, of a given Series will be issued
in fully registered, certificated form ("Definitive Notes" and "Definitive
Certificates", respectively, and collectively referred to herein as "Definitive
Securities") to Noteholders or Certificateholders or their respective nominees,
rather than to DTC or its nominee, only if (i) DTC is no longer willing or able
to discharge properly its responsibilities as depository with respect to such
Securities and such Administrator or Trustee is unable to locate a qualified
successor (and if it is an Administrator that has made such determination, such
Administrator so notifies the applicable Trustee in writing), (ii) the Issuer,
the Seller the Administrator or the Trustee, as applicable, at its option,
elects to terminate the book-entry system through DTC or (iii) after the
occurrence of an Event of Default or a Servicer Default with respect to such
Securities, holders representing at least a majority of the outstanding
principal amount of the Notes or the Certificates, as the case may be, of such
Series, acting together as a single Class, advise the applicable Trustee
through DTC in writing that the
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continuation of a book-entry system through DTC (or a successor thereto) with
respect to such Notes or Certificates is no longer in the best interest of the
holders of such Securities.
Upon the occurrence of any event described in the immediately
preceding paragraph, the applicable Trustee or Indenture Trustee will be
required to notify all applicable Securityholders of a given Series through
Participants of the availability of Definitive Securities. Upon surrender by
DTC of the definitive certificates representing the corresponding Securities
and receipt of instructions for re-registration, the applicable Trustee or
Indenture Trustee will reissue such Securities as Definitive Securities to such
Securityholders.
Payments and distributions of principal of, and interest on, such
Definitive Securities will thereafter be made by the applicable Trustee or
Indenture Trustee in accordance with the procedures set forth in the related
Indenture or the related Trust Agreement or Pooling and Servicing Agreement, as
applicable, directly to holders of Definitive Securities in whose names the
Definitive Securities were registered at the close of business on the
applicable Record Date specified for such Securities in the related Prospectus
Supplement. Such payments and distributions will be made by check mailed to
the address of such holder as it appears on the register maintained by the
applicable Trustee or Indenture Trustee. The final payment or distribution on
any such Definitive Security, however, will be made only upon presentation and
surrender of such Definitive Security at the office or agency specified in the
notice of final distribution to the applicable Securityholders. The applicable
Trustee or the Indenture Trustee will provide such notice to the applicable
Securityholders not less than 15 nor more than 30 days prior to the date on
which such final payment or distribution is expected to occur.
Definitive Securities will be transferable and exchangeable at the
offices of the applicable Trustee or of a registrar named in a notice delivered
to holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the applicable Trustee or Indenture
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection therewith.
THE TRUSTS
With respect to each Series of Securities with respect to which a
Trust is the Issuer, the Seller will establish a separate Trust pursuant to the
respective Trust Agreement or Pooling and Servicing Agreement, as applicable,
for the transactions described herein and in the related Prospectus Supplement.
On the applicable Closing Date, the Seller will sell the Loan Assets to the
Trust as specified in the related Prospectus Supplement. With respect to each
Series of Securities, the Issuer will pledge the Loan Assets to the Indenture
Trustee, for the benefit of the Noteholders, as specified in the related
Prospectus Supplement.
The Servicer will service the Loan Assets included in the Trust
Property and will receive fees for such services as specified in the related
Prospectus Supplement. To the extent specified in the related Prospectus
Supplement, in order to facilitate the servicing of the Loan Assets, the
Seller, the Issuer and each Trustee will authorize the Servicer to retain
physical possession of the applicable Loan Assets and other documents relating
thereto as custodian with respect to such Loan Assets and related documents.
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The principal offices of each Issuer that is not a grantor trust and
the related Owner Trustee, if any, will be specified in the applicable
Prospectus Supplement.
THE TRUSTEE
As used herein, the term "Trustee" shall refer to the Indenture
applicable Trust Agreement with respect to a Series of Certificates or the
Pass-Through Trustee under the applicable Pooling and Servicing Agreement with
respect to a Series of Certificates. The Trustees with respect to each Series
will be specified in the related Prospectus Supplement. The Trustee's
liability in connection with the issuance and sale of the related Securities is
limited solely to the express obligations of such Trustee set forth in the
related Trust Agreement, Indenture or Pooling and Servicing Agreement, as
applicable.
Any commercial bank or trust company serving as Trustee may have
normal banking relationships with the Issuer, the Seller or the Servicer. In
addition, the Trustee will have the power and the responsibility for appointing
co- trustees or separate trustees of all or any part of the Trust Property
relating to a particular Series of Securities. At any time, for the purpose of
meeting any legal requirements of any jurisdiction in which any part of the
Trust Property may at the time be located, the Seller, or the Issuer, together
with the Trustee, acting jointly, shall have the power and shall execute and
deliver all instruments to appoint one or more Persons approved by the Trustee
to act as co-trustee or co-trustees, jointly with the Trustee, or separate
trustee or separate trustees, of all or any part of the Trust Property, and to
vest in such Person or Persons, in such capacity, such title to the Trust
Property, or any part thereof, and, subject to the provisions of the applicable
Indenture, Trust Agreement or Pooling and Servicing Agreement, such powers,
duties, obligations, rights and trusts as the Seller, or the Issuer, together
with the Trustee, may consider necessary or desirable. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee by the applicable Indenture, Trust Agreement or Pooling and
Servicing Agreement will be conferred or imposed upon the Trustee and such
separate trustee or co-trustee jointly, or in any jurisdiction in which the
Trustee shall be incompetent or unqualified to perform certain acts, singly
upon such separate trustee or co-trustee who shall exercise and perform such
rights, powers, duties and obligations solely at the direction of the Trustee.
The Trustee will make no representations as to the validity or
sufficiency of the applicable Indenture, Trust Agreement or Pooling and
Servicing Agreement, the related Securities, or of any Loan Asset or related
document, and will not be accountable for the use or application by the Seller
or a Transferor of any funds paid to the Seller or such Transferor in respect
of the Securities or the related Assets, or amounts deposited in the related
Distribution Account or deposited into any other account for purposes of making
payments or distributions to Securityholders. If no Event of Default has
occurred, the Trustee will be required to perform only those duties
specifically required of it under the applicable Indenture, Trust Agreement or
Pooling and Servicing Agreement. However, upon receipt of the various
certificates, reports or other instruments required to be furnished to it, the
Trustee will be required to examine them to determine whether they conform to
the requirements of the applicable Indenture, Trust Agreement or Pooling and
Servicing Agreement.
The Trustee may resign at any time and the Seller, the Servicer or the
Administrator, as applicable, may remove the Trustee if the Trustee ceases to
be eligible to continue as such under the applicable Indenture, Trust Agreement
or Pooling and Servicing Agreement, if the Trustee becomes insolvent or in such
other instances, if any, as are set forth in the applicable Indenture, Trust
Agreement or Pooling and
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Servicing Agreement. Following any resignation or removal of the Trustee, the
Seller or Servicer, as applicable, will be obligated to appoint a successor
Trustee. Any resignation or removal of the Trustee and appointment of a
successor Trustee does not become effective until acceptance of the appointment
by the successor Trustee.
DESCRIPTION OF THE TRUST PROPERTY
GENERAL
The Trust Property for a Series of Securities may include (i) Loan
Assets and payments or distributions thereon (subject, if specified in the
Prospectus Supplement, to certain exclusions); (ii) if specified in the
Prospectus Supplement, reinvestment income on such payments or distributions;
(iii) all property acquired by foreclosure or deed in lieu of foreclosure with
respect to any Mortgage Loan or Secured Contract included in the Trust Property
and certain rights of the Administrator, if any, and the Servicer under any
policies required to be maintained in respect of the related Loan Assets; and
(iv) if specified in the Prospectus Supplement, one or more forms of Credit
Enhancement. The Trust Property will consist primarily of Loan Assets.
With respect to a Series, FIC will acquire the Loan Assets in the open
market or in privately negotiated transactions from one or more entities, and
each such entity from whom FIC so acquires a significant portion of the Loan
Assets (individually or collectively, the "Transferor") will be described in
the related Prospectus Supplement, including a description of any affiliation
between the Transferor and FIC. To the extent specified in the related
prospectus supplement, the Loan Assets will have been originated or acquired by
the Transferor in one of four ways: (i) the indirect origination and purchase
of retail installment sales contracts from a network of independent contractors
or dealers professionally installing property improvements ("indirect
originations"); (ii) the origination of loans directly to consumers, including
solicitations through direct mail and telemarketing ("direct originations");
(iii) the wholesale purchase of loans, on a flow basis, originated by other
unaffiliated lenders, as correspondents ("correspondent originations"); or (iv)
the purchase, on a bulk basis, of loan portfolios originated by other
unaffiliated lenders ("portfolio acquisitions"). In acquiring the Loan Assets
from a Transferor, FIC will rely on the representations and warranties made by
the Transferor with respect to such Loan Assets. For a summary description of
the expected representations and warranties with respect to such Loan Assets,
See "Description of the Transfer and Servicing Agreements -- Sale and
Assignment of Loan Assets". As further described in the related Prospectus
Supplement for a Series, the Transferor will be obligated to repurchase or
replace any Loan Assets that, subject to the lapse of any applicable cure
period, are in breach of a representation or warranty made by the Transferor
and such breach has a material and adverse affect on the value of such Loan
Assets or the interest of Securityholders therein. To the extent that FIC has
any obligation to repurchase or replace any Loan Assets for a material breach
of any representations or warranties made by FIC, FIC is not expected to have
the financial capability to repurchase or replace such defective Loan Assets,
but rather FIC will be relying on the related Transferor of such defective Loan
Assets to repurchase or replace them. See "The Seller".
The following is a brief description of the Loan Assets expected to be
included in the Trust Property for each Series. If specific information
respecting the Loan Assets is not known at the time a Series is initially
offered, more general information of the nature described below will be
provided in the related Prospectus Supplement, and specific information will be
set forth in a report on Form 8-K to be filed with the Securities and Exchange
Commission within fifteen days after the initial issuance of such
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Series. A copy of the related Sale and Servicing Agreement or Pooling and
Servicing Agreement with respect to each Series will be attached to the Form
8-K and will be available for inspection at the corporate trust office of the
related Trustee specified in the related Prospectus Supplement. A schedule of
the Loan Assets relating to each Series, will be attached to the related Sale
and Servicing Agreement or Pooling and Servicing Agreement delivered to the
applicable Trustee upon delivery of such Series.
MORTGAGE LOANS
The Mortgage Loans will be evidenced by promissory notes, retail
installment sales contracts or other evidences of indebtedness (the "Mortgage
Notes") and will be secured by mortgages, deeds of trust or other similar
security instruments (the "Mortgages") creating a lien or security interest on
single family (one-to-four unit) residences, units in planned unit
developments, units in condominium developments, town homes and Manufactured
Homes (as defined herein) (the "Mortgaged Properties") located in various
states. If specified in the Prospectus Supplement, the Mortgage Loans may
include cooperative apartment or manufactured housing loans ("Cooperative
Loans") secured by security interests in shares issued by private, non-profit,
cooperative housing corporations ("Cooperatives") and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific units in such Cooperatives. To the extent specified in the related
Prospectus Supplement, all or a portion of the Mortgages will be junior liens
on the related Mortgaged Properties, and the related superior liens will not be
included in the related Loan Asset Pool. Certain of the Mortgage Loans may be
partially insured to the extent described in the related Prospectus Supplement
(and subject to the conditions described herein and in the related Prospectus
Supplement) by the FHA under the Title I Program (the "Title I Mortgage
Loans"). To the extent specified in the related Prospectus Supplement, the
Mortgage Loans will have scheduled monthly payment dates throughout a month,
and no Mortgage Loan will provide for deferred interest or negative
amortization, and no commercial or multifamily loans will be included in any
Mortgage Loan Pool.
The payment terms of the Mortgage Loans to be included in the Trust
Property for a Series will be described in the related Prospectus Supplement
and may include any of the following features or combinations thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index, a rate that is fixed for a period of
time or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate. Changes to an adjustable rate may be
subject to periodic limitations, maximum rates, minimum rates or a combination
of such limitations. Accrued interest may be deferred and added to the
principal of a loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage Loans may provide for
the payment of interest at a rate lower than the specified mortgage rate for a
period of time or for the life of the Mortgage Loan with the amount of any
difference contributed from funds supplied by the seller of the Mortgaged
Property or another source.
(b) Principal may be payable on a level debt service basis to
fully amortize the loan over its term, may be calculated on the basis of an
amortization schedule that is significantly longer than the original term to
maturity or on an interest rate that is different from the interest rate on the
Mortgage Loan or may not be amortized during all or a portion of the original
term. Payment of all or a substantial portion of the principal may be due on
maturity. Principal may include interest that has been deferred and added to
the principal balance of the Mortgage Loan.
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(c) Monthly payments of principal and interest may be fixed for
the life of the loan, may increase over a specified period of time or may
change from period to period. Mortgage Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the loan or may decline over time, and may
be prohibited for the life of the loan or for certain periods ("lockout
periods"). Certain loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee in
connection with any such subsequent prepayment. Other loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The loans may include "due-on- sale" clauses which
permit the mortgagee to demand payment of the entire mortgage loan in
connection with the sale or certain transfers of the related mortgaged
property. Other Mortgage Loans may be assumable by persons meeting the then
applicable underwriting standards of the Transferor.
With respect to a Series for which the related Trust Property includes
Mortgage Loans the related Prospectus Supplement may specify, among other
things, information regarding the interest rates (the "Mortgage Rates"), the
average principal balance and the aggregate principal balance of such Mortgage
Loans, the years of origination, geographic dispersion and original principal
balances and the loan-to-value ratios of such Mortgage Loans.
CONTRACTS
As specified in the related Prospectus Supplement for a Series,
"Contracts" may include: (i) loans evidenced by retail installments sales or
loan agreements, including loans secured by new or used Manufactured Homes (as
defined herein) that are not considered to be interests in real property
because such Manufactured Homes are not permanently affixed to real estate
("Secured Contracts") and (ii) loans evidenced by retail installments sales or
loan agreements which are not secured by any interest in real or personal
property ("Unsecured Contracts"). To the extent described in the related
Prospectus Supplement, certain Contracts will be conventional (i.e., not
insured or guaranteed by a governmental agency) contracts (the "Conventional
Contracts"), while other Contracts will be partially insured by the FHA under
the Title I Program (the "Title I Contracts"). To the extent specified in the
related Prospectus Supplement, the Contracts included as part of the Trust
Property for a Series will be fully amortizing and will bear interest at a
fixed annual percentage rate ("APR"). The Secured Contracts differ from
Mortgage Loans in that the Secured Contracts are not secured by an interest in
real property, but rather by an interest in a Manufactured Home that is not
permanently affixed to real estate. In addition, the Contracts differ from
Mortgage Loans in that they are generally originated by a network of
independent contractors or dealers that professionally install property
improvements, rather than by financial institutions or other traditional
mortgage lenders.
While the Unsecured Contracts are not secured by a security interest
in any related real or personal property, such contracts are still subject to
the same underwriting criteria as the Mortgage Loans and the Secured Contracts.
For example, in underwriting an Unsecured Contract, the Transferor will
consider the borrower's credit history and ability to repay the related debt
as well as the value of real or personal property owned by the borrower which
could be the subject of a junior lien in favor of the Transferor; however,
because the Unsecured Contracts generally have smaller principal amounts than
the Mortgage Loans or the Secured Contracts, a junior lien with respect to such
real or personal property will not be
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obtained because the costs associated with obtaining and perfecting such a
junior lien will not justify the benefits provided by such a lien, including
any realization from the enforcement of such lien.
The Manufactured Homes securing the Secured Contracts consist of
manufactured homes within the meaning of 42 United States Code, Section
5402(6), which defines a "Manufactured Home" as "a structure, transportable in
one or more sections, which in the traveling mode, is eight body feet or more
in width or forty body feet or more in length, or, when erected on site, is
three hundred twenty or more square feet, and which is built on a permanent
chassis and designed to be used as a dwelling with or without permanent
foundation when connected to the required utilities, and includes the plumbing,
heating, air-conditioning, and electrical systems contained therein; except
that such term shall include any structure which meets all the requirements of
[this] paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary of
Housing and Urban Development and complies with the standards established under
[this] chapter."
To the extent specified in the Prospectus Supplement with respect to a
Series for which the related Trust Property includes Secured Contracts, for
purposes of calculating the loan-to-value ratio of a Secured Contract relating
to a new Manufactured Home, the "Collateral Value" is no greater than the sum
of a fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site) including
"accessories" identified in the invoice (the "Manufacturer's Invoice Price"),
plus the actual cost of any accessories purchased from the dealer, a delivery
and set-up allowance, depending on the size of the unit and the cost of state
and local taxes, filing fees and up to three years prepaid hazard insurance
premiums. To the extent specified in the related Prospectus Supplement, the
Collateral Value of a used Manufactured Home is the least of the sales price,
the appraised value, and the National Automobile Dealer's Association book
value plus prepaid taxes and hazard insurance premiums. The appraised value of
a Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable.
The related Prospectus Supplement may specify for the Contracts
contained in the related Contract Pool, among other things, the date of
origination of the Contracts; the APRs on the Contracts; the Contract
Loan-to-Value Ratios; the minimum and maximum outstanding principal balance as
of the cut-off date and the average outstanding principal balance; the
outstanding principal balances of the Contracts included in the Contract Pool;
and the original maturities of the Contracts and the last maturity date of any
Contract.
ADDITIONS, SUBSTITUTION AND WITHDRAWAL OF ASSETS
With respect to a Series, as described in the related Prospectus
Supplement, the related Transferor, Seller or Issuer may, subsequent to the
issuance of a Series, (i) deliver additional Assets to be included in the
related Trust Property, (ii) withdraw Assets previously included in the Trust
Property for such Series and substitute comparable assets therefor, or (iii)
withdraw Assets previously included in a Reserve Fund for such Series. Assets
may be added to the Trust Property for a Series subsequent to the issuance of
such Series in the manner described under "Pre-Funding Arrangements" below. In
addition, Assets may be withdrawn from or substituted into the Trust Property
for a Series for the following reasons: (a) curing any breaches of
representations and warranties with respect to such Assets, (b) curing certain
immaterial irregularities with respect to such Assets that do not constitute a
breach of such representations and warranties, or (c) achieving certain
targeted or desired Loan Asset Pool characteristics with respect to the Loan
Assets of a particular Series, including, without limitation, those
characteristics that accommodate the requests of a Rating Agency, the
Underwriters or a third party provider of Credit Enhancement. Any such
additions, withdrawals or substitutions of Assets by the related Transferor or
the Seller or the Issuer
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will be subject to the applicable limitations, requirements and conditions
provided in the related Sale and Servicing Agreement or Pooling and Servicing
Agreement (and described in the related Prospectus Supplement) for such Series.
PRE-FUNDING ARRANGEMENTS
To the extent provided in the related Prospectus Supplement for a
Series, the related Sale and Servicing Agreement or Pooling and Servicing
Agreement will provide for a commitment by the related Trust or Issuer, as
applicable, to subsequently purchase additional Loan Assets ("Subsequent Loan
Assets") following the date on which the related Securities are issued (a
"Pre-Funding Arrangement"). With respect to a Series, the Pre-Funding
Arrangement will require that any Subsequent Loan Assets included in the Trust
Property conform to the requirements and conditions provided in the related
Sale and Servicing Agreement or Pooling and Servicing Agreement. If a
Pre-Funding Arrangement is utilized in connection with the issuance of the
Series of Securities, on the closing date for the issuance of such Series the
related Trustee will be required to deposit in a segregated account (a
"Pre-Funding Account") all or a portion of the proceeds received by such
Trustee in connection with the sale of one or more Classes of Securities of
such Series; and, subsequently, the Issuer will acquire Subsequent Loan Assets
in exchange for the release of money from the Pre-Funding Account for such
Series. In addition, the Pre-Funding Arrangement will be limited to a
specified period, not to exceed three months, during which time any transfers
of Subsequent Loan Assets must occur and to a maximum deposit to the related
Pre-Funding Account of no more than thirty-five percent (35%) of the aggregate
proceeds received from the sale of all Classes of Securities of such Series.
If all of the funds originally deposited in the such Pre-Funding
Account are not used by the end of such specified period, then any remaining
amount of such funds will be applied as a mandatory prepayment of a Class or
Classes of Securities as specified in the related Prospectus Supplement.
Although it is intended that the principal amount of Subsequent Loan Assets to
be included as Trust Property after the closing date for the issuance of any
particular Series will require application of substantially all of the
Pre-Funding Account, and it is not anticipated that there will be any material
amount of principal distributions from amounts remaining on deposit in the
Pre-Funding Account in reduction of the principal balances of any Securities,
no assurance can be given that such a distribution with respect to the
Securities will not occur on the Distribution Date following the Due Period in
which the Pre-Funding Arrangement ends. In any event, it is unlikely that the
Transferor will be able to deliver Subsequent Loan Assets with aggregate
principal balances that exactly equal the Pre-Funding Account, and the portion
of the Pre-Funding Account remaining at the end of the Pre-Funding Arrangement,
if any, will be distributed in reduction of the principal balance of the
Securities of the related Series, as set forth in related Prospectus
Supplement.
As may be further specified in the related Prospectus Supplement,
amounts on deposit in the Pre-Funding Account will be invested in short-term
debt obligations of, or debt obligations guaranteed by, the United States,
repurchase agreements that satisfy the criteria specified in the applicable
Sale and Servicing Agreement or Pooling and Servicing Agreement, certificates
of deposit, time deposits and bankers acceptances of any United States
depository institution or trust company, FDIC insured deposits, including
deposits with the related Trustee, commercial paper, debt obligations, and
money market funds; provided such investments are acceptable to each Rating
Agency rating the Series of Offered Securities at the time at which the
investments are made (collectively "Permitted Investments"); and provided
further that an investment in such Permitted Investments will not require the
Issuer for a Series to be registered as an "investment company" under the
Investment Company Act of 1940, as amended. Permitted Investments
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will consist of short term investments that convert into cash or mature within
a short period of time, have minimal or no exposure to fluctuations in value as
a result of market changes in prevailing interest rates and are acceptable to
each Rating Agency rating the applicable Series of Offered Securities.
The utilization of a Pre-Funding Arrangement is intended to improve
the efficiency of the issuance of a Series of Securities and the sale and
assignment of the Loan Assets to the related Issuer through the incremental
delivery of the Loan Assets on the closing date and during the three month
period following the closing date for such Series, which allows for a more even
accumulation of the Loan Assets by the Seller, the Issuer and the related
Transferor and the issuance of a larger principal amount of Securities for such
Series than would be the case without a Pre-Funding Arrangement.
CREDIT ENHANCEMENT
GENERAL
The amount and types of credit and cash flow enhancement arrangements
("Credit Enhancement") and the provider thereof, if applicable, with respect to
each Class of Securities of a given Series, if any, will be set forth in the
related Prospectus Supplement. If and to the extent provided in the related
Prospectus Supplement, Credit Enhancement may be in the form of the
subordination of one or more Classes of Securities of such Series, the
overcollateralization of the Trust Property with respect to a Series, the
establishment of one or more Reserve Funds, the use of a cross- support
feature, the use of a Mortgage Pool Insurance Policy, Guaranty Policy, Special
Hazard Insurance Policy, bankruptcy bond, surety bond, letter of credit, credit
or liquidity facility, guaranteed investment contract, swap or other interest
rate protection agreement, repurchase obligation, yield maintenance agreement,
other agreements with respect to third party payments or other support, cash
deposits or such other form of Credit Enhancement as may be described in the
related Prospectus Supplement, or any combination of two or more of the
foregoing. If specified in the related Prospectus Supplement, Credit
Enhancement for a Class of Securities may cover one or more other Classes of
Securities of the same Series, and Credit Enhancement for a Series of
Securities may cover one or more other Series of Securities.
The presence of Credit Enhancement for the benefit of any Class or
Series of Securities is intended to enhance the likelihood of receipt by the
Securityholders of such Class or Series of the full amount of principal and
interest due thereon and to decrease the likelihood that such Securityholders
will experience losses. To the extent specified in the related Prospectus
Supplement, any Credit Enhancement with respect to a Series will not provide
protection against all risks of loss and will not guarantee repayment of the
entire principal balance of the Securities of such Series and interest thereon.
If losses occur which exceed the amount covered by such Credit Enhancement or
which are not covered by the Credit Enhancement, holders will bear their
allocable share of deficiencies, as described in the related Prospectus
Supplement. In addition, if a form of Credit Enhancement covers more than one
Class or Series of Securities, Securityholders of any such Class or Series will
be subject to the risk that such credit enhancement will be exhausted by the
claims of Securityholders of other Classes or Series.
SUBORDINATION
If specified in the related Prospectus Supplement, payments and
distributions in respect of scheduled principal, interest or any combination
thereof that otherwise would have been payable or distributable to one or more
Classes of a Series (the "Subordinated Securities") will instead be payable to
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one or more other Classes of such Series (the "Senior Securities") under the
circumstances and to the extent provided in such Prospectus Supplement. If
specified in the Prospectus Supplement, delays in receipt of scheduled payments
on the Loan Assets and losses on defaulted Loan Assets will be borne first by
the various Classes of Subordinated Securities and thereafter by the various
Classes of Senior Securities, in each case under the circumstances and subject
to the limitations specified in the Prospectus Supplement. The aggregate
payments and distributions in respect of delinquent payments or distributions
on the Loan Assets over the lives of the Securities of a Series or at any time,
the aggregate losses in respect of defaulted Loan Assets which must be borne by
the Subordinated Securities by virtue of subordination and the amount of the
payments and distributions otherwise due to the Subordinated Securities that
will be distributable to holders of Senior Securities on any Distribution Date
may be limited as specified in the related Prospectus Supplement. If aggregate
payments and distributions in respect of delinquent payments or distributions
on the Loan Assets or aggregate losses in respect of such Loan Assets were to
exceed the total amounts distributable and available for distribution to
holders of Subordinated Securities were to exceed the specified maximum amount,
holders of Senior Securities could experience losses on their Securities.
In addition to or in lieu of the foregoing, if specified in the
related Prospectus Supplement, all or any portion of payments or distributions
otherwise due to holders of Subordinated Securities on any Distribution Date
may instead be deposited into one or more Reserve Funds (as defined below)
established by the related Trustee. If specified in the related Prospectus
Supplement, such deposits may be made (i) on each Distribution Date, (ii) on
each Distribution Date for specified periods, or (iii) on each Distribution
Date until the balance in the Reserve Fund has reached a specified amount and,
following payments from the Reserve Fund to holders of Senior Securities or
otherwise, thereafter to the extent necessary to restore the balance in the
Reserve Fund to required levels, in each case as specified in such Prospectus
Supplement. If specified in the related Prospectus Supplement, amounts on
deposit in the Reserve Fund may be released to the Seller or Issuer or the
holders of any Class of Securities at the times and under the circumstances
specified in such Prospectus Supplement.
If specified in the related Prospectus Supplement, various Classes of
Senior Securities and Subordinated Securities may themselves be subordinate in
their right to receive certain payments and distributions to other Classes of
Senior and Subordinated Securities, respectively, through a cross-support
mechanism or otherwise.
As between Classes of Senior Securities and as between Classes of
Subordinated Securities, payments and distributions may be allocated among such
Classes (i) in the order of their Stated Maturity or Assumed Final Distribution
Dates, (ii) in accordance with a schedule or formula, (iii) in relation to the
occurrence of events, or (iv) otherwise, in each case as specified in the
related Prospectus Supplement. As between Classes of Subordinated Securities,
payments and distributions to holders of Senior Securities on account of
delinquencies or losses and payments to any Reserve Fund will be allocated as
specified in the related Prospectus Supplement.
OVERCOLLATERALIZATION
If provided in the related Prospectus Supplement, the aggregate
principal balance of the Loan Assets included in the Trust Property may exceed
the aggregate original principal balance of the Securities of a Series thereby
creating an "Excess Spread" on each Distribution Date. If provided in the
related Prospectus Supplement, such Excess Spread may be distributed to holders
of Senior Securities to produce and maintain a specified level of
overcollateralization. With respect to a Series of Securities, the
overcollateralization level may be fixed or may increase or decrease over time,
subject to certain floors,
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caps and triggers, as set forth in the related Prospectus Supplement and the
related Indenture, Sale and Servicing Agreement or Pooling and Servicing
Agreement.
CROSS-SUPPORT
If specified in the related Prospectus Supplement, separate Classes of
related Series of Securities may represent the beneficial ownership of or be
separately secured by, separate groups of Assets included in the Trust Property
for a Series or otherwise available for the benefit of such Securities. In
such case, Credit Enhancement may be provided by a cross-support feature which
may require that payments and distributions be made with respect to Securities
evidencing beneficial ownership of or secured by one or more groups of Assets
prior to payments or distributions to Subordinated Securities evidencing a
beneficial ownership interest in or secured by other groups of Assets included
in the same Trust Property. The Prospectus Supplement for a Series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
GUARANTY INSURANCE
If specified in the Prospectus Supplement, one or more financial
guaranty insurance policies (each, a "Guaranty Policy") will be obtained. Each
such Guaranty Policy with respect to a Series will, subject to limitations
described in the related Prospectus Supplement, provide to the holders of the
insured Securities of a Series a guarantee of payment of any interest and/or
principal payments due to such holders on each Distribution Date. The related
Prospectus Supplement will describe the terms of any Guaranty Policy and will
set forth certain information with respect to the applicable insurer.
MORTGAGE POOL INSURANCE
With respect to a Series for which the related Trust Property includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, a
Series for which the related Trust Property includes Contracts), in order to
decrease the likelihood that holders of the Securities of such Series will
experience losses in respect of such Mortgage Loans, if specified in the
related Prospectus Supplement, one or more mortgage pool insurance policies
(each, a "Mortgage Pool Insurance Policy") will be obtained. Each such Mortgage
Pool Insurance Policy will, subject to the limitations described below and in
the Prospectus Supplement, cover loss by reason of default in payments on such
Mortgage Loans up to the amounts specified in the Prospectus Supplement or
reported on Form 8-K and for the periods specified in the Prospectus
Supplement. To the extent specified in the related Prospectus Supplement, the
Servicer under the related Sale and Servicing Agreement or Pooling and
Servicing Agreement will agree to use its best reasonable efforts to cause to
be maintained in effect any such Mortgage Pool Insurance Policy and to file
claims thereunder to the issuer of such Mortgage Pool Insurance Policy (the
"Pool Insurer"). A Mortgage Pool Insurance Policy, however, is not a blanket
policy against loss, since claims thereunder may only be made respecting
particular defaulted Mortgage Loans and only upon satisfaction of certain
conditions precedent set forth in such policy as described in the related
Prospectus Supplement. To the extent specified in the related Prospectus
Supplement, no Mortgage Pool Insurance Policy, if any, will cover losses due to
a failure to pay or denial of a claim under a primary mortgage insurance
policy, irrespective of the reason therefor. The related Prospectus Supplement
will describe the terms of any applicable Mortgage Pool Insurance Policy and
will set forth certain information with respect to the related Pool Insurer.
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SPECIAL HAZARD INSURANCE
With respect to a Series for which the related Trust Property includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, each
Series for which the related Trust Property includes Contracts), in order to
decrease the likelihood that holders of the Securities of such Series will
experience losses in respect of such Mortgage Loans, if specified in the
related Prospectus Supplement, one or more Special Hazard Insurance Policies
(each, a "Special Hazard Insurance Policy") will be obtained. Each such Special
Hazard Insurance Policy with respect to a Series will, subject to limitations
described below and in the related Prospectus Supplement, protect holders of
the Securities of such Series from loss caused by reason of damage to Mortgaged
Properties caused by certain hazards (including earthquakes and, to a limited
extent, tidal waves and related water damage) not covered by the standard form
of hazard insurance policy for the respective states in which the Mortgaged
Properties are located or under flood insurance policies, if any, covering the
Mortgaged Properties and (ii) the application of the coinsurance clause
contained in hazard insurance policies. Any Special Hazard Insurance Policy may
not cover losses occasioned by war, civil insurrection, certain governmental
actions, errors in design, faulty workmanship or materials (except under
certain circumstances), nuclear reaction, flood (if the Mortgaged Property is
located in a federally designated flood area), chemical contamination and
certain other risks. Aggregate claims under each Special Hazard Insurance
Policy will be limited as described in the related Prospectus Supplement. Any
Special Hazard Insurance Policy may also provide that no claim may be paid
unless hazard and if applicable, flood insurance on the Mortgaged Property has
been kept in force and other protection and preservation expenses have been
paid.
The related Prospectus Supplement will describe the terms of any
applicable Special Hazard Insurance Policy and will set forth certain
information with respect to the related special hazard insurer.
RESERVE FUNDS
If specified in the Prospectus Supplement with respect to a Series,
assets such as cash, U.S. Treasury securities, instruments evidencing ownership
of principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in such Prospectus Supplement will be deposited by the Seller or
Issuer in one or more accounts (each, a "Reserve Fund") established and
maintained with the related Trustee. Such cash and the payments on such other
assets will be used to enhance the likelihood of timely payment and
distribution of principal of, and interest on, or, if specified in the related
Prospectus Supplement, to provide additional protection against losses in
respect of the Assets included in the related Trust Property, to pay the
expenses of the related Issuer or for such other purposes specified in such
Prospectus Supplement. Whether or not the Seller or Issuer has any obligation
to make such a deposit, certain amounts to which the holders of the
Subordinated Securities of such Series, if any, the Seller or Issuer would
otherwise be entitled may instead be deposited into the Reserve Fund from time
to time and in the amounts as specified in the related Prospectus Supplement.
Any cash in any Reserve Fund and the proceeds of any other instrument upon
maturity will be invested in Permitted Investments. If a letter of credit is
deposited with the applicable Trustee, such letter of credit will be
irrevocable. To the extent specified in the Prospectus Supplement with respect
to a Series, any instrument deposited therein will name the related Trustee, in
its capacity as trustee for the holders of the Securities of such Series, as
beneficiary and will be issued by an entity acceptable to each rating agency
that rates such Securities. Additional information with respect to such
instruments deposited in the Reserve Funds may be set forth in the Prospectus
Supplement.
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SERVICING OF THE LOAN ASSETS
Except as otherwise noted in the applicable Prospectus Supplement, the
description set forth below of the servicing of Loan Assets is applicable to
Loan Assets included in the Trust Property with respect to a Series of
Securities.
To the extent provided in the related Prospectus Supplement, the Loan
Assets included in the Trust Property for a Series of Securities will be
serviced by (i) the related Servicer as sole servicer, (ii) the related Master
Servicer as administrator or master servicer, (iii) one or more loan servicing
institutions as servicers or (iv) by another institution as master servicer. If
an institution other than the Servicer acts as the sole servicer or as the
master servicer for a Series, the Servicer may have no servicing obligations
with respect to such Series. Generally, the discussion in this section of the
Prospectus is applicable under circumstances when the Servicer is an affiliate
of the Seller or Issuer. If the Servicer is not an affiliate of the Seller or
Issuer, the discussion relating to the servicing of the Loan Assets as set
forth below may be modified or superseded by any discussion relating to the
servicing of the Loan Assets set forth in the Prospectus Supplement.
To the extent specified in the related Prospectus Supplement, the Loan
Assets will be serviced by one or more loan servicing institutions, which may
include the Servicer or a Subservicer, pursuant to a subservicing agreement
between each Subservicer and the Servicer (each, a "Subservicing Agreement"),
which may be entered into only with the prior written consent of the applicable
Trustee and the Administrator, if any.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When a Mortgaged Property has been or is about to be conveyed by the
borrower, the Servicer, on behalf of the Trustee, shall, to the extent it has
knowledge of such conveyance or prospective conveyance, enforce the rights of
the Trustee as the mortgagee of record to accelerate the maturity of the
related Mortgage Loan under any "due-on-sale" clause contained in the related
Mortgage; provided, however, that the Servicer shall not exercise any such
right if the "due-on-sale" clause, in the reasonable belief of the Servicer, is
not enforceable under applicable law. In such event or in the event the
related Mortgage does not contain a "due-on-sale" clause, the Servicer shall
enter into an assumption and modification Agreement with the person to whom
such property has been or is about to be conveyed, pursuant to which such
person becomes liable under such Mortgage and, unless prohibited by applicable
law or the mortgage documents, the borrower remains liable thereon. The
Servicer is also authorized to enter into a substitution of liability agreement
with such person, pursuant to which the original borrower is released from
liability and such person is substituted as borrower and becomes liable under
the Mortgage.
REALIZATION UPON DEFAULTED LOAN ASSETS
With respect to any defaulted Loan Asset as to which no satisfactory
arrangements can be made for collection of delinquent payments or the cure of
any other event of default, the Servicer will take such action as it shall deem
to be in the best interest of the Securityholders. Without limiting the
generality of the preceding sentence, the Servicer will, in accordance with the
servicing standard described above, (i) in the case of Title I Mortgage Loans
and Title I Contracts only, direct the Trustee (or any Administrator) to submit
an FHA Claim to the FHA, in accordance with FHA Regulations, or (ii) in the
case of Mortgage Loans and Contracts, take such other action as the Servicer
deems to be in the best interests of the
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Securityholders, which, if no superior lien exists on the related Mortgaged
Property, could include a foreclosure upon such Mortgaged Property in the name
of the Trustee for the benefit of the Securityholders, provided such action is
economically justified. Typically, however, the Servicer has chosen not to
pursue foreclosures of defaulted loans comparable to the Loan Assets due to the
costs involved. In servicing mortgage loans and contracts secured by junior
liens in their portfolios, it will not be the Servicer's or any Subservicer's
practice to satisfy the senior mortgage(s) at or prior to the foreclosure sale
of the related Mortgaged Property, or to advance funds to keep the senior
mortgage(s) current. In addition, if a defaulted Loan Asset (together with any
senior lien indebtedness) has a high loan-to-value ratio, then the Servicer
will be less likely to foreclose on the related Mortgaged Property, even if the
Servicer has a first-lien position for such defaulted Loan Asset. In the event
an FHA Claim is rejected by the FHA due to circumstances that constitute a
breach of the Transferor's representations and warranties in the applicable
Sale and Servicing Agreement or Pooling and Servicing Agreement, the Transferor
will be required to repurchase the related Title I Mortgage Loan or Title I
Contract at the purchase price and in the manner set forth in such Sale and
Servicing Agreement or Pooling and Servicing Agreement.
In connection with any collection activities or foreclosure, the
Servicer is required to exercise collection and foreclosure procedures with the
same degree of care and skill in its exercise or use, as it would exercise or
use under the circumstances in the conduct of its own affairs.
WAIVERS AND DEFERMENTS OF CERTAIN PAYMENTS
Each Sale and Servicing Agreement and each Pooling and Servicing
Agreement will require the Servicer to make reasonable efforts to collect all
payments called for under the terms and provisions of the Loan Assets.
Consistent with the foregoing, the Servicer may at its own discretion waive any
late payment charge, assumption fee or any penalty interest in connection with
the payment of a Loan Asset or any other fee or charge which the Servicer would
be entitled to retain as servicing compensation and may waive, vary or modify
any term of any Loan Asset or consent to the postponement of strict compliance
with any such term or in any matter grant indulgence to any borrower, subject
to the limitations set forth in the applicable Sale and Servicing Agreement or
Pooling and Servicing Agreement and the FHA Regulations, if applicable.
SUBSERVICERS
The Servicer is permitted under the applicable Sale and Servicing
Agreement or Pooling and Servicing Agreement to enter into servicing
arrangements from time to time with subservicers (each, a "Subservicer")
meeting the requirements of such Sale and Servicing Agreement or Pooling and
Servicing Agreement, provided that the applicable Trustee gives written consent
thereto. Notwithstanding any subservicing arrangements, the Servicer shall not
be relieved of its obligations under the applicable Sale and Servicing
Agreement or Pooling and Servicing Agreement to the applicable Trustee and the
Securityholders, and the Servicer shall be obligated to the same extent and
under the same terms and conditions as if it alone were servicing and
administering the related Loan Assets.
REMOVAL AND RESIGNATION OF SERVICER
To the extent specified in the Prospectus Supplement, the applicable
Trustee may remove the Servicer upon the occurrence and continuation beyond the
applicable cure period of certain events described in the applicable Sale and
Servicing Agreement or Pooling and Servicing Agreement. To the
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extent specified in the Prospectus Supplement, the Servicer will not be
permitted to resign from its obligations and duties except by mutual consent of
the Servicer, the Seller, the Issuer the applicable Trustee and any other
persons so specified in the applicable Sale and Servicing Agreement or Pooling
and Servicing Agreement, or upon the determination that the Servicer's duties
are no longer permissible under applicable law and such incapacity cannot be
cured by the Servicer. No such resignation shall become effective until a
qualified successor has assumed the Servicer's responsibilities and
obligations. Upon removal or resignation of the Servicer, a successor servicer
will be appointed pursuant to the terms and conditions set forth in the
applicable Sale and Servicing Agreement or Pooling and Servicing Agreement.
ADVANCES
To the extent specified in the Prospectus Supplement, neither the
Servicer, nor any Subservicer on behalf of the Servicer, shall have any
obligation to advance its own funds for any delinquent scheduled payments of
principal or interest on any Loan Asset or to satisfy or keep current the
indebtedness secured by any superior liens on the related Mortgaged Property.
To the extent specified in the Prospectus Supplement, no costs incurred by the
Servicer or any Subservicer in respect of servicing advances shall, for the
purposes of payments or distributions to Securityholders, be added to the
amount owing under the related Loan Asset.
SERVICING PROCEDURES
To the extent specified in the related Prospectus Supplement, the
Servicer and each Subservicer will service the Loan Assets pursuant to written
guidelines promulgated by the Seller, the Issuer or the Servicer. The Servicer
will exercise its best reasonable efforts to insure that any Subservicers
service the Loan Assets in compliance with such guidelines and in a manner
consistent with industry standards.
MORTGAGE LOANS. To the extent specified in the related Prospectus
Supplement, the Servicer and each Subservicer will be required to service and
administer the Mortgage Loans and will have full power and authority, acting
alone, to do any and all things in connection with such servicing and
administration which the Servicer may deem necessary or desirable and
consistent with the terms of the applicable Sale and Servicing Agreement or
Pooling and Servicing Agreement. The Servicer, in servicing and administering
the Mortgage Loans, will be required to employ or cause to be employed
procedures (including collection, foreclosure, liquidation and REO Property
management and liquidation procedures) and exercise the same care that it
customarily employs and exercises in servicing and administering loans of the
same type as the Mortgage Loans for its own account, all in accordance with
accepted servicing practices of prudent lending institutions and servicers of
loans of the same type as the Mortgage Loans and giving due consideration to
the Securityholders' reliance on the Servicer. With respect to any Title I
Mortgage Loan, the foregoing servicing standard also shall include the
requirement that the Servicer will and will cause any Subservicer to, comply
with FHA Regulations in servicing the Title I Mortgage Loans so that the FHA
Insurance remains in full force and effect with respect to the Title I Mortgage
Loans, except for good faith disputes relating to FHA Regulations or such FHA
Insurance, unless such disputes would result in the termination or suspension
of such FHA Insurance. The Servicer will be required to maintain the
facilities, procedures and experienced personnel necessary to comply with such
servicing standard and the duties of the Servicer set forth in the applicable
Sale and Servicing Agreement or Pooling and Servicing Agreement.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds of
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liquidation of the Mortgage Loan after the reimbursement to the Servicer of its
expenses and after the satisfaction of any senior liens.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Loan Assets -- General Legal Considerations -- Cooperative Loans". This
approval is usually based on the purchaser's income and net worth and numerous
other factors. Although the Cooperative's approval is unlikely to be
unreasonably withheld or delayed, the necessity of acquiring such approval
could limit the number of potential purchasers for those shares and otherwise
limit the ability to sell and realize the value of those shares.
In general, a "tenant-stockholder" (as defined in Code Section
216(b)(2)) of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of Code Section 216(b)(1) is allowed a
deduction for amounts paid or accrued within his taxable year to the
corporation representing his proportionate share of certain interest expenses
and certain real estate taxes allowable as a deduction under Code Section
216(a) to the corporation under Code Sections 163 and 164. In order for a
corporation to qualify under Code Section 216(b)(1) for its taxable year in
which such items are allowable as a deduction to the corporation, such Code
Section requires, among other things, that at least 80% of the gross income of
the corporation be derived from its tenant-stockholders (as defined in Code
Section 216(b)(2). By virtue of this requirement, the status of a corporation
for purposes of Code Section 216(b)(1) must be determined on a year-to-year
basis. Consequently, there can be no assurance that Cooperatives relating to
the Cooperative Loans will qualify under such Code Section for any particular
year. In the event that such a Cooperative fails to qualify for one or more
years, the value of the collateral securing any related Cooperative Loans could
be significantly impaired because no deduction would be allowable to
tenant-stockholders under Code Section 216(a) with respect to those years. In
view of the significance of the tax benefits accorded tenant-stockholders of a
corporation that qualifies under Code Section 216(b)(1), the likelihood that
such a failure would be permitted to continue over a period of years appears
remote.
So long as it acts as servicer of the Mortgage Loans, the Servicer
will be required to maintain certain insurance covering errors and omissions in
the performance of its obligations as servicer and certain fidelity bond
coverage ensuring against losses through wrongdoing of its officers, employees
and agents.
CONTRACTS. With respect to Trust Property that includes Contracts,
pursuant to the applicable Sale and Servicing Agreement or Pooling and
Servicing Agreement, the Servicer will service and administer the Contracts
assigned to the Trustee as more fully set forth below. The Servicer, either
directly or through Subservicers subject to general supervision by the
Servicer, will perform diligently all services and duties specified in each
Sale and Servicing Agreement or Pooling and Servicing Agreement in the same
manner as prudent lending institutions of property improvement and/or
manufactured housing installment sales contracts of the same type as the
Contracts in those jurisdictions where the related borrowers are located. The
Servicer will monitor the performance of each Subservicer, if any, and, unless
the related Prospectus Supplement states otherwise, will remain liable for the
servicing of the Contracts in accordance with the terms of the applicable Sale
and Servicing Agreement or Pooling and Servicing Agreement. The duties to be
performed by the Servicer or the Subservicer, if any, will include collection
and remittance of principal and interest payments, collection of insurance
claims and, if necessary, repossession.
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<PAGE> 64
ADMINISTRATION AND SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Loan Asset, the Servicer may receive compensation
with respect to each interest payment thereon in an amount specified in the
related Prospectus Supplement. As compensation for its servicing duties, each
Subservicer, if any, will be entitled to a monthly servicing fee in the amount
specified in the related Prospectus Supplement. In addition to the primary
compensation, each Servicer or Subservicer, if any, will retain all assumption
underwriting fees and late payment charges, to the extent collected from
borrowers if provided in the related Prospectus Supplement.
The Servicer and any Subservicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Loan Assets. No loss will be suffered on the Securities by reason of such
expenses to the extent claims for such expenses are paid directly under any
applicable Mortgage Pool Insurance Policy, any primary mortgage insurance
policy, or from any other forms of Credit Enhancement. In the event, however,
that the defaulted Mortgage Loans are not covered by a Mortgage Pool Insurance
Policy, any primary mortgage insurance policy, or another form of Credit
Enhancement, or claims are either not made or not paid under such policies or
Credit Enhancement, or if coverage thereunder has ceased, a loss will occur on
the Securities of the affected Series to the extent that the proceeds from the
liquidation of a defaulted Loan Asset, after reimbursement of the Servicer's
and the Subservicer's expenses, are less than the then outstanding principal
balance of such defaulted Loan Asset.
THE SELLER AND THE ISSUER
FIRSTPLUS INVESTMENT CORPORATION ("FIC") or a Trust formed by FIC for
such purpose, will act as Issuer with respect to each Series of Securities, and
with respect to each Series of Securities in which a Trust is the Issuer, FIC
will act as Seller. FIC, a Nevada corporation, was incorporated in 1995 as a
limited purpose finance corporation. All of the outstanding capital stock of
FIC is owned by RAC Financial Group, Inc., the common stock of which is traded
in the over-the-counter market on the Nasdaq National Market. The Seller
maintains its principal office at 3773 Howard Hughes Parkway, Suite 300N, Las
Vegas, Nevada 89109, and its telephone number is (702) 892-3772.
As a limited purpose finance corporation under the Rating Agency
guidelines, the business operations of FIC will be limited to functions
relating to the issuance of one or more Series of Securities or similar series
of asset- backed or mortgage-backed securities, the acquisition and resale of
Loan Assets and other incidental activities related thereto. FIC does not
have, and is not expected in the future to have, any significant assets. If
FIC were required to repurchase a Loan Asset included in the Trust Property for
a Series, its only sources of funds to make such repurchase would be funds
obtained from the enforcement of a corresponding obligation, if any, on the
part of the Transferor of such Loan Asset or the related Servicer, as the case
may be, or from a Reserve Fund, if any, established to provide funds for such
repurchases.
Neither FIC nor any of its affiliates will insure or guarantee the
Securities of any Series or the Loan Assets backing any such Series. See "Risk
Factors -- Limited Assets."
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THE SERVICER AND THE TRANSFEROR
To the extent specified in the related Prospectus Supplement, the
Servicer with respect to any Series of Securities may be FIRSTPLUS FINANCIAL,
INC. ("FFI"), an affiliate of FIC. In addition, to the extent specified in the
related Prospectus Supplement for a Series, the related Transferor of the Loan
Assets to the Seller or the Issuer, as applicable, for such Series may also be
FFI. See "Description of the Trust Property -- General".
The delinquency and loss experience of FFI for the periods indicated
is set forth below. In the event that FFI is not the Servicer with respect to
a Series, or if an entity other than FFI acts as Servicer with respect to a
Series, the delinquency experience of such Servicer will be set forth in the
related Prospectus Supplement.
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<PAGE> 66
Delinquency Experience
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
DELINQUENCY DATA: 1994 1995
------- --------------------------------------------------
Delinquencies in Serviced Loan
Portfolio (at period end) (1): Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
31-60 days . . . . . . . . . . . 3.7% 2.3% 1.7% 1.8% 1.5%
61-90 days . . . . . . . . . . . 1.4 1.0 0.7 0.7 0.5
91 days and over . . . . . . . . 3.2 3.3 1.9 2.2 2.1
--- --- --- --- ---
Total . . . . . . . . . . 8.3% 6.6% 4.3% 4.7% 4.1%
=== === === === ===
Serviced Loan Portfolio (at
period end) $60,850 $70,410 $177,358 $238,584 $387,343
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------
1996
---------------------------------------------------
Delinquencies in Serviced Loan
Portfolio (at period end) (1): Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- -------
<S> <C> <C> <C> <C>
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) $506,287 $750,529 $1,267,147 $1,882,187
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C>
LOSS AND DEFAULT DATA:
Net Losses as a percentage of the average
Serviced Loan Portfolio (2) . . . . . . . . . . 0.39% 0.44% 0.04%
Defaults as a percentage of the average
Serviced Loan Portfolio (2) . . . . . . . . . . 2.04% 2.64% 0.69%
</TABLE>
(1) Delinquencies (as a percentage of the total serviced loan portfolio
balance) typically increase in November and December of each calendar
year.
(2) The average serviced loan portfolio is calculated by adding the
beginning and ending balances for the period presented and dividing
the sum by two.
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<PAGE> 67
While the preceding tables generally indicate that FFI is experiencing
declining delinquency, loss and default rates on its serviced loan portfolio as
a whole, such rates have been increasing on a pool-by-pool basis. Although
such increases to date have been within the parameters anticipated by FFI at
the time of the issuance of each Series of Securities, there can be no
assurance that such rates will not continue to increase. Loan Assets that will
be conveyed to the Seller or Issuer in connection with the issuance of a Series
of Securities will generally possess reduced delinquency, default and loss
rates due to certain requirements of the Underwriters and Rating Agencies for
such Series. THE OVERALL DECLINE IN THE DELINQUENCY RATES ON THE SERVICED
LOAN PORTFOLIO IS PRINCIPALLY DUE TO THE INCREASED VOLUME OF LOANS ORIGINATED
BY FFI. FFI CALCULATES ITS DELINQUENCY AND DEFAULT RATES BY DIVIDING THE
AMOUNT OF DELINQUENT OR DEFAULTED LOANS IN THE SERVICED LOAN PORTFOLIO BY THE
TOTAL SERVICED LOAN PORTFOLIO. SINCE FFI AND ITS AFFILIATES ARE ORIGINATING
HIGHER VOLUMES OF NEW LOANS THAT, DUE TO THEIR LACK OF SEASONING, TEND TO HAVE
LOWER DELINQUENCY AND DEFAULT RATES, FFI'S OVERALL DELINQUENCY AND DEFAULT
RATES HAVE DECREASED.
Because delinquencies and losses typically occur months or years after
a loan is originated, data relating to delinquencies and losses as a percentage
of the current portfolio can understate the risk of future delinquencies,
losses or foreclosures. There is no assurance that the delinquency,
foreclosure and loss experience with respect to any of the Loan Assets or with
respect to any pool of Loan Assets will be comparable to the experience
reflected above for assets originated and serviced by FFI or its affiliates.
Because certain Loan Assets may have been underwritten pursuant to standards
that rely primarily on the value of the related Mortgaged Properties rather
than the creditworthiness of the related mortgagor, the actual rates of
delinquencies, foreclosures and losses on such Loan Assets, particularly in
periods during which the value of the related Mortgage Properties has declined,
could be higher than those historically experienced by the mortgage lending
industry in general. In addition, the rate of delinquencies, foreclosures and
losses with respect to the Loan Assets will also be affected by, among other
things, interest rate fluctuations and general and regional economic
conditions. See "Risk Factors -- Certain Factors Affecting Delinquencies,
Foreclosures and Losses on Loan Assets".
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of each Sale and
Servicing Agreement or Pooling and Servicing Agreement pursuant to which an
Issuer will purchase Loan Assets from the Seller or Transferor, as applicable,
and the Servicer will agree to service such Loan Assets, each Trust Agreement
(in the case of a grantor trust, the Pooling and Servicing Agreement) pursuant
to which a Trust will be created and Securities will be issued and each
Administration Agreement pursuant to which FFI will undertake certain
administrative duties with respect to a Trust that issues Notes (collectively,
the "Transfer and Servicing Agreements"). Forms of the Transfer and Servicing
Agreements have been filed as exhibits to the Registration Statement of which
this Prospectus forms a part. This summary does not purport to be complete and
is subject to, and qualified in its entirety by reference to, all the
provisions of the Transfer and Servicing Agreements.
SALE AND ASSIGNMENT OF LOAN ASSETS
On or prior to the Closing Date specified with respect to any given
Series of Securities in the related Prospectus Supplement (the "Closing Date"),
the Transferor will sell and assign to the Seller or Issuer without recourse,
its entire interest in the Loan Assets comprising the related Loan Asset Pool,
together with all principal and interest on such Loan Assets (subject to
exclusions or adjustments, specified
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<PAGE> 68
in the related Prospectus Supplement, on or with respect to such Loan Assets on
or after the Cut-off Date), other than principal and interest due and payable
in respect of such Loan Assets on or before the date specified in the related
Prospectus Supplement. On the Closing Date, the Seller or Issuer will transfer
and assign to the applicable Trustee, without recourse, pursuant to a Sale and
Servicing Agreement, a Pooling and Servicing Agreement or an Indenture as
applicable, its entire interest in the Loan Assets comprising the related Loan
Asset Pool, together with all principal and interest on such Loan Assets
(subject to exclusions or adjustments specified in the related Prospectus
Supplement, on or with respect to such Loan Assets on or after the Cut-off
Date), other than principal and interest due and payable in respect of such
Loan Assets on or before the date specified in the related Prospectus
Supplement. Each such Loan Asset will be identified in a schedule appearing as
an exhibit to such Sale and Servicing Agreement or such Pooling and Servicing
Agreement (a "Schedule of Loan Assets"). The applicable Trustee will,
concurrently with such transfer and assignment, execute and deliver the related
Securities. Unless otherwise provided in the related Prospectus Supplement,
the net proceeds received from the sale of the Securities of a given Series
will be applied to the purchase of the related Loan Assets from the Seller or
Transferor and, to the extent specified in the related Prospectus Supplement,
to provide for the funding of the applicable Credit Enhancement.
In addition, as to each Loan Asset that is a Mortgage Loan, the Seller
or Issuer, as applicable, will deliver to the applicable Trustee or its
custodian, as specified in the related Prospectus Supplement, the related
mortgage note ("Mortgage Note") and mortgage ("Mortgage"), any assumption and
modification agreement, an assignment of the Mortgage in recordable form,
evidence of title insurance and, if applicable, the certificate of private
mortgage insurance. In instances where recorded documents cannot be delivered
due to delays in connection with recording, the Seller or Issuer, as
applicable, may deliver copies thereof and deliver the original recorded
documents promptly upon receipt.
With respect to each Loan Asset that is a Cooperative Loan, the Seller
or Issuer will cause to be delivered to the applicable Trustee or its
custodian, as specified in the related Prospectus Supplement, the related
original Cooperative note endorsed to the order of such Trustee, the original
security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate and related blank stock powers. The Seller or Issuer will file in
the appropriate office an assignment and a financing statement evidencing such
Trustee's security interest in each Cooperative Loan.
With respect to each Loan Asset that is a Contract for a Manufactured
Home, the Seller or Issuer will deliver or cause to be delivered to the
applicable Trustee, the original Contract and copies of documents and
instruments related to each Contract and the security interest in the
Manufactured Home securing each Contract. To give notice of the right, title
and interest of the Securityholders to the Contracts, the Seller or Issuer will
cause a UCC-1 financing statement to be filed identifying such Trustee as the
secured party and identifying all Contracts as collateral. To the extent
specified in the related Prospectus Supplement, the Contracts will not be
stamped or otherwise marked to reflect their assignment from the Seller or
Issuer to such Trustee. Therefore, if a subsequent purchaser were able to take
physical possession of the Contracts without notice of such assignment, the
interest of the holders of the Securities of the applicable Series in the
Contracts could be defeated. See "Certain Legal Aspects of the Loan Assets."
To the extent specified in the related Prospectus Supplement, in the
applicable Sale and Servicing Agreement, Pooling and Servicing Agreement or
Indenture, as applicable, the Seller or Issuer generally will represent and
warrant to the applicable Trustee, among other things, that (i) the information
with respect to each
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<PAGE> 69
Loan Asset set forth in the Schedule of Loan Assets attached thereto is true
and correct in all material respects; (ii) at the date of initial issuance of
the Securities, the Seller or Issuer, as applicable, has good and marketable
title to the Loan Assets included in the Trust Property and such other items
comprising the corpus of the Trust Property are free and clear of any lien,
mortgage, pledge, charge, security interest or other encumbrance; (iii) at the
date of initial issuance of the Securities, no payment in respect of a Loan
Asset is 30 or more days delinquent and there are no delinquent tax or
assessment liens against the related Mortgaged Property, if any; and (iv) at
origination, each Mortgage Loan complied in all material respects with
applicable state and federal laws, including, without limitation, consumer,
usury, truth-in-lending, consumer credit protection, equal credit opportunity
and disclosure laws and with respect to any Title I Mortgage Loans, the FHA
Regulations.
In the event that the Seller or Issuer has acquired the Loan Assets
for a Series, if specified in the related Prospectus Supplement, the Seller or
Issuer, as applicable, may, in lieu of making the representations set forth in
the preceding paragraph, cause the entity from which such Loan Assets were
acquired to make such representations (other than those regarding such Seller's
or Issuer's title to the Loan Assets, which will in all events be made by such
Seller or Issuer, as applicable), in the agreement pursuant to which such Loan
Assets are acquired, or if such entity is acting as Servicer, in the applicable
Sale and Servicing Agreement or Pooling and Servicing Agreement, or if such
entity is acting as a Subservicer, in its Subservicing Agreement. In such
event, such representations, and the Seller's rights against such entity in the
event of a breach thereof, will be assigned to the Trustee for the benefit of
the Securityholders of such Series.
CONVEYANCE OF SUBSEQUENT LOAN ASSETS
With respect to a Series of Securities for which a Pre-Funding
Arrangement is provided, in connection with any conveyance of Subsequent Loan
Assets to the Issuer, as applicable, after the issuance of such Series, the
related Sale and Servicing Agreement or Pooling and Servicing Agreement will
require the Transferor and Seller to satisfy the following conditions, among
others: (i) each Subsequent Loan Asset purchased after the Closing Date must
satisfy the representations and warranties contained in the subsequent transfer
agreement to be entered into by the Transferor, the applicable Trustee and the
Seller or Issuer (the "Subsequent Transfer Agreement") and in the related Sale
and Servicing Agreement or Pooling and Servicing Agreement; (ii) the Transferor
will not select such Subsequent Loan Assets in a manner that it believes is
adverse to the interests of the Securityholders; (iii) as of the related
Cut-off date, all of the Loan Assets in the Loan Asset Pool at that time,
including the Subsequent Loan Assets purchased after the closing date will
satisfy the criteria set forth in the related Sale and Servicing Agreement or
Pooling and Servicing Agreement; (iv) the Subsequent Loan Assets will have been
approved by any third party provider of Credit Enhancement, if applicable; and
(v) prior to the purchase of each Subsequent Loan Asset the applicable Trustee
will perform an initial review of certain related loan file documentation for
such Loan Asset and issue an initial certification for which the required
documentation in such loan file has been received with respect to each such
Subsequent Loan Asset. The Subsequent Loan Assets, on an aggregate basis, will
have characteristics similar to the characteristics of the pool of Initial Loan
Assets as described in the related Prospectus Supplement. Each acquisition of
any Subsequent Loan Assets will be subject to the review by any third party
provider of Credit Enhancement, if applicable, the Rating Agencies and the
Transferor's accountants of the aggregate statistical characteristics of the
related Loan Asset Pool for compliance with the applicable statistical criteria
set forth in the related Sale and Servicing Agreement or Pooling and Servicing
Agreement.
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<PAGE> 70
REPURCHASE OR SUBSTITUTION OF LOAN ASSETS
The Trustee (or its custodian as specified in the related Prospectus
Supplement) will review the documents delivered to it with respect to the Loan
Assets included in the related Trust Property. To the extent specified in the
related Prospectus Supplement, if any document is not delivered or is found to
be defective in any material respect and the Seller or Issuer cannot deliver
such document or cure such defect within 60 days after notice thereof (which
the applicable Trustee will undertake to give within 45 days of the delivery of
such documents), and if any other party obligated to deliver such document or
cure such defect has not done so and has not substituted or repurchased the
affected Loan Asset, then the Seller or Issuer, as applicable, will, not later
than the Determination Date next succeeding the end of such 60-day period (a)
if provided in the Prospectus Supplement remove the affected Loan Asset from
the Trust Property and substitute one or more other Loan Assets therefor or (b)
repurchase, or cause the Transferor to repurchase the Loan Asset for a price
equal to 100% of its principal balance plus interest thereon as of the date
specified in the related Prospectus Supplement, plus the amount of unreimbursed
servicing advances made by the Servicer or any Subservicer with respect to such
Loan Asset. To the extent specified in the related Prospectus Supplement, such
purchase price will be deposited in the Collection Account on such
Determination Date and such repurchase and, if applicable, substitution
obligation will constitute the sole remedy available to holders of the
Securities of the applicable Series or the related Trustee against the Seller
or the Issuer for a material defect in a document relating to a Loan Asset.
If the Prospectus Supplement for a Series of Securities so provides,
then in lieu of agreeing to repurchase or substitute Loan Assets as described
above, the Seller or the Issuer may obtain such an agreement from the entity
which sold such Loan Assets to the Seller or Issuer, as applicable, which
agreement will be assigned to the applicable Trustee for the benefit of the
holders of the Securities of such Series.
EVIDENCE AS TO COMPLIANCE
The related Sale and Servicing Agreement or Pooling and Servicing
Agreement will provide that on or before a specified date after the end of each
of the Servicer's fiscal years elapsing during the term of its appointment,
beginning with the first fiscal year ending after the Closing Date, the
Servicer, at its expense, will furnish to the applicable Trustee and certain
other Persons (i) an opinion by a firm of independent certified public
accountants on the financial position of the Servicer at the end of the
relevant fiscal year and the results of operations and changes in financial
position of the Servicer for such year then ended on the basis of an
examination conducted in accordance with generally accepted auditing standards,
and (ii) if the Servicer is then servicing any Mortgage Loans, a statement from
such independent certified public accountants to the effect that based on an
examination of certain specified documents and records relating to the
servicing of the Servicer's mortgage loan portfolio conducted substantially in
compliance with the audit program for mortgages serviced for the United States
Department of Housing and Urban Development Mortgage Audit Standards, or the
Uniform Single Audit Program for Mortgage Bankers (the "Applicable Accounting
Standards"), such firm is of the opinion that such servicing has been conducted
in compliance with the Applicable Accounting Standards except for (a) such
exceptions as such firm shall believe to be immaterial and (b) such other
exceptions as shall be set forth in such statement.
LIST OF SECURITYHOLDERS
Upon written request of the applicable Trustee, the Registrar for a
Series of Securities will provide to the Trustee, within fifteen days after
receipt of such request, a list of the names and addresses of all
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<PAGE> 71
holders of record of the Securities of such Series as of the most recent Record
Date for payment or distributions to holders of Securities of that Series. Upon
written request of three or more holders of record of a Series of Securities
for purposes of communicating with other holders with respect to their rights
under the applicable Indenture, Trust Agreement or Pooling and Servicing
Agreement for such Series, the applicable Trustee will afford such holders
access during business hours to the most recent list of holders of such Series
held by such Trustee. With respect to Book Entry Securities, the only named
holder on the Certificate Register will be the Clearing Agency.
No Indenture, Trust Agreement or Pooling and Servicing Agreement will
provide for the holding of any annual or other meetings of holders of
Securities.
ADMINISTRATION OF THE DISTRIBUTION ACCOUNT
The applicable Sale and Servicing Agreement or Pooling and Servicing
Agreement with respect to a Series will require the Servicer to maintain a
Distribution Account that is either: (i) an account maintained with a
depository institution the debt obligations of which (or, in the case of a
depository institution which is a part of a holding company structure, the debt
obligations of the holding company of which) have a long-term or short-term
rating acceptable to each rating agency that rated the Securities; (ii) an
account or accounts the deposits in which are fully insured by either the Bank
Insurance Fund (the "BIF"), the Federal Deposit Insurance Corporation (the
"FDIC") or the Savings Association Insurance Fund (as successor to the Federal
Savings and Loan Insurance Corporation) ("SAIF") of the FDIC; (iii) a trust
account (which shall be a "segregated trust account") maintained with the
corporate trust department of a federal or state chartered depository
institution or trust company with trust powers and acting in its fiduciary
capacity for the benefit of the applicable Trustee which depository institution
or trust company will be required to have capital and surplus of not less than
the amount specified in the related Indenture, Trust Agreement, Sale and
Servicing Agreement or Pooling and Servicing Agreement; or (iv) an account that
will not cause any rating agency rating the Securities of such Series to
downgrade or withdraw its then-current rating assigned to the Securities, as
evidenced in writing by such rating agency. The instruments in which amounts in
the Distribution Account may be invested are limited to Permitted Investments.
To the extent specified in the related Prospectus Supplement, a Distribution
Account may be maintained as an interest bearing account, or the funds held
therein may be invested pending each succeeding Distribution Date in Permitted
Investments. To the extent specified in the related Prospectus Supplement, the
Seller, the Issuer or the Trustee will be entitled to receive any such interest
or other income earned on funds in the Distribution Account as additional
compensation. To the extent specified in the related Prospectus Supplement, the
following payments and collections received subsequent to the cut-off date will
be deposited in the Distribution Account:
(i) all payments on account of scheduled principal;
(ii) all payments on account of interest accruing and collected on
and after the date specified in the related Prospectus Supplement, subject to
exclusions or adjustments described in such Prospectus Supplement;
(iii) all Liquidation Proceeds net of certain amounts reimbursed to
the Subservicers or the Servicer, as described in the related Sale and
Servicing Agreement or Pooling and Servicing Agreement;
(iv) all Insurance Proceeds;
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<PAGE> 72
(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 payments and distributions on such
Distribution Date;
(iv) if applicable, the aggregate principal balance of any Class of
Securities which are Compound Interest Securities after giving effect to any
increase in such principal balance that results from the accrual of interest
that is not yet distributable thereon;
(v) if applicable, the amount otherwise distributable to holders
of any Class of Securities that were distributed to holders of other Classes of
Securities;
(vi) if any Class of Securities has priority in the right to
receive Principal Prepayments, the amount of Principal Prepayments received by
the related Trustee in respect of the related Loan Assets;
(vii) certain performance information regarding the Loan Assets,
including delinquency and foreclosure information, specified in the related
Sale and Servicing Agreement or Pooling and Servicing Agreement;
(viii) the amount of coverage then remaining under any Credit
Enhancement; and
(ix) all other information required to be provided pursuant to the
related Indenture, Trust Agreement, Sale and Servicing Agreement or Pooling and
Servicing Agreement.
The Servicer or the applicable Trustee will also furnish annually
customary information deemed necessary for holders of such Securities to
prepare their tax returns.
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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 Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
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AMENDMENT
Each of the Sale and Servicing Agreement with respect to a Series and
the Pooling and Servicing Agreement with respect to a Series may be amended by
the Issuer, or the Seller, as applicable, the Servicer and the applicable
Trustee without the consent of the Securityholders of such Series, to cure any
error or ambiguity, to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein or to add any other
provisions with respect to matters or questions arising under such Sale and
Servicing Agreement or such Pooling and Servicing Agreement provided that such
action will not adversely affect in any material respect the interests of any
Securityholders of such Series. An amendment described above shall not be
deemed to adversely affect in any material respect the interests of the
Securityholders of a Series if either (a) an opinion of counsel satisfactory to
the applicable Trustee is obtained to such effect, or (b) the person requesting
the amendment obtains a letter from each of the rating agencies then rating the
Securities of that Series to the effect that the amendment, if made, would not
result in a downgrading or withdrawal of the rating then assigned by it to such
Securities.
To the extent specified in the Prospectus Supplement, each of the Sale
and Servicing Agreement with respect to a Series and the Pooling and Servicing
Agreement with respect to a Series may also be amended by the Issuer, or the
Seller, as applicable, the Servicer, and the applicable Trustee with the
consent of the Securityholders evidencing interests aggregating in excess of
50% of the then outstanding principal balance of the Securities of the
applicable Series for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of such Sale and Servicing
Agreement or such Pooling and Servicing Agreement or of modifying in any manner
the rights of Securityholders of that Series; provided, however, that no such
amendment may (i) reduce in any manner the amount of, or delay the timing of,
collections of payments received on the related Loan Assets or distributions
which are required to be made on any Security without the consent of the holder
of such Security, (ii) adversely affect in any material respect the interests
of the holders of any Class of Securities in any manner other than as described
in clause (i), without the consent of the holders of Securities evidencing 100%
of the then outstanding principal balance of such Class or (iii) reduce the
aforesaid percentage of Securities of any Class required to consent to any such
amendment, without the consent of the holders of Securities evidencing 100% of
the then outstanding principal balance of such Class.
CERTAIN LEGAL ASPECTS OF THE LOAN ASSETS
The following discussion contains summaries of certain legal aspects
of the Loan Assets which are general in nature. Because such legal aspects are
governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Loan Assets is situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Loan Assets.
In addition, the following discussion also contains a summary of the
Title I Program, which may be applicable to certain of the Loan Assets. With
respect to each Series for which the related Trust Property includes Contracts,
the related Prospectus Supplement will contain a discussion of certain legal
aspects of manufactured housing contracts.
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GENERAL LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other
charges that may be assessed on borrowers, require certain disclosures to
borrowers, and may require licensing of the Transferor, the Seller, the Issuer,
the Trustee, the Administrator, the Servicer and any Subservicer. In addition,
most states have other laws, public policies and general principles of equity
relating to the protection of consumers and the prevention of unfair and
deceptive practices which may apply to the origination, servicing and
collection of the Loan Assets.
The Loan Assets may also be subject to federal laws, including: (i)
the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the Loan
Assets; (ii) the Real Estate Settlement Procedures Act and Regulation X
promulgated thereunder, which require certain disclosures to the borrowers
regarding the settlement and servicing of the Mortgage Loans; (iii) the Equal
Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit
discrimination on the basis of age, race, color, sex, religion, marital status,
national origin, receipt of public assistance or the exercise of any right
under the Consumer Credit Protection Act; (iv) the Fair Credit Reporting Act,
which regulates the use and reporting of information related to the borrower's
credit experience; (v) the Federal Trade Commission Preservation of Consumers'
Claims and Defenses Rule, 16 C.F.R. Part 433, regarding the preservation of a
consumer's rights; (vi) the Fair Housing Act, 42 U.S.C. 3601 et seq., relating
to the creation and governance of the Title I Program; (vii) the Home Ownership
and Equity Protection Act; and (viii) if applied, the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended (the "Relief Act").
MORTGAGES. The Mortgage Loans will be secured by either deeds of
trust, mortgages, deeds to secure debt or chattel mortgages, depending upon the
prevailing practice in the state in which the Mortgaged Property subject to a
Mortgage Loan is located. In some states, a mortgage creates a lien upon the
real property encumbered by the mortgage. In other states, the mortgage
conveys legal title to the property to the mortgagee subject to a condition
subsequent, i.e., the payment of the indebtedness secured thereby. There are
two parties to a mortgage, the borrower, who is the owner of the property and
usually the borrower, and the mortgagee, who is the lender. Under the mortgage
instrument, the borrower delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
has three parties, the owner of the property and usually the borrower, called
the trustor (similar to a borrower), a lender called the beneficiary (similar
to a mortgagee), and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. The trustee's authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by applicable state law, the express
provisions of the deed of trust or mortgage, and, in some cases, with respect
to deeds of trust, the directions of the beneficiary. Some states use a
security deed or deed to 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
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the land, separate dwelling units and all common areas. The cooperative is
directly responsible for project management and, in most cases, payment of real
estate taxes and hazard and liability insurance. If there is a blanket mortgage
on the cooperative apartment building and/or underlying land, as is generally
the case, the cooperative, as project borrower, is also responsible for meeting
these mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a party
are generally subordinate to the interest of the holder of the blanket mortgage
in that building. If the cooperative is unable to meet the payment obligations
arising under its blanket mortgage, the mortgagee holding the blanket mortgage
could foreclose on that mortgage and terminate all subordinate proprietary
leases and occupancy agreements. In addition, the blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not fully
amortize with a significant portion of principal being due in one lump sum at
final maturity. The inability of the cooperative to refinance this mortgage and
its consequent inability to make such final payment could lead to foreclosure
by the mortgagee providing the financing. A foreclosure in either event by the
holder of the blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed the purchase by an
individual tenant-stockholder of cooperative shares or, in the case of a pool
of Mortgage Loans including Cooperative Loans, the collateral securing the
Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing such
tenant-stockholder's pro rata share of the cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a cooperative and accompanying
occupancy rights is financed through a cooperative share loan evidenced by a
promissory note and secured by a security interest in the occupancy agreement
or proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in
the security agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of cooperative shares.
FORECLOSURE
MORTGAGES. Foreclosure of a mortgage is generally accomplished by
judicial action. Generally, the action is initiated by the service of legal
pleadings upon all parties having an interest of record in the real property.
Delays in completion of the foreclosure may occasionally result from
difficulties in locating necessary parties defendant. Judicial foreclosure
proceedings are often not contested by any of the parties defendant. However,
when the mortgagee's right to foreclose is contested, the legal proceedings
necessary to resolve the issue can be time consuming. After the completion of
a judicial foreclosure, the court 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
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mortgage as made and cannot be relieved from his default if the mortgagee has
exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature the court may exercise
equitable powers to relieve a borrower of a default and deny the mortgagee
foreclosure on proof that either the borrower's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a
court of equity may relieve the borrower from an entirely technical default
where such default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non-collusive, regularly
conducted foreclosure sale may be challenged as a fraudulent conveyance,
regardless of the parties' intent, if a court determines that the sale was for
less than reasonably equivalent value and such sale occurred while the borrower
was insolvent and within one year (or within the state statute of limitations
if the trustee in bankruptcy elects to proceed under state fraudulent
conveyance law) of the filing of bankruptcy. Similarly, a suit against the
debtor on the mortgage note may take several years and, generally, is a remedy
alternative to foreclosure, the mortgagee being precluded from pursuing both at
the same time.
In some states, mortgages may also be foreclosed by advertisement
pursuant to a power of sale provided in the mortgage. Foreclosure of a
mortgage by advertisement is essentially similar to foreclosure of a deed of
trust by nonjudicial power of sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust or deed to secure debt which authorizes the trustee to sell the
property upon default by the borrower under the terms of the note, deed of
trust or deed to secure debt. In some states, prior to such sale, the trustee
must record a notice of default and send a copy to the borrower-trustor and to
any person who has recorded a request for a copy of a notice of default and
notice of sale. In addition, in some states, prior to such sale, the trustee
must provide notice to any other individual having an interest of record in the
real property, including any junior lienholders. In some states, the borrower,
or any other person having a junior encumbrance on the real estate, may, during
a reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligations, including
attorney's and trustee's fees to the extent allowed by applicable law. Certain
states may require notices of sale to be published periodically for a
prescribed period in a specified manner prior to the date of the trustee's
sale. In addition, some state laws require that a copy of the notice of sale
be posted on the property and sent to all parties having an interest in the
real property. In certain states, foreclosure under a deed of trust may also
be accomplished by judicial action in the manner provided for foreclosure of
mortgages.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is generally
a public sale. Because of the difficulty a potential buyer at the sale might
have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, a third party may be unwilling to purchase the property at a
foreclosure sale. For these and other reasons, it is common for the lender to
purchase the property from the trustee, referee or other court officer for an
amount equal to the principal amount of the indebtedness secured by the
mortgage or deed of trust, plus accrued and unpaid interest and 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
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statutory minimum purchase price which the lender may offer for the property.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume ownership of
the mortgaged property and, therefore, the burdens of ownership, including the
obligation to pay taxes, obtain casualty insurance and to make such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending
upon market conditions, the ultimate proceeds of the sale of the property may
not equal the lender's investment in the property. Any loss may be mitigated
by the receipt of any mortgage insurance proceeds.
A second mortgagee may not foreclose on the property securing a second
mortgage unless it forecloses subject to the first mortgage and any other prior
liens, in which case it must either pay the entire amount due on the first
mortgage and such other liens, prior to or at the time of the foreclosure sale
or undertake the obligation to make payments on the first mortgage and such
liens, in either event adding the amounts expended to the balance due on the
second loan, and may be subrogated to the rights of the first mortgagee. In
addition, in the event that the foreclosure of a second mortgage triggers the
enforcement of a "due-on-sale" clause, the second mortgagee may be required to
pay the full amount of the first mortgage to the first mortgagee. Accordingly,
with respect to those Mortgage Loans which are second mortgage loans, if the
lender purchases the property, the lender's title will be subject to all senior
liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage or deed of trust under which the
sale was conducted. Any remaining proceeds are generally payable to the
holders of junior mortgages or deeds of trust and other liens and claims in
order of their priority, whether or not the borrower is in default. Any
additional proceeds are generally payable to the borrower or trustor. The
payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgagee; however, a junior lienholder whose
rights in the property are terminated pursuant to foreclosure by a senior
lienholder will not share in the proceeds from the subsequent disposition of
the property. Junior lienholders may also institute legal proceedings separate
from the foreclosure proceedings of the senior lienholders.
Some states impose prohibitions or limitations on remedies available
to the mortgagee, including the right to recover the debt from the borrower.
See "--Anti-Deficiency Legislation and Other Limitations on Lenders" below.
COOPERATIVE LOANS. The cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the cooperative's Certificate of
Incorporation and Bylaws, as well as the proprietary lease or occupancy
agreement, and may be canceled by the cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owned by such
tenant-stockholder, including mechanics' liens against the cooperative
apartment building incurred by such tenant-stockholder. The proprietary lease
or occupancy agreement generally permits the cooperative to terminate such
lease or agreement in the event a borrower fails to make payments or defaults
in the performance of covenants required thereunder. Typically, the lender and
the cooperative enter into a recognition agreement which establishes the rights
and obligations of both parties in the event of a default by the
tenant-stockholder on its obligations under the proprietary lease or occupancy
agreement. A default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
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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 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.
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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
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these statutes is generally to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws, the
Relief Act and state laws affording relief to debtors, may interfere with or
affect the ability of the secured mortgage lender to realize upon collateral
and/or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a
debtor through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure
a monetary default in respect of a mortgage loan on a debtor's residence by
paying arrearages within a reasonable time period and reinstating the original
mortgage loan payment schedule even though the lender accelerated the mortgage
loan and final judgment of foreclosure had been entered in state court
(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
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instrument or deed of trust is not monetary, such as the borrower's failure to
adequately maintain the property or the borrower's execution of a second
mortgage or deed of trust affecting the property. The exercise by the court of
its equity powers will depend on the individual circumstances of each case.
Finally, some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under deeds of trust receive notices in addition to
those prescribed statutorily. For the most part, these cases have upheld the
statutory notice provisions as being reasonable or have found that the sale by
a trustee under a deed of trust or under a mortgage having a power of sale does
not involve sufficient state action to afford constitutional protection to the
borrower.
Some of the Mortgage Loans may not restrict secondary financing,
thereby permitting the borrower to use the Mortgaged Property as security for
one or more additional loans. Where the borrower encumbers the Mortgaged
Property with one or more junior liens, the senior lender is subjected to
additional risk. First, the borrower may have difficulty servicing and
repaying multiple loans. Second, acts of the senior lender which prejudice the
junior lender or impair the junior lender's security may create 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
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Supervision (the "OTS"), as successor to the Federal Home Loan Bank Board which
preempt state law restrictions on the enforcement of due-on-sale clauses.
The Garn-St. Germain Act also sets forth nine instances in which a
mortgage lender covered by the Garn-St. Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. The Garn-St. Germain Act also grants the Director of the Office
of Thrift Supervision (successor to the Federal Home Loan Bank Board) authority
to prescribe by regulation further instances in which a due-on-sale clause may
not be exercised upon the transfer of the property. To date no such
regulations have been issued. Regulations promulgated under the Garn-St.
Germain Act also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan pursuant to a "due-on-sale" clause.
If interest rates were to rise above the interest rates on the
Mortgage Loans, then any inability of the Servicer or the subservicer to
enforce due-on-sale clauses may result in the Trust Property including a
greater number of Mortgage Loans bearing below-market interest rates than would
otherwise be the case, since a transferee of the property underlying a Mortgage
Loan would have a greater incentive in such circumstances to assume the
seller's Mortgage Loan. Any inability to enforce due-on-sale clauses may affect
the average life of the Mortgage Loans and the number of Mortgage Loans that
may be outstanding until maturity.
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
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states, a secured party which takes a deed in lieu of foreclosure or acquires a
mortgaged property at a foreclosure sale or assumes active control over the
operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a secured lender (such as a Trustee or a
Trust) to homeowners. In the event that title to a property securing a Mortgage
Loan in a pool of Mortgage Loans was acquired by a Trustee or a Trust and
cleanup costs were incurred in respect of the property, the holders of the
related Securities might realize a loss if such costs were required to be paid.
In addition, the presence of certain environmental contamination, including,
but not limited to, lead-based paint, asbestos and leaking underground storage
tanks could result in the holders of the related Securities realizing a loss if
associated costs were required to be paid. The Seller, the Issuer, the
Administrator, the Underwriters, the Transferors, the Servicers, and any of
their respective affiliates (i) have not caused any environmental site
assessments or evaluations to be conducted with respect to any properties
securing the Mortgage Loans, (ii) are not required to make any such assessments
or evaluations and (iii) make no representations or warranties and assume no
liability with respect to the absence or effect of hazardous wastes or
hazardous substances on any property or any casualty resulting from the
presence or effect of hazardous wastes or hazardous substances.
In the event that title to a Mortgaged Property is acquired by a
Trustee or Issuer and cleanup costs are incurred in respect of such property,
the related Securityholders might realize a loss if such costs are required to
be paid. In addition, the presence of certain environmental contamination,
including, but not limited to, lead-based paint, asbestos and leaking
underground storage tanks could result in the Securityholders realizing a loss
if any associated remedial costs are required to be paid. The Transferor, the
Seller, the Issuer, the Servicer, any subservicer and any of their respective
affiliates (i) have not caused any environmental site assessments or
evaluations to be conducted with respect to any Mortgaged Property, (ii) are
not required to make any such assessments or evaluations and (iii) make no
representations or warranties and assume no liability with respect to the
absence or effect of hazardous wastes or hazardous substances on any property
or any casualty resulting from the presence or effect of hazardous wastes or
hazardous substances.
TRUTH IN LENDING ACT
In September 1994, the Reigle Community Development and Regulatory
Improvement Act of 1994 (the "Reigle Act") was enacted which incorporates the
Home Ownership and Equity Protection Act of 1994, and which adds certain
additional provisions to Regulation Z, the implementing regulation of the
Truth-in-Lending Act ("TILA"). These provisions impose additional disclosure
and other requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates or high up-front fees and charges ("covered
loans"). In general, mortgage loans within the purview of the Reigle Act have
annual percentage rates over 10% greater than the yield on Treasury Securities
of comparable maturity and/or fees and points which exceed the greater of 8% of
the total loan amount or $400. The provisions of the Reigle Act apply on a
mandatory basis to all mortgage loans originated on or after October 1, 1995.
These provisions can impose specific statutory liabilities upon creditors who
fail to comply with their provisions and may affect the enforceability of the
related loans. In addition, any assignee of a creditor would generally be
subject to all claims and defenses that the consumer could assert against the
creditor, including, without limitation, the right to rescind the mortgage
loan. A substantial majority of the loans originated or purchased by the
Transferor are covered by the Reigle Act.
The Reigle Act provisions impose additional disclosure requirements on
lenders originating covered loans and prohibit lenders from originating covered
loans that are underwritten solely on the basis of the
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borrower's home equity without regard to the borrower's ability to repay the
loan. The Transferor believes that only a small portion of its loans
originated in fiscal 1994 and fiscal 1995 are of the type that, unless
modified, would be prohibited by the Reigle Act. As a result of the Reigle Act
provisions, with respect to all covered loans, the Transferor applies loan
underwriting criteria that take into consideration the borrower's ability to
repay.
The Reigle Act provisions also prohibit lenders from including
prepayment fee clauses in covered loans to borrowers with debt-to-income ratios
in excess of 50% or covered loans used to refinance existing loans originated
by the same lender. The Transferor reported immaterial amounts of prepayment
fee revenues in fiscal 1993, 1994 and 1995, respectively. The Transferor will
continue to collect prepayment fees on loans originated prior to effectiveness
of the Reigle Act provisions and on non-covered loans, as well as on covered
loans in permitted circumstances following the effectiveness of the Reigle Act
provisions. The Reigle Act provisions impose other restrictions on covered
loans, including restrictions on balloon payments and negative amortization
features, which the Transferor does not believe will have a material effect on
its operations.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of home improvement first
mortgage loans originated by certain lenders after March 31, 1980. A similar
federal statute was in effect with respect to mortgage loans made during the
first three months of 1980. The Office of Thrift Supervision is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized any state to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects application of the federal law. In addition,
even where Title V is not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on mortgage loans
covered by Title V. Certain states have taken action to reimpose interest rate
limits and/or to limit discount points or other charges.
A similar federal statute, adopted in 1976, provides federal usury
preemption with respect to Title I Mortgage Loans, such as the Title I Mortgage
Loans. This statute also permits states to reimpose interest rate limits by
passing legislation at any time after June 30, 1976. To date, no state has
enacted any reported statute to reimpose interest rate limits with respect to
any loans, mortgage or advance that is insured under Title I.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's Mortgage Loan (including a
borrower who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active
duty) may not be charged interest above an annual rate of 6% during the period
of such borrower's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such interest rate limitation or
similar limitations under state law could have an effect, for an indeterminate
period of time, on the ability of the Servicer or the subservicer to collect
full amounts of interest on certain of the Mortgage Loans. Any shortfall in
interest collections resulting from the application of the Relief Act or
similar legislation, which would not be recoverable from the related Mortgage
Loans, would result in a reduction of the amounts available for distribution to
the holders of the Offered Securities, but the Offered Securities would receive
the full
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amount otherwise distributable to such holders to the extent that amounts are
available from the credit enhancement provided for the Offered Securities. See
"Risk Factors -- Limitations of Credit Enhancement". In addition, the Relief
Act imposes limitations which would impair the ability of the Servicer or
subservicer to foreclose on an affected Mortgage Loan during the borrower's
period of active duty status. Thus, in the event that such a Mortgage Loan goes
into default there may be delays and losses occasioned by the inability to
realize upon the related Mortgaged Property in a timely fashion.
THE TITLE I PROGRAM
GENERAL. Sections 1 and 2(a) of the National Housing Act of 1934, as
amended (the "Act"), authorize the creation of the Federal Housing
Administration (which is an agency within the United States Department of
Housing and Urban Development; such agency and department are referred to
together herein as the "FHA") and the Title I Program. Certain of the Mortgage
Loans or Contracts included in the Trust Property may be loans insured under
the Title I Program. FHA Regulations contain the requirements under which
approved Title I Lenders may obtain insurance against a portion of losses
incurred with respect to eligible loans that have been originated and serviced
in accordance with FHA regulations, up to the amount of such Title I Lender's
FHA Reserve, as described below, and subject to the terms and conditions
established under the Act and FHA Regulations. While FHA Regulations permit
the Secretary of HUD, subject to statutory limitations, to waive a Title I
Lender's noncompliance with FHA Regulations if enforcement would impose an
injustice on the lender (provided the Title I Lender has acted in good faith,
is in substantial compliance with FHA Regulations and has credited the borrower
for any excess charges), in general, an insurance claim against the FHA will be
denied if the Title I loan to which it relates does not strictly satisfy the
requirements of the Act and FHA Regulations.
Unlike certain other government loan insurance programs, loans under
the Title I Program (other than loans in excess of $25,000) are not subject to
prior review by the FHA. Under the Title I Program, the FHA disburses
insurance proceeds with respect to defaulted loans for which insurance claims
have been filed by a Title I Lender prior to any review of such loans. A Title
I Lender is required to repurchase a Title I loan from the FHA that is
determined to be ineligible for insurance after insurance claim payments for
such loan have been paid to such lender. Under the FHA Regulations, if the
Title I Lender's obligation to repurchase the Title I loan is unsatisfied, the
FHA is permitted to offset the unsatisfied obligation against future insurance
claim payments owed by the FHA to such lender. FHA Regulations permit the FHA
to disallow an insurance claim with respect to any loan that does not qualify
for insurance for a period of up to two years after the claim is made and to
require the Title I Lender that has submitted the insurance claim to repurchase
the loan. Pursuant to a letter ruling issued by the FHA in October 1994, the
FHA has stated that, as a policy, the FHA will strive to review all insurance
claim submissions in a timely manner and limit the period of time within which
it will request the repurchase of a loan to a period of one year after claim
submission. The letter further states, however, that the FHA may find it
necessary with respect to some claim submissions to apply the foregoing
two-year incontestability provision strictly.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or lot
(or cooperative interest therein) on which to place such home or the purchase
of both a manufactured home loan and the lot (or cooperative interest therein)
on which such home is placed. Title I Program loans may be made directly to
the owners of the property to be improved or purchased ("direct loans") or with
the assistance of a dealer or home improvement contractor that will have an
interest in the proceeds of the loan ("dealer loans").
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Subject to certain limitations described below, eligible Title I loans
are insured by the FHA for 90% of an amount equal to the sum of (i) the net
unpaid principal amount and the uncollected interest earned to the date of
default, (ii) interest on the unpaid loan obligation from the date of default
to the date of the initial submission of the insurance claim, plus 15 calendar
days (the total period not to exceed nine months) at a rate of 7% per annum,
(iii) uncollected court costs, (iv) title examination costs, (v) fees for
required inspections by the lenders or its agents, up to $75, and (vi)
origination fees up to a maximum of 5% of the loan amount. However, the
insurance coverage provided by the FHA is limited to the extent of the balance
in the Title I Lender's FHA Reserve maintained by the FHA. Accordingly if
sufficient insurance coverage is available in such FHA Reserve, then the Title
I Lender bears the risk of losses on a Title I loan for which a claim for
reimbursement is paid by the FHA of at least 10% of the unpaid principal,
uncollected interest earned to the date of default, interest from the date of
default to the date of the initial claim submission and certain expenses.
Under the Title I Program, the FHA maintains an FHA insurance coverage
reserve account (a "FHA Reserve") for each Title I Lender. The amount in each
Title I Lender's FHA Reserve is a maximum of 10% of the amounts disbursed,
advanced or expended by a Title I Lender in originating or purchasing eligible
loans registered with the FHA for Title I Insurance, with certain adjustments
permitted or required by FHA Regulations. The balance of such FHA Reserve is
the maximum amount of insurance claims the FHA is required to pay to the
related Title I Lender. Mortgage loans to be insured under the Title I Program
will be registered for insurance by the FHA, and the increase in Title I
insurance coverage to which the Title I Lender is entitled by reason of the
reporting of such loans under the Title I Lender's contract of insurance will
be included in the FHA Reserve for the originating Title I Lender following
the receipt and acknowledgment by the FHA of a transfer of note report on the
prescribed form (the "Transfer Report") pursuant to FHA Regulations.
Under the Title I Program the FHA will reduce the insurance coverage
available in a Title I Lender's FHA Reserve with the respect to loans insured
under such Title I Lender's contract of insurance by (i) the amount of FHA
Insurance claims approved for payment related to such loans, (ii) prior to
October 1, 1995, after a Title I Lender has held its Title I contract of
insurance for five years, the amount of the annual reduction (the "Annual
Reduction") equal to 10% of the amount of insurance coverage contained in the
related FHA Reserve as of that date, and (iii) the amount of reduction of the
Title I Lender's FHA Reserve by reason of the sale, assignment or transfer of
loans registered under the Title I Lender's contract of insurance. Such
insurance coverage also may be reduced for any FHA insurance claims previously
disbursed to the Title I Lender that are subsequently rejected by the FHA. On
June 5, 1995, the FHA announced the elimination of Annual Reductions, effective
as of October 1, 1995.
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
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seller's FHA Reserve may be exhausted as the result of a sale of only a portion
of its total portfolio, with the result that its remaining Title I Program
portfolio may be ineligible for Title I Program benefits until the lender
originates or otherwise acquires additional loans reported for insurance under
the Title I Program. Accordingly, the insurance coverage reserves transferred
to the purchasing Title I Lender in such case will be less than 10% of the
lesser of the purchase price or the principal balance of the portfolio of loans
purchased, which may be the case with respect to the Transferor's purchase of
certain Title I Mortgage Loans and Title I Contracts from certain Title I
lenders and the transfer of the related insurance coverage from such lenders'
FHA Reserves. Additionally, pursuant to FHA Regulations, not more than $5,000
in insurance coverage shall be transferred to or from a Title I Lender's
insurance coverage reserve account during any October 1 to September 30 fiscal
year without the approval of the Secretary of HUD. Such HUD approval is
generally viewed as automatic, provided the formal requirements for transfer
are satisfied, but HUD does have the right under FHA Regulations to withhold
approval.
Unlike most other FHA insurance programs, the obligation of the FHA to
reimburse a Title I Lender for losses in the portfolio of insured loans held by
such Title I Lender is limited to the amount in an FHA Reserve maintained on a
lender-by-lender basis and not on a loan-by-loan basis. Except when to do so
would be in HUD's best interest, the FHA does not track or "earmark" the loans
within a Title I Lender's portfolio to determine whether a reduction in such
lender's FHA Reserve as the result of an insurance claim by such lender are, in
fact, attributable to the insured loan with respect to which the claim was
made. For this reason, if a Title I Lender is holding insured loans as a
fiduciary on behalf of multiple non-affiliated beneficiaries, in order for such
a lender to cause its FHA Reserve to be reduced only by an amount to which a
particular beneficiary is entitled by reason of the insured loans beneficially
held by it, the Title I Lender must segregate or "earmark" its FHA Reserve on
its own books and records according to which beneficiary is entitled to what
portion of the insurance coverage in the Title I Lender's FHA Reserve as if the
insurance coverage were not commingled by the FHA in such FHA Reserve. If such
Title I Lender continues to submit claims with respect to loans held on behalf
of a beneficiary whose portion of insurance coverage in its FHA Reserve has
been exhausted, the FHA will continue to honor such claims until all insurance
coverage in such Title I Lender's FHA Reserve has been exhausted, even though
such FHA Reserve may, in fact, be held by the Title I Lender for the benefit of
a different beneficiary than the beneficiary of the insured loans to which the
claims relate under a separate contractual agreement. In addition, under
certain FHA administrative offset regulations, the FHA may offset an
unsatisfied obligation of a Title I Lender to repurchase loans that are
determined to be ineligible for insurance against future insurance claim
payments owed by the FHA to such lender. In the case of a given Series, if the
related Trustee were to hold loans insured under the Seller's or Issuer's FHA
Reserve on behalf of another entity, the FHA were to determine that insurance
claims were paid in respect of loans ineligible for insurance that related to
such other entity, and the Trustee, on behalf of such other entity, was unable
or otherwise failed to repurchase the ineligible loans, then the FHA could
offset the amount of the repurchase obligation against insurance proceeds
payable with respect to one or more Title I Mortgage Loans or Title I Contracts
included in the Trust Property of such Series. If the Trustee were unable to
recover the amount of such offset from the entity, the Securityholders with
respect to such Series could experience a loss as a result.
Accordingly, claims paid to the Trustee (or the Administrator, if any)
by the FHA with respect to Title I loans insured under FIC's FHA Reserve other
than the Title I Mortgage Loans and Title I Contracts may reduce the FHA
Insurance Amount. In the applicable Sale and Servicing Agreement or Pooling
and Servicing Agreement, FIC and the Trustee (or the Administrator, if any)
will agree not to submit claims to the FHA with respect to Title I loans other
than the Title I Mortgage Loans and Title I Contracts if the effect thereof
would be to reduce the FHA Insurance Amount. FIC has committed to use its FHA
contract of insurance under the Title I Program only to report
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the record ownership of loans transferred and assigned to the Trustee pursuant
to the applicable Sale and Servicing Agreement or Pooling and Servicing
Agreement and similar such agreements that may be entered into by FIC in the
future.
On the final Transfer Date, such FHA Insurance Amount will be the
maximum amount of insurance coverage in FIC's FHA Reserve that will be
available for the submission of claims on the Title I Mortgage Loans, and
thereafter, such FHA Insurance Amount will be decreased as a result of payments
by the FHA in respect of FHA Claims submitted for the Title I Mortgage Loans
and Title I Contracts after the Transfer Dates and as a result of the
repurchase or substitution of Title I Mortgage Loans and Title I Contracts by
the Transferor. Except in connection with the conveyance of any Subsequent
Mortgage Loans that are Title I Mortgage Loans and the substitution of Title I
Mortgage Loans and Title I Contracts, the FHA Insurance Amount for the Title I
Mortgage Loans and Title I Contracts will not be increased for any other Title
I loans, either previously or subsequently owned by the Seller or the Issuer
and reported for insurance in FIC's FHA Reserve.
On the final Transfer Date, the amount of FHA insurance coverage that
will have been transferred from the Transferor's FHA Reserve to FIC's FHA
Reserve may be less than the maximum amount of insurance coverage transferrable
which would otherwise equal 10% of the unpaid principal balance or the purchase
price, if less. However, if individual Title I Mortgage Loans and Title I
Contracts are repurchased from the applicable Trustee, by the Transferor, the
Servicer and/or any Subservicer, then with respect to any individual Title I
Mortgage Loan or Title I Contract the amount of FHA insurance coverage that
will be transferred from the Trustee's FHA Reserve, in all likelihood, will be
the maximum amount of insurance coverage of 10% of the unpaid principal balance
or the purchase price, if less, until such time as FIC's FHA Reserve has been
reduced to a balance which is less than such maximum amount. Accordingly, the
transfer of insurance coverage from FIC's FHA Reserve as the result of the
repurchase of Title I Mortgage Loans and Title I Contracts will cause a
disproportionately larger reduction to the FHA Insurance Amount for each
individual Title I Mortgage Loan and Title I Contract and if a significant
amount of Title I Mortgage Loans and Title I Contracts are repurchased, could
result in a substantial reduction of such FHA Insurance Amount and the relative
percentage of such FHA Insurance Amount to the principal balance of the Title I
Mortgage Loans and Title I Contracts remaining in the Trust Property.
REQUIREMENTS FOR TITLE I PROPERTY IMPROVEMENT LOANS AND CONTRACTS.
The proceeds of loans originated under the Title I Program for property
improvements may be used only for improvements that substantially protect or
improve the basic habitability or utility of an eligible property. Although
Title I loans are available for several types of properties, the Title I
Mortgage Loans will include primarily one-to four-family property improvement
loans. FHA Regulations require that the borrower have at least a one-half
interest in (i) fee simple title to the real property to be improved with the
loan proceeds ("Secured Property"), (ii) a lease on the Secured Property for a
fixed term that expires no sooner than six months after the maturity date of
the property improvement loan or (iii) a properly recorded land installment
contract for the purchase of the Secured Property. Any Title I property
improvement loan originated after August 1994 in excess of $7,500 must be
secured by a recorded lien on the improved property which is evidenced by a
mortgage or deed of trust executed by the borrower and all other owners in fee
simple. Prior to August 1994, any Title I property improvement loan in excess
of $5,000 was required to be secured by such a recorded lien.
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;
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provided that such maximum principal amount does not exceed $25,000 for a
single family property improvement loan. No single borrower is permitted to
have more than an aggregate of $25,000 in unpaid principal obligations with
respect to Title I loans without prior approval of HUD. Generally, the term of
a Title I loan that is a property improvement loan may not be less than six
months nor greater than 20 years and 32 days. A borrower may obtain multiple
Title I loans with respect to multiple properties (subject to the
aforementioned limit on loans to a single borrower), and a borrower may obtain
more than one Title I loan with respect to a single property, in each case as
long as the total outstanding balance of all Title I loans on the same property
does not exceed the maximum loan amount for the type of Title I loan thereon
having the highest permissible loan amount. If a property improvement loan (or
combination of loans on a single property) exceeds $15,000, and either (i) the
property is not owner occupied or (ii) the structure on the property was
completed within six months prior to the application for the loan, the borrower
is required to have equity in the property at least equal to the loan amount.
In all other cases, there is no requirement that the owner contribute equity to
the property other than fees and costs that may not be added to the balance of
the loan as described below.
Fees and charges that may be added to the balance of property
improvement loans include (i) architectural and engineering fees, (ii) building
permit costs, (iii) credit report costs, (vi) fees for required appraisals (if
applicable), (iv) title examination costs and (v) fees for required inspections
by the lender or its agent, up to $75. The Title I Lender is entitled to
recover the following fees and charges in connection with a property
improvement loan from the borrower as part of the borrower's initial payment:
(i) an origination fee not to exceed 1% of the loan amount, (ii) discount
points, however, after July 5, 1995, only to the extent a lender can
demonstrate a clear relationship between the charging of discount points and
some tangible benefit to the borrower such as a compensating decrease in the
interest rate being charged, (iii) recording fees, recording taxes, filing fees
and documentary stamp taxes, (iv) title insurance costs, (v) current year tax
and insurance escrow payments, (vi) fees necessary to establish the validity of
the lien, (vii) appraisal fees that are not eligible to be financed, (viii)
survey costs, (ix) handling charges for refinancing or modification of an
existing loan, up to $100, (x) fees for approving assumption or preparing
assumption agreements, not to exceed 5%, (xi) certain fees of closing agents
and (xii) such other items as may be specified by the FHA. FHA Regulations
prohibit the advancement of such fees and charges to the borrower by any party
to the transaction.
FHA Regulations distinguish between "direct loans" and "dealer loans."
A loan is a "dealer loan" if an approved dealer having a direct or indirect
financial interest in the transaction assists the borrower in obtaining the
loan. A loan made by the lender to the borrower without the assistance of any
party with a financial interest in the loan transaction (other than the lender)
is a "direct loan."
With respect to dealer loans, the dealer-contractor typically enters
into a consumer credit contract or note with the borrower and, after completion
of the financed improvements, assigns the contract or note to the Title I
Lender. The dealer-contractor presents the loan application to the Title I
Lender, receives the check or money order representing the loan proceeds and
may accompany the borrower to the institution for the purpose of receiving
payment. As a condition to the disbursement of the proceeds of a dealer loan,
the Title I Lender is required to obtain a completion certificate signed by the
borrower and the dealer certifying that the improvements have been completed in
accordance with the contract and that the borrower has received no inducement
from the dealer to enter into the transaction other than discount points. The
Title I Lender may enter into an agreement under which the lender has full or
partial recourse against the dealer for a period of three years in the event
the Title I Lender sustains losses with respect to loans originated by such
dealer and such loans do not satisfy FHA Regulations. FHA Regulations require
that each dealer meet certain net worth and experience requirements and be
approved by the FHA on an
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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.
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
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a Manufactured Home may not be less than six months nor greater than 20 years
and 32 days, except that the maximum term of a manufactured home lot loan is
limited to 15 years and 32 days and the maximum term of a multimodule
manufactured home and lot in combination is limited to 25 years and 32 days.
Borrower eligibility for a Title I Contract for a Manufactured Home
requires that the borrower become the owner of the property to be financed with
such loan and occupy the manufactured home as the borrower's principal
residence, except for a manufactured home lot loan which allows six months from
the date of the loan to occupy the home as the borrower's principal residence.
If a manufactured home is classified as realty, then ownership of the home must
be in fee simple, and also, the ownership of the manufactured home lot must be
in fee simple, except for a lot which consists of a share in a cooperative
association that owns and operates a manufactured home park. The borrower's
minimum cash down payment requirement to obtain financing through a Title I
Contract for a Manufactured Home is as follows: (i) at least 5% of the first
$5,000 and 10% of the balance of the purchase price of a new manufactured home
and at least 10% of the purchase price of an existing manufactured home for a
manufactured home purchase loan, or in lieu of a full or partial cash down
payment, the trade-in of the borrower's equity in an existing manufactured
home; (ii) at least 10% of the purchase price and development costs of a lot
for a manufactured home lot loan; and (iii) at least 5% of the first $5,000 and
10% of the balance of the purchase price of the manufactured home and lot for a
combination loan.
Any manufactured home financed by a Title I Contract must be certified
by the manufacturer to have been constructed in compliance with the National
Manufactured Housing Construction and Safety Standards Act of 1974 (42 U.S.C.
Sections 5401-5426), so as to conform to all applicable Federal construction
and safety standards, and with respect to the purchase of a new manufactured
home, the manufacturer must furnish the borrower with a one year written
warranty on a HUD approved form which obligates the manufacturer to correct any
nonconformity with all applicable Federal construction and safety standards or
any defects in materials or workmanship which become evident within one year
after the date of delivery. The regulations under the Title I Program set forth
certain additional requirements relating to the construction, transportation
and installation of any manufactured home and standards for the manufactured
homesite financed by any Title I Contract. The proceeds from a Title I Contract
for a Manufactured Home may be used as follows: the purchase or refinancing of
a manufactured home, a suitably developed lot for a manufactured home already
owned by the borrower or a manufactured home and suitably developed lot for the
home in combination; or the refinancing of an existing manufactured home
already owned by the borrower in connection with the purchase of a manufactured
home lot or an existing lot already owned by the borrower in connection with
the purchase of a manufactured home. In addition, the proceeds for a Title I
Contract for a Manufactured Home which is a manufactured home purchase loan may
be used for the purchase, construction or installation of a garage, carport,
patio or other comparable appurtenance to the manufactured home, and the
proceeds for a Title I Contract for a Manufactured Home which is a combination
loan may be used for the purchase, construction or installation of a
foundation, garage, carport, patio or other comparable appurtenance to the
manufactured home. The proceeds from a Title I Contract for a Manufactured
Home cannot be used for the purchase of furniture or the financing of any items
and activities which are set forth on the list published by the Secretary of
HUD as amended from time to time.
Any Title I Contract for a Manufactured Home must be secured by a
recorded lien on the manufactured home (or lot or home and lot, as
appropriate), its furnishings, equipment, accessories and appurtenance, which
lien must be a first lien, superior to any other lien on the property which is
evidenced by a properly recorded financing statement, a properly recorded
security instrument executed by the borrower and any other owner of the
property or other acceptable instrument. With respect to any Title I
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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 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.
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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 it's entire interest in the note (or a judgment in lieu of the
note), in any securities held and in any claims filed in any legal proceedings.
If, at the time the note is assigned to the United States, the Secretary of HUD
has reason to believe that the note is not valid or enforceable against the
borrower, the FHA may deny the claim and reassign the note to the Title I
Lender. If either such defect is discovered after the FHA has paid a claim,
the FHA may require the Title I Lender to repurchase the paid claim and to
accept an assignment of the loan note. If the Title I Lender subsequently
obtains a valid and enforceable judgment against the borrower, it may resubmit
a new insurance claim with an assignment of the judgment. The FHA may contest
any insurance claim previously paid by it and make a demand for repurchase of
the loan with respect to which the claim was paid at any time up to two years
from the date the claim was certified for payment and may do so thereafter in
the event of fraud or misrepresentation on the part of the Title I Lender.
A claim for reimbursement of loss with respect to a loan eligible for
insurance under the Title I Program is required to be made on an FHA-approved
form executed by a duly qualified officer of the Title I Lender and must be
accompanied by copies of certain relevant documents and documentation specified
in the FHA Regulations to support the claim. The Title I Lender is required,
among other things, to document its efforts to effect recourse against any
dealer in accordance with any recourse agreement with such dealer. If the loan
is subject to an unsatisfied dealer recourse agreement claim, the Title I
Lender is also required to assign its rights under such recourse agreement.
The FHA has the right to deny any claim
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for insurance in whole or in part based upon a violation of the FHA Regulations
unless a waiver of compliance is granted. The Title I Lender is permitted to
appeal any such claim denial and resubmit the claim within six months of the
date of the claim denial, subject to a reprocessing fee. The applicable Sale
and Servicing Agreement or Pooling and Servicing Agreement provides that the
Trustee (or the Administrator) shall submit an FHA Claim with respect to any
Title I Mortgage Loan or Title I Contract that goes into default if the default
cannot be cured.
If, as a result of the delay in the transfer of the FHA Insurance
described above, FHA Insurance is not available with respect to any defaulted
Title I Mortgage Loan or Title I Contract at the time it goes into default,
then the amount required to make interest payments to the Securityholders with
respect to the principal amount thereof, until such FHA Insurance becomes
available and a claim for insurance can be made, if at all, will be paid from
other amounts, if any, available in the Distribution Account.
NO RIGHTS OF SECURITYHOLDERS AGAINST FHA. Because the Trust and the
Securityholders will not hold an FHA contract of insurance, the FHA will not
recognize the Trust or the Securityholders as the owners of the Title I
Mortgage Loans, Title I Contracts or any portion thereof, entitled to submit
FHA Claims to the FHA. Accordingly, the Trust and the Securityholders will
have no direct right to receive insurance payments from the FHA. In the event
the Trustee (or the Administrator, if any) submits an FHA Claim to the FHA and
the FHA approves payment of such FHA Claim, the related FHA Insurance Proceeds
will be payable only to the Trustee or to the Administrator, if any, as agent
and attorney-in- fact for the Trustee. The Securityholders' rights relating to
the receipt of payment from and the administration, processing and submissions
of FHA Claims by the Trustee or the Administrator, if any, are limited and
governed by the related Sale and Servicing Agreement or Pooling and Servicing
Agreement and FHA Claims Administration Agreement and these functions are
obligations of the Trustee and the Administrator, if any, not the FHA.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the Notes
and the Certificates of any Series, to the extent it relates to matters of law
or legal conclusions with respect thereto, represents the opinion of tax
counsel to each Trust with respect to the related Series on the material
matters associated with such consequences, subject to the qualifications set
forth herein. "Tax Counsel" with respect to each Issuer will be Andrews & Kurth
L.L.P. The summary does not purport to deal with federal income tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. For example, it does not discuss the tax treatment
of Noteholders or Certificateholders that are insurance companies, regulated
investment companies or dealers in securities. Moreover, there are no cases or
Internal Revenue Service ("IRS") rulings on similar transactions involving both
debt and equity interests issued by a trust with terms similar to those of the
Notes and the Certificates. As a result, the IRS may disagree with all or a
part of the discussion below. Prospective investors are urged to consult their
own tax advisors in determining the federal, state, local, foreign and any
other tax consequences to them of the purchase, ownership and disposition of
the Notes and the Certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. Each Issuer will be
provided with an opinion of Tax Counsel regarding certain federal income tax
matters discussed below. An opinion of
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Tax Counsel, however, is not binding on the IRS or the courts. No ruling on
any of the issues discussed below will be sought from the IRS. For purposes of
the following summary, references to the Issuer shall be deemed to refer to
either FIC or the related Trust for the applicable Series, and references to
the Trust, the Notes, the Certificates and related terms, parties and documents
shall be deemed to refer, unless otherwise specified herein, to each Trust, if
any, and the Notes, Certificates and related terms, parties and documents
applicable to the related Series. The federal income tax consequences to
Certificateholders will vary depending on whether an election is made to treat
the Trust as a partnership under the Code or whether the Trust will be treated
as a grantor trust. The Prospectus Supplement for each Series of Securities
will specify whether a partnership election will be made or the Trust will be
treated as a grantor trust.
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
The following general discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of the Notes and the
Certificates of a Trust for which a partnership election will be made, to the
extent it relates to matters of law or legal conclusions with respect thereto,
represents the opinion of Tax Counsel to each Trust with respect to the related
Series on the material matters associated with such consequences, subject to
the qualifications set forth herein. In addition, Tax Counsel has prepared or
reviewed the statements in the Prospectus under the heading "Trusts for Which 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.
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OID, INDEXED SECURITIES, ETC. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities, Interest Only Securities or Principal Only Securities.
Moreover, the discussion assumes that the interest formula for the Notes meets
the requirements for "qualified stated interest" under Treasury regulations
(the "OID regulations") relating to original issue discount ("OID"), and that
any OID on the Notes (i.e., any excess of the principal amount of the Notes
over their issue price) does not exceed a de minimis amount (i.e., 1/4% of
their principal amount multiplied by the number of full years included in their
term), all within the meaning of the OID regulations. If these conditions are
not satisfied with respect to any given Series of Notes, additional tax
considerations with respect to such Notes will be disclosed in the applicable
Prospectus Supplement.
INTEREST INCOME ON THE NOTES. Based on the above assumptions, except
as discussed in the following paragraph, the Notes will not be considered
issued with OID. The stated interest thereon will be taxable to a Noteholder
as ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of
a Note issued with a de minimis amount of OID must include such OID in income,
on a pro rata basis, as principal payments are made on the Note. A purchaser
who buys a Note for more or less than its principal amount will generally be
subject, respectively, to the premium amortization or market discount rules of
the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain cash
method holders, including regulated investment companies, as set forth in
Section 1281 of the Code) generally would be required to report interest income
as interest accrues on 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
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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 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
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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 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.
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All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated
business taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or
in part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Receivable, the
Trust might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Loan Assets were not
issued with OID, and, therefore, the Trust should not have OID income.
However, the purchase price paid by the Trust for the Loan Assets may be
greater or less than the remaining principal balance of the Loan Assets at the
time of purchase. If so, the Loan Assets will have been acquired at a premium
or discount, as the case may be. (As indicated above, the Trust will make this
calculation on an aggregate basis, but might be required to recompute it on an
asset-by-asset basis.)
If the Trust acquires the Loan Assets at a market discount or premium,
the Trust will elect to include any such discount in income currently as it
accrues over the life of the Loan Assets or to offset any such premium against
interest income on the Loan Assets. As indicated above, a portion of such
market discount income or premium deduction may be allocated to
Certificateholders.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the Trust will be considered to
distribute its assets to the partners, who would then be treated as
recontributing those assets to the Trust, as a new partnership. The Trust will
not comply with certain technical requirements that might apply when such a
constructive termination occurs. As a result, the Trust may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Trust might not be able to
comply due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates
sold. A Certificateholder's tax basis in a Certificate will generally equal
the holder's cost increased by the holder's share of Trust income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the
amount realized on a sale of a Certificate would include the holder's share of
the Notes and other liabilities of the Trust. A holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Loan Assets would
generally be treated as ordinary income to the holder and would
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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,
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bought or sold on behalf of such person throughout the year. In addition,
brokers and financial institutions that hold Certificates through a nominee are
required to furnish directly to the Trust information as to themselves and
their ownership of Certificates. A clearing agency registered under Section
17A of the Exchange Act is not required to furnish any such information
statement to the Trust. The information referred to above for any calendar
year must be furnished to the Trust on or before the following January 31.
Nominees, brokers and financial institutions that fail to provide the Trust
with the information described above may be subject to penalties.
The Seller will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may
be precluded from separately litigating a proposed adjustment to the items of
the Trust. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the income
and losses of the Trust.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear
whether the Trust would be considered to be engaged in a trade or business in
the United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is
not expected that the Trust would be engaged in a trade or business in the
United States for such purposes, the Trust will withhold as if it were so
engaged in order to protect the Trust from possible adverse consequences of a
failure to withhold. The Trust expects to withhold on the portion of its
taxable income that is allocable to foreign Certificateholders pursuant to
Section 1446 of the Code, as if such income were effectively connected to a
U.S. trade or business, at a rate of 35% for foreign holders that are taxable
as corporations and 39.6% for all other foreign holders. Subsequent adoption
of Treasury regulations or the issuance of other administrative pronouncements
may require the Trust to change its withholding procedures. In determining a
holder's withholding status, the Trust may rely on IRS Form W-8, IRS Form W-9
or the holder's certification of nonforeign status signed under penalties of
perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust's income. Each foreign holder
must obtain a taxpayer identification number from the IRS and submit that
number to the Trust on Form W-8 in order to assure appropriate crediting of the
taxes withheld. A foreign holder 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.
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BACKUP WITHHOLDING. Distributions made on the Certificates and
proceeds from the sale of the Certificates will be subject to a "backup"
withholding tax of 31% if, in general, the Certificateholder fails to comply
with certain identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code.
TRUSTS TREATED AS GRANTOR TRUSTS
TAX CHARACTERIZATION OF THE TRUST AS A GRANTOR TRUST
The following general discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of the Notes and the
Certificates of a Trust for which a partnership election will not be made, to
the extent it relates to matters of law or legal conclusions with respect
thereto, represents the opinion of Tax Counsel to each Trust with respect to
the related Series on the material matters associated with such consequences,
subject to the qualifications set forth herein. In addition, Tax Counsel has
prepared or reviewed the statements in the Prospectus under the heading "Trusts
Treated as Grantor Trusts", and is of the opinion that such statements are
correct in all material respects. Such statements are intended as an
explanatory discussion of the possible effects of the classification of any
Trust as a grantor trust for federal income tax purposes on investors generally
and of related tax matters affecting investors generally, but do not purport to
furnish information in the level of detail or with the attention to an
investor's specific tax circumstances that would be provided by an investor's
own tax advisor. Accordingly, each investor is advised to consult its own tax
advisors with regard to the tax consequences to it of investing in Notes or
Certificates.
If a partnership election is not made, Tax Counsel will deliver its
opinion that the Trust will not be classified as an association taxable as a
corporation and that such Trust will be classified as a grantor trust under
subpart E, Part I of subchapter J of Chapter 1 of Subtitle A of the Code. In
this case, owners of Certificates (referred to herein as "Grantor Trust
Certificateholders") will be treated for federal income tax purposes as owners
of a portion of the Trust's assets as described below. The Certificates issued
by a Trust that is treated as a grantor trust are referred to herein as
"Grantor Trust Certificates".
CHARACTERIZATION. Each Grantor Trust Certificateholder will be
treated as the owner of a pro rata undivided interest in the interest and
principal portions of the Trust represented by the Grantor Trust Certificates
and will be considered the equitable owner of a pro rata undivided interest in
each of the Loan Assets in the Trust. Any amounts received by a Grantor Trust
Certificateholder in lieu of amounts due with respect to any Loan Asset because
of a default or delinquency in payment will be treated for federal income tax
purposes as having the same character as the payments they replace.
Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire
income from the Loan Assets in the Trust represented by Grantor Trust
Certificates, including interest, 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
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share of income and deductions as and when collected by or paid to the
Servicer. A Grantor Trust Certificateholder using an accrual method of
accounting must take into account its pro rata share of income and deductions
as they become due or are paid to the Servicer, whichever is earlier. If the
servicing fees paid to the Servicer are deemed to exceed reasonable servicing
compensation, the amount of such excess could be considered as an ownership
interest retained by the Servicer (or any person to whom the Servicer assigned
for value all or a portion of the servicing fees) in a portion of the interest
payments on the Loan Assets. The Loan Assets would then be subject to the
"coupon stripping" rules of the Code discussed below.
PREMIUM. The price paid for a Grantor Trust Certificate by a holder
will be allocated to such holder's undivided interest in each Loan Asset based
on each Loan Asset's relative fair market value, so that such holder's
undivided interest in each Loan Asset will have its own tax basis. A Grantor
Trust Certificateholder that acquires an interest in Loan Assets at a premium
may elect to amortize such premium under a constant interest method.
Amortizable bond premium will be treated as an offset to interest income on
such Grantor Trust Certificate. The basis for such Grantor Trust Certificate
will be reduced to the extent that amortizable premium is applied to offset
interest payments. It is not clear whether a reasonable prepayment assumption
should be used in computing amortization of premium allowable under Section
171. A Grantor Trust Certificateholder that makes this election for a Grantor
Trust Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Grantor Trust Certificateholder acquires
during the year of the election or thereafter.
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a Grantor Trust Certificate acquired at a
premium should recognize a loss if a Loan Asset prepays in full, equal to the
difference between the portion of the prepaid principal amount of such Loan
Asset that is allocable to the Grantor Trust Certificate and the portion of the
adjusted basis of the Grantor Trust Certificate that is allocable to such Loan
Asset. If a reasonable prepayment assumption is used to amortize such premium,
it appears that such a loss would be available, if at all, only if prepayments
have occurred at a rate faster than the reasonable assumed prepayment rate. It
is not clear whether any other adjustments would be required to reflect
differences between an assumed prepayment rate and the actual rate of
prepayments.
STRIPPED NOTES AND STRIPPED COUPONS
Although the tax treatment of stripped bonds is not entirely clear,
based on recent guidance by the IRS, each purchaser of a Grantor Trust
Certificate will be treated as the purchaser of a stripped bond which generally
should be treated as a single debt instrument issued on the day it is purchased
for purposes of calculating any original issue discount. Generally, under
applicable Treasury regulations (the "Section 1286 Treasury Regulations"), if
the discount on a stripped bond is larger than a de minimis amount (as
calculated for purposes of the OID rules of the Code) such stripped bond will
be considered to have been issued with OID. See "--Original Issue Discount"
below. Based on the preamble to the Section 1286 Treasury Regulations, Tax
Counsel is of the opinion that, although the matter is not entirely clear, the
interest income on the Certificates at the sum of the Pass Through Rate and the
portion of the Servicing Fee Rate that does not constitute excess servicing
will be treated as "qualified stated interest" within the meaning of the
Section 1286 Treasury Regulations and such income will be so treated in the
Trustee's tax information reporting.
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Original Issue Discount. The IRS has stated in published rulings
that, in circumstances similar to those described herein, the special rules of
the Code relating to "original issue discount" (currently Sections 1271 through
1273 and 1275) will be applicable to a Grantor Trust Certificateholder's
interest in those Loan Assets meeting the conditions necessary for these
sections to apply. Generally, a Grantor Trust Certificateholder that acquires
an undivided interest in a Loan Asset issued or acquired with OID must include
in gross income the sum of the "daily portions," as defined below, of the OID
on such Loan Asset for each day on which it owns a Certificate, including the
date of purchase but excluding the date of disposition. In the case of an
original Grantor Trust Certificateholder, the daily portions of OID with
respect to a Loan Asset generally would be determined as follows. A
calculation will be made of the portion of OID that accrues on the Loan Asset
during each successive monthly accrual period (or shorter period in respect of
the date of original issue or the final Distribution Date). This will be done,
in the case of each full monthly accrual period, by adding (i) the present
value of all remaining payments to be received on the Loan Asset under the
prepayment assumption used in respect of the Loan Assets and (ii) any payments
received during such accrual period, and subtracting from that total the
"adjusted issue price" of the Loan Asset at the beginning of such accrual
period. No representation is made that the Loan Assets will prepay at any
prepayment assumption. The "adjusted issue price" of a Loan Asset at the
beginning of the first accrual period is its issue price (as determined for
purposes of the OID rules of the Code) and the "adjusted issue price" of a Loan
Asset at the beginning of a subsequent accrual period is the "adjusted issue
price" at the beginning of the immediately preceding accrual period plus the
amount of OID allocable to that accrual period and reduced by the amount of any
payment (other than "qualified stated interest") made at the end of or during
that accrual period. The OID accruing during such accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the period. With respect to an initial accrual period
shorter than a full monthly accrual period, the daily portions of OID must be
determined according to a reasonable method, provided that such method is
consistent with the method used to determine the yield to maturity of the Loan
Assets.
With respect to the Loan Assets, the method of calculating OID as
described above will cause the accrual of OID to either increase or decrease
(but never below zero) in any given accrual period to reflect the fact that
prepayments are occurring at a faster or slower rate than the prepayment
assumption used in respect of the Loan Assets. Subsequent purchasers that
purchase Loan Assets at more than a de minimis discount should consult their
tax advisors with respect to the proper method to accrue such OID.
MARKET DISCOUNT. A Grantor Trust Certificateholder that acquires an
undivided interest in Loan Assets may be subject to the market discount rules
of Sections 1276 through 1278 to the extent an undivided interest in a Loan
Asset is considered to have been purchased at a "market discount." Generally,
the amount of market discount is equal to the excess of the portion of the
principal amount of such Loan Asset allocable to such holder's undivided
interest over such holder's tax basis in such interest. Market discount with
respect to a Grantor Trust Certificate will be considered to be zero if the
amount allocable to the Grantor Trust Certificate is less than 0.25% of the
Grantor Trust Certificate's stated redemption price at maturity multiplied by
the weighted average maturity remaining after the date of purchase. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
shall be treated as ordinary income to the extent that it does not exceed the
accrued market discount at the time of such payment. The amount of accrued
market
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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 its interest deductions for the
taxable year attributable to any indebtedness incurred or continued to purchase
or carry such Grantor Trust Certificate purchased with market discount. For
these purposes, the de minimis rule referred above applies. Any such deferred
interest expense would not exceed the market discount that accrues during such
taxable year and is, in general, allowed as a deduction not later than the year
in which such market discount is includible in income. If such holder elects
to include market discount in income currently as it accrues on all market
discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
PREMIUM. To the extent a Grantor Trust Certificateholder is
considered to have purchased an undivided interest in a Loan Asset for an
amount that is greater than its stated redemption price at maturity of such
Loan Asset, such Grantor Trust Certificateholder will be considered to have
purchased the Loan Asset with "amortizable bond premium" equal in amount to
such excess. A Grantor Trust Certificateholder (who does not hold the
Certificate for sale to customers or in inventory) may elect under Section 171
of the Code to amortize such premium. Under the Code, premium is allocated
among the interest payments on the Loan Assets to which it relates and is
considered as an offset against (and thus a reduction of) such interest
payments. With certain exceptions, such an election would apply to all debt
instruments held or subsequently acquired by the electing holder. Absent such
an election, the premium will be deductible as an ordinary loss only upon
disposition of the Certificate or pro rata as principal is paid on the Loan
Assets.
ELECTION TO TREAT ALL INTEREST AS OID. The OID regulations permit a
Grantor Trust Certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method. If such an election were to be
made with respect to a Grantor Trust Certificate with market discount, the
Certificateholder would
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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, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof,
an estate, the income of which is subject to United States federal income
taxation regardless of its source or a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States fiduciaries have authority to control all
substantial decisions of the trust.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a Grantor Trust Certificateholder at any
time during such year, such information as may be deemed necessary or desirable
to assist Grantor Trust Certificateholders in preparing their federal income
tax returns, or to enable holders to make such information available to
beneficial owners or financial intermediaries that hold Grantor Trust
Certificates as nominees on behalf of beneficial owners. If a holder,
beneficial owner, financial intermediary or other recipient of a payment on
behalf of a beneficial owner fails to supply a certified taxpayer
identification number or if the Secretary of the Treasury determines that such
person has not
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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.
NOTES ISSUED BY FIC
Notes issued by FIC, as Issuer, will be subject to the same rules of
taxation as Notes issued by a Trust for which a partnership election is made,
as described above under the heading "Trusts for Which a Partnership Election
Is Made - Tax Consequences to Holders of the Notes."
THE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A SECURITYHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS OF THE SECURITIES SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE SECURITIES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans (each a "Benefit Plan"), from
engaging in certain transactions involving "plan assets" with persons that are
"parties in interest" under ERISA or "disqualified persons" under the Code with
respect to such Benefit Plan. ERISA also imposes certain duties on persons who
are fiduciaries of Benefit Plans subject to ERISA and prohibits certain
transactions between a Benefit Plan and parties in interest with respect to
such Benefit Plans. Under ERISA, any person who exercises any authority or
control with respect to the management or disposition of the assets of a
Benefit Plan is considered to be a fiduciary of such Benefit Plan (subject to
certain exceptions not here relevant). A violation of these "prohibited
transaction" rules may result in an excise tax or other penalties and
liabilities under ERISA and the Code for such persons.
Certain transactions involving an Issuer might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit Plan
that purchased Notes or Certificates if assets of the Issuer were deemed to be
assets of the Benefit Plan. Under a regulation issued by the United States
Department of Labor (the "Plan Assets Regulation"), the assets of an Issuer
would be treated as plan assets of a Benefit Plan for the purposes of ERISA and
the Code only if the Benefit Plan acquired an "equity interest" in the Issuer
and none of the exceptions contained in the Plan Assets Regulation was
applicable. An equity interest is defined under the Plan Assets Regulation as
an interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. The likely
treatment in this context of Notes and Certificates of a given Series will be
discussed in the related Prospectus Supplement.
Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33)
of ERISA) are not subject to ERISA requirements. Due to the complexities of
the "prohibited transaction" rules and the penalties imposed upon persons
involved in prohibited transactions, it is important that the fiduciary of any
Benefit Plan considering the purchase of Securities consult with its tax and/or
legal advisors regarding whether the assets of the related Issuer would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
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LEGAL INVESTMENT MATTERS
To the extent specified in the related Prospectus Supplement, the
Securities of a Series will not constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") because a
substantial number of the Mortgage Loans are secured by liens on real estate
that are not first liens, as required by SMMEA. Accordingly, many institutions
with legal authority to invest in "mortgage related securities" may not be
legally authorized to invest in the Offered Securities.
Institutions whose investment activities are subject to legal
investment laws or regulations or review by certain regulatory authorities may
be subject to restrictions on investment in certain Classes of the Securities.
Any financial institution which is subject to the jurisdiction of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation ("FDIC"), the Office of
Thrift Supervision ("OTS"), the National Credit Union Administration ("NCUA"),
or other federal or state agencies with similar authority should review any
applicable rules, guidelines and regulations prior to purchasing the
Securities. The Federal Financial Institutions Examination Council, for
example, has issued a Supervisory Policy Statement on Securities Activities
effective February 10, 1992 (the "Policy Statement"). The Policy Statement has
been adopted by the Comptroller of the Currency, the Federal Reserve Board, the
FDIC, the OTS, and the NCUA (with certain modifications), with respect to the
depository institutions that they regulate. The Policy Statement prohibits
depository institutions from investing in certain "high-risk mortgage
securities" (including securities such as certain Classes of Securities),
except under limited circumstances, and sets forth certain investment practices
deemed to be unsuitable for regulated institutions. The NCUA issued final
regulations effective December 2, 1991 that restrict and in some instances
prohibit the investment by federal credit unions in certain types of mortgage
related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying", or in securities which are issued in book-entry
form.
Investors should consult their own legal advisors in determining
whether and to what extent the Securities constitute legal investments for such
investors.
PLAN OF DISTRIBUTION
Securities are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The related
Prospectus Supplement will set forth the terms of offering of a Series of
Securities, including the public offering or purchase price of each Class of
Securities of such Series being offered thereby or the method by which such
price will be determined and the net proceeds to the Issuer from the sale of
each such Class of Securities. Such Securities will be acquired by the
Underwriters for their own account and may be resold from time to time in one
or more transactions including negotiated transactions, at fixed public
offering prices or at varying prices to be determined at the time of sale or at
the time of commitment therefor. The managing Underwriter or Underwriters with
respect to the offer and sale of a particular Series of Securities will be set
forth on the cover of the Prospectus Supplement relating
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to such Series and the members of the underwriting syndicate, if any, will be
named in such Prospectus Supplement.
In connection with the sale of the Securities, Underwriters may
receive compensation from the related Issuer or from purchasers of the
Securities in the form of discounts, concessions or commissions. Underwriters
and dealers participating in the distribution of the Securities may be deemed
to be Underwriters in connection with such Securities, and any discounts or
commissions received by them from the related Issuer or the Seller and any
profit on the resale of Securities by them may be deemed to be underwriting
discounts and commissions under the Securities Act. The Prospectus Supplement
will describe any such compensation paid by the related Issuer.
It is anticipated that the underwriting agreement pertaining to the
sale of any Series of Securities will provide that the obligations of the
Underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Securities if any are
purchased and that the related Issuer or the Seller will indemnify the
underwriters against certain civil liabilities, including liabilities under the
Securities Act.
USE OF PROCEEDS
To the extent specified in an applicable Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Securities will be applied to the simultaneous purchase of the Loan
Assets related to such Series or to reimburse the amounts previously used to
effect such a purchase, the costs of carrying such Loan Assets until sale of
the Securities and other expenses connected with pooling the Loan Assets and
issuing the Securities.
LEGAL OPINIONS
Certain legal matters relating to the Securities of any Series will be
passed upon for the related Issuer, the Seller and the Servicer by Andrews &
Kurth L.L.P., Dallas, Texas. In addition, certain United States federal and
Texas state tax and other matters will be passed upon for the related Issuer by
Andrews & Kurth L.L.P., Dallas, Texas.
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INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
"Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
"Administration Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
"Administration Fee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
"Administrator" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 28
"Applicable Accounting Standards" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
"Assets" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, 4
"Benefit Plan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
"BIF" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
"Call Risk" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
"Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Closing Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 55
"Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
"Cooperatives" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 40
"Credit Enhancement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 7, 16, 17, 44
"Cut-off Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
"Definitive Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32, 36
"Depository" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
"Distribution Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 29
"DTC Participants" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 33
"ERISA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Events of Default" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 61
"Excess Spread" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
"Extension Risk" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
"FDIC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59, 97
"FHA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
"FHA Claims Administration Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
"FHA Claims Administrator" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
"FHA Reserve" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
"Garn-St. Germain Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
"Guaranty Policy" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
"Indenture" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 2
"Indenture Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Indirect DTC Participants" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
"Interest Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"IRS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
"Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Loan Asset Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
"Loan Assets" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
"Master Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Mortgage Notes" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
"Mortgaged Properties" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
"Mortgages" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
"NCUA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
"Notes" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"OID" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
"OID regulations" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
"OTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71, 97
"Owner Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Pass Through Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Permitted Investments" . . . . . . . . . . . . . . . . . . . . . . . . . 43
"Plan Assets Regulation" . . . . . . . . . . . . . . . . . . . . . . . . 96
"Policy Statement" . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
"Pre-Funding Account" . . . . . . . . . . . . . . . . . . . . . . . . . . 43
"Pre-Funding Arrangement" . . . . . . . . . . . . . . . . . . . . . . . 6, 43
"Rating Agency" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Reigle Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
"Relief Act" . . . . . . . . . . . . . . . . . . . . . . . . . . .19, 63, 73
"Reserve Fund" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"SAIF" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
"Sale and Servicing Agreement" . . . . . . . . . . . . . . . . . . . . . ii
"Schedule of Loan Assets" . . . . . . . . . . . . . . . . . . . . . . . . 56
"Secured Property" . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
"Seller" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 1
"Senior Securities" . . . . . . . . . . . . . . . . . . . . . . . . . 31, 45
"Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, ii, 1
"SMMEA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 97
"Subordinated Securities" . . . . . . . . . . . . . . . . . . . . . . 31, 44
"Subsequent Loan Assets" . . . . . . . . . . . . . . . . . . . . . . . 6, 43
"Subsequent Transfer Agreement" . . . . . . . . . . . . . . . . . . . . . 57
"Subservicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
"TILA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
"Title V" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
"Transfer and Servicing Agreements" . . . . . . . . . . . . . . . . . . . 55
"Transfer Report" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
"Transferor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
"Trust" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 1
"Trust Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 1
"Trust Property" . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, 4
"Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 38
"Window Period Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . 70
</TABLE>
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reports to Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Home Loan Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Transferor and Servicer . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepayment and Yield Considerations
Description of the Offered Securities . . . . . . . . . . . . . . . . . . . . .
Description of Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . .
Description of the Transfer and Servicing Agreements . . . . . . . . . . . . .
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROSPECTUS
Prospectus Supplement . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Incorporation of Certain Documents by Reference . . . . . . . . . . . . . . . v
Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi
Summary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Description of the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Description of the Certificates . . . . . . . . . . . . . . . . . . . . . . . 28
Pool Factors and Trading Information . . . . . . . . . . . . . . . . . . . . 29
Certain Information Regarding the Securities . . . . . . . . . . . . . . . . 30
The Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
The Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Description of the Trust Property . . . . . . . . . . . . . . . . . . . . . . 39
Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Servicing of the Loan Assets . . . . . . . . . . . . . . . . . . . . . . . . 48
The Seller and the Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . 52
The Servicer and the Transferor . . . . . . . . . . . . . . . . . . . . . . . 53
Description of the Transfer and Servicing Agreements . . . . . . . . . . . . 55
Certain Legal Aspects of the Loan Assets . . . . . . . . . . . . . . . . . . 62
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . 83
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Legal Investment Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Index of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
</TABLE>
-----------
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and Prospectus. This obligation is in addition to the obligation of
dealers to deliver a Prospectus Supplement and Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR, ANY AFFILIATE OF THE DEPOSITOR
OR ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
SHALL NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY IN ANY STATE TO ANY PERSON TO WHO IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH STATE. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DOES NOT IMPLY THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
$_________________
FIRSTPLUS HOME LOAN TRUST 199_-_
FIRSTPLUS
INVESTMENT CORPORATION
(DEPOSITOR)
FIRSTPLUS FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
--------------
PROSPECTUS SUPPLEMENT
--------------
[UNDERWRITER]
____________, 199_
<PAGE> 114
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus Supplement and the accompanying Prospectus shall
not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any jurisdiction in which such
offer, solicitation or sale would be unlawful prior to the registration or
qualification under the securities laws of any such jurisdiction.
SUBJECT TO COMPLETION; DATED MAY 22, 1997
PROSPECTUS
ASSET-BACKED CERTIFICATES
(ISSUABLE IN SERIES)
FIRSTPLUS INVESTMENT CORPORATION
This Prospectus relates to Asset-Backed Certificates (the
"Certificates") which may be issued from time to time in one or more series
(each, a "Series") by FIRSTPLUS INVESTMENT CORPORATION (the "Depositor") on
terms determined at the time of sale and described in this Prospectus and the
related Prospectus Supplement (a "Prospectus Supplement"). As specified in the
related Prospectus Supplement, the Certificates of a Series may be issued in
one or more classes (each, a "Class") and certain of these Classes of
Certificates (the "Offered Certificates") will be offered hereby and by such
Prospectus Supplement.
Each Series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (a "Trust Fund") to be formed by
the Depositor as the depositor pursuant to a Pooling and Servicing Agreement.
The issuer ("Issuer") with respect to a Series of Certificates will be the
Trust Fund. The Trust Fund for each Series of Certificates will consist
primarily of a segregated pool (a "Mortgage Asset Pool") of one or more of the
following mortgage related assets (the "Mortgage Assets"): (i) pools 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,
mortgage loans for property improvement, debt consolidation and/or home equity
purposes, 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"); (ii) pools 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 unsecured
loans for Manufactured Homes, home improvement, debt consolidation and/or home
equity purposes ("Unsecured Contracts" and, together with the Secured
Contracts, the "Contracts"); and (iii) mortgage-backed certificates, mortgage
pass-through certificates or mortgage participation certificates (the "Agency
Securities"), issued or guaranteed by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC"). To the extent specified in
the related Prospectus Supplement, the Mortgage Loans and Contracts may include
Title I Mortgage Loans and Title I Contracts. If specified in the related
Prospectus Supplement, the Trust Fund for a Series of Certificates may include
the rights or other ancillary or incidental assets (together with the Mortgage
Assets, collectively, the "Assets") that are intended (i) to provide credit
enhancement for the ultimate or timely distributions of proceeds from the
Mortgage Assets to Certificateholders or (ii) to assure the servicing of the
Mortgage Assets.
BEFORE PURCHASING ANY OFFERED CERTIFICATES, PROSPECTIVE INVESTORS
SHOULD REVIEW THE INFORMATION SET FORTH ON PAGE 12 HEREIN UNDER THE CAPTION
"RISK FACTORS" AND SUCH INFORMATION AS MAY BE SET FORTH UNDER THE CAPTION "RISK
FACTORS" IN THE RELATED PROSPECTUS SUPPLEMENT.
(Cover continued on next page)
------------------------
PROCEEDS OF THE ASSETS OF A TRUST FUND WILL BE THE SOLE SOURCE OF
PAYMENTS ON THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES WILL NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR OR ANY OF ITS
AFFILIATES. EXCEPT AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT, NEITHER THE OFFERED CERTIFICATES NOR THE UNDERLYING MORTGAGE ASSETS
WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR
BY THE DEPOSITOR, ANY OF ITS AFFILIATES, OR ANY OTHER PERSON.
------------------------
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 OR ANY RELATED
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
Offers of the Certificates 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 Certificates
prior to the offering thereof. There can be no assurance that a secondary
market will develop for the Certificates of any Series or, if it does develop,
that such market will continue.
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS MAY NOT
BE USED TO CONSUMMATE SALES OF THE OFFERED CERTIFICATES FOR ANY SERIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
THE DATE OF THIS PROSPECTUS IS MAY __, 1997.
<PAGE> 115
(Cover continued from previous page)
Each Series will be issued in one or more Classes, one or more of
which may be Principal Only Certificates, Interest Only Certificates, Compound
Interest Certificates, Variable Interest Rate Certificates, Scheduled
Amortization Certificates, Companion Certificates, Special Allocation
Certificates or any other Class of Certificates, if any, included in such
Series and described in the related Prospectus Supplement. Principal Only
Certificates will not accrue, and will not be entitled to receive, any
interest. Payments or distribution of interest on each Class of Certificates
other than Principal Only Certificates and Compound Interest Certificates will
be made on each Distribution Date as specified in the related Prospectus
Supplement. Interest will not be paid or distributed on Compound Interest
Certificates on a current basis until the date or period specified in the
related Prospectus Supplement. Prior to such time, interest on such Class of
Compound Interest Certificates will accrue and the amount of interest so
accrued will be added to the principal thereof on each Distribution Date. The
amount of principal and interest available and payable on each Series on each
Distribution Date will be applied to the Classes of such Series in the order
and as otherwise specified in the related Prospectus Supplement. Principal
payments or distributions on each Class of a Series will be made on a pro rata,
or other selection basis among Certificates of such Class, as specified in the
related Prospectus Supplement. Certificates of a Series will be subject to
redemption or repurchase only under the circumstances and according to the
priorities described herein and in the related Prospectus Supplement. The
Depositor or its affiliates may retain or hold for sale from time to time all
or a portion of one or more Classes of a Series.
The yield on each Class of a Series will be affected by the rate of
payment of principal and interest (including prepayments) on the related
Mortgage Assets and the timing of receipt of such payments as described herein
and in the related Prospectus Supplement.
If specified in the Prospectus Supplement for a Series, one or more
elections may be made to treat all or specified portions of the related Trust
Fund as a "real estate mortgage investment conduit" ("REMIC") or to treat the
arrangement by which such Series is issued as a REMIC, for federal income tax
purposes. If applicable, the Prospectus Supplement for a Series will specify
which Class or Classes of such Series of Certificates will be considered to be
regular interests in the related REMIC and which Class of Certificates or other
interests will be designated as the residual interest in the related REMIC. See
"Certain Federal Income Tax Consequences" herein.
See "ERISA Considerations" herein and in the related Prospectus
Supplement for a discussion of restrictions on the acquisition of Certificates
by "plan fiduciaries."
PROSPECTUS SUPPLEMENT
As further described herein, the Prospectus Supplement relating to
each series of Offered Certificates will, among other things, set forth, as and
to the extent appropriate: (i) a description of each Class of such Offered
Certificates, including with respect to each such Class the following (A) the
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 Certificates
of the same Series; (iii) the respective dates on which distributions are to be
made; (iv) information as to the Assets, including the Mortgage Assets and
Credit Enhancement, constituting the related Trust Fund; (v) the circumstances,
if any, under which the related Trust Fund may be subject to early termination;
(vi) additional information with respect to the method of distribution of such
Offered Certificates; (vii) whether one or more REMIC elections will be made
and the designation of the
ii
<PAGE> 116
"regular interests" and "residual interests" in each REMIC to be created and
the identity of the person (the "REMIC Administrator") responsible for the
various tax-related duties in respect of each REMIC to be created; (viii) the
initial percentage ownership interest in the related Trust Fund to be evidenced
by each Class of Certificates of such Series; (ix) information concerning the
Trustee (as defined herein) of the related Trust Fund; (x) if the related Trust
Fund includes Mortgage Loans or Contracts, information concerning the Servicer
and any Master Servicer (each as defined herein) of such Mortgage Loans or
Contracts; (xi) information as to the nature and extent of subordination of any
Class of Certificates of such Series, including a Class of Offered
Certificates; and (xii) whether such Offered Certificates will be initially
issued in definitive or book-entry form.
The actual characteristics of the Mortgage 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 Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith is required to file reports and other information (the
"Reports") with the Securities and Exchange Commission (the "Commission"). The
Depositor has filed with the Commission a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Certificates. This Prospectus, which forms a part of the Registration
Statement, and the Prospectus Supplement relating to each Series of
Certificates contain summaries of the material documents referred to herein and
therein, but do not contain all of the information contained in such
Registration Statement pursuant to the rules and regulations of the Commission.
For further information, reference is made to such Registration Statement and
the exhibits thereto. The Registration Statement can be inspected and copied at
prescribed rates at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street N.W., 1st Floor,
Room 1024, Washington, D.C. 20549, and at the following regional offices of the
Commission: Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511 and New York Regional Office, 7 World
Trade Center, 13th Floor, New York, New York 10048. In addition, the Commission
maintains a Web site on the Internet that contains reports, proxy and
information statements and other information regarding the Depositor. The
address of such Web site is http://www.sec.gov.
The Depositor does not plan to send any financial information to
Certificateholders. The Trustee will include with each distribution to
Certificateholders a statement containing certain payment information with
respect to such Certificates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Depositor pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Certificates
shall be deemed to be incorporated by reference in this Prospectus and to be a
part hereof from the date of filing of such documents. Any statement contained
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 another 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.
iii
<PAGE> 117
The Depositor will provide without charge to each person to whom a
copy of this Prospectus has been delivered, upon the request of such person, a
copy of any or all of the documents referred to above which have been or may be
incorporated in this Prospectus by reference (other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
any such document). Requests for such copies should be directed, on behalf of
FIRSTPLUS INVESTMENT CORPORATION, to 3773 Howard Hughes Parkway, Suite 300N,
Las Vegas, Nevada 89109, Attention: Russell D. Ungerman (702) 866-2236.
iv
<PAGE> 118
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUPPLEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . iii
SUMMARY OF PROSPECTUS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Limited Liquidity and Fluctuation in Value from Market
Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Limited Assets of Trust Fund . . . . . . . . . . . . . . . . . . . 15
Effect of Prepayments on Average Life . . . . . . . . . . . . . . 16
Effect of Prepayments on Yield . . . . . . . . . . . . . . . . . . 17
Limitations of Credit Enhancement . . . . . . . . . . . . . . . . 18
Limited Nature of Ratings . . . . . . . . . . . . . . . . . . . . 19
Adverse Tax Consequences . . . . . . . . . . . . . . . . . . . . . 20
Certain Factors Affecting Delinquencies, Foreclosures and
Losses on Underlying Loans . . . . . . . . . . . . . . . . . . . 20
Risks Associated with Certain Mortgage Assets . . . . . . . . . . 22
Recharacterization of Sale of Mortgage Assets as Borrowing . . . . 24
DESCRIPTION OF THE CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . 24
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
The Certificates -- General . . . . . . . . . . . . . . . . . . . 25
Form of Certificates; Transfer and Exchange . . . . . . . . . . . 25
REMIC Election . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Classes of Certificates . . . . . . . . . . . . . . . . . . . . . 26
Distributions of Principal and Interest . . . . . . . . . . . . . 28
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Book Entry Registration . . . . . . . . . . . . . . . . . . . . . 31
Mutilated, Destroyed, Lost or Stolen Certificates . . . . . . . . 31
ASSETS SECURING OR UNDERLYING THE CERTIFICATES . . . . . . . . . . . . . . 32
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Agency Securities . . . . . . . . . . . . . . . . . . . . . . . . 34
Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Additions, Substitution and Withdrawal of Assets . . . . . . . . . 41
Pre-Funding Arrangements . . . . . . . . . . . . . . . . . . . . . 41
CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Overcollateralization . . . . . . . . . . . . . . . . . . . . . . 44
Cross-Support . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Certificate Insurance . . . . . . . . . . . . . . . . . . . . . . 44
Pool Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>
v
<PAGE> 119
<TABLE>
<S> <C>
Special Hazard Insurance . . . . . . . . . . . . . . . . . . . . . . 45
Reserve Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Other Insurance, Guarantees and Similar Instruments or Agreements . 46
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS . . . . . . . . . . . . . . . . 46
Enforcement of Due-on-Sale Clauses . . . . . . . . . . . . . . . . . 47
Realization Upon Defaulted Mortgage Loans . . . . . . . . . . . . . 47
Waivers and Deferments of Certain Payments . . . . . . . . . . . . . 48
Subservicers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Removal and Resignation of Servicer . . . . . . . . . . . . . . . . 48
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Servicing Procedures . . . . . . . . . . . . . . . . . . . . . . . . 49
Administration and Servicing Compensation and Payment of Expenses . 50
THE POOLING AND SERVICING AGREEMENT . . . . . . . . . . . . . . . . . . . . . 50
Assignment of Mortgage Assets . . . . . . . . . . . . . . . . . . . 51
Conveyance of Subsequent Mortgage Assets . . . . . . . . . . . . . . 52
Repurchase or Substitution of Mortgage Loans and Contracts . . . . . 53
Evidence as to Compliance . . . . . . . . . . . . . . . . . . . . . 54
List of Certificateholders . . . . . . . . . . . . . . . . . . . . . 54
Administration of the Certificate Account . . . . . . . . . . . . . 54
Reports to Certificateholders . . . . . . . . . . . . . . . . . . . 55
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . 56
Rights Upon Event of Default . . . . . . . . . . . . . . . . . . . . 56
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
THE SERVICER AND THE TRANSFEROR . . . . . . . . . . . . . . . . . . . . . . . 58
THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS . . . . . . . . . . . . . . . . 60
General Legal Considerations . . . . . . . . . . . . . . . . . . . . 61
Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Truth in Lending Act . . . . . . . . . . . . . . . . . . . . . . . . 70
Applicability of Usury Laws . . . . . . . . . . . . . . . . . . . . 71
Soldiers' and Sailors' Civil Relief Act . . . . . . . . . . . . . . 71
The Title I Program . . . . . . . . . . . . . . . . . . . . . . . . 71
LEGAL INVESTMENT MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . 80
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . 83
Federal Income Tax Consequences for REMIC Certificates . . . . . . . . . . . 83
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Status of REMIC Certificates . . . . . . . . . . . . . . . . . . . . 84
Taxation of Regular Certificates . . . . . . . . . . . . . . . . . . 85
</TABLE>
vi
<PAGE> 120
<TABLE>
<S> <C>
Taxation of Residual Certificates . . . . . . . . . . . . . . . . 93
Treatment of Certain Items of REMIC Income and Expense . . . . . . 95
Tax-Related Restrictions on Transfer of Residual Certificates . . 97
Taxes That May Be Imposed on the REMIC Pool . . . . . . . . . . . 100
Limitations on Deduction of Certain Expenses . . . . . . . . . . . 102
Taxation of Certain Foreign Investors . . . . . . . . . . . . . . 102
Backup Withholding . . . . . . . . . . . . . . . . . . . . . . . . 103
Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . 103
Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made . . . . . . . . . . . . . . . . . 104
Standard Certificates . . . . . . . . . . . . . . . . . . . . . . 104
Premium and Discount . . . . . . . . . . . . . . . . . . . . . . . 106
Sale or Exchange of Certificates . . . . . . . . . . . . . . . . . 107
Stripped Certificates . . . . . . . . . . . . . . . . . . . . . . 108
Taxation of Stripped Certificates . . . . . . . . . . . . . . . . 110
Reporting Requirements and Backup Withholding . . . . . . . . . . 111
Taxation of Certain Foreign Investors . . . . . . . . . . . . . . 111
STATE TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . 111
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
FINANCIAL INFORMATION AND ADDITIONAL INFORMATION . . . . . . . . . . . . . 112
APPENDIX A - INDEX TO LOCATION OF PRINCIPAL TERMS . . . . . . . . . . . . . 114
</TABLE>
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<PAGE> 121
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and in the
Prospectus Supplement with respect to the Series offered thereby and to the
related Pooling and Servicing Agreement. Unless otherwise specified, initially
capitalized terms used and not defined in this Summary of Prospectus have the
meanings given to them in this Prospectus and in the related Prospectus
Supplement. Reference is made to the " Index to Location of Principal Terms"
set forth in Appendix A for the location of certain capitalized terms.
Securities Offered . . . . . . . . . . . . . . Asset Backed Certificates
issuable in Series as
described in the Prospectus
Supplement. Certificates of a
Series will be issued
pursuant to a pooling and
servicing agreement (each, a
"Pooling and Servicing
Agreement") between the
Depositor, as depositor, the
Servicer, any Administrators,
the Master Servicer, if any,
and the Trustee for such
Series and will evidence
beneficial interests in the
assets included in a trust
fund (the "Trust Fund") and
assigned to the Trustee for
the applicable Series.
Holders of Certificates are
referred to herein as
"Holders" or
"Certificateholders."
The Certificates of any
Series may be issued in one or
more classes (each a "Class"),
as specified in the related
Prospectus Supplement. One or
more Classes of Certificates
of each Series:
(i) may be entitled to receive
distributions allocable only
to principal ("Principal Only
Certificates"), only to
interest ("Interest Only
Certificates") or to any
combination thereof;
(ii) may be entitled to
receive distributions only of
prepayments of principal
throughout the lives of the
Certificates of such Series or
during specified periods;
(iii) may be subordinated in
the right to receive
distributions of scheduled
payments of principal,
prepayments of principal,
interest or any combination
thereof to one or more other
Classes of such Series
throughout the lives of the
Certificates of such Series or
during specified periods;
(iv) may be entitled to
receive such distributions
only after the occurrence of
events specified in the
Prospectus Supplement;
(v) may be entitled to receive
distributions in accordance
with a schedule or formula or
on the basis of collections
from designated portions of
the Assets securing such
Series or in the related Trust
Fund;
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<PAGE> 122
(vi) may be entitled to
receive interest at a rate
that is subject to change from
time to time ("Variable
Interest Rate Certificates")
or at a fixed rate;
(vii) may accrue interest,
with such accrued interest
added to the principal amount
of the Certificates of such
Class and no payments being
made thereon until such time
as is specified in the related
Prospectus Supplement
("Compound Interest
Certificates").
As specified in the related
Prospectus Supplement, each
Series of Certificates will be
entitled to distributions from
the Assets included in the
related Trust Fund and any
other assets pledged or
otherwise available for the
benefit of Holders of such
Series. The timing and amounts
of such distributions may vary
among Classes, over time, or
otherwise as specified in the
related Prospectus Supplement.
The Depositor or its
affiliates may retain or hold
for sale from time to time all
or a portion of one or more
Classes of a Series.
The Certificates of each Class
of a Series will be issued
either in fully registered
form or in book entry form in
the authorized denominations
specified in the Prospectus
Supplement. The Certificates
and Mortgage Assets will be
guaranteed or insured, if at
all, to the extent specified
in the related Prospectus
Supplement; otherwise, the
Certificates will not be
guaranteed or insured by GNMA,
FNMA, FHLMC, any governmental
entity or by any other person,
and the Mortgage Assets (other
than Agency Securities)
relating to a Series will not
be guaranteed or insured by
any governmental agency or
instrumentality or any other
insurer.
Depositor . . . . . . . . . . . . . . . . . . . FIRSTPLUS INVESTMENT
CORPORATION will transfer the
Assets for a Series to the
related Trust Fund (the
"Depositor"). See "The
Depositor."
Issuer . . . . . . . . . . . . . . . . . . . . The Issuer will be the
Trust Fund established by the
Depositor pursuant to the
related Pooling and Servicing
Agreement (the "Issuer").
Servicer . . . . . . . . . . . . . . . . . . . If the related Trust Fund
includes Mortgage Loans or
Contracts, the entity or
entities named as the
Servicer in the related
Prospectus Supplement (the
"Servicer"), that will act as
servicer with respect to such
Mortgage Loans or Contracts.
The Servicer may be an
affiliate of the Depositor.
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<PAGE> 123
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 Mortgage Loans or
Contracts included in the
related Trust Fund (e.g.,
REMIC Administrator, FHA
Claims Administrator, etc.).
The Administrator may be an
affiliate of the Depositor.
Master Servicer . . . . . . . . . . . . . . . . If the related Trust Fund
includes 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 Depositor.
Trustee . . . . . . . . . . . . . . . . . . . . A bank, trust company or
other fiduciary acting as a
trustee and named in the
related Prospectus Supplement
(the "Trustee"), that will
enter into the related
Pooling and Servicing
Agreement.
Distributions of Interest . . . . . . . . . . . Each Class of a Series
(other than a Class of
Principal Only Certificates)
will accrue interest at the
rate set forth in (or, in the
case of Variable Interest
Certificates, as determined
as provided in) the related
Prospectus Supplement (the
"Certificate Interest Rate").
One or more Classes of a
Series may be entitled to
receive distributions of
interest only to the extent
of amounts available to make
such distributions. Interest
on each Class will accrue
during the respective periods
and be paid or distributed on
the respective dates
specified in the related
Prospectus Supplement (each
such period a "Due Period"
and each such date a
"Distribution Date").
Interest on all Certificates
that bear or receive
interest, other than Compound
Interest Certificates, will
be distributed on the
Distribution Dates specified
in the related Prospectus
Supplement. However, failure
to distribute interest on a
current basis may not
necessarily be an Event of
Default with respect to a
particular Series or Class of
Certificates. Interest on any
Class of Compound Interest
Certificates will not be paid
or distributed currently, but
will accrue and the amount of
the interest so accrued will
be added to the principal
thereof on each Distribution
Date until such time as is
specified in the related
Prospectus Supplement.
Principal Only Certificates
will not accrue, and will not
be entitled to receive, any
interest. Upon maturity or
earlier termination of the
Certificates of any Class or
earlier termination of the
Trust Fund for any Series,
interest will be paid to the
date specified in the related
Prospectus Supplement.
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<PAGE> 124
Each payment of interest on
each Class of Certificates (or
addition to principal of a
Class of Compound Interest
Certificates) on a
Distribution Date will include
all interest accrued during
the related Due Period. If the
Due Period for a Series ends
on a date other than a
Distribution Date for such
Series, the yield realized by
the Holders of such
Certificates may be lower than
the yield that would result if
the Due Period ended on such
Distribution Date.
Additionally, if specified in
the related Prospectus
Supplement, interest accrued
for a Due Period for one or
more Classes may be calculated
on the assumption that
principal distributions (and
additions to principal of the
Certificates), and allocations
of losses on the Mortgage
Assets (if specified in the
related Prospectus
Supplement), are made on the
first day of the preceding Due
Period and not on the
Distribution Date for such
preceding Due Period when
actually made or added. Such
method would produce a lower
effective yield than if
interest were calculated on
the basis of the actual
principal amount outstanding.
With respect to each Class of
Variable Interest Rate
Certificates of a Series, the
related Prospectus Supplement
will set forth: (i) the
initial Certificate Interest
Rate, (or the manner of
determining the initial
Certificate Interest Rate);
(ii) the formula, index or
other method by which the
Certificate Interest Rate will
be determined from time to
time; (iii) the periodic
intervals at which such
determination will be made;
(iv) the interest rate cap
(the "Maximum Variable
Interest Rate") if any, and
the interest rate floor (the
"Minimum Variable Interest
Rate"), if any, on the
Certificate Interest Rate for
such Variable Interest Rate
Certificates; and (v) any
other terms relevant to such
Class of Certificates. See
"Description of the
Certificates -- Distributions
of Principal and Interest" and
-- "Distributions of
Interest."
Distributions of Principal . . . . . . . . . . Principal distributions on
the Certificates of a Series
will be made from amounts
available therefor on each
Distribution Date in an
aggregate amount determined
as set forth in the related
Prospectus Supplement and
will be allocated among the
respective Classes of a
Series of Certificates at the
times, in the manner and in
the priority set forth in the
related Prospectus
Supplement.
Except with respect to
Compound Interest Certificates
and Interest Only
Certificates, on each
Distribution Date principal
distributions will be made on
the Certificates of a Series
in an aggregate amount
determined as specified in the
related Prospectus Supplement.
If a Series has a
4
<PAGE> 125
Class of Compound Interest
Certificates, additional
principal distributions on the
Certificates of such Series
will be made on each
Distribution Date in an amount
equal to the interest accrued,
but not then payable or
distributable, on such Class
of Compound Interest
Certificates for the related
Due Period. See "Description
of the Certificates --
Distributions of Principal and
Interest -- Distributions of
Principal."
Unscheduled Distributions . . . . . . . . . . . If specified in the related
Prospectus Supplement, the
Certificates of a Series will
be subject to receipt of
distributions before the next
scheduled Distribution Date
as described under
"Description of Certificates
-- Distributions of Principal
and Interest -- Unscheduled
Distributions."
Allocation of Losses . . . . . . . . . . . . . If specified in the related
Prospectus Supplement, on any
Distribution Date on which
the principal balance of the
Mortgage Assets relating to a
Series is reduced due to
losses on such Mortgage
Assets, (i) the amount of
such losses will be allocated
first, to reduce the
aggregate outstanding
principal balance of the
Subordinate Certificates of
such Series or other
subordination or reserves, if
any, and, thereafter, to
reduce the aggregate
outstanding principal balance
of the remaining Certificates
of such Series in the
priority and manner specified
in such Prospectus Supplement
until the aggregate
outstanding principal balance
of each Class of such
Certificates so specified has
been reduced to zero or paid
in full, thus reducing the
amount of principal
distributable on each such
Class of Certificates or (ii)
such losses may be allocated
in any other manner set forth
in the related Prospectus
Supplement. As specified in
the related Prospectus
Supplement, such reductions
of principal of a Class or
Classes of a Series of
Certificates will be
allocated to the Holders of
the Certificates of such
Class or Classes pro rata in
the proportion which the
outstanding principal of each
Certificate of such Class or
Classes bears to the
aggregate outstanding
principal balance of all
Certificates of such Class or
Classes. See "Description of
the Certificates --
Distributions of Principal
and Interest -- Distributions
of Principal."
Scheduled Final Distribution Date . . . . . . . The "Scheduled Final
Distribution Date" for each
Class of Certificates of a
Series will be the date after
which no Certificates of such
Class will remain
outstanding, as specified and
determined on the basis of
the assumptions set forth in
the related Prospectus
Supplement. The Scheduled
Final Distribution Date of a
Class of Certificates may
equal the maturity date of
the
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<PAGE> 126
Mortgage Asset in the related
Trust Fund which has the
latest stated maturity or will
be determined as described in
the related Prospectus
Supplement.
The actual maturity date of
the Certificates of a Series
will depend primarily upon the
rate and timing of principal
and interest payments
(including the level of
prepayments) with respect to
the Mortgage Assets (including
in the case of Agency
Securities the Mortgage Assets
that back such Agency
Securities) securing or
underlying such Series of
Certificates. The actual
maturity of any Certificates
is likely to occur earlier and
may occur substantially
earlier than the Scheduled
Final Distribution Date of the
Certificates as a result of
the application of prepayments
and the allocation of other
distributions to the reduction
of the principal balances of
the Certificates. The rate and
timing of principal and
interest payments including
prepayments on the Mortgage
Assets securing or underlying
a Series will depend on a
variety of factors, including
certain characteristics of
such Mortgage Loans and the
prevailing level of interest
rates from time to time, as
well as on a variety of
economic, demographic, tax,
legal, social and other
factors. No assurance can be
given as to the actual rate
and timing of principal and
interest payments including
the level of prepayments
experienced with respect to a
Series. See "Risk Factors --
Effect of Prepayments on
Average Life" herein.
Assets Securing or Underlying
the Certificates . . . . . . . . . . . . . . Each Series of Certificates
will represent beneficial
ownership interests in a
Trust Fund. As specified in
the related Prospectus
Supplement, the Mortgage
Assets included in the Trust
Fund with respect to a Series
of Certificates will include
Mortgage 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, mortgage loans for
property improvement, debt
consolidation and/or home
equity purposes, 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");
(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
6
<PAGE> 127
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
unsecured loans for
Manufactured Homes or for home
improvement, debt
consolidation and/or home
equity purposes ("Unsecured
Contracts" and, together with
the Secured Contracts, the
"Contracts"); and
(iii) mortgage-backed
certificates, mortgage
pass-through certificates or
mortgage participation
certificates, including
residual interests ("Agency
Securities") issued or
guaranteed by the Government
National Mortgage Association
("GNMA"), the Federal National
Mortgage Association ("FNMA")
or the Federal Home Loan
Mortgage Corporation
("FHLMC");
As specified in the related
Prospectus Supplement, a Trust
Fund may also include, or the
related Certificates may also
have the benefits of, certain
rights and other ancillary or
incidental assets (together
with the Mortgage Assets,
collectively, the "Assets"),
that are intended (i) to
enhance the likelihood of
ultimate or timely
distributions of proceeds from
the Mortgage Assets to
Certificateholders, 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
Mortgage Assets, including
interest rate exchange
agreements, reinvestment
income and cash accounts. The
Certificates of any Series
will be entitled to payment
only from the Assets included
in the related Trust Fund and
any other Assets pledged or
otherwise available for the
benefit of the holders of such
Certificates as specified in
the related Prospectus
Supplement.
A. Mortgage Loans . . . . . . . . . . . . . . . As specified in the related
Prospectus Supplement for a
Series, "Mortgage Loans" may
include: (i) conventional
(i.e., not insured or
guaranteed by any
governmental agency) Mortgage
Loans secured by first liens
on one-to-four family
residential properties; (ii)
Mortgage 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) Mortgage Loans secured
by junior (i.e., second,
third, etc.) liens on the
related mortgaged properties,
including loans for property
improvements, debt
consolidation and/or home
equity purposes (which
7
<PAGE> 128
may be evidenced by retail
installment sales contracts
and installment loan
agreements); (iv) Mortgage
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 "Assets Securing or
Underlying the Certificates --
Mortgage Loans" herein. To the
extent described in the
related Prospectus Supplement,
certain of the junior lien
Mortgage Loans will 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
will 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 Trust Fund and
will specify certain
information regarding the
payment terms of such Mortgage
Loans. See "Assets Securing or
Underlying the Certificates --
Mortgage Loans."
B. Contracts . . . . . . . . . . . . . . . . . As specified in the related
Prospectus Supplement for a
Series, "Contracts" may
include: (i) loans evidenced
by retail installments sales
or loan agreements, including
loans secured by new or used
Manufactured Homes (as
defined herein) that are not
considered to be interests in
real property because such
Manufactured Homes are not
permanently affixed to real
estate ("Secured Contracts")
and (ii) unsecured loans for
Manufactured Homes or for
property improvement, debt
consolidation and/or home
equity purposes (such
unsecured loans are
collectively, the "Unsecured
Contracts"). See "Assets
Securing or Underlying the
Certificates -- Contracts"
herein. To the extent
described in the related
Prospectus Supplement,
certain Contracts that are
secured by Manufactured Homes
and Unsecured Contracts will
be conventional (i.e., not
insured or guaranteed by a
governmental agency) loan
contracts (the "Conventional
Contracts"), while other
Contracts that are secured by
Manufactured Homes or that
are unsecured loans for
Manufactured Homes or
property improvements will 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 any
Contracts included in the
8
<PAGE> 129
Trust Fund. See "Assets
Securing or Underlying the
Certificates -- Contracts."
C. Agency Securities . . . . . . . . . . . . . As specified in the related
Prospectus Supplement for a
Series, "Agency Securities"
may include: (i) "fully
modified pass-through"
mortgage-backed certificates
guaranteed as to timely
payment of principal and
interest by GNMA ("GNMA
Certificates"); (ii)
guaranteed mortgage
pass-through certificates
issued and guaranteed as to
timely payment of principal
and interest by FNMA ("FNMA
Certificates"); (iii)
mortgage participation
certificates issued and
guaranteed as to timely
payment of interest and, to
the extent specified in the
related Prospectus
Supplement, ultimate payment
of principal by FHLMC ("FHLMC
Certificates"); (iv) stripped
mortgage-backed securities
representing an undivided
interest in all or a part of
either the principal
distributions (but not the
interest distributions) or
the interest distributions
(but not the principal
distributions) or in some
specified portion of the
principal and interest
distributions (but not all of
such distributions) on
certain GNMA, FNMA or FHLMC
Certificates and, unless
otherwise specified in the
Prospectus Supplement,
guaranteed to the same extent
as the underlying securities;
(v) other types of
mortgage-backed certificates,
mortgage pass-through
certificates or mortgage
participation certificates
issued or guaranteed by GNMA,
FNMA or FHLMC, such as FNMA
Guaranteed REMIC Pass-Through
Certificates and FHLMC
Multiclass Mortgage
Participation Certificates,
and including residual
interest securities, as
described in the related
Prospectus Supplement; or
(vi) a combination of such
Agency Securities.
All GNMA Certificates will be
backed by the full faith and
credit of the United States.
No FHLMC or FNMA Certificates
will be backed, directly or
indirectly, by the full faith
and credit of the United
States. See "Assets Securing
or Underlying the Certificates
-- Agency Securities."
D. Pre-Funding Arrangements . . . . . . . . . . To the extent provided in
the related Prospectus
Supplement for a Series, the
related Pooling and Servicing
Agreement will provide for a
commitment by the related
Trust Fund to subsequently
purchase additional Mortgage
Assets ("Subsequent Mortgage
Assets") from the Depositor
following the date on which
the Trust Fund is established
and the related Certificates
are issued (a "Pre-Funding
Arrangement"). See "Assets
9
<PAGE> 130
Securing or Underlying the
Certificates -- Pre-Funding
Arrangements" herein.
Credit Enhancement . . . . . . . . . . . . . . If specified in the related
Prospectus Supplement, a
Series, or certain Classes
within such Series, may have
the benefit of one or more
types of credit enhancement
("Credit Enhancement")
including but not limited to
overcollateralization,
subordination, cross support,
mortgage pool insurance,
certificate insurance,
special hazard insurance, a
bankruptcy bond, reserve
funds, cash accounts, other
insurance, guarantees,
letters of credit and similar
instruments and arrangements.
The protection against losses
afforded by any such Credit
Enhancement will be limited.
See "Risk Factors --
Limitations of Credit
Enhancement" and "Credit
Enhancement" herein.
Book Entry Registration . . . . . . . . . . . . If the Prospectus Supplement
for a Series so provides,
Certificates of one or more
Classes of such Series may be
issued in book entry form
("Book Entry Certificates") in
which case a single
Certificate will be issued in
the name of a clearing agency
(a "Clearing Agency")
registered with the Securities
and Exchange Commission, or
its nominee. Transfers and
pledges of Book Entry
Certificates may be made only
through entries on the books
of the Clearing Agency in the
name of brokers, dealers,
banks and other organizations
eligible to maintain accounts
with the Clearing Agency
("Clearing Agency
Participants") or their
nominees. Transfers and
pledges by purchasers and
other beneficial owners of
Book Entry Certificates
("Beneficial Owners") other
than Clearing Agency
Participants may be effected
only through Clearing Agency
Participants. Beneficial
Owners will receive
distributions of principal and
interest, and, if applicable,
may tender Certificates for
repurchase to the related
Trustee, only through the
Clearing Agency and Clearing
Agency Participants. Except as
otherwise specified in this
Prospectus or a related
Prospectus Supplement, the
terms "Certificateholders" and
"Holders" shall be deemed to
include Beneficial Owners. See
"Risk Factors -- Limited
Liquidity and Fluctuation in
Value from Market Conditions
-- Book Entry Registration"
and "Description of the
Certificates -- Book Entry
Registration."
Certain Federal Income Tax
Consequences . . . . . . . . . . . . . . . . The federal income tax
consequences to Holders of a
Series will depend on, among
other factors, whether one or
more elections are made to
treat the related Trust Fund
or specified portions thereof
as a "real estate mortgage
investment conduit" ("REMIC")
under the provisions of
10
<PAGE> 131
the Internal Revenue Code of
1986, as amended (the "Code").
The Prospectus Supplement for
each Series will specify
whether such an election will
be made.
If the applicable Prospectus
Supplement so specifies with
respect to a Series of
Certificates, one or more
REMIC elections will be made
with respect to such Series of
Certificates. Certificates of
such Series will be designated
as "regular interests" in a
REMIC ("Regular Certificates")
or as "residual interests" in
a REMIC ("Residual
Certificates").
If the applicable Prospectus
Supplement so specifies with
respect to a Series of
Certificates, the Certificates
of such Series will not be
treated as regular or residual
interests in a REMIC for
federal income tax purposes
but instead will be treated as
(i) indebtedness of the
Issuer, (ii) an undivided
beneficial ownership interest
in the Mortgage Assets (and
the arrangement pursuant to
which the Mortgage Assets will
be held and the Certificates
will be issued will be treated
as a grantor trust under
Subpart E, part I of
subchapter J of Chapter 1 of
Subtitle A of the Code and not
as an association taxable as a
corporation for federal income
tax purposes); (iii) equity
interests in an association
that will satisfy the
requirements for qualification
as a real estate investment
trust; or (iv) interests in an
entity that will satisfy the
requirements for qualification
as a partnership for federal
income tax purposes. The
federal income tax
consequences to Holders of any
such Series will be described
in the related Prospectus
Supplement to the extent not
described herein.
Compound Interest Certificates
and Principal Only
Certificates will, and certain
other Classes of Certificates
may, be issued with original
issue discount that is not de
minimis. In such cases, the
Holder will be required to
include the original issue
discount in gross income as it
accrues, which may be prior to
the receipt of cash, or a
portion of the cash,
attributable to such income.
If a Certificate is issued at
a premium, the Holder will be
entitled to make an election
to amortize such premium on a
constant yield method.
Certificates constituting
regular or residual interests
in a REMIC will generally
represent "loans secured by an
interest in real property" for
domestic building and loan
associations and "real estate
assets" for real estate
investment trusts to the
extent that the underlying
mortgage loans and interest
thereon qualify for such
treatment. Non-REMIC
Certificates will not qualify
for such treatment.
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A Holder of a Residual
Certificate will be required
to include in its income its
pro rata share of the taxable
income of the REMIC. In
certain circumstances, the
Holder of a Residual
Certificate may have REMIC
taxable income or tax
liability attributable to
REMIC taxable income for a
particular period in excess of
cash distributions for such
period or have an after-tax
return that is less than the
after- tax return on
comparable debt instruments.
In addition, a portion (or, in
some cases, all) of the income
from a Residual Certificate
(i) may not be subject to
offset by losses from other
activities, (ii) for a Holder
that is subject to tax under
the Code on unrelated business
taxable income, may be treated
as unrelated business taxable
income and (iii) for a foreign
Holder, may not qualify for
exemption from or reduction of
withholding. Further,
individual Holders are subject
to limitations on the
deductibility of expenses of
the REMIC. See "Certain
Federal Income Tax
Consequences."
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 Certificates 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
Certificates of such Series
may not be transferred unless
the Trustee and the Depositor
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 Trustee, the
Depositor or 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
"Description of the
Certificates -- General" and
"ERISA Considerations."
Legal Investment Matters . . . . . . . . . . . Certificates 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. Accordingly,
many institutions with legal
authority to invest in
"mortgage related securities"
may not be legally
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<PAGE> 133
authorized to invest in the
Certificates of any Series.
Investors should consult their
own legal advisors in
determining whether and to
what extent the Certificates
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 Mortgage Assets included
in the related Trust Fund or
to reimburse the amounts
previously used to effect
such purchase, the costs of
carrying the Mortgage Assets
until sale of such Series and
to pay other expenses
connected with pooling the
Mortgage 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 Certificates of such
Class be rated in one of the
four highest rating
categories established for
such Certificates by a
nationally recognized
statistical rating agency (a
"Rating Agency").
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<PAGE> 134
RISK FACTORS
In considering an investment in the Offered Certificates 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. In general, to the extent that the factors
discussed below pertain to or are influenced by the characteristics or behavior
of the underlying loans included in a particular Trust Fund (which comprise the
Mortgage Assets consisting of Mortgage Loans or the Contracts), they would
similarly pertain to and be influenced by the characteristics or behavior of
the mortgage loans underlying any Agency Securities included in such Trust
Fund.
LIMITED LIQUIDITY AND FLUCTUATION IN VALUE FROM MARKET CONDITIONS
General. The Offered Certificates 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 Certificates for an indefinite period of time.
Furthermore, except to the extent described herein and in the related
Prospectus Supplement, Certificateholders will have no redemption rights, and
the Offered Certificates of each Series are subject to early retirement only
under certain specified circumstances described herein and in the related
Prospectus Supplement. See "Description of the Certificates -- Termination"
herein.
Lack of a Secondary Market. There can be no assurance that a
secondary market for the Offered Certificates 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 Certificates remain outstanding. The
Prospectus Supplement for any Series of Offered Certificates may indicate that
an underwriter specified therein intends to establish a secondary market in
such Offered Certificates; 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 Certificates may be listed on any securities exchange.
Book Entry Registration. Because transfers and pledges of Book Entry
Certificates can be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Book Entry Certificates may be reduced to the extent that some investors are
unwilling to hold Certificates in book entry form in the name of Clearing
Agency Participants, and the ability to pledge Book Entry Certificates may be
limited due to lack of a physical certificate. Beneficial Owners of Book Entry
Certificates may, in certain cases, experience delay in the receipt of
distributions of principal and interest since such distributions will be
forwarded by the related Trustee to the Clearing Agency who will then forward
payment to the Clearing Agency Participants who will thereafter forward payment
to Beneficial Owners. In the event of the insolvency of the Clearing Agency or
of a Clearing Agency Participant in whose name Certificates are recorded, the
ability of Beneficial Owners to obtain timely payment and (if the limits of
applicable insurance coverage by the Securities Investor Protection Corporation
are exceeded, or if such coverage is otherwise unavailable) ultimate payment of
principal and interest on Book Entry Certificates may be impaired.
Limited Nature of Ongoing Information. The primary source of ongoing
information regarding the Offered Certificates of any Series, including
information regarding the status of the related Mortgage Assets and any Credit
Enhancement for such Certificates, will be the periodic reports to
Certificateholders to be delivered pursuant to the related Pooling and
Servicing Agreement as described herein under the heading "The Pooling and
Servicing Agreement -- Reports to Certificateholders". There can be no
assurance that any additional ongoing information regarding the Offered
Certificates of any Series will be available through any other source. The
limited nature of such information in respect of a Series of Offered
Certificates may adversely affect the liquidity thereof, even if a secondary
market for such Certificates does develop.
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<PAGE> 135
Sensitivity to Fluctuations in Prevailing Interest Rates. Insofar as
a secondary market does develop with respect to any Series of Offered
Certificates or Class thereof, the market value of such Certificates 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
Mortgage Loans) and prevailing interest rates. The price payable at any given
time in respect of certain Classes of Offered Certificates (in particular, a
Class with a relatively long average life, or a Class of Companion
Certificates, Interest Only Certificates or Principal Only Certificates) may be
extremely sensitive to small fluctuations in prevailing interest rates; and the
relative change in price for an Offered Certificate in response to an upward or
downward movement in prevailing interest rates may not necessarily equal the
relative change in price for such Offered Certificate in response to an equal
but opposite movement in such rates. Accordingly, the sale of Offered
Certificates by a holder in any secondary market that may develop may be at a
discount from the price paid by such holder. The Depositor is not aware of any
source through which price information about the Offered Certificates will be
generally available on an ongoing basis.
LIMITED ASSETS OF TRUST FUND
The Offered Certificates and Mortgage 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 Certificates of any Series
nor the Mortgage Assets in the related Trust Fund will be guaranteed or insured
by the Depositor or any of its affiliates, by any governmental agency or
instrumentality or by any other person, and no Offered Certificate of any
Series will represent a claim against or security interest in the Trust Funds
for any other Series. Accordingly, if the related Trust Fund has insufficient
assets to make payments on a Series of Offered Certificates, no other assets
will be available for payment of the deficiency, and the holders of one or more
Classes of such Offered Certificates 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 Certificates, on any
Distribution Date in respect of which losses or shortfalls in collections on
the Mortgage 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 Certificates, and, thereafter, by the remaining Classes of
Certificates in the priority and manner and subject to the limitations
specified in such Prospectus Supplement. Because distributions of principal on
the Certificates 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
Certificates 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 Certificates 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 Certificates of any
Series because, prior to the retirement of all Classes of such Series having
higher priority in payment than such Compound Interest Certificates, 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
Certificates.
Additions, Substitutions and Withdrawals of Assets. To the extent
provided in the related Prospectus Supplement for a Series, the Depositor may,
subsequent to the issuance of such a Series, deliver additional Assets or
withdraw Assets previously included in the Trust Fund 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 distributions or the date of the final distribution on
the Certificates of such Series. See "Assets Securing or Underlying the
Certificates -- Additions, Substitution and Withdrawal of Assets" herein.
Furthermore, certain amounts on deposit from time to time in certain funds or
accounts constituting part of a Trust Fund, including the Certificate Account
and any accounts maintained as Credit Enhancement, may be withdrawn under
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<PAGE> 136
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 Certificates.
EFFECT OF PREPAYMENTS ON AVERAGE LIFE
As a result of prepayments on the underlying loans, which comprise the
Mortgage Assets consisting of Mortgage Loans or the Contracts or the mortgage
loans or contracts backing the Agency Securities included in any Trust Fund (in
either case, the "Underlying Loans"), the amount and timing of distributions of
principal and/or interest on the Offered Certificates of the related Series may
be highly unpredictable. Prepayments on the Underlying Loans in any Trust Fund
will result in a faster rate of principal payments on one or more Classes of
the related Series of Certificates than if payments on such Underlying Loans
were made as scheduled. Thus, the prepayment experience on the Underlying Loans
in a Trust Fund may affect the average life of one or more Classes of
Certificates of the related Series, including a Class of Offered Certificates.
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 Underlying Loans included in a Trust Fund, then, subject to
the particular terms of the Underlying Loans (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 Underlying Loans are likely to be higher than if
prevailing interest rates remain at or above the rates borne by those
Underlying Loans. Conversely, if prevailing interest rates rise significantly
above the interest rates borne by the Underlying Loans included in a Trust
Fund, then principal prepayments on such Underlying Loans are likely to be
lower than if prevailing interest rates remain at or below the interest rates
borne by those Underlying Loans. In addition to fluctuations in prevailing
interest rates, the rate of prepayments on the Underlying Loans 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 Underlying Loans in any Trust Fund 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 Underlying Loans in any Trust Fund, the retirement of any Class of
Certificates 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
Depositor is not aware of any reliable statistical information regarding the
rates of prepayment of the Contracts and junior lien Mortgage Loans that is
available for these types of loans 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 Contracts and junior lien Mortgage Loans will experience. In fact, a
number of factors suggest that the prepayment experience of the Contracts and
junior lien Mortgage Loans 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 Certificates will be set forth in the related
Prospectus Supplement.
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<PAGE> 137
The extent to which prepayments on the Underlying Loans included in
any Trust Fund ultimately affect the average life of any Class of Certificates
of the related Series will depend on the terms and provisions of such
Certificates. A Class of Certificates, including a Class of Offered
Certificates, may provide that on any Distribution Date the holders of such
Certificates are entitled to a pro rata share of the prepayments on the
Underlying Loans in the related Trust Fund 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 Certificates that entitles the holders
thereof to a disproportionately large share of the prepayments on the
Underlying Loans in the related Trust Fund increases the likelihood of early
retirement of such Class ("Call Risk") if the rate of prepayment is relatively
fast; while a Class of Certificates that entitles the holders thereof to a
disproportionately small share of the prepayments on the Underlying Loans in
the related Trust Fund 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 Certificateholders of such Series to
receive payments (and, in particular, prepayments) of principal of the
Underlying Loans in the related Trust Fund may vary based on the occurrence of
certain events (e.g., the retirement of one or more Classes of Certificates of
such Series) or whether certain contingencies do or do not occur (e.g.,
prepayment and default rates with respect to such Underlying Loans).
A Series of Certificates may include one or more Classes of Scheduled
Amortization Certificates, 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
Certificates, a Classes of Scheduled Amortization Certificates will generally
provide a relatively stable cash flow so long as the actual rate of prepayment
on the Underlying Loans included in the related Trust Fund remains relatively
constant at the rate, or within the range of rates, of prepayment used to
establish the specific principal payment schedule for such Certificates.
Prepayment risk with respect to a given Mortgage Asset Pool does not disappear,
however, and the stability afforded to Scheduled Amortization Certificates
comes at the expense of one or more Companion Classes of the same Series, any
of which Companion Classes may also be a Class of Offered Certificates. 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 Underlying Loans in the
related Trust Fund when the rate of prepayment is relatively fast, and/or may
entitle the holders thereof to a disproportionately small share of prepayments
on the Underlying Loans in the related Trust Fund 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 Certificates if all payments of principal of the Underlying Loans
in the related Trust Fund were allocated on a pro rata basis.
EFFECT OF PREPAYMENTS ON YIELD
A Series of Certificates may include one or more classes of Offered
Certificates offered at a premium or discount. Yields on such Classes of
Certificates will be sensitive, and in some cases extremely sensitive, to
prepayments on the Underlying Loans in the related Trust Fund and, where the
amount of interest payable with respect to a Class is disproportionately large,
as compared to the amount of principal, as with certain classes of Stripped
Interest Certificates, 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 Certificates may vary from the anticipated yield will
depend upon the degree to which such Certificates 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 Certificate 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.
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<PAGE> 138
LIMITATIONS OF CREDIT ENHANCEMENT
Limitations Regarding Types of Losses Covered. The related Prospectus
Supplement for a Series of Certificates 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 Certificates.
Disproportionate Benefits to Certain Classes and Series. A Series of
Certificates may include one or more Classes of Subordinate Certificates (which
may include Offered Certificates), if provided in the related Prospectus
Supplement. Although subordination is intended to reduce the likelihood of
temporary shortfalls and ultimate losses to holders of Senior Certificates, 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 Certificates 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 Certificates of such Series has been repaid in full. As
a result, the impact of losses and shortfalls experienced with respect to the
Mortgage Assets may fall primarily upon those classes of Offered Certificates
having a later right of payments. Moreover, if a form of Credit Enhancement
covers the Offered Certificates of more than one Series and losses on the
related Mortgage Assets exceed the amount of such Credit Enhancement, it is
possible that the holders of Offered Certificates of one (or more) such Series
will be disproportionately benefited by such Credit Enhancement to the
detriment of the holders of Offered Certificates 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
Certificates, including the subordination of one or more other Classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such Classes of Certificates based on an assumed level of
defaults, delinquencies and losses on the Underlying Loans that comprise or
back the Mortgage Assets and certain other factors. There can be no assurance
that the default, delinquency and loss experience on such Underlying Loans will
not exceed such assumed levels. See "Credit Enhancement" herein. If the
defaults, delinquencies and losses on such Underlying Loans do exceed such
assumed levels, the holders of one or more Classes of Offered Certificates 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. 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 Fund 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 Fund. 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
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<PAGE> 139
and qualification by the originating lenders of any individual Title I Mortgage
Loans and Title I Contracts. See "Certain Legal Aspects of the Mortgage Assets
- -- The Title I Program" herein.
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 Depositor, the FHA Claims Administrator, the Servicer, any subservicer and
the Transferor 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 Depositor'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 Mortgage Assets -- The Title I Program --
General" herein.
Because the Trust Fund is not eligible to hold an FHA contract of
insurance under the Title I Program, the FHA will not recognize the Trust Fund
or the Certificateholders as the owners of the Title I Mortgage Loans or Title
I Contracts, or any portion thereof, entitled to submit FHA Claims.
Accordingly, the Trust Fund and the Certificateholders will have no direct
right to receive insurance payments from the FHA. The Depositor 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 Depositor. The Certificateholders 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 Pooling
and Servicing Agreement. The Certificateholders' rights relating to the receipt
of payment from and the administration, processing and submission of FHA Claims
by the Depositor or any FHA Claims Administrator are limited and governed by
the related Pooling and Servicing Agreement and the FHA Claims Administration
Agreement and these functions are obligations of the Depositor and the FHA
Claims Administrator, not the FHA. See "Certain Legal Aspects of the Mortgage
Assets -- The Title I Program -- Claims Procedures under Title I" herein.
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a Class of Offered
Certificates will reflect only its assessment of the likelihood that holders of
such Offered Certificates will receive distributions to which such
Certificateholders are entitled under the related Pooling and Servicing
Agreement. Such rating will not constitute an assessment of the likelihood that
principal prepayments on the Underlying Loans will be made, the degree to which
the rate of such prepayments might differ from that originally anticipated or
the likelihood of early optional termination of the related Trust Fund.
Furthermore, such rating will not address the possibility that prepayment of
the Underlying Loans 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 Certificate 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 Certificates.
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<PAGE> 140
The amount, type and nature of Credit Enhancement, if any, provided
with respect to a Series of Certificates will be determined on the basis of
criteria established by each Rating Agency rating a Class of Certificates 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 Underlying Loans. In other
cases, such criteria may be based upon determination of the values of the
Mortgaged Properties that provide security for the Underlying Loans. 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
Certificates of any Series may be insufficient to fully protect the holders
thereof from losses on the related Mortgage Asset Pool. See "Credit
Enhancement" herein.
ADVERSE TAX CONSEQUENCES
Original Issue Discount. All of the Compound Interest Certificates
and Principal Only Certificates will be, and certain of the other Certificates
may be, issued with original issue discount for federal income tax purposes. A
Holder of a Certificate 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 Certificates generally will be treated as original issue discount for
this purpose. At certain rapid Mortgage Asset prepayment rates, original issue
discount may accrue on certain Classes of Certificates, including certain
variable rate Regular Certificates, that may never be received as cash,
resulting in a subsequent loss on such Certificates. See "Certain Federal
Income Tax Consequences -- Federal Income Tax Consequences for REMIC
Certificates -- Taxation of Regular Certificates -- Original Issue Discount"
and "Certain Federal Income Tax Consequences -- Federal Income Tax Consequences
for Certificates as to Which No REMIC Election Is Made -- Standard Certificates
- -- Premium and Discount -- Original Issue Discount" and " -- Stripped
Certificates -- Taxation of Stripped Certificates -- Original Issue Discount."
Residual Certificates. An election may be made to treat all or any
portion of any Trust Fund as a REMIC for federal income tax purposes. Holders
("Residual Holders") of Certificates representing the residual interests in the
related REMIC ("Residual Certificates") must report on their federal income tax
returns their pro rata share of REMIC taxable income or loss. All or a portion
of the REMIC taxable income reportable by Residual Holders may be treated as
such holders' "excess inclusion" subject to special rules for federal income
tax purposes. The REMIC taxable income, and possibly the tax liabilities of the
Residual Holders, may exceed the cash distributions on the Residual
Certificates during certain periods. Residual Holders who are individuals may
be subject to limitations on the deductibility of servicing fees on the related
Mortgage Assets and other REMIC administrative expenses. Hence, Residual
Holders may experience an after-tax return that is significantly lower than
would be anticipated based upon the stated interest rate, if any, of their
Residual Certificates. See "Certain Federal Income Tax Consequences -- Federal
Income Tax Consequences for REMIC Certificates -- Taxation of Residual
Certificates."
CERTAIN FACTORS AFFECTING DELINQUENCIES, FORECLOSURES AND LOSSES ON UNDERLYING
LOANS
General. The payment performance of the Offered Certificates of any
Series will be directly related to the payment performance of the Underlying
Loans included in the related Trust Fund. Set forth below is a discussion of
certain factors that will affect the full and timely payment of the Underlying
Loans included in any Trust Fund.
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
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higher rates of loss and delinquency on mortgage loans generally. Any
concentration of the Underlying Loans 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 the Underlying Asset. An investment in
Certificates secured by or evidencing an interest in a Mortgage Pool may be
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 Certificates secured by or evidencing interests in such
Mortgage Pool 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 "Assets Securing or Underlying the Certificates
- -- Mortgage Loans."
An investment in Certificates 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 Certificates 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 for
recovery of the outstanding principal and unpaid interest of the defaulted
Contracts. See "Assets Securing or Underlying the Certificates -- 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 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 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 Fund 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 Mortgage Loan, it
would do so subject to any related senior lien(s). In order for the 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 Mortgage Loan in the aggregate, the Trust
Fund, 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 if the deficiency judgment is not obtained or realized. Any
such delays or losses will be borne by the Certificates of a Series to the
extent that such delays or losses are not otherwise covered by amounts
available from any Credit Enhancement provided for such Certificates, as
specified in the related Prospectus Supplement. See "Certain Legal Aspects of
the Mortgage Assets -- Foreclosure -- Junior Liens" herein.
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Certain Legal Considerations of Mortgage Loans and Contracts.
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 Depositor, the 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 Mortgage Loans and Contracts. The Mortgage Loans and
Contracts also may 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 Mortgage Loans and Contracts; (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 and Contracts; (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"). See "Certain Legal Aspects of the Mortgage
Assets" herein. 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
Mortgage Assets" herein.
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 Mortgage Loans and Contracts, 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 Mortgage 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 Mortgage Loan or Contract because of a violation of the
aforementioned laws, public policies or general principles of equity,
distributions from the Trust Fund may be delayed or the Trust Fund may be
unable to make all distributions owed to the Certificateholders to the extent
any related losses are not otherwise covered by amounts available from any
Credit Enhancement provided for the Series of Certificates. 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
related Transferor or the Depositor will be required to repurchase or replace
any Mortgage Loan or Contract which, at the time of origination, did not comply
with applicable federal and state laws or regulations.
RISKS ASSOCIATED WITH CERTAIN MORTGAGE 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
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is required. In addition, the FHA Regulations do not require that the borrower
obtain insurance against physical damage arising from earth movement (including
earthquakes, landslides and mudflows) as a condition to obtaining a property
improvement loan insured under the Title I Program. Accordingly, if a Mortgaged
Property that secures a Title I Mortgage Loan suffers any uninsured hazard or
casualty losses, holders of any Offered Certificates 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 Certificates, 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 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 Contract will not
amend any certificate of title to change the lienholder specified therein from
such Servicer to the Trustee and will not deliver any certificate of title to
such Trustee or note thereon the 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 such servicer. If any related Credit Enhancement is
exhausted and a Contract is in default, then recovery of amounts due on such
Contracts is dependent on repossession and resale of the Manufactured Home
securing such Contract. Certain other factors may limit the ability of the
Holders 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 in the related Trust Fund will not be secured by an
interest in the related real estate or otherwise, and the Trust Fund, as the
owner of such 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 Fund will have recourse only against the borrower's
assets generally, along with all other general unsecured creditors of the
borrower. In a bankruptcy or insolvency proceeding relating to an borrower on
an Unsecured Contract, the obligations of the borrower under such Unsecured
Contract may be discharged in their entirety, notwithstanding the fact that the
portion of such borrower's assets made available to the related Trust Fund 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 the borrower's
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. Each Transferor of Contracts 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
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securing such Contract. A breach of any such warranty that materially adversely
affects any Contract would create an obligation of the Transferor to repurchase
or replace such Contract unless such breach is cured.
Reliance on Management of Timeshare Units. Unlike most conventional
single-family residential properties, the value of a timeshare unit is
substantially dependent on the management of the resort property in which it is
located. Management of timeshare resort properties includes operation of a
reservation system, maintenance of the physical structure, refurbishing of
individual units, maintenance and management of common areas and recreational
facilities, and facilitating the rental of individual units on behalf of
timeshare owners. In addition, timeshare units, which are purchased for
intervals of one or more specified weeks each year, are marketed as the owner's
purchase of future vacation opportunities rather than as a primary residence, a
second home or an investment. Accordingly, while borrowers are obligated to
make payments under their Mortgage Loans irrespective of any defect in, damage
to or change in conditions (such as poor management, faulty construction or
physical, social or environmental conditions) relating to the timeshare
properties, any such defect, damage or change in conditions could result in
delays in payment or in defaults by borrowers whose timeshare units are
affected.
RECHARACTERIZATION OF SALE OF MORTGAGE ASSETS AS BORROWING
The Depositor will agree in the Pooling and Servicing Agreement that
the transfer of the Mortgage Assets to the Trust Fund is intended as a valid
sale and transfer of the Mortgage Assets to the Trustee for the benefit of the
Certificateholders. However, if the Mortgage Assets are held to be property of
the Depositor or if for any reason the Pooling and Servicing Agreement is held
to create a security interest in the Mortgage Assets, the Depositor will agree
in the Pooling and Servicing Agreement that such transfer shall be treated as
the grant of a security interest in the Mortgage Assets to the Trust Fund.
Also, the Depositor will warrant that if the transfer of the Mortgage Assets by
it is deemed to be a grant of a security interest in the Mortgage Assets, the
Trustee will have a perfected first-priority security interest therein. The
Depositor is required to take all actions that are required under law to
protect the Trust Fund's security interest in the Mortgage Assets. If the
transfer of the Mortgage Assets to the Trust Fund is deemed to create a
security interest therein, a tax or government lien on property of the
Depositor arising before the Mortgage Assets came into existence may have
priority over the Trusts Fund's interest in such Mortgage Assets.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The following summaries describe certain features common to each
Series. Such summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Pooling and Servicing Agreement and the Prospectus Supplement relating to each
Series. When particular provisions or terms used or referred to in a Pooling
and Servicing Agreement are referred to herein, such provisions or terms shall
be as used or referred to in such Pooling and Servicing Agreement.
The Certificates will not be insured or guaranteed by GNMA, FNMA,
FHLMC, any governmental entity or, to the extent specified in the related
Prospectus Supplement, any other person. To the extent specified in the related
Prospectus Supplement, the Depositor's only obligations with respect to a
Series will be to obtain certain representations and warranties from each
Transferor and to assign to the related Trustee the Depositor's rights with
respect thereto, and its obligations pursuant to certain representations and
warranties made by it.
To the extent specified in the related Prospectus Supplement, the
Mortgage Assets relating to a Series, other than the Agency Securities and the
Title I Mortgage Loans and Title I Contracts, will not be
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insured or guaranteed by any governmental entity or, any other person. With
respect to a Series for which the related Trust Fund includes Mortgage Loans or
Contracts, to the extent that delinquent payments on or losses in respect of
defaulted Mortgage Loans or Contracts, are not paid from any applicable Credit
Enhancement, such delinquencies may result in delays in distributions to the
Holders of one or more Classes of such Series, and such losses will be borne by
the Holders of one or more Classes of such Series. To the extent specified in
the related Prospectus Supplement, the Servicer will have no obligation to
advance such delinquencies.
In addition, with respect to a Series for which the related Trust Fund
includes Mortgage Assets, late payments on such Mortgage Assets may result in
delays in distributions to the Holders of one or more Classes of such Series,
and losses on such Mortgage Assets will be borne by the Holders of one or more
Classes of such Series, to the extent such late payments and losses are not
advanced or paid from any applicable Credit Enhancement.
THE CERTIFICATES -- GENERAL
The Certificates will be issued in Series pursuant to separate Pooling
and Servicing Agreements (each, a "Pooling and Servicing Agreement") between
the Depositor, the Servicer, the Administrator, if any, the Master Servicer, if
any, and the related Trustee named in the Prospectus Supplement. A form of
Pooling and Servicing Agreement has been filed as an Exhibit to the
Registration Statement of which this Prospectus forms a part. The Pooling and
Servicing Agreement relating to a Series of Certificates will be filed as an
Exhibit to a Report on Form 8-K to be filed with the Commission within 15 days
following the issuance of such Series of Certificates.
The "Issuer" with respect to a Series of Certificates will be the
related Trust Fund established by the Depositor pursuant to the related Pooling
and Servicing Agreement. Each Series of Certificates will be entitled to
distributions only from the Assets included in the related Trust Fund and any
other assets pledged or otherwise available for the benefit of the Holders of
such Series as specified in the related Prospectus Supplement. Accordingly, the
investment characteristics of a Series of Certificates will be determined by
the Assets included in the related Trust Fund. The Certificates of a Series
will not represent obligations of the Depositor, the Servicer, any
Administrator, any Master Servicer, the Trustee or any affiliate thereof.
FORM OF CERTIFICATES; TRANSFER AND EXCHANGE
As specified in the related Prospectus Supplement, the Certificates of
each Series will be issued either in book entry form or fully registered
certificated form in the minimum denominations for each Class specified in the
related Prospectus Supplement. To the extent specified in the Prospectus
Supplement, the original Principal Balance of each Certificate will equal the
aggregate distributions allocable to principal to which such Certificate is
entitled. To the extent specified in the related Prospectus Supplement,
distributions allocable to interest on each Certificate of a Series that is not
entitled to distributions allocable to principal will be calculated based on
the Notional Principal Balance of such Certificate. The "Notional Principal
Balance" of a Certificate will be a notional amount assigned to such
certificate and will not evidence an interest in or entitlement to
distributions allocable to principal, but will be used solely for convenience
in expressing the calculation of interest and for certain other purposes.
Except as described below under "Book Entry Registration" with respect
to Book Entry Certificates, the Certificates of each Series will be
transferable and exchangeable on a register to be maintained at the corporate
trust office of the related Trustee or such other office or agency maintained
for such purposes by the Trustee. To the extent specified in the Prospectus
Supplement with respect to a Series, under the related Pooling and Servicing
Agreement, the Trustee will be appointed initially as the "Registrar" for such
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Series for purposes of maintaining books and records of the ownership and
transfer of the Certificates of such Series. To the extent specified in the
Prospectus Supplement with respect to a Series, no service change will be made
for any registration of transfer or exchange of Certificates of such Series,
but payment of a sum sufficient to cover any tax or other governmental charge
may be required.
Under current law the purchase and holding of a Class of Certificates
entitled only to a specified percentage of distributions of either interest or
principal or a notional amount of either interest or principal on the related
Mortgage Assets or a Class of Certificates entitled to receive distributions of
interest and principal on the Mortgage Assets only after distributions to other
Classes or after the occurrence of certain specified events by or on behalf of
any employee benefit plan or other retirement arrangement (including individual
retirement accounts and annuities, Keogh plans and collective investment funds
in which such plans, accounts or arrangements are invested) subject to
provisions of ERISA or the Code, may result in "prohibited transactions" within
the meaning of ERISA and the Code. See "ERISA Considerations." To the extent
specified in the related Prospectus Supplement, transfer of Certificates of
such a Class will not be registered unless the transferee (i) executes a
representation letter stating that it is not, and is not purchasing on behalf
of, any such plan, account or arrangement or (ii) provides an opinion of
counsel satisfactory to the related Trustee and the Depositor that the purchase
of Certificates of such a Class by or on behalf of such plan, account or
arrangement is permissible under applicable law and will not subject the
related Trustee, the Servicer, the Administrator, if any, the Master Servicer,
if any, or the Depositor to any obligation or liability in addition to those
undertaken in the Pooling and Servicing Agreement.
REMIC ELECTION
As to each Series, one or more elections may be made to treat all or
specified portions of the related Trust Fund as a REMIC for federal income tax
purposes. The related Prospectus Supplement will specify whether a REMIC
election is to be made. Alternatively, the Pooling and Servicing Agreement for
a Series may provide that a REMIC election may be made at the discretion of the
Depositor, the Servicer, the Administrator, if any, the Master Servicer, if
any, or another entity and may only be made if certain conditions are
satisfied. As to any such Series, the terms and provisions applicable to the
making of a REMIC election, as well as any material federal income tax
consequences to Holders of such Series not otherwise described herein, will be
set forth in the related Prospectus Supplement. If such an election is made
with respect to a Series, one of the Classes of such Series will be designated
as evidencing the "residual interests" in the related REMIC, as defined in the
Code. All other Classes of such Series will constitute "regular interests" in
the related REMIC, as defined in the Code. As to each Series with respect to
which a REMIC election is to be made, the Servicer, the Administrator, if any,
the related Trustee, a Residual Holder or another person as specified in the
related Prospectus Supplement will be obligated to take all actions required in
order to comply with applicable laws and regulations and will be obligated to
pay any prohibited transaction taxes. The person so specified, to the extent
provided in the related Prospectus Supplement, will be entitled to
reimbursement for any such payment from the assets of the related Trust Fund
or, if applicable, from any Residual Holder.
CLASSES OF CERTIFICATES
Each Series will be issued in one or more Classes. If specified in the
Prospectus Supplement, one or more Classes of a Series may evidence beneficial
ownership interests in separate groups of Assets included in the related Trust
Fund or otherwise available for the benefit of such Series. The Certificates of
a Series will have an aggregate original principal balance as specified in the
related Prospectus Supplement. The original principal balance of the
Certificates of a Series and the Certificate Interest Rate on the Classes of
such Certificates will be determined in the manner specified in the Prospectus
Supplement.
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Each Class of Certificates that is entitled to distributions allocable
to interest will bear interest at the applicable Certificate Interest Rate,
which may be a fixed rate (which may be zero) or, in the case of Variable
Interest Certificates, may be a rate that is subject to change from time to
time (a) in accordance with a schedule, (b) in reference to an index, or (c)
otherwise in each case as specified in the related Prospectus Supplement.
Notwithstanding the foregoing, if specified in the related Prospectus
Supplement, one or more Classes of a Series may be entitled to receive
distributions of interest only to the extent of amounts available to make such
distributions. One or more Classes of Certificates may provide for interest
that accrues, but is not currently payable ("Compound Interest Certificates").
With respect to any Class of Compound Interest Certificates, 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.
A Series may include one or more Classes entitled only to
distributions (i) allocable to interest ("Interest Only Certificates"), (ii)
allocable to principal ("Principal Only Certificates"), and allocable as
between scheduled payments of principal and Principal Prepayments, as defined
below under "Distributions of Principal and Interest" or (iii) allocable to
both principal (and allocable as between scheduled payments of principal and
Principal Prepayments) and interest. A Series may include one or more classes
as to which distributions will be allocated (i) on the basis of collections
from designated portions of the Assets included in the related Trust Fund, (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.
A Series of Certificates may include one or more Classes of Scheduled
Amortization Certificates and Companion Certificates. "Scheduled Amortization
Certificates" are Certificates 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 Certificates"
are Certificates 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 Certificates on such
Distribution Date. Because of the manner of application of distributions of
principal to Companion Certificates, the weighted average lives of Companion
Certificates of a Series may be expected to be more sensitive to the actual
rate of prepayments on the Mortgage Assets in the related Trust Fund than will
the Scheduled Amortization Certificates of such Series.
One or more Series of Certificates may constitute a Series of "Special
Allocation Certificates" which may include Senior Certificates, Subordinated
Certificates, Priority Certificates and Non-Priority Certificates. As more
fully described in the related Prospectus Supplement for a Series of Special
Allocation Certificates, Special Allocation Certificates are Certificates for
which the timing and/or priority of distributions of principal and/or interest
may favor one or more Classes of such Certificates over one or more other
Classes of such Certificates. 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 Certificates, losses on the Assets included in the related Trust
Fund 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 Certificates in a Series may be comprised of one or
more Classes of Senior Certificates having a priority in right to distributions
of principal and interest over one or more Classes of Subordinated
Certificates, to the extent described in the related Prospectus Supplement, as
a form of Credit Enhancement. See "Credit Enhancement -- Subordination".
Typically, Subordinated Certificates of a Series will carry a rating by the
rating agencies rating the Certificates of such Series lower than that of the
Senior Certificates
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of such Series. In addition, one or more Classes of Certificates of a Series
("Priority Certificates") may be entitled to a priority of distributions of
principal or interest from Assets included in the related Trust Fund over
another Class of Certificates of such Series ("Non-Priority Certificates"), but
only after the exhaustion of other Credit Enhancement applicable to such
Series. Priority Certificates and Non-Priority Certificates nonetheless may be
within the same rating category.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
General. Distributions of principal and interest on the Certificates
of a Series will be made by the related Trustee, to the extent of funds
available therefor, on the related Distribution Date. Distributions will be
made to the persons in whose names the Certificates of such Series are
registered at the close of business on the dates specified in the related
Prospectus Supplement (each, a "Record Date"). With respect to Certificates
other than Book Entry Certificates, distributions will be made by check or
money order mailed to Certificateholders of such Series at their addresses
appearing in the books and records maintained by or on behalf of the Issuer of
such Series or, if specified in the related Prospectus Supplement, in the case
of Certificates that are of a certain minimum denomination as specified in the
related Prospectus Supplement, upon written request by a Holder of such Series,
by wire transfer or by such other means as are agreed upon with such
Certificateholder; provided, however, that the final distribution in retirement
of a Series (other than Book Entry Certificates) will be made only upon
presentation and surrender of such Certificates at the office or agency of the
related Trustee specified in the notice to Certificateholders of such final
distribution. With respect to Book Entry Certificates, such distributions will
be made as described below under "Book Entry Registration" and in the related
Prospectus Supplement.
To the extent specified in the related Prospectus Supplement,
distributions allocable to principal and interest on the Certificates of a
Series will be made by the related Trustee out of, and only to the extent of,
funds in a separate account established and maintained under the related
Pooling and Servicing Agreement for the benefit of Certificateholders of such
Series (the "Certificate Account"), including any funds transferred from any
related Reserve Fund or otherwise applicable accounts maintained by the
Trustee. As between Certificates of different Classes of a Series and as
between distributions of principal (and, if applicable, between distributions
of Principal Prepayments) and interest, distributions made on any Distribution
Date will be applied as specified in the related Prospectus Supplement. To the
extent specified in the related Prospectus Supplement, distributions to any
Class of Certificates will be made pro rata to all Certificateholders of that
Class. If specified in the related Prospectus Supplement, the amounts received
by the Trustee as described below under "Assets Securing or Underlying the
Certificates" will be invested in the Permitted Investments specified herein
and in the related Prospectus Supplement, and all income or other gain from
such investments will be deposited in the related Certificate Account and will
be available to make distributions on the Certificates of the applicable Series
on the next succeeding Distribution Date in the manner specified in the related
Prospectus Supplement.
Distributions of Interest. Each Class of a Series (other than a Class
of Principal Only Certificates) will accrue interest at the applicable
Certificate Interest Rate. One or more Classes may be entitled to receive
distributions of interest only to the extent of amounts available to make such
distributions. Interest on each Class will accrue during the related Due Period
and will be distributed on the related Distribution Date. Interest on all
Certificates which bear or receive interest, other than Compound Interest
Certificates, will be distributed on the Distribution Dates specified in the
related Prospectus Supplement. However, failure to distribute interest on a
current basis may not necessarily be an Event of Default with respect to a
particular Series or Class of Certificates. Interest on any Class of Compound
Interest Certificates or similar securities will not be distributed currently,
but will accrue and the amount of the interest so accrued will be added to the
principal thereof on each Distribution Date until the date specified in the
related Prospectus Supplement. Principal Only Certificates will not accrue, and
will not be entitled to receive, any interest. Upon maturity
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or earlier repurchase of the Certificates of any Class, interest will be paid
to the date specified in the related Prospectus Supplement.
Each payment of interest on each Class of Certificates (or addition to
principal of a Class of Compound Interest Certificates) on a Distribution Date
will include all interest accrued during the related Due Period. If the Due
Period for a Series ends on a date other than a Distribution Date for such
Series, the yield realized by the Holders of such Certificates may be lower
than the yield that would result if the Due Period ended on such Distribution
Date. Additionally, if specified in the related Prospectus Supplement,
interest accrued for a Due Period for one or more Classes may be calculated on
the assumption that principal distributions (and additions to principal of the
Certificates), and allocations of losses on the Mortgage Assets (if specified
in the related Prospectus Supplement), are made on the first day of the
preceding Due Period and not on the Distribution Date for such preceding Due
Period when actually made or added. Such method would produce a lower effective
yield than if interest were calculated on the basis of the actual principal
amount outstanding.
A Series may include one or more Classes of Variable Interest Rate
Certificates. With respect to each Class of Variable Interest Certificates of a
Series, the related Prospectus Supplement will set forth: (i) the initial
Certificate Interest Rate (or the manner of determining the initial Certificate
Interest Rate); (ii) the formula, index or other method by which the
Certificate Interest Rate will be determined from time to time; (iii) the
periodic intervals at which such determination will be made; (iv) the Maximum
Variable Interest Rate, if any, and the Minimum Variable Interest Rate; and (v)
any other terms relevant to such Class of Certificates.
Distributions of Principal. Principal distributions on the
Certificates of a Series will be made from amounts available therefor on each
Distribution Date in an aggregate amount determined as set forth in the related
Prospectus Supplement and will be allocated among the respective Classes of a
Series of Certificates at the times, in the manner and in the priority set
forth in the related Prospectus Supplement.
Except with respect to Compound Interest Certificates and Interest
Only Certificates or similar securities, unless specified otherwise in the
related Prospectus Supplement, on each Distribution Date principal
distributions will be made on the Certificates of a Series in an aggregate
amount determined in the related Prospectus Supplement. If a Series of
Certificates has a Class of Compound Interest Certificates, additional
principal payments on the Certificates of such Series will be made on each
Distribution Date in an amount equal to the interest accrued, but not then
distributable, on such Class of Compound Interest Certificates for the related
Due Period.
If specified in the related Prospectus Supplement, on any Distribution
Date on which the principal balance of the Mortgage Assets relating to a Series
is reduced due to losses on such Mortgage Assets, (i) the amount of such losses
will be allocated first, to reduce the aggregate outstanding principal balance
of the Subordinate Certificates of such Series (or other subordination, if
any,) and, thereafter, to reduce the aggregate outstanding principal balance of
the remaining Certificates of such Series in the priority and manner specified
in such Prospectus Supplement until the aggregate outstanding principal balance
of each Class of such Certificates of such Series so specified has been reduced
to zero or paid in full, thus reducing the amount of principal distributable on
each such Class of Certificates or (ii) such losses may be allocated in any
other manner set forth in the related Prospectus Supplement. To the extent
specified in the related Prospectus Supplement, such reductions of principal of
a Class or Classes of Certificates will be allocated to the Holders of the
Certificates of such Class or Classes pro rata in the proportion which the
outstanding principal of each Certificate of such Class or Classes bears to the
aggregate outstanding principal balance of all Certificates of such Class.
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If provided in the related Prospectus Supplement, one or more Classes
of Senior Certificates of a Series will be entitled to receive all or a
disproportionate percentage of the payments of principal which are received on
the related Mortgage Assets in advance of their scheduled due dates and are not
accompanied by amounts representing scheduled interest due after the month of
such payments ("Principal Prepayments") in the percentages and under the
circumstances or for the periods specified in the Prospectus Supplement. To the
extent provided in the related Prospectus Supplement, any such allocation of
principal prepayments to such Class or Classes will have the effect of
accelerating the amortization of such Senior Certificates while increasing the
interests evidenced by the Subordinated Certificates in rights to the benefit
of the Assets in the related Trust Fund. Increasing the interests of the
Subordinated Certificates relative to that of the Senior Certificates is
intended to preserve the availability of the subordination credit enhancement
provided to the Priority Certificates by the Subordinated Certificates. See
"Credit Enhancement -- Subordination."
Unscheduled Distributions. If specified in the related Prospectus
Supplement, the Certificates of a Series will be subject to receipt of
distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in the related Prospectus
Supplement. If applicable, the related Trustee will be required to make such
unscheduled distributions on the Certificates of a Series on the date and in
the amount specified in the related Prospectus Supplement if, due to
substantial payments of principal (including Principal Prepayments) on the
related Mortgage Assets, low rates then available for reinvestment of such
payments or both, the Trustee determines, based on the assumptions specified in
the related Pooling and Servicing Agreement, that the amount anticipated to be
on deposit in the Certificate Account for such Series on the next related
Distribution Date, together with, if applicable, any amounts available to be
withdrawn from any related Reserve Fund or from any other Credit Enhancement
provided for such Series, may be insufficient to make required distributions on
the Certificates of such Series on such Distribution Date. To the extent
specified in the related Prospectus Supplement, the amount of any such
unscheduled distribution that is allocable to principal will not exceed the
amount that would otherwise have been required to be distributed as principal
on the Certificates of such Series on the next Distribution Date. To the extent
specified in the related Prospectus Supplement, all unscheduled distributions
will include interest at the applicable Certificate Interest Rate (if any) on
the amount of the unscheduled distribution allocable to principal for the
period and to the date specified in such Prospectus Supplement.
To the extent specified in the related Prospectus Supplement, all
distributions allocable to principal in any unscheduled distribution made on
the Certificates of a Series will be made in the same priority and manner as
distributions of principal on such Certificates would have been made on the
next Distribution Date, and with respect to Certificates of the same Class,
unscheduled distributions of principal will be made on a pro rata basis. Notice
of any unscheduled distribution will be given by the Trustee prior to the date
of such distribution.
TERMINATION
The obligations created by the Pooling ans Servicing Agreement for
each Series of Certificates will terminate following (i) the final payment or
other liquidation of the last Mortgage Asset subject thereto or the disposition
of all property acquired upon foreclosure of any Mortgage Loan subject thereto
and (ii) the payment (or provision for payment) to the Certificateholders of
that Series of all amounts required to be paid to them pursuant to such Pooling
and Servicing Agreement. Written notice of termination of a Pooling and
Servicing Agreement will be given to each Certificateholder of the related
Series, and the final distribution will be made only upon presentation and
surrender of the Certificates of such Series at the location to be specified in
the notice of termination.
If specified in the related Prospectus Supplement, a Series of
Certificates may be subject to optional early termination through the
repurchase of the Mortgage Assets in the related Trust Fund by the party or
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parties specified therein, under the circumstances and in the manner set forth
therein. If provided in the related Prospectus Supplement upon the reduction of
the Class Principal Balance of a specified Class or Classes of Certificates by
a specified percentage or amount or upon a specified date, a party designated
therein may be authorized or required to repurchase or to solicit bids for the
purchase of the Mortgage Assets of the related Trust Fund, or of a sufficient
portion of such Mortgage Assets to retire such class or classes, under the
circumstances and in the manner set forth therein. If a REMIC election will be
made with respect to a Series of Certificates, there may be additional
conditions to the termination of the related Trust Fund which will be set forth
in the related Pooling and Servicing Agreement for such Series of Certificates.
BOOK ENTRY REGISTRATION
If the Prospectus Supplement for a Series so provides, Certificates of
any Class of such Series may be issued in book entry form ("Book Entry
Certificates") and held in the form of a single certificate issued in the name
of a Clearing Agency ("Clearing Agency") registered with the Securities and
Exchange Commission or its nominee. Transfers and pledges of Book Entry
Certificates may be made only through entries on the books of the Clearing
Agency in the name of brokers, dealers, banks and other organizations eligible
to maintain accounts with the Clearing Agency ("Clearing Agency Participants")
or their nominees. Clearing Agency Participants may also be Beneficial Owners
(as defined below) of Book Entry Certificates.
Purchasers and other Beneficial Owners of Book Entry Certificates
("Beneficial Owners") may not hold Book Entry Certificates directly, but may
hold, transfer or pledge their ownership interest in the Book Entry
Certificates only through Clearing Agency Participants. Additionally,
Beneficial Owners will receive all distributions of principal and interest with
respect to Book Entry Certificates, and, if applicable, may request repurchase
of Book Entry Certificates only through the Clearing Agency and the Clearing
Agency Participants. Beneficial Owners will not be registered holders of
Certificates or be entitled to receive definitive certificates representing
their ownership interest in the Certificates except under the limited
circumstances, if any, described in the related Prospectus Supplement. See
"Risk Factors -- Limited Liquidity and Fluctuation in Value from Market
Conditions -- Book Entry Registration."
If Certificates of a Series are issued as Book Entry Certificates, the
Clearing Agency will be required to make book entry transfers among Clearing
Agency Participants, to receive and transmit distributions of principal and
interest with respect to the Certificates of such Series, and to receive and
transmit requests for repurchase with respect to such Certificates. Clearing
Agency Participants with whom Beneficial Owners have accounts with respect to
such Book Entry Certificates will be similarly required to make book entry
transfers and receive and transmit distributions and repurchase requests on
behalf of their respective Beneficial Owners. Accordingly, although Beneficial
Owners will not be registered holders of Certificates and will not possess
physical certificates, a method will be provided whereby Beneficial Owners may
receive distributions, transfer their interests, and submit repurchase
requests.
MUTILATED, DESTROYED, LOST OR STOLEN CERTIFICATES
To the extent specified in the related Prospectus Supplement, (i) any
mutilated Certificate is surrendered to the Certificate Registrar, or the
Trustee receives evidence to its satisfaction of the destruction, loss or theft
of any Certificate, and (ii) there is delivered to the Depositor, the Trustee
and the Certificate Registrar such security or indemnity as may be required by
each of them to hold each of them harmless, then, in the absence of notice to
the Depositor, the Trustee and the Certificate Registrar that such Certificate
has been acquired by a bona fide purchaser, the Trustee shall execute, deliver
and authenticate, in exchange for or in lieu of any such mutilated, destroyed,
lost or stolen Certificate, a new Certificate of like tenor and Percentage
Interest, but bearing a number not contemporaneously outstanding. Upon the
issuance of any such new Certificate, the Depositor and the Trustee may require
the payment of a sum sufficient to cover any tax
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or other governmental charge that may be imposed in relation thereto and any
other expenses connected therewith. Any such duplicate Certificate shall
constitute complete and indefeasible evidence of ownership in the Trust Fund,
as if originally issued, whether or not the mutilated, destroyed, lost or
stolen Certificate shall be found at any time.
ASSETS SECURING OR UNDERLYING THE CERTIFICATES
GENERAL
Each Series of Certificates will represent a beneficial interest in
the Assets included in the related Trust Fund and transferred to the related
Trustee by the Depositor. Such Assets may include (i) Mortgage 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 Fund that includes Mortgage Loans or Contracts, all property
acquired by foreclosure or deed in lieu of foreclosure with respect to any such
Mortgage Loan or Contract and certain rights of the Administrator, if any, and
the Servicer under any policies required to be maintained in respect of the
related Mortgage Assets; and (iv) if specified in the Prospectus Supplement,
one or more forms of Credit Enhancement. The primary Assets of any Trust Fund
will consist of Mortgage Assets.
With respect to a Series, the Depositor will acquire the Mortgage
Assets in the open market or in privately negotiated transactions from one or
more entities, and each such entity from whom the Depositor so acquires a
significant portion of the Mortgage 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 Depositor. To
the extent specified in the related prospectus supplement, the Mortgage 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 Mortgage Assets from a Transferor, the Depositor will rely on
the representations and warranties made by the Transferor with respect to such
Mortgage Assets. For a summary description of the expected representations and
warranties with respect to such Mortgage Assets, See "The Pooling and Servicing
Agreement -- Assignment of Mortgage Assets" herein. As further described in the
related Prospectus Supplement for a Series, the Transferor will be obligated to
repurchase or replace any Mortgage 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 Mortgage Assets or the interest of Certificateholders therein. To the
extent that the Depositor has any obligation to repurchase or replace any
Mortgage Assets for a material breach of any representations or warranties made
by the Depositor, the Depositor is not expected to have the financial
capability to repurchase or replace such defective Mortgage Assets, but rather
the Depositor will be relying on the related Transferor of such defective
Mortgage Assets to repurchase or replace them. See"The Depositor" herein.
The following is a brief description of the Mortgage Assets expected
to be included in the Trust Funds. If specific information respecting the
Mortgage 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 Pooling and Servicing Agreement with respect to each Series will be
attached to the Form 8-K and will be
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available for inspection at the corporate trust office of the related Trustee
specified in the related Prospectus Supplement. A schedule of the Mortgage
Assets relating to each Series, will be attached to the related Pooling and
Servicing Agreement delivered to the 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, townhomes 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 Mortgage Loan 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 Fund
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.
(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.
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(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 Depositor.
With respect to a Series for which the related Trust Fund 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.
AGENCY SECURITIES
Government National Mortgage Association (GNMA). GNMA is a
wholly-owned corporate instrumentality of the United States within the United
States Department of Housing and Urban Development. Section 306(g) of Title III
of the National Housing Act of 1934, as amended (the "Housing Act"), authorizes
GNMA to guarantee the timely payment of the principal of and interest on
certificates which represent an interest in a pool of mortgage loans insured by
the Federal Housing Administration ("FHA Loans"), or guaranteed by the Farmers
Home Administration ("FmHA Loans") or partially guaranteed by the Veterans'
Administration ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d)
of the Housing Act, borrow from the United States Treasury in an amount which
is at any time sufficient to enable GNMA, with no limitations as to amount, to
perform its obligations under its guarantee.
GNMA Certificates. Each GNMA Certificate relating to a series (which
may be issued under either the GNMA I program or the GNMA II program, as
referred to by GNMA) will be a "fully modified pass-through" mortgage-backed
certificate issued and serviced by a mortgage banking company or other
financial concern ("GNMA Issuer") approved by GNMA or approved by FNMA as a
seller servicer of FHA Loans, FmHA Loans and/or VA Loans. Each GNMA Certificate
will represent a fractional undivided interest in a pool of mortgage loans
which may include FHA Loans, FmHA Loans and/or VA Loans. Each such mortgage
loan is secured by a one- to four-family residential property. Each such GNMA
Certificate will provide for the payment by or on behalf of the GNMA Issuer to
the registered holder of such GNMA Certificate of scheduled monthly payments of
principal and interest equal to the registered holder's proportionate interest
in the aggregate amount of the monthly principal and interest payment on each
FHA Loan, FmHA Loan or VA Loan underlying such GNMA Certificate, less the
applicable servicing and guarantee fee which together equal the difference
between the interest on the FHA Loan, FmHA Loan or VA Loan and the pass-through
rate on the GNMA Certificate. In addition, each payment will include
proportionate pass-through payments of any prepayments of principal on the FHA
Loans, FmHA Loans or VA Loans underlying such GNMA Certificate and liquidation
proceeds in the event of a foreclosure or other disposition of any such FHA
Loans, FmHA Loans or VA Loans.
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The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States.
Each such GNMA Certificate will have an original maturity of not more
than 30 years (but may have an original maturity of substantially less than 30
years). GNMA will approve the issuance of each such GNMA Certificate in
accordance with a guarantee agreement (a "Guaranty Agreement") between GNMA and
the GNMA Issuer. Pursuant to its Guaranty Agreement, a GNMA Issuer will be
required to advance its own funds in order to make timely payments of all
amounts due on the GNMA Certificate, even if the payments received by the GNMA
Issuer on the mortgage loans underlying each such GNMA Certificate are less
than the amounts due on such GNMA Certificate.
If a GNMA Issuer is unable to make payments on a GNMA Certificate as
such payments become due, it is required promptly to notify GNMA and request
GNMA to make such payments. Upon such notification and request, GNMA will make
such payments directly to the registered holder of the GNMA Certificate. In the
event no payment is made by a GNMA Issuer and the GNMA Issuer fails to notify
and request GNMA to make such payment, the holder of the GNMA Certificate will
have recourse only against GNMA to obtain such payment. In the case of GNMA
Certificates issued in definitive form, the Trustee, as registered holder of
the GNMA Certificates, will have the right to proceed directly against GNMA
under the terms of the Guaranty Agreements relating to such GNMA Certificates
for any amounts that are not paid when due. In the case of GNMA Certificates
issued in book-entry form, The Participants Trust Corporation ("PTC"), or its
nominee, will have the right to proceed against GNMA in such event.
All mortgage loans underlying a particular GNMA I Certificate must
have the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on each GNMA I
Certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying such GNMA I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular GNMA II Certificate may have
per annum interest rates that vary from each other by up to one percentage
point. The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate relating
to a series will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans of VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installment on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments
on any FHA Loans, FmHA Loans or VA Loans underlying a GNMA Certificate relating
to a series or any other early recovery of principal on such loan will be
passed through to the Trustee as the registered holder of such GNMA
Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or
by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from non-"buydown" GNMA
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Certificates and will include amounts to be collected from both the borrower
and the related escrow account. The graduated payment mortgage loans will
provide for graduated interest payments that, during the early years of such
mortgage loans, will be less than the amount of stated interest on such
mortgage loans. The interest not so paid will be added to the principal of such
graduated payment mortgage loans and, together with interest thereon, will be
paid in subsequent years. The obligations of GNMA and of a GNMA Issuer will be
the same irrespective of whether the GNMA Certificates relating to a series of
Certificates are backed by graduated payment mortgage loans or "buydown"
mortgage loans. No statistics comparable to the FHA's prepayment experience on
level payment, non-"buydown" mortgage loans are available in respect of
graduated payment or " buydown" mortgages. GNMA Certificates included in the
Trust Fund for a Series may be held in book-entry form.
If specified in the related Prospectus Supplement, GNMA Certificates
included in the Trust Fund for a Series may be held on deposit at PTC, a
limited purpose trust company organized under the banking law of the State of
New York. PTC operates a private sector, industry-owned depository and
settlement facility for the book-entry transfer of interests in GNMA
Certificates. Distributions of principal of and interest on each GNMA
Certificate held through PTC will be credited by PTC to the PTC participant on
whose account the GNMA Certificate is credited.
Federal National Mortgage Association (FNMA). FNMA is a federally
chartered and privately owned corporation organized and existing under the
Federal National Mortgage Association Charter Act (the "Charter Act"). FNMA was
originally established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately-managed corporation by legislation enacted in
1968.
FNMA provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. FNMA acquires funds to purchase mortgage loans from many capital
market investors that may not ordinarily invest in mortgages, thereby expanding
the total amount of funds available for housing. Operating nationwide, FNMA
helps to redistribute mortgage funds from capital surplus to capital-short
areas.
FNMA Certificates. FNMA Certificates are Guaranteed Mortgage
Pass-Through Certificates representing fractional undivided interests in a pool
of mortgage loans formed by FNMA. Each mortgage loan must meet the applicable
standards of the FNMA purchase program. Mortgage loans comprising a pool are
either provided by FNMA from its own portfolio or purchased pursuant to the
criteria of the FNMA purchase program.
Mortgage loans underlying FNMA Certificates relating to a series will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The rate
of interest payable on a FNMA Certificate is equal to the lowest interest rate
of any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Thus,
the annual interest rates on the mortgage loans underlying a FNMA Certificate
will generally be between 50 basis points and 250 points greater than the
annual FNMA Certificate pass-through rate. If specified in the related
Prospectus Supplement, FNMA Certificates included in the Trust Fund with
respect to a Series may be backed by adjustable rate mortgages.
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Regular monthly installment payments on each FNMA Certificate will be
comprised of interest due as specified by such FNMA Certificate plus the
scheduled principal payments on the Mortgage Loans underlying such FNMA
Certificate due during the period beginning on the second day of the month
prior to the month in which the scheduled monthly installment on such FNMA
Certificate is due and ending on the first day of such month in which the
scheduled monthly installment on such FNMA Certificate is due. Such regular
monthly installments on each such FNMA Certificate will be distributed to the
holder of record on the 25th day of each month. Any principal prepayments on
the mortgage loans underlying any FNMA Certificate included in the Trust Fund
with respect to a Series or any other early recovery of principal on such
mortgage loans will be passed through to the holder of record of such FNMA
Certificate on the 25th day of the month next following such prepayment or
recovery and, in turn, a portion of such amounts will be paid or distributed to
Holders of such Series, secured thereby, as additional principal payments.
FNMA guarantees to each registered holder of a FNMA Certificate that
it will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guarantees are obligations solely of FNMA and are not backed by, nor
entitled to, the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United
States nor any agency thereof is obligated to finance FNMA's operations or to
assist FNMA in any other manner. If FNMA were unable to satisfy its
obligations, distributions to holders of FNMA Certificates would consist solely
of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FNMA Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
Federal Home Loan Mortgage Corporation (FHLMC). FHLMC is a corporate
instrumentality of the United States created pursuant to Title III of the
Emergency Home Finance Act of 1970, as amended (the "FHLMC Act"). The common
stock of FHLMC is owned by the Federal Home Loan Banks. FHLMC was established
primarily for the purpose of increasing the availability of mortgage credit for
the financing of urgently needed housing. It seeks to provide an enhanced
degree of liquidity for residential mortgage investments primarily by assisting
in the development of secondary markets for conventional mortgages. The
principal activity of FHLMC currently consists of the purchase of first lien
conventional mortgage loans or participation interests in such mortgage loans
and the sale of the mortgage loans or participations so purchased in the form
of mortgage securities, primarily FHLMC Certificates. FHLMC is confined to
purchasing, so far as practicable, mortgage loans that it deems to be of such
quality, type and class as to meet generally the purchase standards imposed by
private institutional mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien
conventional loans, FHA Loans or VA Loans (a "FHLMC Certificate Group"). FHLMC
Certificates are sold under the terms of a Mortgage Participation Certificate
Agreement. A FHLMC Certificate may be issued under either FHLMC's Cash Program
or Guarantor Program.
To the extent described in the related Prospectus Supplement, mortgage
loans underlying the FHLMC Certificates relating to a series will consist of
mortgage loans with original terms to maturity of between 10 and 30 years. Each
such mortgage loan must meet the applicable standards set forth in FHLMC Act. A
FHLMC Certificate group may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another FHLMC Certificate group.
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Under the Guarantor Program any such FHLMC Certificate group may include only
whole loans or participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of
the applicable Certificate rate on the registered holder's pro rata share of
the unpaid principal balance outstanding on the underlying mortgage loans in
the FHLMC Certificate group represented by such FHLMC Certificate, whether or
not received. FHLMC also guarantees to each registered holder of a FHLMC
Certificate collection by such holder of all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the Prospectus Supplement for a Series, guarantee the timely payment of
scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees the timely
payment of principal based on the difference between the pool factor published
in the month preceding the month of distribution and the pool factor published
in such month of distribution. Pursuant to its guarantees, FHLMC indemnifies
holders of FHLMC Certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. FHLMC may remit the
amount due on account of its guarantee of collection of principal at any time
after default on an underlying mortgage loan, but not later than (i) 30 days
following foreclosure sale, (ii) 30 days following payment of the claim by any
mortgage insurer, or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the borrower for accelerated payment of
principal. In taking actions regarding the collection of principal after
default on the mortgage loans underlying FHLMC Certificates, including the
timing of demand for acceleration, FHLMC reserves the right to exercise its
judgment with respect to the mortgage loans in the same manner as for mortgage
loans which it has purchased but not sold. The length of time necessary for
FHLMC to determine that a mortgage loan should be accelerated varies with the
particular circumstances of each borrower, and FHLMC has not adopted standards
which require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage
loans and, accordingly, monthly distributions to holders of FHLMC Certificates
would be affected by delinquent payments and defaults on such mortgage loans.
In addition to FHLMC's guarantees of timely payment of interest and
ultimate collection of principal, FHLMC guarantees with respect to FHLMC
Certificates representing certain qualifying mortgage loans the timely payment
by each borrower of the monthly principal scheduled to be paid under the
amortization schedule applicable to each such mortgage loan ("Scheduled
Principal"). Servicers of the mortgage loans comprising these FHLMC
Certificates are required to pay Scheduled Principal to FHLMC whether or not
received from the borrowers. FHLMC, in turn, guarantees to pay Scheduled
Principal to each registered holder of such FHLMC Certificates whether or not
received from the servicers. FHLMC monthly payments of Scheduled Principal are
computed based upon the servicer's monthly report to FHLMC of the amount of
Scheduled Principal due to be paid on the related mortgage loans. The
Prospectus Supplement for each Series for which the related Trust Fund includes
FHLMC Certificates will set forth the nature of FHLMC's guarantee with respect
to scheduled principal payments on the mortgage loans in the pools represented
by such FHLMC Certificates.
Requests for registration of ownership of FHLMC Certificates made on
or before the last business day of a month are made effective as of the first
day of that month. With respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, a Federal Reserve Bank which maintains book-entry accounts
with
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respect thereto will make payments of interest and principal each month to
holders in accordance with the holders' instructions. The first payment to a
holder of a FHLMC Certificate will normally be received by the 15th day of the
second month following the month in which the purchaser became recognized as
the holder of such FHLMC Certificate. Thereafter, payments will normally be
received by the 15th day of each month.
A FHLMC Certificate may be issued under programs created by FHLMC,
including its Cash Program or Guarantor Program. Under FHLMC's Cash Program,
the pooled mortgage loans underlying a FHLMC Certificate are purchased for cash
from a number of sellers. With respect to FHLMC Certificate Pools formed prior
to June 1, 1987, under the Cash Program, there is no limitation on the amount
by which interest rates on the mortgage loans underlying a FHLMC Certificate
may exceed the interest rate on the FHLMC Certificate. Under such program,
FHLMC purchases groups of whole mortgage loans at specified percentages of
their unpaid principal balances, adjusted for accrued or prepaid interest,
which, when applied to the interest rate of the mortgage loans purchased,
results in the yield (expressed as a percentage) required by FHLMC. The
required yield, which includes a minimum servicing fee retained by the
servicer, is calculated using the outstanding principal balance of the mortgage
loans, an assumed term and a prepayment period as determined by FHLMC. No
mortgage loan is purchased by FHLMC at greater than 100% of its outstanding
principal balance. Thus, the range of interest rates on the mortgage loans in a
FHLMC Certificate Pool formed prior to June 1987 under the Cash Program will
vary since mortgage loans are purchased and identified to a FHLMC Certificate
Pool based upon their yield to FHLMC rather than on the interest rates on the
mortgage loans. With respect to FHLMC Certificate Pools formed on or after June
1, 1987, the range of interest rates on the mortgage loans and participations
in a FHLMC Certificate Pool which is comprised of 15- or 30-year fixed-rate
single family mortgage loans bought by FHLMC under the Cash Program will be
restricted to one percentage point. In addition, the minimum interest rate on
any mortgage loan in a FHLMC Certificate Pool will be greater than or equal to
the annual pass-through rate on the related FHLMC Certificate, and the maximum
interest rate will not be more than two percentage points above such
pass-through rate.
Under FHLMC's Guarantor Program, the mortgage loans underlying a FHLMC
Certificate are purchased from a single seller in exchange for such FHLMC
Certificate. The interest rate on a FHLMC Certificate under such program is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC. Under the
Guarantor Program, the range between the lowest and highest annual interest
rates on the mortgage loans in a FHLMC Certificate Pool may not exceed two
percentage points. For some FHLMC Certificates issued pursuant to purchase
contracts under the Guarantor Program on or after September 1, 1987, the range
of the interest rates on the mortgage loans in a FHLMC Certificate Pool will
not exceed one percentage point.
Stripped Agency Securities. Agency Securities may consist of one or
more stripped mortgage-backed securities, each as described herein and in the
related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but
not the interest distributions) or the interest distributions (but not the
principal distributions), or in some specified portion of the principal and
interest distributions (but not all of such distributions) on certain GNMA
Certificates, FNMA Certificates, FHLMC Certificates, or other Agency
Securities. The underlying securities will be held under a trust agreement by
GNMA, FNMA or FHLMC each as trustee, or by another trustee named in the related
Prospectus Supplement. FHLMC, FNMA or GNMA will guarantee each stripped Agency
Security to the same extent as such entity guarantees the underlying securities
backing such stripped Agency Security, to the extent specified in the related
Prospectus Supplement.
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Other Agency Securities. If specified in the related Prospectus
Supplement, a Trust Fund may include other mortgage pass-through or
participation certificates issued or guaranteed by GNMA, FNMA or FHLMC,
including but not limited to FNMA Guaranteed REMIC Pass-Through Certificates
and FHLMC Multiclass Mortgage Participation Certificates. The characteristics
of any such mortgage pass-through or participation certificates will be
described in such Prospectus Supplement. If specified, a combination of
different types of Agency Securities may be included in a Trust Fund.
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) unsecured loans for Manufactured Homes and for
property improvement, debt consolidation and/or home equity purposes (such
unsecured loans are collectively, the "Unsecured Contracts"). To the extent
described in the related Prospectus Supplement, certain Contracts that are
secured by Manufactured Homes and Unsecured Contracts will be conventional
(i.e., not insured or guaranteed by a governmental agency) loan contracts (the
"Conventional Contracts"), while other Contracts that are secured by
Manufactured Homes or that are unsecured loans for Manufactured Homes or
property improvements 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 in the Trust Fund with respect to
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 ability to pay 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.
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." Moreover, if an election is made to treat a Trust Fund
including Secured Contracts as a REMIC as described in "Certain Federal Income
Tax Consequences --
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Federal Income Tax Consequences for REMIC Certificates," the related
Manufactured Homes will have a minimum of 400 square feet of living space and a
minimum width in excess of 102 inches.
To the extent specified in the Prospectus Supplement with respect to a
Series for which the related Trust Fund 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 Depositor may, subsequent to the
issuance of a Series, (i) deliver additional Assets to the related Trust Fund,
(ii) withdraw Assets previously included in a Trust Fund 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
Fund 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 Fund 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 Mortgage Asset Pool
characteristics with respect to the 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 Depositor will be subject to the applicable
limitations, requirements and conditions provided in the related 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 Pooling and Servicing Agreement will provide for a
commitment by the related Trust Fund to subsequently purchase additional
Mortgage Assets ("Subsequent Mortgage Assets") from the Depositor following the
date on which the Trust Fund is established and the related Certificates are
issued (a "Pre-Funding Arrangement"). With respect to a Series, the Pre-Funding
Arrangement will require that any Subsequent Mortgage Assets transferred to the
Trust Fund conform to the requirements and conditions provided in the related
Pooling and Servicing Agreement. If a Pre-Funding Arrangement is utilized in
connection with the issuance of the Series of Certificates, on the closing date
for the issuance of such Series the related Trustee will be required
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to deposit in a segregated account (a "Pre-Funding Account") all or a portion
of the proceeds received by the Trustee in connection with the sale of one or
more Classes of Certificates of such Series; and subsequently, the Trust Fund
will acquire Subsequent Mortgage Assets from the Depositor 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 Mortgage 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 Certificates 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 Certificates as specified in the related Prospectus Supplement.
Although it is intended that the principal amount of Subsequent Mortgage Assets
transferred to the Trust Fund 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 Certificates,
no assurance can be given that such a distribution with respect to the
Certificates 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 Mortgage 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 Certificates 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 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 Trustee, commercial paper, debt
obligations, and money market funds; provided such investments are acceptable
to each Rating Agency rating the Series of Certificates 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 Fund 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 Certificates.
The utilization of a Pre-Funding Arrangement is intended to improve
the efficiency of the issuance of a Series of Certificates and the sale of the
Mortgage Assets to the related Trust Fund through the incremental delivery of
the Mortgage 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 Mortgage Assets by the Depositor and the related Transferor
and the issuance of a larger principal amount of Certificates for such Series
than would be the case without a Pre-Funding Arrangement.
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CREDIT ENHANCEMENT
GENERAL
Various forms of credit enhancement ("Credit Enhancement") may be
provided with respect to one or more Classes of a Series or with respect to the
Assets in the related Trust Fund. Credit Enhancement may be in the form of the
subordination of one or more Classes of such Series, the overcollateralization
of the Trust Fund with respect to a Series, the establishment of one or more
Reserve Funds, the use of a cross-support feature, the use of a Mortgage Pool
Insurance Policy, Certificate Insurance Policy, Special Hazard Insurance
Policy, bankruptcy bond, or another form of Credit Enhancement described in the
related Prospectus Supplement, or any combination of the foregoing. 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
Certificates 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.
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 Certificates") will instead be payable to one or more
other Classes of such Series (the "Senior Certificates") 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 Mortgage Assets and losses on defaulted Mortgage Assets will be borne
first by the various Classes of Subordinated Certificates and thereafter by the
various Classes of Senior Certificates, 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 Mortgage Assets over the lives of the Certificates of a Series or at any
time, the aggregate losses in respect of defaulted Mortgage Assets which must
be borne by the Subordinated Certificates by virtue of subordination and the
amount of the distributions otherwise distributable to the Subordinated
Certificates that will be distributable to Holders of Senior Certificates 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 Mortgage Assets or aggregate losses in respect of such
Mortgage Assets were to exceed the total amounts distributable and available
for distribution to Holders of Subordinated Certificates were to exceed the
specified maximum amount, Holders of Senior Certificates could experience
losses on their Certificates.
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 Certificates on any Distribution Date
may instead be deposited into one or more Reserve Fund (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 Certificates 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 Certificates at the times and under the circumstances specified in
such Prospectus Supplement.
If specified in the related Prospectus Supplement, various Classes of
Senior Certificates and Subordinated Certificates may themselves be subordinate
in their right to receive certain distributions to
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other Classes of Senior and Subordinated Certificates, respectively, through a
cross-support mechanism or otherwise.
As between Classes of Senior Certificates and as between Classes of
Subordinated Certificates, distributions may be allocated among such Classes
(i) in the order of their Scheduled 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 Certificates, distributions to
Holders of Senior Certificates on account of delinquencies or losses and
payments to any Reserve Fund will be allocated as specified in the related
Prospectus Supplement.
OVERCOLLATERALIZATION
If provided in the related Prospectus Supplement, the aggregate
principal balance of the Mortgage Assets included in the Trust Fund may exceed
the aggregate original principal balance of the Certificates in 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 Certificates to produce and maintain a specified level of
overcollateralization. With respect to a Series of Certificates, 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 Pooling and Servicing Agreement.
CROSS-SUPPORT
If specified in the related Prospectus Supplement, separate Classes of
related Series of Certificates may represent the beneficial ownership of or be
separately secured by, separate groups of Assets included in the Trust Fund for
a Series or otherwise available for the benefit of such Certificates. In such
case, Credit Enhancement may be provided by a cross-support feature which may
require that distributions be made with respect to Certificates evidencing
beneficial ownership of or secured by one or more asset groups prior to
distributions to Subordinated Certificates evidencing a beneficial ownership
interest in or secured by other asset groups within the same Trust Fund. The
Prospectus Supplement for a Series which includes a cross-support feature will
describe the manner and conditions for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by
one or more forms of Credit Enhancement may apply concurrently to two or more
separate Trust Funds for a separate Series of Certificates. If applicable, the
Prospectus Supplement will identify the Trust Funds to which such credit
support relates and the manner of determining the amount of the coverage
provided thereby and of the application of such coverage to the identified
Trust Funds.
CERTIFICATE INSURANCE
If specified in the Prospectus Supplement, one or more Certificate
Guaranty Insurance Policies (each, a "Certificate Guaranty Policy") will be
obtained. Such Certificate Guaranty Policy with respect to a Series will,
subject to limitations described in the related Prospectus Supplement, provide
to the Holders of the insured Certificates of such Series a guarantee of
payment of any interest and/or principal payments due to such Holders on each
Distribution Date. The related Prospectus Supplement will describe the terms of
any Certificate Guaranty Policy and will set forth certain information with
respect to the Certificate Insurer.
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POOL INSURANCE
With respect to a Series for which the related Trust Fund includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, a
Series for which the related Trust Fund includes Contracts), in order to
decrease the likelihood that Holders of the Certificates 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. 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 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, the Mortgage Pool Insurance Policies, if
any, will not 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.
SPECIAL HAZARD INSURANCE
With respect to a Series for which the related Trust Fund includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, each
Series for which the related Trust Fund includes Contracts), in order to
decrease the likelihood that Holders of the Certificates 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. 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 Certificates 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. See "Servicing of
the Mortgage Loans and Contracts -- Standard Hazard Insurance." Any Special
Hazard Insurance Policy may not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear
reaction, flood (if the Mortgaged Property is located in a federally designated
flood area), chemical contamination and certain other risks. Aggregate claims
under each Special Hazard Insurance Policy will be limited as described in the
related Prospectus Supplement. Any Special Hazard Insurance Policy may also
provide that no claim may be paid unless hazard and if applicable, flood
insurance on the Mortgaged Property has been kept in force and other protection
and preservation expenses have been paid.
The related Prospectus Supplement will describe the terms of any
applicable Special Hazard Insurance Policy and will set forth certain
information with respect to the related Special Hazard Insurer.
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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 related
Transferor or the Depositor 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 Fund, to pay the expenses of the
related Trust Fund or for such other purposes specified in such Prospectus
Supplement. Whether or not the related Transferor or the Depositor has any
obligation to make such a deposit, certain amounts to which the Holders of the
Subordinated Certificates of such Series, if any, the related Transferor or the
Depositor 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 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 Certificates of such Series, as
beneficiary and will be issued by an entity acceptable to each rating agency
that rates such Certificates. Additional information with respect to such
instruments deposited in the Reserve Funds may be set forth in the Prospectus
Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the Prospectus Supplement with respect to a Series,
the related Trust Fund may also include, or the Certificates 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 Assets
included in such Trust Fund, (ii) paying administrative expenses, (iii)
establishing a minimum reinvestment rate on the distributions made in respect
of such Assets, (iv) guaranteeing timely distribution of principal and interest
on the Certificates of such Series, or (v) for such other purpose as is
specified in such Prospectus Supplement. Such arrangements may include
agreements under which Holders of the Certificates 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 Servicers or the Administrator, if any,
to advance delinquent installments in respect of the Mortgage Loans. See
"Servicing of Mortgage Loans and Contracts --Advances".
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS
Except as otherwise noted, the description set forth below of the
servicing of Mortgage Loans is applicable to Mortgage Loans included in the
Trust Fund with respect to a Series of Certificates.
To the extent provided in the related Prospectus Supplement, with
respect to a Series of Certificates for which the related Trust Fund includes
Mortgage Loans or Contracts, the Mortgage Loans or Contracts included in the
Trust Fund for a Series of Certificates 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
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applicable under circumstances when the Servicer is an affiliate of the
Depositor. If the Servicer is not an affiliate of the Depositor, the discussion
relating to the servicing of the Mortgage Loans and Contracts as set forth
below may be modified or superseded by any discussion relating to the servicing
of the Mortgage Loans and Contracts set forth in the Prospectus Supplement.
To the extent specified in the related Prospectus Supplement, the
Mortgage Loans and Contracts 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 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 or Note; 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 and Note do 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 the Note 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 Note.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
With respect to any defaulted Mortgage Loan 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 Certificateholders. Without
limiting the generality of the preceding sentence, the Servicer will, in
accordance with the servicing standard described above, (i) in the case of
Title I Mortgage Loans and Title I Contracts only, direct the Trustee (or any
Administrator) to submit an FHA Claim to the FHA, in accordance with FHA
Regulations, or (ii) in the case of Mortgage Loans and Contracts, take such
other action as the Servicer deems to be in the best interests of the
Certificateholders, 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 Certificateholders, provided such action
was economically justified and would not affect the status of the REMIC or
cause a tax to be imposed upon the REMIC for federal income tax purposes.
Typically, however, the Servicer has chosen not to pursue foreclosures of
defaulted loans comparable to the Mortgage Loans and Contracts 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
Mortgaged Property, or to advance funds to keep the senior mortgage(s) current.
In addition, if a defaulted mortgage loan or contract (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 mortgage loan or contract. In the
event an FHA Claim is rejected by the FHA due to circumstances that constitute
a breach of the Transferor's representations and warranties in the Pooling and
Servicing Agreement, the Transferor will be required to repurchase the related
Title I Mortgage Loan or Title I Contract at the purchase price and in the
manner set forth in the Pooling and Servicing Agreement.
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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
The Pooling and Servicing Agreement requires the Servicer to make
reasonable efforts to collect all payments called for under the terms and
provisions of the Mortgage Loans and the Contracts. 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 Mortgage Loan or a Contract 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 Mortgage Loan or Contract 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 Pooling and Servicing
Agreement and the FHA Regulations, if applicable.
SUBSERVICERS
The Servicer is permitted under the Pooling and Servicing Agreement to
enter into servicing arrangements with subservicers meeting the requirements of
the Pooling and Servicing Agreement, provided that the Trustee gives written
consent thereto. Notwithstanding any subservicing arrangements, the Servicer
shall not be relieved of its obligations under the Pooling and Servicing
Agreement to the Trustee and the Certificateholders, 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 Mortgage Loans and the Contracts.
REMOVAL AND RESIGNATION OF SERVICER
To the extent specified in the Prospectus Supplement, the Trustee may
remove the Servicer upon the occurrence and continuation beyond the applicable
cure period of certain events described in the related 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 Depositor, the Trustee and any other
persons so specified in the related 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 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 Mortgage 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 Certificateholders, be added to the amount owing
under the related Mortgage Asset.
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SERVICING PROCEDURES
To the extent specified in the related Prospectus Supplement, the
Servicer and each Subservicer will service the Mortgage Loans and Contracts
pursuant to written guidelines promulgated by the Depositor or the Servicer.
The Servicer will exercise its best reasonable efforts to insure that the
Subservicers service the Mortgage Loans and Contracts 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 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 Certificateholders' 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 Pooling and Servicing Agreement relating to the servicing of the Mortgage
Loans.
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
Mortgage Assets" herein. 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
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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 Fund that includes Contracts, the
Servicer will service and administer the Contracts assigned to the Trustee
pursuant to the related Pooling and Servicing Agreement. The Servicer, either
directly or through Subservicers subject to general supervision by the
Servicer, will perform diligently all services and duties specified in each
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 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 Mortgage Loan and Contract, the Servicer may
receive compensation with respect to each interest payment thereon in an amount
specified in the related Prospectus Supplement. As compensation for its
servicing duties, each Subservicer, if any, will be entitled to a monthly
servicing fee in the amount specified in the related Prospectus Supplement. In
addition to the primary compensation, each Servicer or Subservicer, if any,
will retain all assumption underwriting fees and late payment charges, to the
extent collected from Borrowers if provided in the related Prospectus
Supplement.
The Servicer and any Subservicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans and Contracts. No loss will be suffered on the Certificates by
reason of such expenses to the extent claims for such expenses are paid
directly under any applicable Mortgage Pool Insurance Policy, a primary
mortgage insurance policy, or from other forms of Credit Enhancement. In the
event, however, that the defaulted Mortgage Loans are not covered by a Mortgage
Pool Insurance Policy, Primary Mortgage Insurance Policies, 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 Certificates of the affected Series to the extent that the
proceeds from the liquidation of a defaulted Mortgage Loan or Contract, after
reimbursement of the Servicer's and the Subservicer's expenses, are less than
the principal balance of such defaulted Mortgage Loan or Contract.
THE POOLING AND SERVICING AGREEMENT
The following summaries describe certain provisions of the Pooling and
Servicing Agreement not described elsewhere in this Prospectus. Where
particular provisions or terms used in the Pooling and Servicing Agreements are
referred to, the actual provisions (including definitions of terms) are
incorporated by reference as a part of such summaries. The description set
forth below is subject to modification in the
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Prospectus Supplement for a Series of Certificates to describe the terms and
provisions of the particular Pooling and Servicing Agreement relating to such
Series of Certificates.
Generally, the discussion in this section of the Prospectus is
applicable under circumstances when the Servicer is an affiliate of the
Depositor. If the Servicer is not an affiliate of the Depositor, the discussion
relating to pooling and administration (or master servicing) as set forth below
may be modified or superseded by any discussion relating to the pooling and
administration (or master servicing) set forth in the Prospectus Supplement. In
addition, certain of the following summaries only apply to a Pooling and
Servicing Agreement relating to series of Certificates for which the related
Trust Fund includes Mortgage Loans or Contracts. Provisions of Pooling and
Servicing Agreements relating to series of Certificates for which the related
Trust Fund includes other types of Mortgage Assets will be summarized and
described in the related Prospectus Supplement.
ASSIGNMENT OF MORTGAGE ASSETS
Assignment of Mortgage Loans. At the time of issuance of the
Certificates of a Series, the Depositor will assign the Mortgage Loans to the
related Trustee, together with all principal and interest (subject to
exclusions or adjustments specified in the related Prospectus Supplement
received by the Depositor on or with respect to such Mortgage Loans on or after
the cut-off date) other than principal and interest due and payable on or
before the date specified in the related Prospectus Supplement. The Trustee
will, concurrently with such assignment, execute, countersign and deliver the
Certificates to the Depositor in exchange for the Mortgage Loans. Each Mortgage
Loan will be identified in a schedule appearing as an exhibit to the Pooling
and Servicing Agreement.
In addition, as to each Mortgage Loan, the Depositor will deliver to
the Trustee or its custodian, as specified in the related Prospectus
Supplement, the Mortgage Note and 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 Depositor may deliver copies thereof and deliver
the original recorded documents promptly upon receipt.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor, as depositor, will cause to be delivered to the Trustee or its
custodian, as specified in the related Prospectus Supplement, the related
original Cooperative note endorsed to the order of the 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 Depositor will file in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
To the extent specified in the related Prospectus Supplement, in the
Pooling and Servicing Agreement the Depositor generally will represent and
warrant to the Trustee, among other things, that (i) the information with
respect to each Mortgage Loan set forth in the schedule of Mortgage Loans
attached thereto is true and correct in all material respects; (ii) at the date
of initial issuance of the Certificates, the Depositor has good and marketable
title to the Mortgage Loans included in the Trust Fund and such other items
comprising the corpus of the Trust Fund are free and clear of any lien,
mortgage, pledge, charge, security interest or other encumbrance; (iii) at the
date of initial issuance of the Certificates, no Mortgage Loan is 30 or more
days delinquent and there are no delinquent tax or assessment liens against the
property covered by the related Mortgage; and (iv) each Mortgage Loan at the
time it was made 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.
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If specified in the related Prospectus Supplement, the Depositor may,
in lieu of making the representations set forth in the preceding paragraph,
cause the entity from which such Mortgage Loans were acquired to make such
representations (other than those regarding the Depositor's title to the
Mortgage Loans, which will in all events be made by the Depositor), in the
sales agreement pursuant to which such Mortgage Loans are acquired, or if such
entity is acting as Servicer, in the Pooling and Servicing Agreement, or if
such entity is acting as a Subservicer, in its Subservicing Agreement. In such
event such representations, and the Depositor's rights against such entity in
the event of a breach thereof, will be assigned to the Trustee for the benefit
of the holders of the Certificates of such Series.
Assignment of Contracts. The Depositor will cause the Contracts to be
assigned to the Trustee, together with principal and interest due on or with
respect to the Contracts after the date specified in the related Prospectus
Supplement. Each Contract will be identified in a loan schedule ("Contract Loan
Schedule") appearing as an exhibit to the related Pooling and Servicing
Agreement.
In addition, with respect to each Contract for a Manufactured Home,
the Depositor will deliver or cause to be delivered to the 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
Certificateholders to the Contracts, the Depositor will cause a UCC-1 financing
statement to be filed identifying the 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 Depositor to the Trustee. Therefore, if a
subsequent purchaser were able to take physical possession of the Contracts
without notice of such assignment, the interest of the Holders of the
Certificates of the applicable Series in the Contracts could be defeated. See
"Certain Legal Aspects of the Mortgage Assets."
To the extent specified in the Prospectus Supplement, the Depositor
will provide limited representations and warranties to the Trustee concerning
the Contracts. Such representations and warranties will include: (i) that the
information with respect to each Contract set forth in the Contract Loan
Schedule provides an accurate listing of the Contracts and that the information
respecting such Contracts set forth in such Contract Loan Schedule is true and
correct in all material respects at the date or dates respecting which such
information is furnished; (ii) that, immediately prior to the conveyance of the
Contracts, the Depositor had good and marketable title to, and was sole owner
of, each such Contract; and (iii) that there has been no other sale by it of
such Contract.
Assignment of Agency Securities. With respect to each Series, to the
extent specified in the related Prospectus Supplement, the Depositor will cause
any Agency Securities included in the related Trust Fund to be registered in
the name of the Trustee. The Trustee (or its custodian as specified in the
related Prospectus Supplement) will have possession of any certificated Agency
Securities. To the extent specified in the related Prospectus Supplement, the
Trustee will not be in possession of or be assignee of record of any underlying
assets for an Agency Security. Each Agency Security will be identified in a
schedule appearing as an exhibit to the related Pooling and Servicing
Agreement. The Depositor will represent and warrant to the Trustee, among other
things, the information contained in such schedule is true and correct and that
immediately prior to the transfer of the related securities to the Trustee, the
Depositor had good and marketable title to, and was the sole owner of, each
such security.
CONVEYANCE OF SUBSEQUENT MORTGAGE ASSETS
With respect to a Series of Certificates for which a PreFunding
Arrangement is provided, in connection with any conveyance of Subsequent
Mortgage Assets to the Trust Fund after the issuance of such Series, the
related Pooling and Servicing Agreement will require the Transferor and
Depositor to satisfy the
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following conditions, among others: (i) each Subsequent Mortgage 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 Trustee and the Depositor (the "Subsequent Transfer
Agreement") and in the related Pooling and Servicing Agreement; (ii) the
Transferor will not select such Subsequent Mortgage Assets in a manner that it
believes is adverse to the interests of the Certificateholders; (iii) as of the
related cut-off date, all of the Mortgage Assets in the Mortgage Asset Pool at
that time, including the Subsequent Mortgage Assets purchased after the closing
date will satisfy the criteria set forth in the related Pooling and Servicing
Agreement; (iv) the Subsequent Mortgage Assets will have been approved by any
third party provider of Credit Enhancement, if applicable; and (v) prior to the
purchase of each Subsequent Mortgage Asset the Trustee will perform an initial
review of certain related loan file documentation for such Mortgage Asset and
issue an initial certification for which the required documentation in such
loan file has been received with respect to each such Subsequent Mortgage
Asset. The Subsequent Mortgage Assets on an aggregate basis, will have
characteristics similar to the characteristics of the pool of Initial Mortgage
Assets as described in the related Prospectus Supplement. Each acquisition of
any Subsequent Mortgage 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 Mortgage Asset Pool for compliance with the applicable statistical
criteria set forth in the related Pooling and Servicing Agreement.
REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS AND CONTRACTS
The Trustee (or its custodian as specified in the related Prospectus
Supplement) will review the documents delivered to it with respect to the
Mortgage Loans and Contracts included in the related Trust Fund. 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 Depositor
cannot deliver such document or cure such defect within 60 days after notice
thereof (which the 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 Mortgage Loan or Contract, then the Depositor 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
Mortgage Loan or Contract from the Trust Fund and substitute one or more other
Mortgage Loans or Contracts therefor or (b) repurchase the Mortgage Loan or
Contract from the 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 Mortgage Loan. 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 Certificates of the applicable Series or the
Trustee against the Depositor for a material defect in a document relating to a
Mortgage Loan or Contract.
If the Prospectus Supplement for a Series of Certificates so provides,
then in lieu of agreeing to repurchase or substitute Mortgage Loans or
Contracts as described above, the Depositor may obtain such an agreement from
the entity which sold such Mortgage Loans or Contracts to the Depositor, which
agreement will be assigned to the Trustee for the benefit of the holders of the
Certificates of such series.
If a REMIC election is to be made with respect to all or a portion of
a Trust Fund, there may be federal income tax limitations on the right to
substitute Mortgage Loans or Contracts as described above.
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EVIDENCE AS TO COMPLIANCE
The related 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 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 CERTIFICATEHOLDERS
Upon written request of the Trustee, the Registrar for a Series of
Certificates 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
such Series as of the most recent Record Date for payment of distributions to
Holders of that Series. Upon written request of three or more Holders of record
of a Series of Certificates for purposes of communicating with other Holders
with respect to their rights under the Pooling and Servicing Agreement for such
Series, the Trustee will afford such Holders access during business hours to
the most recent list of Holders of that Series held by the Trustee. With
respect to Book Entry Certificates, the only named Holder on the Certificate
Register will be the Clearing Agency.
The Pooling and Servicing Agreement will not provide for the holding
of any annual or other meetings of Holders of Certificates.
ADMINISTRATION OF THE CERTIFICATE ACCOUNT
The Pooling and Servicing Agreement with respect to a Series will
require that the Certificate Account be any of the following: (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
Certificates; (ii) an account or accounts the deposits in which are fully
insured by either the Bank Insurance Fund (the "BIF"), the Federal Deposit
Insurance Corporation (the "FDIC") or the Savings Association Insurance Fund
(as successor to the Federal Savings and Loan Insurance Corporation) ("SAIF")
of the FDIC; (iii) a trust account (which shall be a "segregated trust
account") maintained with the corporate trust department of a federal or state
chartered depository institution or trust company with trust powers and acting
in its fiduciary capacity for the benefit of the 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 Pooling and Servicing
Agreement; or (v) an account that will not cause any rating agency rating the
Certificates of such Series to downgrade or withdraw its then-current rating
assigned to the Certificates as evidenced in writing by such rating agency. The
instruments in which amounts in the Certificate Account may be invested are
limited Permitted Investments. To the extent specified in the related
Prospectus Supplement, a Certificate Account may be maintained as an interest
bearing account, or the funds held
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therein may be invested pending each succeeding Distribution Date in Permitted
Investments. To the extent specified in the related Prospectus Supplement, the
Depositor or the Trustee will be entitled to receive any such interest or other
income earned on funds in the Certificate 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 Certificate 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 Pooling and
Servicing Agreement;
(iv) all Insurance Proceeds;
(v) all proceeds of any Mortgage Loan or Contract or property
acquired in respect thereof repurchased by the Servicer, the Depositor or the
Transferor or otherwise as described above or under "Termination" below;
(vi) all amounts, if any, required to be transferred to the
Certificate Account from any Credit Enhancement for the related Series; and
(vii) all other amounts required to be deposited in the Certificate
Account pursuant to the related Pooling and Servicing Agreement.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution on the Certificates of a Series,
to the extent specified in the related Prospectus Supplement, the Trustee will
furnish to Holders of such Certificates 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
Certificates after giving effect to distributions on such Distribution Date;
(iv) if applicable, the aggregate principal balance of any Class
Certificates which are Compound Interest Certificates 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 Certificates that was distributed to Holders of other Classes
of Certificates;
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(vi) if any Class of Certificates has priority in the right to
receive Principal Prepayments, the amount of Principal Prepayments in respect
of the related Mortgage Assets;
(vii) certain performance information, including delinquency and
foreclosure information specified in the related 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 Pooling and Servicing Agreement.
The Servicer or the Trustee will also furnish annually customary
information deemed necessary for Holders of such Certificates to prepare their
tax returns.
EVENTS OF DEFAULT
"Events of Default" under the 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 Pooling and Servicing Agreement materially affecting the rights of
Holders of the Certificates of such Series which continues unremedied for 60
days after the giving of written notice of such failure to the Servicer by the
Trustee or to the Servicer or the Trustee by the Holders of such Certificates
evidencing interests aggregating not less than 25% of the affected Class of
Certificates; 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 Pooling and Servicing Agreement
remains unremedied by the Servicer, the Trustee, or Holders of Certificates of
each Class of Certificates affected thereby evidencing, as to each such Class
interests aggregating not less than 51%, may terminate all of the rights and
obligations of the Servicer under the Pooling and Servicing Agreement,
whereupon the Trustee, or a new Servicer appointed pursuant to the Pooling and
Servicing Agreement, will succeed to all the responsibilities, duties and
liabilities of the Servicer under the 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 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
Trustee, or to the 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 Trustee
will be required to fulfill the duties of the Servicer.
No Holder of Certificates will have any right under the Pooling and
Servicing Agreement to institute any proceeding with respect to the Pooling and
Servicing Agreement, unless such Holder previously has given to the Trustee
written notice of default and unless the Holders of Certificates as specified
in the Prospectus Supplement have made written request to the Trustee to
institute such proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity and the Trustee for 60 days has
neglected or refused to institute any such proceedings. However, the Trustee
is under no obligation to exercise any of the trusts or powers vested in it by
the Pooling and Servicing Agreement or to make any investigation of matters
arising thereunder or to institute, conduct or defend any litigation thereunder
or in
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relation thereto at the request, order or direction of any of the Holders,
unless such Holders have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
AMENDMENT
The Pooling and Servicing Agreement with respect to a Series may be
amended by the Depositor, the Servicer and the Trustee without the consent of
the Holder of the Certificates 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 the Pooling and Servicing
Agreement provided that such action will not adversely affect in any material
respect the interests of any Holders of that Series. An amendment described
above shall not be deemed to adversely affect in any material respect the
interests of the Holders of that Series if either (a) an opinion of counsel
satisfactory to the 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 Certificates 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 Certificates. Notwithstanding the foregoing, the
Depositor, the Servicer and the Trustee may amend each Pooling and Servicing
Agreement without the consent of the Holders of the Certificates of the
relevant Series in order to modify, eliminate or add to any of its provisions
to such extent as may be appropriate or necessary to maintain REMIC status of
all or any portion of any Trust Fund as to which a REMIC election has been made
with respect to the applicable Certificates or to avoid or minimize the risk of
the imposition of any tax on the Trust Fund created by such Pooling and
Servicing Agreement that would be a claim against the Trustee at any time prior
to final redemption of the Certificates, provided that the Trustee has obtained
the opinion of independent counsel to the effect that such action is necessary
or appropriate to maintain REMIC status or to avoid or minimize the risk of the
imposition of such a tax.
To the extent specified in the Prospectus Supplement, the Pooling and
Servicing Agreement may also be amended by the Depositor, the Servicer, and the
Trustee with the consent of the Holders of Certificates evidencing interests
aggregating in excess of 50% of the aggregate principal balance of the
Certificates 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
Pooling and Servicing Agreement or of modifying in any manner the rights of
Holders of Certificates 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 Mortgage Assets or
distributions which are required to be made on any Certificate without the
consent of the Holder of such Certificate, (ii) adversely affect in any
material respect the interests of the Holders of any Class of Certificates in
any manner other than as described in clause, (i) without the consent of the
Holders of Certificates of 100% of such Class or (iii) reduce the aforesaid
percentage of Certificates of any Class required to consent to any such
amendment, without the consent of the Holders of 100% of the Certificates of
such Class then outstanding.
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 Certificates will be applied to the simultaneous purchase of the
Mortgage Assets related to such Series or to reimburse the amounts previously
used to effect such a purchase, the costs of carrying such Mortgage Assets
until sale of the Certificates and other expenses connected with pooling the
Mortgage Assets and issuing the Certificates.
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THE DEPOSITOR
FIRSTPLUS INVESTMENT CORPORATION (the "Depositor"), 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 Depositor 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 Depositor will be limited to
functions relating to the issuance of one or more Series of Certificates or
similar series of asset-backed or mortgage-backed securities, the acquisition
and resale of Mortgage Assets and other incidental activities related thereto.
The Depositor does not have, and is not expected in the future to have, any
significant assets. If the Depositor were required to repurchase a Mortgage
Asset included in the Trust Fund 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
Mortgage 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 Depositor nor any of its affiliates will insure or
guarantee the Certificates of any Series or the Mortgage Assets backing any
such Series. See "Risk Factors -- Limited Assets of Trust Fund."
THE SERVICER AND THE TRANSFEROR
To the extent specified in the related Prospectus Supplement, the
Servicer with respect to any series of Certificates evidencing interests in
Mortgage Loans or Contracts may be FIRSTPLUS FINANCIAL, INC. ("FFI"), an
affiliate of the Depositor. In addition, to the extent specified in the related
Prospectus Supplement for a Series, the related Transferor of the Mortgage
Assets to the Depositor for such Series may also be FFI. See"Assets Securing or
Underlying the Certificates -- General".
The delinquency and loss experience of FFI for the periods indicated
is set forth below. In the event that FFI is not the Servicer with respect to a
Series, or if an entity other than FFI acts as Servicer with respect to a
Series, the delinquency experience of such Servicer will be set forth in the
related Prospectus Supplement.
Delinquency Experience
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
1994 1995
------- ---------------------------------------------
DELINQUENCY DATA: DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Delinquencies in Serviced Loan
Portfolio (at period end) (1):
31-60 days . . . . . . . 3.7% 2.3% 1.7% 1.8% 1.5%
61-90 days . . . . . . . 1.4 1.0 0.7 0.7 0.5
91 days and over . . . . 3.2 3.3 1.9 2.2 2.1
------ ------ ------ ------ ------
Total . . . . . 8.3% 6.6% 4.3% 4.7% 4.1%
====== ====== ====== ====== ======
Serviced Loan Portfolio (at period
end) $60,850 $70,410 $177,358 $238,584 $387,343
</TABLE>
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Loss Experience
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
1996
-------------------------------------------------------
<S> <C> <C> <C> <C>
Delinquencies in Serviced Loan
Portfolio (at period end) (1): Mar. 31 June 30 Sept. 30 Dec. 31
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 $506,287 $750,529 $1,267,147 $1,882,187
period end)
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1993 1994 1995 1996
-------- -------- ------- ------
<S> <C> <C> <C>
LOSS AND DEFAULT DATA:
Net Losses as a percentage of the average Serviced Loan
Portfolio (2) . . . . . . . . . . . . . . . . . . . . . . 0.39% 0.44% 0.04%
Defaults as a percentage of the average Serviced Loan
Portfolio (2) . . . . . . . . . . . . . . . . . . . . . . 2.04% 2.64% 0.69%
</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 Certificates, there can be no assurance
that such rates will not continue to increase. Mortgage Assets that will be
conveyed to the Depositor in connection with the issuance of a Series of
Certificates will generally possess reduced delinquency, default and loss rates
due to certain requirements of the Underwriters and Rating Agencies for such
Series. THE OVERALL DECLINE IN THE DELINQUENCY RATES ON THE SERVICED LOAN
PORTFOLIO IS PRINCIPALLY DUE TO THE INCREASED VOLUME OF LOANS ORIGINATED BY
FFI. FFI CALCULATES ITS DELINQUENCY AND DEFAULT RATES BY DIVIDING THE AMOUNT OF
DELINQUENT OR DEFAULTED LOANS IN THE SERVICED LOAN PORTFOLIO BY THE TOTAL
SERVICED LOAN PORTFOLIO. SINCE FFI AND ITS AFFILIATES ARE ORIGINATING HIGHER
VOLUMES OF NEW LOANS THAT, DUE TO THEIR LACK OF SEASONING, TEND TO HAVE LOWER
DELINQUENCY AND DEFAULT RATES, FFI'S OVERALL DELINQUENCY AND DEFAULT RATES HAVE
DECREASED.
Because delinquencies and losses typically occur months or years after
a loan is originated, data relating to delinquencies and losses as a percentage
of the current portfolio can understate the risk of future delinquencies,
losses or foreclosures. There is no assurance that the delinquency, foreclosure
and loss experience with respect to any of the Mortgage Assets or with respect
to any Mortgage Asset Pool will be comparable to the experience reflected above
for assets originated and serviced by FFI or its affiliates. Because certain
Mortgage Assets may have been underwritten pursuant to standards that rely
primarily on the value of the related Mortgaged Properties rather than the
creditworthiness of the related mortgagor, the actual rates of delinquencies,
foreclosures and losses on such Mortgage 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 Mortgage 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 Underlying Loans".
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THE TRUSTEE
Any commercial bank or trust company serving as Trustee may have
normal banking relationships with the Depositor 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 Fund relating
to a particular Series of Certificates. In the event of such appointment, all
rights, powers, duties and obligations conferred or imposed upon the Trustee by
the 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 Pooling and Servicing Agreement, the related
Certificates, or of any Mortgage Loan, Agency Security, Contract or related
document, and will not be accountable for the use or application by the
Depositor or an Transferor of any funds paid to the Depositor or such
Transferor in respect of the Certificates or the related Assets, or amounts
deposited in the related Certificate Account or deposited into any other
account for purposes of making payments or distributions to Holders. If no
Event of Default has occurred, the Trustee will be required to perform only
those duties specifically required of it under the applicable 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 Pooling and Servicing Agreement.
The Trustee may resign at any time and the Depositor or the Servicer,
as applicable, may remove the Trustee if the Trustee ceases to be eligible to
continue as such under the applicable Pooling and Servicing Agreement, if the
Trustee becomes insolvent or in such other instances, if any, as are set forth
in the applicable Pooling and Servicing Agreement. Following any resignation or
removal of the Trustee, the Depositor 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 Fund or property securing the same
may at the time be located, the Depositor 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 co-trustees,
jointly with the Trustee, or separate trustee or separate trustees, of all or
any part of the Trust Fund, and to vest in such Person or Persons, in such
capacity, such title to the Trust Fund, or any part thereof, and, subject to
the provisions of the Pooling and Servicing Agreement, such powers, duties,
obligations, rights and trusts as the Depositor and the Trustee may consider
necessary or desirable.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects
of residential mortgage loans 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 Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Mortgage Loans.
In addition, the following discussion also contains a summary of the
Title I Program, which may be applicable to certain of the Mortgage Loans and
Contracts. With respect to each Series for which the
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related Trust Fund 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 Depositor, the
Trustee, the Administrator, the Servicer and any Subservicer. In addition, most
states have other laws, public policies and general principles of equity
relating to the protection of consumers and the prevention of unfair and
deceptive practices which may apply to the origination, servicing and
collection of the Mortgage Loans.
The Mortgage Loans are also 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
Mortgage Loans; (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.
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Cooperative Loans. Certain of the Mortgage Loans may be Cooperative
Loans. The private, non-profit, cooperative apartment corporation owns all the
real property that comprises the project, including the land, separate dwelling
units and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative
apartment building and/or underlying land, as is generally the case, the
cooperative, as project borrower, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a party
are generally subordinate to the interest of the holder of the blanket mortgage
in that building. If the cooperative is unable to meet the payment obligations
arising under its blanket mortgage, the mortgagee holding the blanket mortgage
could foreclose on that mortgage and terminate all subordinate proprietary
leases and occupancy agreements. In addition, the blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not fully
amortize with a significant portion of principal being due in one lump sum at
final maturity. The inability of the cooperative to refinance this mortgage and
its consequent inability to make such final payment could lead to foreclosure
by the mortgagee providing the financing. A foreclosure in either event by the
holder of the blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed the purchase by an
individual tenant-stockholder of cooperative shares or, in the case of a pool
of Mortgage Loans including Cooperative Loans, the collateral securing the
Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing such
tenant-stockholder's pro rata share of the cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a cooperative and accompanying
occupancy rights is financed through a cooperative share loan evidenced by a
promissory note and secured by a security interest in the occupancy agreement
or proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in
the security agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of cooperative shares.
FORECLOSURE
Mortgages. Foreclosure of a mortgage is generally accomplished by
judicial action. Generally, the action is initiated by the service of legal
pleadings upon all parties having an interest of record in the real property.
Delays in completion of the foreclosure may occasionally result from
difficulties in locating necessary parties defendant. Judicial foreclosure
proceedings are often not contested by any of the parties defendant. However,
when the mortgagee's right to foreclose is contested, the legal proceedings
necessary to resolve the issue can be time consuming. After the completion of a
judicial foreclosure, the court 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
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mortgage as made and cannot be relieved from his default if the mortgagee has
exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature the court may exercise
equitable powers to relieve a borrower of a default and deny the mortgagee
foreclosure on proof that either the borrower's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the borrower from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of
the parties' intent, if a court determines that the sale was for less than
reasonably equivalent value and such sale occurred while the borrower was
insolvent and within one year (or within the state statute of limitations if
the trustee in bankruptcy elects to proceed under state fraudulent conveyance
law) of the filing of bankruptcy. Similarly, a suit against the debtor on the
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In some states, mortgages may also be foreclosed by advertisement
pursuant to a power of sale provided in the mortgage. Foreclosure of a mortgage
by advertisement is essentially similar to foreclosure of a deed of trust by
nonjudicial power of sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust or deed to secure debt which authorizes the trustee to sell the
property upon default by the borrower under the terms of the note, deed of
trust or deed to secure debt. In some states, prior to such sale, the trustee
must record a notice of default and send a copy to the borrower-trustor and to
any person who has recorded a request for a copy of a notice of default and
notice of sale. In addition, in some states, prior to such sale, the trustee
must provide notice to any other individual having an interest of record in the
real property, including any junior lienholders. In some states, the borrower,
or any other person having a junior encumbrance on the real estate, may, during
a reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligations, including
attorney's and trustee's fees to the extent allowed by applicable law. Certain
states may require notices of sale to be published periodically for a
prescribed period in a specified manner prior to the date of the trustee's
sale. In addition, some state laws require that a copy of the notice of sale be
posted on the property and sent to all parties having an interest in the real
property. In certain states, foreclosure under a deed of trust may also be
accomplished by judicial action in the manner provided for foreclosure of
mortgages.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is generally
a public sale. Because of the difficulty a potential buyer at the sale might
have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, a third party may be unwilling to purchase the property at a
foreclosure sale. For these and other reasons, it is common for the lender to
purchase the property from the trustee, referee or other court officer for an
amount equal to the principal amount of the indebtedness secured by the
mortgage or deed of trust, plus accrued and unpaid interest and 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
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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.
With respect to any Series for which a REMIC election is made, the
REMIC provisions of the Code and the Pooling and Servicing Agreement may
require the Servicer to hire an independent contractor to operate any REO
Property. The costs of such operation may be significantly greater than the
cost of direct operation by the Servicer.
Some states impose prohibitions or limitations on remedies available
to the mortgagee, including the right to recover the debt from the borrower.
See "Certain Legal Aspects of the Mortgage Assets -- Foreclosure --
Anti-Deficiency Legislation and Other Limitations on Lenders".
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.
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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 "-- Foreclosure -- 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 Certificateholders as the holders of a
junior deed of trust or a junior mortgage, are subordinate in lien and in
payment to those of the holder of the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or beneficiary to receive
and apply hazard insurance and condemnation proceeds and, upon default of the
borrower, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage, the junior
mortgagee's or junior beneficiary's lien will be extinguished unless the junior
mortgagee satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. A junior mortgagee or
beneficiary in some states may satisfy a defaulted senior lien in full and in
some states may cure such default and bring the senior loan current, in either
event, adding the amounts expended to the balance due on the junior loan. In
most states, absent a provision in the mortgage or deed of trust to the
contrary, no notice of default is required to be given to a junior mortgagee or
beneficiary. See "-- Foreclosure" herein.
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
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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.
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,
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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
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mortgage having a power of sale does not involve sufficient state action to
afford constitutional protection to the borrower.
Some of the Mortgage Loans may not restrict secondary financing,
thereby permitting the borrower to use the Mortgaged Property as security for
one or more additional loans. Where the borrower encumbers the Mortgaged
Property with one or more junior liens, the senior lender is subjected to
additional risk. First, the borrower may have difficulty servicing and repaying
multiple loans. Second, acts of the senior lender which prejudice the junior
lender or impair the junior lender's security may create 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 intrafamily 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
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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 Fund 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
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 Certificate
Trustee, a PMBS Trustee, or a Trust Fund) to homeowners. In the event that
title to a property securing a Mortgage Loan in a pool of Mortgage Loans was
acquired by a Certificate Trustee, a PMBS Trustee, or a Trust Fund and cleanup
costs were incurred in respect of the property, the Holders of the related
Certificates 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 Certificates realizing a loss
if associated costs were required to be paid. The Depositor, the Administrator,
the Underwriters, the Transferors, the Servicers, and any of their respective
affiliates (i) have not caused any
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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 the
Trust Fund and cleanup costs are incurred in respect of such property, the
certificateholders 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 Certificateholders realizing a loss if any associated
remedial costs are required to be paid. The Transferor, the Depositor, 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 or effect of hazardous wastes
or hazardous substances on any property or any casualty resulting from the
presence or effect of hazardous wastes or hazardous substances.
TRUTH IN LENDING ACT
In September 1994, the Reigle Community Development and Regulatory
Improvement Act of 1994 (the "Reigle Act") was enacted which incorporates the
Home Ownership and Equity Protection Act of 1994, and which adds certain
additional provisions to Regulation Z, the implementing regulation of the
Truth-in-Lending Act ("TILA"). These provisions impose additional disclosure
and other requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates or high up-front fees and charges ("covered
loans"). In general, mortgage loans within the purview of the Reigle Act have
annual percentage rates over 10% greater than the yield on Treasury Securities
of comparable maturity and/or fees and points which exceed the greater of 8% of
the total loan amount or $400. The provisions of the Reigle Act apply on a
mandatory basis to all mortgage loans originated on or after October 1, 1995.
These provisions can impose specific statutory liabilities upon creditors who
fail to comply with their provisions and may affect the enforceability of the
related loans. In addition, any assignee of a creditor would generally be
subject to all claims and defenses that the consumer could assert against the
creditor, including, without limitation, the right to rescind the mortgage
loan. A substantial majority of the loans originated or purchased by the
Transferor are covered by the Reigle Act.
The Reigle Act provisions impose additional disclosure requirements on
lenders originating covered loans and prohibit lenders from originating covered
loans that are underwritten solely on the basis of the borrower's home equity
without regard to the borrower's ability to repay the loan. The Transferor
believes that only a small portion of its loans originated in fiscal 1994 and
fiscal 1995 are of the type that, unless modified, would be prohibited by the
Reigle Act. As a result of the Reigle Act provisions, with respect to all
covered loans, the Transferor applies loan underwriting criteria that take into
consideration the borrower's ability to repay.
The Reigle Act provisions also prohibit lenders from including
prepayment fee clauses in covered loans to borrowers with debt-to-income ratios
in excess of 50% or covered loans used to refinance existing loans originated
by the same lender. The Transferor reported immaterial amounts of prepayment
fee revenues in fiscal 1993, 1994 and 1995, respectively. The Transferor will
continue to collect prepayment fees on loans originated prior to effectiveness
of the Reigle Act provisions and on non-covered loans, as well as on covered
loans in permitted circumstances following the effectiveness of the Reigle Act
provisions. The Reigle Act provisions impose other restrictions on covered
loans, including restrictions on
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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 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 Certificates, but the Offered Certificates 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
Certificates. See "Risk Factors -- Limitations of Credit Enhancement" herein.
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 Untied States Department of
Housing and Urban Development; such agency and department are referred to
together herein as the "FHA") and the Title I Program. Certain of the Mortgage
Loans or Contracts contained in a Trust Fund may be loans insured under the
Title I Program. FHA Regulations contain the requirements under which approved
Title I Lenders may obtain insurance against a portion of losses incurred with
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respect to eligible loans that have been originated and serviced in accordance
with FHA Regulations, up to the amount of such Title I Lender's FHA Reserve, as
described below, and subject to the terms and conditions established under the
Act and FHA Regulations. While FHA Regulations permit the Secretary of HUD,
subject to statutory limitations, to waive a Title I Lender's noncompliance
with FHA Regulations if enforcement would impose an injustice on the lender
(provided the Title I Lender has acted in good faith, is in substantial
compliance with FHA Regulations and has credited the borrower for any excess
charges), in general, an insurance claim against the FHA will be denied if the
Title I loan to which it relates does not strictly satisfy the requirements of
the Act and FHA Regulations.
Unlike certain other government loan insurance programs, loans under
the Title I Program (other than loans in excess of $25,000) are not subject to
prior review by the FHA. Under the Title I Program, the FHA disburses insurance
proceeds with respect to defaulted loans for which insurance claims have been
filed by a Title I Lender prior to any review of such loans. A Title I Lender
is required to repurchase a Title I loan from the FHA that is determined to be
ineligible for insurance after insurance claim payments for such loan have been
paid to such lender. Under the FHA Regulations, if the Title I Lender's
obligation to repurchase the Title I loan is unsatisfied, the FHA is permitted
to offset the unsatisfied obligation against future insurance claim payments
owed by the FHA to such lender. FHA Regulations permit the FHA to disallow an
insurance claim with respect to any loan that does not qualify for insurance
for a period of up to two years after the claim is made and to require the
Title I Lender that has submitted the insurance claim to repurchase the loan.
Pursuant to a letter ruling issued by the FHA in October 1994, the FHA has
stated that, as a policy, the FHA will strive to review all insurance claim
submissions in a timely manner and limit the period of time within which it
will request the repurchase of a loan to a period of one year after claim
submission. The letter further states, however, that the FHA may find it
necessary with respect to some claim submissions to apply the foregoing
two-year incontestability provision strictly.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or lot
(or cooperative interest therein) on which to place such home or the purchase
of both a manufactured home loan and the lot (or cooperative interest therein)
on which such home is placed. Title I Program loans may be made directly to the
owners of the property to be improved or purchased ("direct loans") or with the
assistance of a dealer or home improvement contractor that will have an
interest in the proceeds of the loan ("dealer loans").
Subject to certain limitations described below, eligible Title I loans
are insured by the FHA for 90% of an amount equal to the sum of (i) the net
unpaid principal amount and the uncollected interest earned to the date of
default, (ii) interest on the unpaid loan obligation from the date of default
to the date of the initial submission of the insurance claim, plus 15 calendar
days (the total period not to exceed nine months) at a rate of 7% per annum,
(iii) uncollected court costs, (iv) title examination costs, (v) fees for
required inspections by the lenders or its agents, up to $75, and (vi)
effective July 5, 1995, 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
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by FHA Regulations. The balance of such FHA Reserve is the maximum amount of
insurance claims the FHA is required to pay to the related Title I Lender.
Mortgage loans to be insured under the Title I Program will be registered for
insurance by the FHA, and the increase in Title I insurance coverage to which
the Title I Lender is entitled by reason of the reporting of such loans under
the Title I Lender's contract of insurance will be included in the FHA Reserve
for the originating Title I Lender following the receipt and acknowledgment by
the FHA of a transfer of note report on the prescribed form (the "Transfer
Report") pursuant to FHA Regulations.
Under the Title I Program the FHA will reduce the insurance coverage
available in a Title I Lender's FHA Reserve with the respect to loans insured
under such Title I Lender's contract of insurance by (i) the amount of FHA
Insurance claims approved for payment related to such loans, (ii) prior to
October 1, 1995, after a Title I Lender has held its Title I contract of
insurance for five years, the amount of the annual reduction (the "Annual
Reduction") equal to 10% of the amount of insurance coverage contained in the
related FHA Reserve as of that date, and (iii) the amount of reduction of the
Title I Lender's FHA Reserve by reason of the sale, assignment or transfer of
loans registered under the Title I Lender's contract of insurance. Such
insurance coverage also may be reduced for any FHA insurance claims previously
disbursed to the Title I Lender that are subsequently rejected by the FHA. On
June 5, 1995, the FHA announced the elimination of Annual Reductions, effective
as of October 1, 1995.
Upon the receipt and acknowledgment by the FHA of a Transfer Report,
originations of new loans will increase a Title I Lender's insurance coverage
reserve account balance by 10% of the amount disbursed, advanced or expended in
originating such loans registered with the FHA for insurance under the Title I
Program. A Title I Lender is permitted to sell or otherwise transfer loans
reported for insurance under the Title I Program only to another Title I
Lender. Upon any such transfer, except a transfer with recourse or under a
guaranty or repurchase Agreement, the seller is required to file a Transfer
Report with the FHA reporting the transfer of such loans. Upon notification and
approval of such transfer, the FHA Reserve of the selling Title I Lender is
reduced, and the FHA Reserve of the purchasing Title I Lender is increased, by
an amount equal to the lesser of 10% of the actual purchase price of the loans
or the net unpaid principal balance of the loans, up to the total amount of the
selling Title I Lender's FHA Reserve. Thus, in the event the selling Title I
Lender's FHA Reserve was less than 10% of the unpaid principal balance of its
portfolio of loans reported for insurance under the Title I Program prior to
the sale, the seller's FHA Reserve may be exhausted as the result of a sale of
only a portion of its total portfolio, with the result that its remaining Title
I Program portfolio may be ineligible for Title I Program benefits until the
lender originates or otherwise acquires additional loans reported for insurance
under the Title I Program. Accordingly, the insurance coverage reserves
transferred to the purchasing Title I Lender in such case will be less than 10%
of the lesser of the purchase price or the principal balance of the portfolio
of loans purchased, which may be the case with respect to the Transferor's
purchase of certain Title I Mortgage Loans and Title I Contracts from certain
Title I lenders and the transfer of the related insurance coverage from such
lenders' FHA Reserves. Additionally, pursuant to FHA Regulations, not more than
$5,000 in insurance coverage shall be transferred to or from a Title I Lender's
insurance coverage reserve account during any October 1 to September 30 fiscal
year without the approval of the Secretary of HUD. Such HUD approval is
generally viewed as automatic, provided the formal requirements for transfer
are satisfied, but HUD does have the right under FHA Regulations to withhold
approval.
Unlike most other FHA insurance programs, the obligation of the FHA to
reimburse a Title I Lender for losses in the portfolio of insured loans held by
such Title I Lender is limited to the amount in an FHA Reserve maintained on a
lender-by-lender basis and not on a loan-by-loan basis. Except when to do so
would be in HUD's best interest, the FHA does not track or "earmark" the loans
within a Title I Lender's portfolio to determine whether a reduction in such
lender's FHA Reserve as the result of an insurance claim by such lender are, in
fact, attributable to the insured loan with respect to which the claim
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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 Fund,
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 Fund. If the Trustee were unable to recover the
amount of such offset from the other trust fund, the Trust Fund could
experience a loss as a result.
Accordingly, claims paid to the Trustee (or the Administrator, if any)
by the FHA with respect to Title I loans insured under the Depositor's FHA
Reserve other than the Title I Mortgage Loans and Title I Contracts may reduce
the FHA Insurance Amount. In the Pooling and Servicing Agreement, the Depositor
and the Trustee (or the Administrator, if any) will agree not to submit claims
to the FHA with respect to Title I loans other than the Title I Mortgage Loans
and Title I Contracts if the effect thereof would be to reduce the FHA
Insurance Amount. The Depositor 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 Pooling and
Servicing Agreement and similar pooling and servicing agreements that may be
entered into by the Depositor in the future.
On the final Transfer Date, such FHA Insurance Amount will be the
maximum amount of insurance coverage in the Depositor's FHA Reserve that will
be available for the submission of claims on the Title I Mortgage Loans, and
thereafter, such FHA Insurance Amount will be decreased as a result of payments
by the FHA in respect of FHA Claims submitted for the Title I Mortgage Loans
and Title I Contracts after the Transfer Dates and as a result of the
repurchase or substitution of Title I Mortgage Loans and Title I Contracts by
the Transferor. Except in connection with the conveyance to the Trust Fund of
any Subsequent Mortgage Loans that are Title I Mortgage Loans and the
substitution of Title I Mortgage Loans and Title I Contracts, the FHA Insurance
Amount for the Title I Mortgage Loans and Title I Contracts will not be
increased for any other Title I loans, either previously or subsequently owned
by the Depositor and reported for insurance in the Depositor'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 Depositor'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 Trustee, on behalf of the Trust
Fund, 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
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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 Depositor's FHA
Reserve has been reduced to a balance which is less than such maximum amount.
Accordingly, the transfer of insurance coverage from the Depositor'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 Fund.
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 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
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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.
Sections 5401-5426), so as to conform to all applicable Federal construction
and safety standards, and with respect to the purchase of a new manufactured
home, the manufacturer must furnish the borrower with a one year written
warranty on a HUD approved form which obligates the manufacturer to correct any
nonconformity with all applicable Federal construction and safety standards or
any defects in materials or workmanship which become evident within one year
after the date of delivery. The regulations under the Title I Program set forth
certain additional requirements relating to the construction, transportation
and installation of any manufactured home and standards for the
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manufactured homesite financed by any Title I Contract. The proceeds from a
Title I Contract for a Manufactured Home may be used as follows: the purchase
or refinancing of a manufactured home, a suitably developed lot for a
manufactured home already owned by the borrower or a manufactured home and
suitably developed lot for the home in combination; or the refinancing of an
existing manufactured home already owned by the borrower in connection with the
purchase of a manufactured home lot or an existing lot already owned by the
borrower in connection with the purchase of a manufactured home. In addition,
the proceeds for a Title I Contract for a Manufactured Home which is a
manufactured home purchase loan may be used for the purchase, construction or
installation of a garage, carport, patio or other comparable appurtenance to
the manufactured home, and the proceeds for a Title I Contract for a
Manufactured Home which is a combination loan may be used for the purchase,
construction or installation of a foundation, garage, carport, patio or other
comparable appurtenance to the manufactured home. The proceeds from a Title I
Contract for a Manufactured Home cannot be used for the purchase of furniture
or the financing of any items and activities which are set forth on the list
published by the Secretary of HUD as amended from time to time.
Any Title I Contract for a Manufactured Home must be secured by a
recorded lien on the manufactured home (or lot or home and lot, as
appropriate), its furnishings, equipment, accessories and appurtenance, which
lien must be a first lien, superior to any other lien on the property which is
evidenced by a properly recorded financing statement, a properly recorded
security instrument executed by the borrower and any other owner of the
property or other acceptable instrument. With respect to any Title I Contract
involving a manufactured home purchase loan or combination loan and the sale of
the manufactured home by a dealer, the lender or its agent (other than a
manufactured home dealer) must conduct a site-of-placement inspection within 60
days after the date of the loan to verify that the terms and conditions of the
purchase contract have been met, the manufactured home and any options and
appurtenances included in the purchase price or financed with the loan have
been delivered and installed and the placement certificate executed by the
borrower and the dealer is in order.
Title I Underwriting Requirements. FHA Regulations require that,
before making a loan insured under the Title I Program, a Title I Lender
exercise prudence and diligence in determining whether the borrower and any
co-maker or co-signer is solvent and an acceptable credit risk with a
reasonable ability 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
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borrower's housing and other recurring expenses generally may not exceed a
maximum percentage of gross income as published from time to time in the
Federal Register. The Title I Lender is required to document any compensating
factors that support the approval of the loan if such expense-to-income ratios
are not satisfied. A Title I Lender is prohibited from approving a loan under
the Title I Program without the approval of the FHA if the lender has knowledge
that the borrower is past due more than 30 days under the original terms of an
obligation owed to or insured or guaranteed by the Federal Government or the
borrower has made material misstatements of fact on applications for loans or
other assistance.
UNDER THE TITLE I PROGRAM, THE FHA DOES NOT REVIEW OR APPROVE FOR
QUALIFICATION FOR INSURANCE THE INDIVIDUAL LOAN INSURED THEREUNDER AT THE TIME
OF APPROVAL BY THE LENDING INSTITUTION (AS IS TYPICALLY THE CASE WITH OTHER
FEDERAL LOAN INSURANCE PROGRAMS). If, after a loan has been made and reported
for insurance under the Title I Program, a Title I Lender discovers any
material misstatement of fact or that the loan proceeds have been misused by
the borrower, dealer or any other party, such Title I Lender is required
promptly to report such finding to the FHA. In such case, provided that the
validity of any lien on the property has not been impaired, the insurance of
the loan under the Title I Program will not be affected unless such material
misstatement of facts or misuse of loan proceeds was caused by (or was
knowingly sanctioned by) such Title I Lender or its employees.
Claims Procedures Under Title I. The term "default" is defined under
FHA Regulations as the failure of the borrower to make any payment due under
the note for a period of 30 days after such payment is due. The "date of
default" is considered to be the date 30 days after the borrower's first
failure to make an installment payment on the note that is not covered by
subsequent payments applied to overdue installments in the order they became
due. When a loan reported for insurance under the Title I Program goes into
default, a Title I Lender is required to contact the borrower and any co-maker
and co-signer by telephone or in person to determine the reasons for the
default and to seek a cure. If such Title I Lender is not able to effect a cure
after diligent efforts, it may provide the borrower with a notice of default
stating that the loan will be accelerated in 30 days if the loan is not brought
current or the borrower does not enter into a loan modification agreement or
repayment plan. The notice of default must meet certain requirements set forth
in the FHA Regulations and must conform to applicable state law provisions.
Such Title I Lender is permitted to rescind the acceleration of maturity of the
loan only if the borrower brings the loan current, executes a modification
agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity of a secured property improvement
loan, a Title I Lender has the option to proceed against the security or make a
claim under its contract of insurance. If a Title I Lender chooses to proceed
against the Secured Property under a security instrument (or if it accepts a
voluntary conveyance or surrender of the Secured Property), (i) the Title I
Lender must proceed against the loan security by foreclosure and acquire good,
marketable title to the property securing the loan and (ii) the Title I Lender
must take all actions necessary under applicable law to preserve its rights, if
any, to obtain a deficiency judgment against the borrower, provided however,
the Title I Lender may still file an FHA Insurance claim, but only with the
prior approval of the Secretary of HUD.
If a Title I Lender files an insurance claim with the FHA under the
Title I Program, the FHA reviews the claim, the complete loan file,
certification of compliance with applicable state and local laws in carrying
out any foreclosure or repossession, and where the borrower is in bankruptcy or
deceased, evidence that the lender has properly filed proofs of claims.
Generally, a Title I Lender must file its claim of insurance with the FHA not
later than nine months after the date of default. Concurrently with filing the
insurance claim, such Title I Lender is required to assign to the United States
of America it's entire interest in the note (or a judgment in lieu of the
note), in any securities held and in any claims filed in any legal proceedings.
If, at the time the note is assigned to the United States, the Secretary of HUD
has reason to believe that the note is not valid or enforceable against the
borrower, the FHA may deny the claim and
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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 Pooling and Servicing Agreement provides that the
Trustee (or the Administrator) shall submit an FHA Claim with respect to any
Title I Mortgage Loan or Title I Contract that goes into default if the default
cannot be cured.
If, as a result of the delay in the transfer of the FHA Insurance
described above, FHA Insurance is not available with respect to any defaulted
Title I Mortgage Loan or Title I Contract at the time it goes into default,
then the amount required to make interest payments to the Certificateholders
with respect to the principal amount thereof, until such FHA Insurance becomes
available and a claim for insurance can be made, if at all, will be paid from
other amounts, if any, available in the Certificate Account.
No Rights of Certificateholders Against FHA. Because the Trust Fund
and the Certificateholders will not hold an FHA contract of insurance, the FHA
will not recognize the Trust Fund or the Certificateholders as the owners of
the Title I Mortgage Loans, Title I Contracts or any portion thereof, entitled
to submit FHA Claims to the FHA. Accordingly, the Trust Fund and the
Certificateholders 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
Certificateholders' 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 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.
LEGAL INVESTMENT MATTERS
To the extent specified in the related Prospectus Supplement, the
Certificates 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 Certificates.
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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
Certificates. 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
Certificates. 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 Certificates),
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 Certificates constitute legal investments for
such investors.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Code impose requirements on employee benefit
plans (and on certain other retirement plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and collective
investment funds and separate accounts in which such plans, accounts or
arrangements are invested) (collectively, "Plans") subject to ERISA and Section
4975 of the Code and on persons who are fiduciaries with respect to such Plans.
Among other things, ERISA requires that the assets of Plans be held in trust
and that the trustee, or other duly authorized fiduciary, have exclusive
authority and discretion to manage and control the assets of such Plans. ERISA
also imposes certain duties on persons who are fiduciaries of Plans. Under
ERISA, any person who exercises any authority or control respecting the
management or disposition of the assets of a Plan is considered to be a
fiduciary of such Plan (subject to certain exceptions not here relevant). In
addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA prohibits a broad range of transactions
("Prohibited Transactions") involving Plan assets and persons ("Parties in
Interest") having certain specified relationships to a Plan and imposes
additional prohibitions where Parties in Interest are fiduciaries with respect
to such Plan. Section 4975 of the Code provides many requirements and
prohibitions similar to those under ERISA and applies excise taxes on persons
engaged in Prohibited Transactions.
The United States Department of Labor (the "DOL") has issued
regulations concerning the definition of what constitutes the assets of a Plan
(DOL Reg. Section 2510.3-101, the "Plan Asset Regulations"). Under the Plan
Asset Regulations, the underlying assets and properties of corporations,
partnerships and certain other entities in which a Plan makes an "equity"
investment could be deemed for purposes of ERISA to be assets of the investing
Plan in certain circumstances. In such case, the fiduciary
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making such an investment for the Plan could be deemed to have delegated his or
her asset management responsibility, and the underlying assets and properties
could be subject to ERISA reporting and disclosure. The Certificates of a
Series will be treated as "equity" for purposes of ERISA. Certain exceptions to
the regulation may apply in the case of a Plan's investment in the Certificates
that constitute "equity" investments, but the Depositor cannot predict in
advance whether such exceptions apply due to the factual nature of the
conditions to be met. Accordingly, because the Mortgage Loans or Agency
Securities may be deemed Plan assets of each Plan that purchases such
Certificates, an investment in such Certificates by a Plan might give rise to a
prohibited transaction under ERISA Sections 406 and 407 and be subject to an
excise tax under Code Section 4975 unless a statutory or administrative
exemption applies.
DOL Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1") exempts
from ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage pool investment trusts and the purchase, sale
and holding of "mortgage pool pass-through certificates" in the initial
issuance of such certificates. PTCE 83-1 permits, subject to certain
conditions, transactions which might otherwise be prohibited between Plans and
Parties in Interest with respect to those Plans involving the origination,
maintenance and termination of mortgage pools consisting of mortgage loans
secured by first or second mortgages or deeds of trust on single-family
residential property, and the acquisition and holding of certain mortgage pool
pass-through certificates representing an interest in such mortgage pools by
Plans.
PTCE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying certificateholders against
reductions in pass-through payments due to property damage or defaults in loan
payments in an amount not less than the greater of one percent of the aggregate
principal balance of all covered pooled mortgage loans or the principal balance
of the largest covered pooled mortgage loan; (ii) the existence of a pool
trustee who is not an affiliate of the pool sponsor; and (iii) a limitation on
the amount of the payments retained by the pool sponsor, together with other
funds inuring to its benefit, to not more than adequate consideration for
selling the mortgage loans plus reasonable compensation for services provided
by the pool sponsor to the Mortgage Pool.
Although the Trustee for any series of Certificates will be
unaffiliated with the Depositor, there can be no assurance that the system of
insurance or subordination will meet the general or specific conditions
referred to above. In addition, the nature of a Trust Fund's assets or the
characteristics of one or more classes of the related series of Certificates
may not be included within the scope of PTCE 83-1 or any other class exemption
under ERISA. The Prospectus Supplement will provide additional information with
respect to the application of ERISA and the Code to the related Certificates.
Several underwriters of mortgage-backed securities have applied for
and obtained ERISA prohibited transactions exemptions which are in some
respects broader than PTCE 83-1. Such exemptions can only apply to
mortgage-backed securities which, among other conditions, are sold in an
offering with respect to which such underwriter serves as the sole or a
managing underwriter, or as a selling or placement agent. Several other
underwriters have applied for similar exemptions. If such an exemption might be
applicable to a Series of Certificates, the related Prospectus Supplement will
refer to such possibility.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Certificates
must make its own determination as to whether the general and the specific
conditions of PTCE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general
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fiduciary standards of investment prudence and diversification, an investment
in the Certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
Any Plan proposing to invest in Certificates should consult with its
counsel to confirm that such investment will not result in a Prohibited
Transaction and will satisfy the other requirements of ERISA and the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of
Certificates of any Series, to the extent it relates to matters of law or legal
conclusions with respect thereto, represents the opinion of counsel to the
Depositor with respect to that Series on the material matters associated with
such consequences, subject to any qualifications set forth herein. Counsel to
the Depositor for each Series will be Andrews & Kurth L.L.P. ("Counsel to the
Depositor"). In connection with each Series of Certificates, Counsel to the
Depositor will issue an opinion with respect to the material tax aspects of
such Series, and the Depositor will cause such opinion to be timely filed with
the Commission as an exhibit to a Form 8-K. The discussion below does not
purport to address all federal income tax consequences that may be applicable
to particular categories of investors, some of which may be subject to special
rules. The authorities on which this discussion is based are subject to change
or differing interpretations, and any such change or interpretation could apply
retroactively. This discussion reflects the enactment of the Tax Reform Act of
1986 (the "1986 Act"), the Technical and Miscellaneous Revenue Act of 1988
("TAMRA") and the Revenue Reconciliation Act of 1993, as well as final Treasury
regulations concerning REMICs ("Final REMIC Regulations") promulgated by the
U.S. Department of the Treasury on December 23, 1992. Investors should consult
their own tax advisors in determining the federal, state, local and any other
tax consequences to them of the purchase, ownership and disposition of
Certificates, particularly with respect to federal income tax changes effected
by the 1986 Act, TAMRA and the Final REMIC Regulations. The Prospectus
Supplement for each series of Certificates will discuss any special tax
consideration applicable to any Class or Classes of Certificates of such
Series, and the discussion below is qualified by any such discussion in the
related Prospectus Supplement.
For purposes of this discussion, where the applicable Prospectus
Supplement provides for a fixed retained yield with respect to the Mortgage
Loans, Agency Securities or Contracts underlying a Series of Certificates,
references to the Mortgage Loans, Agency Securities or Contracts will be deemed
to refer to that portion of the Mortgage Loans, Agency Securities or Contracts
held by the Trust Fund which does not include the fixed retained yield.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
GENERAL
With respect to a particular Series of Certificates, an election may
be made to treat the Trust Fund or one or more segregated pools of assets
therein as one or more REMICs within the meaning of Code Section 860D. A Trust
Fund or a portion or portions thereof as to which a REMIC election will be made
will be referred to as a "REMIC Pool." For purposes of this discussion,
Certificates of a Series as to which one or more REMIC elections are made are
referred to as "REMIC Certificates" and will consist of one or more Classes of
"Regular Certificates" and one Class of "Residual Certificates" in the case of
each REMIC Pool. Qualification as a REMIC requires ongoing compliance with
certain conditions. Upon the issuance of each Series of REMIC Certificates,
Counsel to the Depositor will give its opinion generally to
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the effect that, assuming (i) the making of an appropriate election, (ii)
compliance with the Pooling and Servicing Agreement, and (iii) continuing
compliance with the applicable provisions of the Code, as it may be amended
from time to time, and any applicable Treasury regulations adopted thereunder,
each REMIC Pool will qualify as a REMIC. The following general discussion of
the anticipated federal income tax consequences of the purchase, ownership and
disposition of REMIC Certificates, to the extent it relates to matters of law
or legal conclusions with respect thereto, represents the opinion of Counsel to
the Depositor, subject to any qualifications set forth herein. In addition,
Counsel to the Depositor has prepared or reviewed the statements in this
Prospectus under the heading "Certain Federal Income Tax Consequences --
Federal Income Tax Consequences for REMIC Certificates," 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 Fund (or applicable portion thereof) as a REMIC 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 REMIC Certificates. With
respect to each Series of REMIC Certificates, the Regular Certificates will be
considered to be "regular interests" in the REMIC Pool and generally will be
treated for federal income tax purposes as if they were newly originated debt
instruments, and the Residual Certificates will be considered to be "residual
interests" in the REMIC Pool. The Prospectus Supplement for each Series of
Certificates will indicate whether one or more REMIC elections with respect to
the related Trust Fund will be made, in which event references to "REMIC" or
"REMIC Pool" herein shall be deemed to refer to each such REMIC Pool. For
purposes of this discussion, to the extent specified herein or in the
applicable Prospectus Supplement, the term "Mortgage Loans" will be used to
refer to Mortgage Loans, Agency Securities and Contracts.
STATUS OF REMIC CERTIFICATES
REMIC Certificates held by a mutual savings bank or a domestic
building and loan association (a "Thrift Institution") will constitute
"qualifying real property loans" within the meaning of Code Section 593(d)(1)
in the same proportion that the assets of the REMIC Pool would be so treated.
REMIC Certificates held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) in the same proportion that the assets of the
REMIC Pool would be treated as "loans secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v) or as other assets
described in Code Section 7701(a)(19)(C). REMIC Certificates held by a real
estate investment trust (a "REIT") will constitute "real estate assets" within
the meaning of Code Section 856(c)(5)(A), and interest on the REMIC
Certificates will be considered "interest on obligations secured by mortgages
on real property or on interests in real property" within the meaning of Code
Section 856(c)(3)(B) in the same proportion that, for both purposes, the assets
of the REMIC Pool would be so treated. However, if at all times 95% or more of
the assets of the REMIC Pool constitute qualifying assets for Thrift
Institutions and REITs, the REMIC Certificates will be treated entirely as
qualifying assets for such entities (and the income will be treated entirely as
qualifying income). Moreover, the Final REMIC Regulations provide that, for
purposes of Code Sections 593(d)(1) and 856(c)(5)(A), payments of principal and
interest on the Mortgage Loans that are reinvested pending distribution to
holders of REMIC Certificates constitute qualifying assets for such entities.
Where two REMIC Pools are part of a tiered structure they will be treated as
one REMIC for purposes of the tests described above respecting asset ownership
of more or less than 95%. Notwithstanding the foregoing, however, REMIC income
received by a REIT owning a residual interest in a REMIC Pool could be treated
in part as non-qualifying REIT income if the REMIC Pool holds Mortgage Loans
with respect to which income is contingent on borrower profits or property
appreciation. In addition, if the assets of the REMIC include buy-down Mortgage
Loans, it is possible that the percentage of such assets constituting "loans
secured by
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an interest in real property" for purposes of Code Section 7701(a)(19)(C)(v)
may be required to be reduced by the amount of the related buy-down funds.
REMIC Certificates held by a regulated investment company will not constitute
"Government securities" within the meaning of Code Section 851(b)(4)(A)(i).
REMIC Certificates held by certain financial institutions will constitute an
"evidence of indebtedness" within the meaning of Code Section 582(c)(1).
However, REMIC Regular Certificates acquired by another REMIC on its Startup
Day (as defined below) in exchange for regular or residual interests in the
REMIC will constitute "qualified mortgages" within the meaning of Code Section
860G(a)(3). Qualification as a REMIC In order for the REMIC Pool to qualify as
a REMIC, there must be ongoing compliance on the part of the REMIC Pool with
the requirements set forth in the Code. The REMIC Pool must fulfill an asset
test, which requires that no more than a de minimis amount of the assets of the
REMIC Pool, as of the close of the third calendar month beginning after the
"Startup Day" (which for purposes of this discussion is the date of issuance of
the REMIC Certificates) and at all times thereafter, may consist of assets
other than "qualified mortgages" and "permitted investments." The Final REMIC
Regulations provide a "safe harbor" pursuant to which the de minimis
requirement will be met if at all times the aggregate adjusted basis of any
nonqualified assets (i.e., assets other than qualified mortgages and permitted
investments) is less than 1% of the aggregate adjusted basis of all the REMIC
Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements
of the Code for REMIC status during any taxable year, the REMIC Pool will not
be treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC for federal income tax purposes is uncertain. The
REMIC Pool might be entitled to treatment as a grantor trust under the rules
described in "-- Federal Income Tax Consequences for Certificates as to Which
No REMIC Election Is Made" herein. In that case, no entity-level tax would be
imposed on the REMIC Pool. Alternatively, the Regular Certificates may continue
to be treated as debt instruments for federal income tax purposes; but the
REMIC Pool could be treated as a taxable mortgage pool (a "TMP"). If the REMIC
Pool is treated as a TMP, any residual income of the REMIC Pool (i.e. , income
from the Mortgage Loans less interest and original issue discount expense
allocable to the Regular Certificates and any administrative expenses of the
REMIC Pool) would be subject to corporate income tax at the REMIC Pool level.
On the other hand, an entity with multiple classes of ownership interests may
be treated as a separate association taxable as a corporation under Treasury
regulations, and the Regular Certificates may be treated as equity interests
therein. The Code, however, authorizes the Treasury Department to issue
regulations that address situations where failure to meet one or more of the
requirements for REMIC status occurs inadvertently and in good faith, and
disqualification of the REMIC Pool would occur absent regulatory relief.
Investors should be aware, however, that the Conference Committee Report to the
1986 Act (the "Committee Report") indicates that the relief may be accompanied
by sanctions, such as the imposition of a corporate tax on all or a portion of
the REMIC Pool's income for the period of time in which the requirements for
REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
General. Payments received by holders of Regular Certificates
generally should be accorded the same tax treatment under the Code as payments
received on ordinary taxable corporate debt instruments. In general, interest,
original issue discount and market discount on a Regular Certificate will be
treated as ordinary income to a holder of the Regular Certificate (the "Regular
Certificateholder") as they accrue, and principal payments on a Regular
Certificate will be treated as a return of capital to the extent of the Regular
Certificateholder's basis in the Regular Certificate allocable thereto. Regular
Certificateholders must use the accrual method of accounting with regard to
Regular Certificates, regardless of the method of accounting otherwise used by
such Regular Certificateholders.
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Original Issue Discount. Regular Certificates may be issued with
"original issue discount" within the meaning of Code Section 1273(a). Holders
of any class of Regular Certificates having original issue discount generally
must include original issue discount in ordinary income for federal income tax
purposes as it accrues, in accordance with a constant interest method that
takes into account the compounding of interest, in advance of receipt of the
cash or a portion of the cash attributable to such income. Based in part on
Treasury regulations issued on January 27, 1994 under Code Sections 1271
through 1273 and 1275 (the "OID Regulations") and in part on the provisions of
the 1986 Act, the Depositor anticipates that the amount of original issue
discount required to be included in a Regular Certificateholder's income in any
taxable year will be computed in a manner substantially as described below. In
general the OID Regulations apply to debt instruments issued on or after April
4, 1994, except that taxpayers may rely on the OID Regulations for debt
instruments issued after December 21, 1992. Alternatively, proposed Treasury
regulations issued December 21, 1992 may be treated as authority for debt
instruments issued after December 21, 1992 and prior to April 4, 1994, and
proposed Treasury regulations issued in 1986 and 1991 may be treated as
authority upon for instruments issued before December 21, 1992. Regular
Certificateholders should be aware, however, that the OID Regulations either do
not address, or are subject to varying interpretations with regard to, several
issues relevant to securities, such as the Regular Certificates, that are
subject to prepayment. The 1986 Act requires that the amount and rate of
accrual or original issue discount be calculated based on a reasonable assumed
prepayment rate for the Mortgage Loans in a manner prescribed by regulations
not yet issued ("Prepayment Assumption") and provides for adjusting the amount
and rate of accrual of such discount where the actual prepayment rate differs
from the Prepayment Assumption. The Committee Report indicates that the
regulations will require that the Prepayment Assumption be the prepayment
assumption that is used in determining the initial offering price of such
Certificates. The Prospectus Supplement for each Series of such Certificates
will specify the Prepayment Assumption determined by the Depositor for the
purposes of determining the amount and rate of accrual of original issue
discount. No representation is made that the Certificates will prepay at the
Prepayment Assumption or at any other rate. Moreover, the OID Regulations
include an anti-abuse rule allowing the Internal Revenue Service ("IRS") to
apply or depart from the OID Regulations where necessary or appropriate to
ensure a reasonable tax result in light of the applicable statutory provisions.
A tax result will not be considered unreasonable under the anti-abuse rule in
the absence of a substantial effect on the present value of a taxpayer's tax
liability. Investors are advised to consult their own tax advisors as to the
discussion herein and the appropriate method for reporting interest and
original issue discount with respect to the Regular Certificates.
Under the OID Regulations, each Regular Certificate (except to the
extent described below with respect to a Regular Certificate on which
distributions of principal are made in a single installment or upon an earlier
distribution by lot of a specified principal amount upon the request of a
Regular Certificateholder or by random lot (a "Retail Class Certificate")) will
be treated as a single installment obligation for purposes of determining the
original issue discount includible in a Regular Certificateholder's income. The
total amount of original issue discount on a Regular Certificate is the excess
of the "stated redemption price at maturity" of the Regular Certificate over
its "issue price." The issue price of a Regular Certificate is the first price
at which a substantial amount of Regular Certificates of that class are first
sold (other than to bond houses, brokers, underwriters and wholesalers). Unless
specified otherwise in the Prospectus Supplement, the Depositor will determine
original issue discount by including the amount paid by an initial Regular
Certificateholder for accrued interest that relates to a period prior to the
issue date of the Regular Certificate in the issue price of a Regular
Certificate and will include in the stated redemption price at maturity any
interest paid on the first Distribution Date to the extent such interest is
attributable to a period in excess of the number of days between the issue date
and such first Distribution Date. The stated redemption price at maturity of a
Regular Certificate always includes the original principal amount of the
Regular Certificate, but generally will not include distributions of stated
interest if such interest distributions constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest
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generally means stated interest that is unconditionally payable in cash or in
property (other than debt instruments of the issuer), or that will be
constructively received, at least annually at a single fixed rate. Special
rules apply for variable rate Regular Certificates as described below. Any
stated interest in excess of the qualified stated interest is included in the
stated redemption price at maturity. If the amount of original issue discount
is "de minimis" as described below, the amount of original issue discount is
treated as zero, and all stated interest is treated as qualified stated
interest. Distributions of interest on Regular Certificates with respect to
which deferred interest will accrue may not constitute qualified stated
interest, in which case the stated redemption price at maturity of such Regular
Certificates includes all distributions of interest as well as principal
thereon. Moreover, if the interval between the issue date and the first
Distribution Date on a Regular Certificate is longer than the interval between
subsequent Distribution Dates (and interest paid on the first Distribution Date
is less than would have been earned if the stated interest rate were applied to
outstanding principal during each day in such interval), the stated interest
distributions on such Regular Certificate technically do not constitute
qualified stated interest. The OID Regulations provide that in such case a
special rule, applying solely for the purpose of determining whether original
issue discount is de minimis, provides that the interest shortfall for the long
first period (i.e., the interest that would have been earned if interest had
been paid on the first Distribution Date for each day the Regular Certificate
was outstanding) is treated as original issue discount assuming the stated
interest would otherwise be qualified stated interest. Also in such case the
stated redemption price at maturity is treated as equal to the issue price plus
the greater of the amount of foregone interest or the excess, if any, of the
Certificate's stated principal amount over its issue price. The OID Regulations
indicate that all interest on a long first period Regular Certificate that is
issued with non-de minimis original issue discount will be included in the
Regular Certificate's stated redemption price at maturity. Regular
Certificateholders should consult their own tax advisors to determine the issue
price and stated redemption price at maturity of a Regular Certificate.
Under a de minimis rule, original issue discount on a Regular
Certificate will be considered to be zero if such original issue discount is
less than 0.25% of the stated redemption price at maturity of the Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate. For this purpose, the weighted average maturity of the Regular
Certificate is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of
each distribution included in the stated redemption price at maturity of the
Regular Certificate and the denominator of which is the stated redemption price
at maturity of the Regular Certificate. Although currently unclear, it appears
that the schedule of such distributions should be determined in accordance with
the Prepayment Assumption. In addition, if the original issue discount is de
minimis all stated interest (including stated interest that would otherwise be
treated as original issue discount) is treated as qualified stated interest.
Unless the Holder of a Regular Certificate elects to accrue all discount under
a constant yield to maturity method, as described below, the holder of a debt
instrument includes any de minimis original issue discount in income pro rata
as capital gain recognized on retirement of the Regular Certificate as stated
principal payments are received. If a subsequent Holder of a Regular
Certificate issued with de minimis original issue discount purchases the
Regular Certificate at a premium, the subsequent Holder does not include any
original issue discount in income. If a subsequent Holder purchases such
Regular Certificate at a discount all discount is reported as market discount,
as described below.
Of the total amount of original issue discount on a Regular
Certificate, the Regular Certificateholder generally must include in gross
income for any taxable year the sum of the "daily portions," as defined below,
of the original issue discount on the Regular Certificate accrued during an
accrual period for each day on which he holds the Regular Certificate,
including the date of purchase but excluding the date of disposition. Although
not free from doubt, the Depositor intends to treat the monthly
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period ending on the day before each Distribution Date as the accrual period,
rather than the monthly period corresponding to the prior calendar month. With
respect to each Regular Certificate, a calculation will be made of the original
issue discount that accrues during each successive full accrual period (or
shorter period from the date of original issue) that ends on the day before the
related Distribution Date for the Regular Certificate. The original issue
discount accruing in a full accrual period would be the excess, if any, of (i)
the sum of (a) the present value of all of the remaining distributions to be
made on the Regular Certificate as of the end of that accrual period that are
included in the Regular Certificate's stated redemption price at maturity and
(b) the distributions made on the Regular Certificate during the accrual period
that are included in the Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of the Regular Certificate at the
beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence is calculated based on (i)
the yield to maturity of the Regular Certificate at the issue date giving the
effect to the Prepayment Assumption, (ii) events (including actual prepayments)
that have occurred prior to the end of the accrual period and (iii) the
Prepayment Assumption. The effect of these rules is to adjust the rate of
original issue discount accrual to correspond to the actual prepayment
experience. For these purposes, the adjusted issue price of a Regular
Certificate at the beginning of any accrual period equals the issue price of
the Regular Certificate, increased by the aggregate amount of original issue
discount with respect to the Regular Certificate that accrued in all prior
accrual periods and reduced by the amount of distributions included in the
Regular Certificate's stated redemption price at maturity that were made on the
Regular Certificate in such prior periods. The original issue discount accruing
during any accrual period (as determined in this paragraph) will then be
divided by the number of days in the period to determine the daily portion of
original issue discount for each day in the period. With respect to an initial
accrual period shorter than a full accrual period, the daily portions of
original issue discount must be determined using a reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. To the
extent specified in the applicable Prospectus Supplement, an increase in
prepayments on the Mortgage Loans with respect to a Series of Regular
Certificates can result in both a change in the priority of principal payments
with respect to certain Classes of Regular Certificates and either an increase
or decrease in the daily portions of original issue discount with respect to
such Regular Certificates.
In the case of a Retail Class Certificate, the yield to maturity of
such Certificate will be determined based upon the anticipated payment
characteristics of the Class as a whole under the Prepayment Assumption. In
general, the original issue discount accruing on each Retail Class Certificate
in a full accrual period would be its allocable share of the original issue
discount with respect to the entire Class, as determined in accordance with the
preceding paragraph. However, in the case of a distribution of the entire
principal amount of any Retail Class Certificate (or portion thereof), (a) the
remaining unaccrued original issue discount allocable to such Certificate (or
to such portion) will accrue at the time of such distribution, and (b) the
accrual of original issue discount allocable to each remaining Certificate of
such Class (or the remaining principal amount of a Retail Class Certificate
after a distribution in reduction of a portion of its principal amount has been
received) will be adjusted by reducing the present value of the remaining
payments on such Class and the adjusted issue price of such Class to the extent
attributable to the portion of the principal amount thereof that was
distributed.
A subsequent holder of a Certificate issued with original issue
discount who purchases the Certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of original issue discount on the Certificate. In
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computing the daily portions of original issue discount for a subsequent
purchaser (as well as an initial purchaser who purchases a Certificate at a
price higher than the issue price but less than the stated redemption price at
maturity), however, the daily portion for any day is reduced by the amount that
would be the daily portion for such day (computed in accordance with the rules
set forth above) multiplied by a fraction, the numerator of which is the
amount, if any, by which the price paid by such purchaser for the Regular
Certificate exceeds the excess of (i) the sum of its issue price and the
aggregate amount of original issue discount that would have been includible in
the gross income of an original holder of the Regular Certificate who purchased
the Regular Certificate at its issue price, over (ii) the amount of any prior
distributions included in the stated redemption price at maturity, and the
denominator of which is the sum of the daily portions for such Regular
Certificate (computed in accordance with the rules set forth above) for all
days beginning on the date after the date of purchase and ending on the date on
which the remaining principal amount of such Regular Certificate is expected to
be reduced to zero under the Prepayment Assumption. Alternatively, such a
subsequent holder may accrue original issue discount by treating the purchase
as a purchase at original issuance and applying the constant yield to maturity
method.
The OID Regulations provide that a holder that acquires a Regular
Certificate on or after April 4, 1994 may elect to include in gross income all
stated interest, original issue discount, de minimis original issue discount,
market discount (as described below under "-- Market Discount"), de minimis
market discount and unstated interest (as adjusted for any amortizable bond
premium or acquisition premium) currently as it accrues using the constant
yield to maturity method. If such an election were made with respect to a
Regular Certificate with market discount, the Regular 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 Regular Certificateholder acquires during the year of the election or
thereafter. Similarly, a Regular Certificateholder that makes this election for
a Regular 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 Regular Certificateholder owns or
acquires. The election to accrue interest, discount and premium on a constant
yield method with respect to a Regular Certificate can not be revoked without
the consent of the IRS.
Regular Certificates may provide for interest based on a variable
rate. The OID Regulations provide special rules for variable rate instruments
that meet four requirements. First, the issue price must not exceed the
noncontingent principal payments by more than the lesser of (i) 1.5% of the
product of the noncontingent principal payments and the weighted average
maturity or (ii) 15% of the noncontingent principal payments. Second, the
instrument must provide for stated interest (compounded or paid at least
annually) at (i) one or more qualified floating rates, (ii) a single fixed rate
and a single objective rate that is a qualified inverse floating rate, (iii) a
single fixed rate and one or more qualified floating rates; or (iv) a single
objective rate. Third, the instrument must provide that each qualified floating
rate or objective rate in effect during the term of the Regular Certificate is
set at a current value of that rate (one occurring in the interval beginning
three months before and ending one year after the rate is first in effect on
the Regular Certificate). Fourth, the debt instrument must not provide for
contingent principal payments. If interest on a Regular Certificate is stated
at a fixed rate for an initial period of less than 1 year followed by a
variable rate that is either a qualified floating rate or an objective rate and
the value of the variable rate on the issue date is intended to approximate the
fixed rate, the fixed rate and the variable rate together constitute a single
qualified floating rate or objective rate. A rate is a qualified floating rate
if variations in the rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the Regular Certificate's
currency denomination. A multiple of a qualified floating rate is not a
qualified floating rate unless it is a rate equal to (i) the product of a
qualified floating rate as described in the previous sentence and a positive
number not greater than 1.35 (but greater than 0.65 for instruments issued on
or after August 13, 1996), or (ii) a product described in (i) increased or
decreased by a fixed rate. A variable rate is not a qualified floating rate if
it is subject to a cap, floor or a restriction
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on the amount of increase or decrease in stated interest rate (governor)
unless: (i) the cap, floor or governor is fixed throughout the Regular
Certificate's term, (ii) the cap or floor is not reasonably expected to cause
the yield on the Regular Certificate to be significantly less or more,
respectively, than the expected yield without the cap or floor, or (iii) the
governor is not reasonably expected to cause the yield to be significantly more
or less than the expected yield without the governor. Before August 13,1996, an
objective rate is a rate that is determined using a single fixed formula and is
based on (i) the yield or changes in price of actively traded personal
property, (ii) one or more qualified floating rates, (iii) a rate that would be
a qualified rate if the Regular Certificate were denominated in another
currency or (iv) a combination of such rates. For instruments issued on or
after August 13, 1996, an objective rate is a rate (other than a qualified
floating rate) that is determined using a single fixed formula and that is
based on objective financial or economic information. An objective rate is a
qualified inverse floating rate if the rate is equal to a fixed rate minus a
qualified floating rate in which the variations of such rate can reasonably be
expected to inversely reflect contemporaneous variations in the qualified
floating rate. However, a variable rate is not an objective rate if it is
reasonably expected that the average value of the rate during the first half of
the Regular Certificate's term will be significantly less or greater than the
average value of the rate during the final half of the Regular Certificate's
term.
If a variable rate Regular Certificate provides for stated interest at
a single qualified floating rate or objective rate that is unconditionally
payable in cash or property at least annually (i) all stated interest is
qualified stated interest, (ii) the amount of qualified stated interest and
original issue discount, if any, that accrues is determined as if the Regular
Certificate had a fixed rate equal to (A) in the case of a qualified floating
rate or qualified inverse floating rate, the value on the issue date of the
qualified floating rate or qualified inverse floating rate or (B) in the case
of any other objective rate, a fixed rate that reflects the yield that is
reasonably expected for the Regular Certificate and (iii) the qualified stated
interest that accrues is adjusted for the interest actually paid. If a variable
rate Regular Certificate is not described in the previous sentence, the Regular
Certificate is treated as a fixed rate Regular Certificate with a fixed rate
substitute or substitutes equal to the value of the qualified floating rates or
qualified inverse floating rate at the date of issue or, in the case of a
Regular Certificate having an objective rate at a fixed rate that reflects the
yield reasonably expected for the Regular Certificate. Qualified stated
interest or original issue discount allocable to an accrual period is adjusted
to reflect differences in the interest actually accrued or paid compared to the
interest accrued or paid at the fixed rate substitute. If a variable rate
Regular Certificate provides for stated interest either at one or more
qualified floating rates or at a qualified inverse floating rate and also
provides for interest at an initial fixed rate that is not intended to
approximate the related floating rate or is fixed for a period of one year or
more, original issue discount is determined as described in the previous two
sentences except that the Regular Certificate is treated as if it provided for
a qualified floating rate or qualified inverse floating rate, as applicable,
rather than a fixed rate. The substitute rate must be one such that the fair
market value of the Regular Certificate would be approximately the same as the
fair market value of the hypothetical certificate.
Under the OID Regulations, a variable rate Regular Certificate not
qualifying for treatment under the variable rate rules described above is
subject to the contingent payment rules. Treasury regulations dealing with
contingent payment debt obligations were issued June 11, 1996 (the "Contingent
Debt Regulations"), and are generally effective August 13, 1996. The Contingent
Debt Regulations by their terms do not apply to REMIC regular interests.
However, the following paragraph describes the applicable Contingent Debt
Regulations as a method that may be considered reasonable.
The Contingent Debt Regulations apply a "noncontingent bond method" to
a debt instrument that is publicly traded or that is issued for cash or
publicly traded property. Under the noncontingent bond method, the issuer is
required to determine the comparable yield for the instrument and to construct
a projected payment schedule for the debt instrument consisting of all
noncontingent payments and a
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projected amount for each contingent payment. The issuer is required to
determine interest expense, and a holder is required to determine interest
income, according to the projected payment schedule formulated by the issuer.
Interest generally is accrued under the noncontingent bond method according to
generally applicable rules of the OID Regulations as described above.
Adjustments in the instrument's issue price and the holder's basis are
determined as if the projected payment schedule were the actual payment
schedule for the instrument. If the actual amount of a contingent payment
differs from the projected amount of the payment, adjustments to interest
accrual are generally taken into account at the time the payment is made in
order to reflect this difference. Gain or loss recognized by a holder on the
sale, exchange, or retirement of the instrument generally will be treated as
interest income or ordinary loss to the holder. A loss will be treated as
ordinary, however, only up to the amount of the holder's total interest
inclusions with respect to the Regular Certificate that were not offset by
previous adjustments. Any additional loss generally will be a capital loss.
Investors are urged to consult their tax advisors as to the proper accrual of
original issue discount (including stated interest) on the Regular
Certificates, including Regular Certificates which may be subject to the
contingent payment rules.
Although unclear at present, the Depositor intends to treat
Certificates bearing an interest rate that is a weighted average of the net
interest rates on the Mortgage Loans or the mortgage loans underlying the
Mortgage Assets as having qualified stated interest if the Mortgage Loans or
the underlying mortgage loans are adjustable rate mortgage loans. In such case,
the applicable index used to compute interest on the Mortgage Loans in effect
on the issue date (or possibly the pricing date) will be deemed to be in effect
beginning with the period in which the first weighted average adjustment date
occurring after the issue date occurs. If the Certificate interest rate for one
or more periods is less than it would be based upon the fully indexed rate, the
excess of the interest payments projected at the assumed index over interest
projected at such initial rate will be tested under the de minimis rules as
described above. Adjustments will be made in each accrual period increasing or
decreasing the amount of ordinary income reportable to reflect the actual
interest rate on the Certificates. It is possible, however, that the IRS may
treat some or all of the interest on Certificates with a weighted average rate
as taxable under the rules relating to obligations providing for contingent
payments. Such treatment may affect the timing of income accruals on such
Certificates.
It is not clear how income should be accrued with respect to Regular
Certificates issued at a significant premium and with respect to REMIC
Certificates, the payments on which consist primarily of a specified portion of
the interest payments on qualified mortgages held by the REMIC ("Premium REMIC
Regular Certificates"). One method of income accrual would be to treat the
Premium REMIC Regular Certificate as a Certificate having qualified stated
interest purchased at a premium equal to the excess of the price paid by such
holder for the Premium REMIC Regular Certificate over its stated principal
amount. Under this approach, a holder would be entitled to amortize such
premium only if it has in effect an election under Section 171 of the Code with
respect to all bonds held by such holder, as described below. Alternatively,
all of the income derived from a Premium REMIC Regular Certificate could be
reported as original issue discount by treating all future payments under the
Prepayment Assumption as fixed payments, in which case the amount and rate of
accrual of original issue discount would be computed by treating the Premium
REMIC Regular Certificate as a Certificate which has no qualified stated
interest, as described above. Finally, the IRS could assert that the Premium
REMIC Regular Certificates should be taxable under the contingent payment rules
governing securities issued with contingent payments.
Market Discount. A purchaser of a Regular Certificate also may be
subject to the market discount rules of Code Sections 1276 through 1278. Under
these sections and the principles applied by the OID Regulations in the context
of original issue discount, "market discount" is the amount by which a
subsequent purchaser's initial basis in the Regular Certificate (i) is exceeded
by the stated redemption price at maturity of the Regular Certificate or (ii)
in the case of a Regular Certificate having original issue discount, is
exceeded by the sum of the issue price of such Regular Certificate plus any
original issue
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discount that would have previously accrued thereon if held by an original
Regular Certificateholder (who purchased the Regular Certificate at its issue
price), in either case less any prior distributions included in the stated
redemption price at maturity of such Regular Certificate. Such purchaser
generally will be required to recognize accrued market discount as ordinary
income as distributions includible in the stated redemption price at maturity
of such Regular Certificate are received, in an amount not exceeding any such
distribution. That recognition rule would apply regardless of whether the
purchaser is a cash-basis or accrual-basis taxpayer. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take into
account the Prepayment Assumption. The Committee Report provides that until
such regulations are issued, such market discount would accrue either (i) on
the basis of a constant interest rate or (ii) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for such period
plus the remaining interest as of the end of such period, or in the case of a
Regular Certificate issued with original issue discount, in the ratio of
original issue discount accrued for the relevant period to the sum of the
original issue discount accrued for such period plus the remaining original
issue discount as of the end of such period. Such purchaser also generally will
be required to treat a portion of any gain on a sale or exchange of the Regular
Certificate as ordinary income to the extent of the market discount accrued to
the date of disposition under one of the foregoing methods, less any accrued
market discount previously reported as ordinary income as partial distributions
in reduction of the stated redemption price at maturity were received. Such
purchaser will be required to defer the deduction of a portion of the excess of
the interest paid or accrued on indebtedness incurred to purchase or carry a
Regular Certificate over the interest distributable thereon. The deferred
portion of such interest expense in any taxable year generally will not exceed
the accrued market discount on the Regular Certificate for such year. Any such
deferred interest expense is, in general, allowed as a deduction not later than
the year in which the related market discount income is recognized or the
Regular Certificate is disposed of. As an alternative to the inclusion of
market discount in income on the foregoing basis, the Regular Certificateholder
may elect to include market discount in income currently as it accrues on all
market discount instruments acquired by such Regular Certificateholder in that
taxable year or thereafter, in which case the interest deferral rule will not
apply. In Revenue Procedure 92-67, the IRS set forth procedures for taxpayers
(1) electing under Section 1278(b) of the Code to include market discount in
income currently, (2) electing under rules of Section 1276(b) of the Code to
use a constant interest rate to determine accrued market discount on a security
where the holder of the security is required to determine the amount of accrued
market discount at a time prior to the holder's disposition of the security,
and (3) requesting consent to revoke an election under Section 1278(b) of the
Code.
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above under "-- Original Issue Discount")
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued, and therefore investors should
consult their own tax advisors regarding the application of these rules as well
as the advisability of making any of the elections with respect thereto.
Premium. A Regular Certificate purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Certificateholder holds such Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
Regular Certificateholder may elect under Code Section 171 to amortize such
premium under a constant yield method that reflects compounding based on the
interval between payments on the Regular Certificates. The Committee Report
indicates a Congressional intent that the same rules that apply to the accrual
of market discount on installment obligations will also apply to amortizing
bond premium under Code Section 171 on installment obligations such as the
Regular Certificates, although it is unclear whether the alternatives to the
constant interest method described above under "-- Market Discount" are
available. Except as
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otherwise provided in Treasury regulations yet to be issued, such amortizable
bond premium will be treated as an offset to interest income on a Regular
Certificate rather than as a separate deduction item. This election, once made,
applies to all taxable obligations held by the taxpayer at the beginning of the
first taxable year to which such election applies and to all taxable debt
obligations thereafter acquired and is binding on such taxpayer in all
subsequent years. Purchasers who pay a premium for their Regular Certificates
should consult their tax advisors regarding the election to amortize premium
and the method to be employed.
Sale or Exchange of Regular Certificates. If a Regular
Certificateholder sells or exchanges a Regular Certificate, the Regular
Certificateholder will recognize gain or loss equal to the difference, if any,
between the amount received and his adjusted basis in the Regular Certificate.
The adjusted basis of a Regular Certificate generally will equal the cost of
the Regular Certificate to the seller, increased by any original issue discount
or market discount previously included in the seller's gross income with
respect to the Regular Certificate and reduced by amounts included in the
stated redemption price at maturity of the Regular Certificate that were
previously received by the seller and by any amortized premium.
Except as described in this paragraph, under "Original Issue Discount"
and under "-- Market Discount," any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or
short-term depending on whether the Regular Certificate has been held for the
long-term capital gain holding period (currently more than one year). Gain from
the disposition of a Regular Certificate that might otherwise be capital gain
will be treated as ordinary income (i) if a Regular Certificate is held as part
of a "conversion transaction" as defined in Code Section 1258(c), up to the
amount of interest that would have accrued on the Regular Certificateholder's
net investment in the conversion transaction at 120% of the appropriate
applicable Federal rate under Code Section 1274(d) in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as part of such transaction, (ii) in the case of a noncorporate taxpayer, to
the extent such taxpayer has made an election under Code Section 163(d)(4) to
have net capital gains taxed as investment income at ordinary income rates, or
(iii) in the case of a Regular Certificate (issued by a REMIC) to the extent
that such gain does not exceed the excess, if any, of (a) the amount that would
have been includible in the gross income of the holder if his yield on such
Regular Certificate were 110% of the applicable Federal rate under Code Section
1274(d) as of the date of purchase, over (b) the amount of income actually
includible in the gross income of such holder with respect to the Regular
Certificate. Although the legislative history to the 1986 Act indicates that
the portion of the gain from disposition of a Regular Certificate that will be
recharacterized as ordinary income under clause (iii) is limited to the amount
of original issue discount (if any) on the Regular Certificate that was not
previously includible in income, the applicable Code provision contains no such
limitation. In addition, gain or loss recognized from the sale of a Regular
Certificate by certain banks or thrift institutions will be treated as ordinary
income or loss pursuant to Code Section 582(c). In the case of a Regular
Certificate subject to the new contingent payment rules issued on January 19,
1993 as described above under "-- Original Issue Discount," any gain on the
sale or exchange of such Certificate is treated as interest income.
TAXATION OF RESIDUAL CERTIFICATES
Taxation of REMIC Income. Generally, the "daily portions" of REMIC
taxable income or net loss will be includible as ordinary income or loss in
determining the federal taxable income of holders of Residual Certificates
("Residual Certificateholders"), and will not be taxed separately to the REMIC
Pool. The daily portions of REMIC taxable income or net loss of a Residual
Certificateholder are determined by allocating the REMIC Pool's taxable income
or net loss for each calendar quarter ratably to each day in such quarter and
by allocating such daily portion among the Residual Certificateholders in
proportion to
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their respective holdings of Residual Certificates in the REMIC Pool on such
day. REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using a calendar year and the accrual method of
accounting, except that (i) the limitation on deductibility of investment
interest expense and expenses for the production of income do not apply, (ii)
all bad loans will be deductible as business bad debts and (iii) the limitation
on the deductibility of interest and expenses related to tax-exempt income will
apply. REMIC taxable income generally means the REMIC Pool's gross income,
including interest, original issue discount income and market discount income,
if any, on the Mortgage Loans, plus income on reinvestment of cash flows and
reserve assets, minus deductions, including interest and original issue
discount expense on the Regular Certificates, servicing fees on the Mortgage
Loans and other administrative expenses of the REMIC Pool, amortization of
premium, if any, with respect to the Mortgage Loans, and any tax imposed on the
REMIC's income from foreclosure property. The requirement that Residual
Certificateholders report their pro rata share of taxable income or net loss of
the REMIC Pool will continue until there are no Certificates of any Class of
the related Series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Loans,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates, on the other hand. Because of the
way REMIC taxable income is calculated, a Residual Certificateholder may
recognize "phantom" income (i.e., income recognized for tax purposes in excess
of income as determined under financial accounting or economic principles)
which will be matched in later years by a corresponding tax loss or reduction
in taxable income, but which could lower the yield to Residual
Certificateholders due to the lower present value of such loss or reduction.
For example, if an interest in the Mortgage Loans is acquired by the REMIC Pool
at a discount, and one or more of such Mortgage Loans is prepaid, the Residual
Certificateholder may recognize taxable income without being entitled to
receive a corresponding amount of cash because (i) the prepayment may be used
in whole or in part to make distributions in reduction of principal on the
Regular Certificates and (ii) the discount income on the Mortgage Loans which
is includible in the REMIC's taxable income may exceed the interest and
discount deduction allowed to the REMIC upon such distributions on the Regular
Certificates. When there is more than one class of Regular Certificates that
distribute principal sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Certificates when distributions in reduction of principal are being
made in respect of earlier maturing classes of Regular Certificates to the
extent that such classes are not issued with substantial discount. If taxable
income attributable to such a mismatching is realized, in general, losses would
be allowed in later years as distributions on the later classes of Regular
Certificates are made. Taxable income may also be greater in earlier years than
in later years as a result of the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of such a Series
of Regular Certificates, may increase over time as distributions in reduction
of principal are made on the lower yielding classes of Regular Certificates,
whereas interest income with respect to any given Mortgage Loan will remain
constant over time as a percentage of the outstanding principal amount of that
loan. Consequently, Residual Certificateholders must have sufficient other
sources of cash to pay any federal, state or local income taxes due as a result
of such mismatching or unrelated deductions against which to offset such
income. Prospective investors should be aware, however, that a portion of such
income may be ineligible for offset by such investor's unrelated deductions.
See the discussion of "excess inclusions" below under "-- Treatment of Certain
Items of REMIC Income and Expense -- Limitations on Offset or Exemption of
REMIC Income; Excess Inclusions." The timing of such mismatching of income and
deductions described in this paragraph, if present with respect to a Series of
Certificates, may have a significant adverse effect upon the Residual
Certificateholder's after-tax rate of return. In addition, a Residual
Certificateholder's taxable income during certain periods may exceed the income
reflected by such Residual Certificateholder for such periods in accordance
with generally accepted accounting principles. Investors should consult their
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own advisors concerning the proper tax and accounting treatment of their
investment in Residual Certificates.
Basis and Losses. The amount of any net loss of the REMIC Pool that
may be taken into account by the Residual Certificateholder is limited to the
adjusted basis of the Residual Certificate as of the close of the quarter (or
time of disposition of the Residual Certificate if earlier), determined without
taking into account the net loss for the quarter. The initial adjusted basis of
a purchaser of a Residual Certificate is the amount paid for such Residual
Certificate. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Certificateholder and
decreased by the amount of loss of the REMIC Pool reportable by the Residual
Certificateholder. A cash distribution from the REMIC Pool also will reduce
such adjusted basis (but not below zero). Any loss that is disallowed on
account of this limitation may be carried over indefinitely with respect to the
Residual Certificateholder as to whom such loss was disallowed and may be used
by such Residual Certificateholder only to offset any income generated by the
same REMIC Pool. The ability of a Residual Certificateholder to deduct net
losses with respect to a Residual Certificate may be subject to additional
limitations under the Code, as to which Residual Certificateholders should
consult their tax advisors.
A Residual Certificateholder will not be permitted to amortize
directly the cost of its Residual Certificate as an offset to its share of the
taxable income of the related REMIC Pool. However, such taxable income will not
include cash received by the REMIC Pool that represents a recovery of the REMIC
Pool's basis in its assets. Such recovery of basis by the REMIC Pool will have
the effect of amortization of the issue price of the Residual Certificates over
their life. However, in view of the possible acceleration of the income of
Residual Certificateholders described above under "-- Taxation of REMIC
Income," the period of time over which such issue price is effectively
amortized may be longer than the economic life of the Residual Certificates.
If a Residual Certificate has a negative value, it is not clear
whether its issue price would be considered to be zero or such negative amount
for purposes of determining the REMIC Pool's basis in its assets. The Final
REMIC Regulations do not address whether residual interests could have a
negative basis and a negative issue price. The Depositor does not intend to
treat a Class of Residual Certificates as having a value of less than zero for
purposes of determining the bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate
is greater that the corresponding portion of the REMIC Pool's basis in the
Mortgage Loans or the Mortgage Loans underlying the Agency Securities, the
Residual Certificateholder will not recover a portion of such basis until
termination of the REMIC Pool unless Treasury regulations yet to be issued
provide for periodic adjustments to the REMIC income otherwise reportable by
such holder. The Final REMIC Regulations do not so provide. See "-- Treatment
of Certain Items of REMIC Income and Expense -- Market Discount" below
regarding the basis of Mortgage Loans to the REMIC Pool and "-- Sale or
Exchange of a Residual Certificate" below regarding possible treatment of a
loss upon termination of the REMIC Pool as a capital loss.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Certificates as described above under "-- Taxation
of Regular Certificates -- Original Issue Discount," without regard to the de
minimis rule described therein.
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Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool in such
Mortgage Loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in such Mortgage Loans is generally the fair market value of the Mortgage
Loans immediately after the transfer thereof to the REMIC Pool. The Final REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool. In respect of
Mortgage Loans that have market discount to which Code Section 1276 applies,
the accrued portion of such market discount would be recognized currently by
the REMIC as an item of ordinary income. Market discount income generally
should accrue in the manner described above under "-- Taxation of Regular
Certificates -- Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage
Loans exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans, based on the aggregate of
the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner analogous
to the discussion above under "-- Taxation of Regular Certificates -- Premium,"
a person that holds a Mortgage Loan as a capital asset under Code Section 1221
may elect under Code Section 171 to amortize premium on Mortgage Loans
originated after September 27, 1985 under a constant yield method. Amortizable
bond premium will be treated as an offset to interest income on the Mortgage
Loans, rather than as a separate deduction item. Because substantially all of
the borrowers with respect to the Mortgage Loans are expected to be
individuals, Code Section 171 will not be available for premium on Mortgage
Loans originated on or prior to September 27, 1985. Premium with respect to
such Mortgage Loans may be deductible in accordance with a reasonable method
regularly employed by the holder thereof. The allocation of such premium pro
rata among principal payments should be considered a reasonable method;
however, the IRS may argue that such premium should be allocated in a different
manner, such as allocating such premium entirely to the final payment of
principal.
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions.
A portion of the income allocable to a Residual Certificate (referred to in the
Code as an "excess inclusion") for any calendar quarter will be subject to
federal income tax in all events. Thus, for example, an excess inclusion (i)
cannot be offset by any unrelated losses or loss carryovers of a Residual
Certificateholder, (ii) will be treated as "unrelated business taxable income"
within the meaning of Code Section 512 if the Residual Certificateholder is a
pension fund or any other organization that is subject to tax only on its
unrelated business taxable income and (iii) is not eligible for any reduction
in the rate of withholding tax in the case of a Residual Certificateholder that
is a foreign investor, as further discussed in "Taxation of Certain Foreign
Investors -- Residual Certificates" below. Members of an affiliated group are
treated as one corporation for purposes of applying the limitations on offset
of excess inclusion income.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Certificates without "significant value," for any
Residual Certificateholder, the excess inclusion for any calendar quarter is
the excess, if any, of (i) the income of such Residual Certificateholder for
that calendar quarter from its Residual Certificate, over (ii) the sum of the
"daily accruals" (as defined below) for all days during the calendar quarter on
which the Residual Certificateholder holds such Residual Certificate. For this
purpose, the daily accruals with respect to a Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable
portion of the product of the "adjusted issue price" (as defined below) of the
Residual Certificate at the beginning of the calendar quarter and 120 percent
of the "Federal long-term rate" in effect at the time the Residual Certificate
is issued. For this purpose, the "adjusted issue price" of a Residual
Certificate at the beginning of any calendar quarter equals the issue price of
the Residual Certificate (adjusted for contributions), increased by the amount
of daily accruals for all prior quarters, and decreased (but not below zero) by
the aggregate amount of payments made on the Residual
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Certificate before the beginning of such quarter. The Federal long-term rate is
an average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Certificate will be treated as an excess inclusion if
the Residual Certificates in the aggregate are considered not to have
"significant value." The Treasury Department has not yet provided regulations
in this respect and the Final REMIC Regulations did not adopt this rule. The
Small Business Job Protection Act ("SBJPA") of 1996 has eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from Residual Certificates that have "significant value"
within the meaning of the Final REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to Residual Certificates
continuously held by thrift institutions since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining
the effect of excess inclusions on the alternative minimum taxable income of a
Residual Certificateholder. First, alternative minimum taxable income for a
Residual Certificateholder is determined without regard to the special rule,
discussed above, that taxable income cannot be less than excess inclusions.
Second, a Residual Certificateholder's alternative minimum taxable income for a
taxable year cannot be less than the excess inclusions for the year. Third,
the amount of any alternative minimum tax net operating loss deduction must be
computed without regard to any excess inclusions. These rules are effective
for taxable years beginning after December 31, 1986, unless a Residual
Certificateholder elects to have such rules apply only to taxable years
beginning after August 20, 1996.
Under Treasury regulations to be promulgated, a portion of the
dividends paid by a REIT which owns a Residual Certificate are to be designated
as excess inclusions in an amount corresponding to the Residual Certificate's
allocable share of the excess inclusions. Similar rules apply in the case of
regulated investment companies, common trust funds and cooperatives. Thus,
investors in such entities which own a Residual Certificate will be subject to
the limitations on excess inclusions described above. The Final REMIC
Regulations do not provide guidance on this issue.
Mark to Market Rules. A Residual Certificate acquired after January 3,
1995 cannot be marked-to-market.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL CERTIFICATES
Disqualified Organizations. If legal title or beneficial interest in
a Residual Certificate is transferred to a Disqualified Organization (as
defined below), a tax would be imposed in an amount equal to the product of (i)
the present value of the total anticipated excess inclusions with respect to
such Residual Certificate for periods after the transfer and (ii) the highest
marginal federal income tax rate applicable to corporations. The Final REMIC
Regulations provide that the anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and projected payments based
on the Prepayment Assumption. The present value discount rate equals the
applicable Federal rate under Code Section 1274(d) that would apply to a debt
instrument that was issued on the date the Disqualified Organization acquired
the Residual Certificate and whose term ended on the close of the last quarter
in which excess inclusions were expected to accrue with respect to the Residual
Certificate. Such a tax generally would be imposed on the transferor of the
Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in
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no event be liable for such tax with respect to a transfer if the transferee
furnishes to the transferor an affidavit that the transferee is not a
Disqualified Organization and, as of the time of the transfer, the transferor
does not have actual knowledge that such affidavit is false. The tax also may
be waived by the Treasury Department if the Disqualified Organization promptly
disposes of the Residual Certificate and the transferor pays income tax at the
highest corporate rate on the excess inclusions for the period the Residual
Certificate is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
PassThrough Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that (i)
states under penalty of perjury that it is not a Disqualified Organization or
(ii) furnishes a social security number and states under penalties of perjury
that the social security number is that of the transferee, provided that during
the period such person is the record holder of the Residual Certificate, the
Pass-Through Entity does not have actual knowledge that such affidavit is
false.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors
is not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations yet to be issued, any person holding an interest in a Pass-Through
Entity as a nominee for another will, with respect to such interest, be treated
as a Pass-Through Entity.
The Pooling and Servicing Agreement with respect to a Series of
Certificates will provide that neither legal title nor beneficial interest in a
Residual Certificate may be transferred or registered unless (i) the proposed
transferee provides to the Depositor and the Trustee an affidavit to the effect
that such transferee is not a Disqualified Organization, is not purchasing such
Residual Certificates on behalf of a Disqualified Organization (i.e., as a
broker, nominee or middleman thereof) and is not an entity that holds REMIC
residual securities as nominee to facilitate the clearance and settlement of
such securities through electronic book-entry changes in accounts of
participating organizations and (ii) the transferor provides a statement in
writing to the Depositor and the Trustee that it has no actual knowledge that
such affidavit is false. Moreover, the Pooling and Servicing Agreement will
provide that any attempted or purported transfer in violation of these transfer
restrictions will be null and void and will vest no rights in any purported
transferee. Each Residual Certificate with respect to a Series will bear a
legend referring to such restrictions on transfer, and each Residual
Certificateholder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Pooling and Servicing Agreement
required under the Code or applicable Treasury regulations to effectuate the
foregoing restrictions. Information necessary to compute an applicable excise
tax must be furnished to the IRS and to the requesting party within 60 days of
the request, and the Depositor or the Trustee may charge a fee for computing
and providing such information.
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Noneconomic Residual Interests. The Final REMIC Regulations would
disregard certain transfers of Residual Certificates, in which case the
transferor would continue to be treated as the owner of the Residual
Certificates and thus would continue to be subject to tax on its allocable
portion of the net income of the REMIC Pool. Under the Final REMIC Regulations,
a transfer of a "noneconomic residual interest" (defined below) to a Residual
Certificateholder (other than a Residual Certificateholder who is not a United
States Person, as defined below under "-- Foreign Investors") is disregarded
for all federal income tax purposes unless no significant purpose of the
transfer is to enable the transferor to impede the assessment or collection of
tax. A residual interest in a REMIC (including a residual interest with a
positive value at issuance) is a "noneconomic residual interest" unless, at the
time of the transfer, (i) the present value of the expected future
distributions on the residual interest at least equals the product of the
present value of the anticipated excess inclusions and the highest corporate
income tax rate in effect for the year in which the transfer occurs, and (ii)
the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy the accrued
taxes. The anticipated excess inclusions and the present value rate are
determined in the same manner as set forth above under "-- Disqualified
Organizations." A significant purpose to impede the assessment or collection of
tax exists if the transferor, at the time of the transfer, either knew or
should have known (had "improper knowledge") that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. Under the Final REMIC Regulations, a transferor is presumed not to have
improper knowledge if (i) the transferor conducted, at the time of the
transfer, a reasonable investigation of the financial condition of the
transferee and, as a result of the investigation, the transferor found that the
transferee had historically paid its debts as they came due and found no
significant evidence to indicate that the transferee will not continue to pay
its debts as they come due in the future; and (ii) the transferee represents to
the transferor that it understands that, as the holder of the noneconomic
residual interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the residual interest and that the transferee intends
to pay taxes associated with holding of residual interest as they become due.
The Pooling and Servicing Agreement will require the transferee of a Residual
Certificate to state as part of the affidavit described above under the heading
"Disqualified Organizations" that such transferee (i) has historically paid its
debts as they come due, (ii) intends to continue to pay its debts as they come
due in the future, (iii) understands that, as the holder of a noneconomic
Residual Certificate, it may incur tax liabilities in excess of any cash flows
generated by the Residual Certificate, and (iv) intends to pay any and all
taxes associated with holding the Residual Certificate as they become due. The
transferor must have no reason to believe that such statement is untrue.
Foreign Investors. The Final REMIC Regulations provide that the
transfer of a Residual Certificate that has "tax avoidance potential" to a
"foreign person" will be disregarded for all federal tax purposes. This rule
appears intended to apply to a transferee who is not a "United States Person"
(as defined below), unless such transferee's income is effectively connected
with the conduct of a trade or business within the United States. A Residual
Certificate is deemed to have tax avoidance potential unless, at the time of
the transfer, the transferor reasonably expects that, for each excess
inclusion, (i) the REMIC Pool will distribute to the transferee residual
interest holder an amount that will equal at least 30% of the excess inclusions
and (ii) that each such amount will be distributed at or after the time at
which the excess inclusion accrues and not later than the close of the calendar
year following the calendar year of accrual. If the Non-United States Person
transfers the Residual Certificate back to a United States Person, the transfer
will be disregarded and the foreign transferor will continue to be treated as
the owner unless arrangements are made so that the transfer does not have the
effect of allowing the transferor to avoid tax on accrued excess inclusions.
The Prospectus Supplement relating to a Series of Certificates may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a United States Person or may describe the circumstances
and restrictions pursuant to which such a transfer may be made. The term
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"United States Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof or an estate or
trust that is subject to United States federal income tax regardless of the
source of its income.
Sale or Exchange of a Residual Certificate. Upon the sale or exchange
of a Residual Certificate, the Residual Certificateholder will recognize gain
or loss equal to the excess, if any, of the amount realized over the adjusted
basis (as described above under "Basis and Losses") of such Residual
Certificateholder in such Residual Certificate at the time of the sale or
exchange. In addition to reporting the taxable income of the REMIC Pool, a
Residual Certificateholder will have taxable income to the extent that any cash
distribution to him from the REMIC Pool exceeds such adjusted basis on that
Distribution Date or Payment Date. Such income will be treated as gain from the
sale or exchange of the Residual Certificate. It is possible that the
termination of the REMIC Pool may be treated as a sale or exchange of a
Residual Certificateholder's Residual Certificate, in which case, if the
Residual Certificateholder has an adjusted basis in his Residual Certificate
remaining when his interest in the REMIC Pool terminates, and if he holds such
Residual Certificate as a capital asset under Code Section 1221, then he will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
The Committee Report provides that, except as provided in Treasury
regulations yet to be issued, the wash sale rules of Code Section 1091 will
apply to dispositions of Residual Certificates. Consequently, losses on
dispositions of Residual Certificates will be disallowed where the seller of
the Residual Certificate, during the period beginning six months before the
sale or disposition of the Residual Certificate and ending six months after
such sale or disposition, acquires (or enters into any other transaction that
results in the application of Code Section 1091) any residual interest in any
REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC owner
trust) that is economically comparable to a Residual Certificate. In any event,
any loss realized by a Residual Certificateholder on the sale will not be
deductible, but, instead, will increase such Residual Certificateholder's
adjusted basis in the newly acquired assets.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
Prohibited Transactions. Net income from certain transactions by the
REMIC Pool, called prohibited transactions, will not be part of the calculation
of income or loss includible in the federal income tax returns of Residual
Certificateholders, but rather will be taxed directly to the REMIC Pool at a
100% rate. Prohibited transactions generally include (i) the disposition of a
qualified mortgage other than for (a) substitution within two years of the
Startup Day for a defective (including a defaulted) obligation (or repurchase
in lieu of substitution of a defective (including a defaulted) obligation at
any time) or for any qualified mortgage within three months of the Startup Day,
(b) foreclosure, default or imminent default of a qualified mortgage, (c)
bankruptcy or insolvency of the REMIC Pool or (d) a qualified (complete)
liquidation, (ii) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold, (iii) the
receipt of compensation for services or (iv) the receipt of gain from
disposition of cash flow investments other than pursuant to a qualified
liquidation. Notwithstanding (i) and (iv), it is not a prohibited transaction
to sell REMIC Pool property to prevent a default on Regular Certificates as a
result of a default on qualified mortgages or to facilitate a clean-up call
(generally, an optional termination to save administrative costs when no more
than a small percentage of the Certificates is outstanding). The Final REMIC
Regulations indicate that the modification of a Mortgage Loan generally will
not be treated as a disposition if it is occasioned by a default or reasonably
foreseeable default, an assumption of the Mortgage Loan, the waiver of a
due-on-sale or encumbrance clause or the conversion of an interest rate by a
borrower pursuant to the terms of a convertible adjustable rate Mortgage Loan.
Final REMIC Regulations also provide that the modification of mortgage loans
underlying pass-through
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certificates will not be treated as a modification of the Agency Securities,
provided that the trust issuing the pass-through certificates was not created
to avoid prohibited transaction rules.
Contributions to the REMIC Pool After the Startup Day. In general,
the REMIC Pool will be subject to a tax at a 100% rate on the value of any
property contributed to the REMIC Pool after the Startup Day. Exceptions are
provided for cash contributions to the REMIC Pool (i) during the three months
following the Startup Day, (ii) made to a qualified reserve fund by a Residual
Certificateholder, (iii) in the nature of a guarantee, (iv) made to facilitate
a qualified liquidation or clean-up call and (v) as otherwise permitted in
Treasury regulations yet to be issued.
Net Income from Foreclosure Property. The REMIC Pool will be subject
to federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. Generally, property acquired by the REMIC Pool
through foreclosure or deed in lieu of foreclosure would be treated as
"foreclosure property" for a period of two years, with possible extensions. Net
income from foreclosure property generally means (i) gain from the sale of a
foreclosure property that is inventory property and (ii) gross income from
foreclosure property other than qualifying rents and other qualifying income
for a real estate investment trust.
Liquidation of the REMIC Pool
If a REMIC Pool and the Trustee adopt a plan of complete liquidation,
within the meaning of Code Section 860F(a)(4)(A)(i) and sell all of the REMIC
Pool's assets (other than cash) within a 90-day period beginning on the date of
the adoption of the plan of liquidation, any gain on the sale of its assets
will not result in a prohibited transaction tax, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims against the REMIC Pool) to holders
of Regular Certificates and Residual Certificateholders within the 90-day
period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for such income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. Treasury regulations provide that, except where there is a single
Residual Certificateholder for an entire taxable year, the REMIC Pool generally
will be subject to the procedural and administrative rules of the Code
applicable to partnerships, including the determination by the IRS of any
adjustments to, among other things, items of REMIC income, gain, loss,
deduction or credit in a unified administrative proceeding. Generally, the
Depositor or the Trustee will be obligated to act as "tax matters person," as
defined in applicable Treasury regulations, with respect to the REMIC Pool, in
its capacity as either Residual Certificateholder or agent of the Residual
Certificateholders. If the Code or applicable Treasury regulations do not
permit the Depositor or the Trustee to act as tax matters person in its
capacity as agent of the Residual Certificateholders, the Residual
Certificateholder chosen by the Residual Certificateholders or such other
person specified pursuant to Treasury regulations will be required to act as
tax matters person.
Treasury regulations provide that a holder of a Residual Certificate
is not required to treat items on its return consistently with their treatment
on the REMIC Pool's return if a holder owns 100% of the Residual Certificates
for the entire calendar year. Otherwise, each holder of a Residual Certificate
is required to treat items on its return consistently with their treatment on
the REMIC Pool's return, unless the holder of a Residual Certificate either
files a statement identifying the inconsistency or establishes that the
inconsistency resulted from incorrect information received from the REMIC Pool.
The IRS may assess
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a deficiency resulting from a failure to comply with the consistency
requirement without instituting an administrative proceeding at the REMIC Pool
level.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over a specified amount and adjusted
yearly for inflation, or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such deductions
may include deductions under Code Section 212 for servicing fees and all
administrative and other expenses relating to the REMIC Pool or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it
holds in another REMIC. Such investors who hold REMIC Certificates either
directly or indirectly through certain pass-through entities may have their pro
rata share of such expenses allocated to them as additional gross income, but
may be subject to such limitation on deductions. In addition, such expenses are
not deductible at all for purposes of computing the alternative minimum tax,
and may cause such investors to be subject to significant additional tax
liability. Treasury regulations provide that the additional gross income and
corresponding amount of expenses generally are to be allocated entirely to the
holders of Residual Certificates in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election.
However, such additional gross income and limitation on deductions will apply
to the allocable portion of such expenses to holders of Regular Certificates,
as well as holders of Residual Certificates, where such Regular Certificates
are issued in a manner that is similar to pass-through certificates in a fixed
investment trust. In general, such allocable portion will be determined based
on the ratio that a REMIC Certificateholder's income, determined on a daily
basis, bears to the income of all holders of Regular Certificates and Residual
Certificates with respect to a REMIC Pool. As a result, individuals, estates or
trusts holding REMIC Certificates (either directly or indirectly through a
grantor trust, partnership, S corporation, REMIC, or certain other pass-through
entities described in the foregoing Treasury regulations) may have taxable
income in excess of the interest income at the pass-through rate or Bond
interest rate on Regular Certificates that are issued in a single class or
otherwise consistently with fixed investment trust status or in excess of cash
distributions for the related period on Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Certificates
Interest, including original issue discount, distributable to Regular
Certificateholders who are nonresident aliens, foreign corporations, or other
Non-United States Persons (as defined below), will be considered "portfolio
interest" and therefore, generally will not be subject to 30% United States
withholding tax, provided that such Non-United States Person (i) is not a
"10-percent shareholders" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C) and (ii)
provides the Trustee, or the person who would otherwise be required to withhold
tax from such distributions under Code Section 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Certificate is a Non-United States Person. If such statement, or
any other required statement, is not provided, 30% withholding will apply
unless reduced or eliminated pursuant to an applicable tax treaty or unless the
interest on the Regular Certificate is effectively connected with the conduct
of a trade or business within the United States by such Non-United States
Person. In the latter case, such Non-United States Person will be subject to
United States federal income tax at regular rates.
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Investors who are Non-United States Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Certificate. The term "Non-United States Person" means any person who is not a
United States Person. Payments on Regular Certificates may subject a Non-United
States Person to United States federal income and withholding tax where such
foreign person also owns, actually or constructively, Residual Certificates
issued by the same REMIC, notwithstanding compliance with the certification
requirements discussed above.
Residual Certificates
The Committee Report indicates that amounts paid to Residual
Certificateholders who are Non-United States Persons are treated as interest
for purposes of the 30% (or lower treaty rate) United States withholding tax.
Treasury regulations provide that amounts distributed to Residual
Certificateholders qualify as "portfolio interest," subject to the conditions
described in "-- Regular Certificates" above, but only to the extent that (i)
the Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Fund or
segregated pool of assets therein (as to which a separate REMIC election will
be made), to which the Residual Certificate relates, consists of obligations
issued in "registered form" within the meaning of Code Section 163(f)(1).
Generally, Mortgage Loans will not be, but certificated regular interests in
another REMIC Pool will be, considered obligations issued in registered form.
Furthermore, a Residual Certificateholder will not be entitled to any exemption
from the 30% withholding tax (or lower treaty rate) to the extent of that
portion of REMIC taxable income that constitutes an "excess inclusion." See "--
Treatment of Certain Items of REMIC Income and Expense -- Limitations on Offset
or Exemption of REMIC Income; Excess Inclusions." If the amounts paid to
Residual Certificateholders who are Non-United States Persons are effectively
connected with the conduct of a trade or business within the United States by
such Non-United States Persons, 30% (or lower treaty rate) withholding will not
apply. Instead, the amounts paid to such Non-United States Persons will be
subject to United States federal income tax at regular rates. If 30% (or lower
treaty rate) withholding is applicable, such amounts generally will be taken
into account for purposes of withholding only when paid or otherwise
distributed (or when the Residual Certificate is disposed of) under rules
similar to withholding upon disposition of debt instruments that have original
issue discount. See "-- Tax-Related Restrictions on Transfer of Residual
Certificates -- Foreign Investors" above concerning the disregard of certain
transfers having "tax avoidance potential." Investors who are Non-United States
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning Residual Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the
sale of the Regular Certificates to or through certain brokers, may be subject
to a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from distribution
on the Regular Certificates would be refunded by the IRS or allowed as a credit
against the Regular Certificateholder's federal income tax liability.
REPORTING REQUIREMENTS
Reports of accrued interest and original issue discount will be made
annually to the IRS and to individuals, estates, nonexempt and non-charitable
trusts, and partnerships who are either holders of record of Regular
Certificates or beneficial owners who own Regular Certificates through a broker
or middleman
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as nominee. All brokers, nominees and all other non-exempt holders of record of
Regular Certificates (including corporations, noncalendar year taxpayers,
securities or commodities dealers, real estate investment trusts, investment
companies, common trust funds, thrift institutions and charitable trusts) may
request such information for any calendar quarter by telephone or in writing by
contacting the person designated in IRS Publication 938 with respect to a
particular Series of Regular Certificates. Holders through nominees must
request such information from the nominee. Treasury regulations provide that
information necessary to compute the accrual of any market discount on the
Regular Certificates must also be furnished.
The IRS's Form 1066 has an accompanying Schedule Q, Quarterly Notice
to Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool to
each Residual Certificateholder by the end of the month following the close of
each calendar quarter (41 days after the end of a quarter under proposed
Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the IRS concerning Code Section 67
expenses (See "-- Limitations on Deduction of Certain Expenses" above)
allocable to such holders. Furthermore, under such regulations, information
must be furnished quarterly to Residual Certificateholders, furnished annually
to holders of Regular Certificates, and filed annually with the IRS concerning
the percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "-- Status of REMIC Certificates."
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO
WHICH NO REMIC ELECTION IS MADE
STANDARD CERTIFICATES
General. With respect a Series of Certificates issued under an
Agreement for which no election is made to treat the related Trust Fund (or a
segregated pool of assets therein) as a REMIC, Counsel to the Depositor will
deliver its opinion to the effect that, assuming compliance with all provisions
of the related Pooling and Servicing Agreement, the related Trust Fund will be
classified as a grantor trust under subpart E, Part 1 of subchapter J of
Chapter 1 of Subtitle A of the Code and not as an association taxable as a
corporation. The following general discussion of the anticipated federal income
tax consequences of the purchase, ownership and disposition of Standard
Certificates, to the extent it relates to matters of law or legal conclusions
with respect thereto, represents the opinion of Counsel to the Depositor,
subject to any qualifications set forth herein. In addition, Counsel to the
Depositor has prepared or reviewed the statements in this Prospectus under the
heading "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for Securities as to Which No REMIC Election is Made -- Standard
Certificates," 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 Fund 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 Standard
Certificates.
Where there is no fixed retained yield with respect to the Mortgage
Loans underlying the Certificates of such a Series, and where such Certificates
are not designated as "Stripped Certificates," the holder of each such
Certificates in such Series will be treated as the owner of a pro rata
undivided interest
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in the ordinary income and corpus portions of the Trust Fund represented by his
Certificate and will be considered the beneficial owner of a pro rata undivided
interest in each of the Mortgage Loans, subject to the discussion below under
"-- Premium and Discount -- Recharacterization of Servicing Fees." Accordingly,
the holder of a Certificate of a particular Series will be required to report
on its federal income tax return its pro rata share of the entire income from
the Mortgage Loans represented by its Certificate, including interest at the
coupon rate on such Mortgage Loans, original issue discount (if any),
prepayment fees, assumption fees, and late payment charges received by the
Depositor or another service provider, in accordance with such
Certificateholder's method of accounting.
A Certificateholder generally will be able to deduct its share of
servicing fees and all administrative and other expenses of the Trust Fund in
accordance with his method of accounting, provided that such amounts are
reasonable compensation for services rendered to that Trust Fund. However,
investors who are individuals, estates or trusts who own Certificates, either
directly or indirectly through certain pass-through entities, will be subject
to limitation with respect to certain itemized deductions described in Code
Section 67, including deductions under Code Section 212 for servicing fees and
all such administrative and other expenses of the Trust Fund, to the extent
that such deductions, in the aggregate, do not exceed two percent of an
investor's adjusted gross income. In addition, Code Section 68 provides that
itemized deductions otherwise allowable for a taxable year of an individual
taxpayer will be reduced by the lesser of (i) 3% of the excess, if any, of
adjusted gross income over a specified amount, or (ii) 80% of the amount of
itemized deductions otherwise allowable for such year. As a result such
investors holding Certificates, directly or indirectly through a pass-through
entity, may have aggregate taxable income in excess of the aggregate amount of
cash received on such Certificates with respect to interest at the pass-through
rate on such Certificates or discount thereon. In addition, such expenses are
not deductible at all for purposes of computing the alternative minimum tax,
and may cause such investors to be subject to significant additional tax
liability. Moreover, where there is fixed retained yield with respect to the
Mortgage Loans underlying a Series of Certificates or where the servicing fees
are in excess of reasonable servicing compensation, the transaction will be
subject to the application of the "stripped bond" and "stripped coupon" rules
of the Code, as described below under "-- Stripped Certificates" and "--
Premium and Discount -- Recharacterization of Servicing Fees," respectively.
Tax Status. To the extent disclosed in the related Prospectus
Supplement, Counsel for the Depositor will deliver its opinion with respect to
Certificates described under this subsection "Standard Certificates" that:
1. A Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be considered
to represent "loans secured by an interest in real property" within the meaning
of Code Section 7701(a)(19)(C)(v), provided that the real property securing the
Mortgage Loans represented by that Certificate is of the type described in such
section of the Code.
2. A Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code Section
856(c)(5)(A) to the extent that the assets of the related Trust Fund consist of
qualified assets, and interest income on such assets will be considered
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B).
3. A Certificate owned by a REMIC will be considered to represent
an " obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent that
the assets of the related Trust Fund consist of "qualified mortgages" within
the meaning of Code Section 860G(a)(3).
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An issue arises as to whether buy-down Mortgage Loans may be
characterized in their entirety under the Code provisions cited in the
immediately preceding paragraph. Code Section 593(d)(1)(C) provides that the
term " qualifying real property loan" does not include a loan "to the extent
secured by a deposit in or share of the taxpayer." The application of this
provision to a buy-down fund with respect to a buy-down Mortgage Loan is
uncertain, but may require that a taxpayer's investment in a buy-down Mortgage
Loan be reduced by the buy-down fund. As to the treatment of buydown Mortgage
Loans as "loans . . . secured by an interest in real property" under Code
Section 7701(a)(19)(C)(v), as " real estate assets" under Code Section
856(c)(5)(A), and as " obligations . . . principally secured by an interest in
real property" under Code Section 860G(a)(3)(A), there is indirect authority
supporting treatment of an investment in a buy-down Mortgage Loan as entirely
secured by real property if the fair market value of the real property securing
the loan exceeds the principal amount of the loan at the time of issuance or
acquisition, as the case may be. There is no assurance that the treatment
described above is proper. Accordingly, Certificateholders are urged to consult
their own tax advisors concerning the effects of such arrangements on the
characterization of such Certificateholder's investment for federal income tax
purposes.
PREMIUM AND DISCOUNT
Certificateholders are advised to consult with their tax advisors as
to the federal income tax treatment of premium and discount arising either upon
initial acquisition of Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Certificate will be determined generally as described above under "-- Federal
Income Tax Consequences for REMIC Certificates -- Treatment of Certain Items of
REMIC Income and Expense -- Premium."
Original Issue Discount. The IRS has stated in published rulings
that, in circumstances similar to those described herein, the original issue
discount rules will be applicable to a Certificateholder's interest in those
Mortgage Loans as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
are applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate borrowers (other than individuals) originated after
July 1, 1982, and mortgages of individuals originated after March 2, 1984. Such
original issue discount could arise by the charging of points by the originator
of the mortgages in an amount greater than a statutory de minimis exception, to
the extent that the points are not for services provided by the lender. It is
generally not anticipated that adjustable rate Mortgage Loans will be treated
as issued with original issue discount. However, the application of the OID
Regulations to adjustable rate mortgage loans with incentive interest rates or
annual or lifetime interest rate caps may result in original issue discount.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provides for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage Loans
acquired by a Certificateholder are purchased at a price equal to the then
unpaid principal amount of such Mortgage Loans, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Loans (i.e., points) will be includible by
such holder.
Market Discount. Certificateholders also will be subject to the
market discount rules to the extent that the conditions for application of
those sections are met. Market discount on the Mortgage Loans will be
determined and will be reported as ordinary income generally in the manner
described above under
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"-- Federal Income Tax Consequences for REMIC Certificates -- Treatment of
Certain Items of REMIC Income and Expense -- Market Discount."
Recharacterization of Servicing Fees. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount
of such excess would be nondeductible under Code Section 162 or 212. In this
regard, there are no authoritative guidelines for federal income tax purposes
as to either the maximum amount of servicing compensation that may be
considered reasonable in the context of this or similar transactions or
whether, in the case of the Certificates, the reasonableness of servicing
compensation should be determined on a weighted average or loan-by-loan basis.
If a loan-by-loan basis is appropriate, the likelihood that such amount would
exceed reasonable servicing compensation as to some of the Mortgage Loans would
be increased. Recently issued IRS guidance indicates that a servicing fee in
excess of reasonable compensation ("excess servicing") will cause the Mortgage
Loans to be treated under the "stripped bond" rules. Such guidance provides
safe harbors for servicing deemed to be reasonable and requires taxpayers to
demonstrate that the value of servicing fees in excess of such amounts is not
greater than the value of the services provided.
Accordingly, if the IRS's approach is upheld, a servicer that receives
a servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Loans.
Under the rules of Code Section 1286, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from the right
to receive some or all of the principal payments on the obligation would result
in treatment of such Mortgage Loans as " stripped coupons" and "stripped
bonds." While Certificateholders would still be treated as owners of beneficial
interests in a grantor trust for federal income tax purposes, the corpus of
such trust could be viewed as excluding the portion of the Mortgage Loans the
ownership of which is attributed to a servicer, or as including such portion as
a second class of equitable interest. Applicable Treasury regulations treat
such an arrangement as a fixed investment trust, since the multiple classes of
trust interests should be treated as merely facilitating direct investments in
the trust assets and the existence of multiple classes of ownership interests
is incidental to that purpose. In general, such a recharacterization should not
have any significant effect upon the timing or amount of income reported by a
Certificateholder, except that the income reported by a cash method holder may
be slightly accelerated. See "-- Stripped Certificates" below for a further
description of the federal income tax treatment of stripped bonds and stripped
coupons.
In the alternative, the amount, if any, by which the servicing fees
paid to the servicers are deemed to exceed reasonable compensation for
servicing could be treated as deferred payments of purchase price by the
Certificateholders to purchase an undivided interest in the Mortgage Loans. In
such event, the present value of such additional payments might be included in
the Certificateholder's basis in such undivided interests for purposes of
determining whether the Certificate was acquired at a discount, at par, or at a
premium. Under this alternative, Certificateholders may also be entitled to a
deduction for unstated interest with respect to each deferred payment. The
Internal Revenue Service may take the position that the specific statutory
provisions of Code Section 1286 described above override the alternative
described in this paragraph. Certificateholders are advised to consult their
tax advisors as to the proper treatment of the amounts paid to the servicers as
set forth herein as servicing compensation or under either of the alternatives
set forth above.
SALE OR EXCHANGE OF CERTIFICATES
Upon sale or exchange of a Certificate, a Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its aggregate adjusted basis in the Mortgage Loans and other
assets represented by the Certificate. In general, the aggregate adjusted basis
will equal the Certificateholder's cost for the Certificate, increased by the
amount of any income previously reported with
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respect to the Certificate and decreased by the amount of any losses previously
reported with respect to the Certificate and the amount of any distributions
received thereon. Except as provided above with respect to market discount on
any Mortgage Loans, and except for certain financial institutions subject to
the provisions of Code Section 582(c), any such gain or loss would be capital
gain or loss if the Certificate was held as a capital asset.
STRIPPED CERTIFICATES
General. The following general discussion of the anticipated federal
income tax consequences of the purchase, ownership and disposition of Stripped
Certificates, to the extent it relates to matters of law or legal conclusions
with respect thereto, represents the opinion of Counsel to the Depositor,
subject to any qualifications set forth herein. In addition, Counsel to the
Depositor has prepared or reviewed the statements in this Prospectus under the
heading "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for Certificates as to Which No REMIC Election is Made -- Stripped
Certificates," 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 Fund 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 Stripped
Certificates.
Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, Certificates for which no REMIC election is made and that are
subject to those rules will be referred to as " Stripped Certificates." The
Certificates will be subject to those rules if (i) the Depositor or any of its
affiliates retains (for its own account or for purposes of resale), in the form
of fixed retained yield or otherwise, an ownership interest in a portion of the
payments on the Mortgage Loans, (ii) the Depositor, any of its affiliates or a
servicer is treated as having an ownership interest in the Mortgage Loans to
the extent it is paid (or retains) servicing compensation in an amount greater
than reasonable consideration for servicing the Mortgage Loans (See "-- Premium
and Discount -- Recharacterization of the Servicing Fees" above) or (iii)
Classes of Certificates are issued in two or more Classes or subclasses
representing the right to non-pro-rata percentages of the interest and
principal payments on the Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to
own "stripped bonds" with respect to its pro rata share of all or a portion of
the principal payments on each Mortgage Loan and/or " stripped coupons" with
respect to its pro rata share of all or a portion of the interest payments on
each Mortgage Loan, including the Stripped Certificate's allocable share of the
servicing fees paid, to the extent that such fees represent reasonable
compensation for services rendered. See discussion above under "-- Premium and
Discount -- Recharacterization of Servicing Fees." For this purpose the
servicing fees will be allocated to the Stripped Certificates in proportion to
the respective offering price of each class (or subclass) of Stripped
Certificates. The holder of a Stripped Certificate generally will be entitled
to a deduction each year in respect of the servicing fees, as described above
under "Standard Certificates -- General," subject to the limitation described
therein.
Code Section 1286 treats a stripped bond or a stripped coupon
generally as a new obligation issued (i) on the date that the stripped interest
is purchased and (ii) at a price equal to its purchase price or, if more than
one stripped interest is purchased, the share of the purchase price allocable
to such stripped
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interest. Each stripped interest generally will have original issue discount
equal to the excess of its stated redemption price at maturity (or, in the case
of a stripped coupon, the amount payable on the due date of such coupon) over
its issue price. Although the treatment of Stripped Certificates for federal
income tax purposes is not clear in certain respects at this time, particularly
where such Stripped Certificates are issued with respect to a Trust Fund
containing variable-rate Mortgage Loans, the Depositor has been advised by
counsel that (i) the Trust Fund will be treated as a grantor trust under
subpart E, Part 1 of subchapter J of Chapter 1 of Subtitle A of the Code and
not as an association taxable as a corporation, and (ii) each Stripped
Certificate should be treated as a single installment obligation for purposes
of calculating original issue discount and gain or loss on disposition. This
treatment is based on the interrelationship of Code Section 1286 and the
regulations thereunder, Code Sections 1272 through 1275, and the OID
Regulations. While under Code Section 1286 computations with respect to
Stripped Certificates arguably should be made in one of the ways described
below under "Taxation of Stripped Certificates -- Possible Alternative
Characterizations," the OID Regulations state, in general, that all debt
instruments issued in connection with the same transaction must be treated as a
single debt instrument. The Trustee will make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, final Treasury regulations issued December 28, 1992
support the treatment of a Stripped Certificate as a single debt instrument
issued on the date it is originated for purposes of calculating any original
issue discount. The preamble to such regulations states that such regulations
are premised on the assumption that an aggregation approach is appropriate in
determining whether original issue discount on a stripped bond or stripped
coupon is de minimis. In addition, under these regulations, a Stripped
Certificate that represents a right to payments of both interest and principal
may be viewed either as issued with original issue discount or market discount
(as described below), at a de minimis original issue discount, or, presumably,
at a premium. The preamble to such regulations also provide that such
regulations are premised on the assumption that generally the interest
component of such a Stripped Certificate would be treated as stated interest
under the OID Regulations. Further, the regulations provide that the purchaser
of such a Stripped Certificate may be required to account for any discount as
market discount rather than original issue discount if either (i) the initial
discount with respect to the Stripped Certificate was treated as zero under the
de minimis rule or (ii) no more than 100 basis points in excess of reasonable
servicing is stripped off the related Mortgage Loans. Any such market discount
would be reportable as described above under "-- Federal Income Tax
Consequences for REMIC Certificates -- Taxation of Regular Certificates --
Market Discount," without regard to the de minimis rule therein.
Status of Stripped Certificates. Even if Strip Certificates evidence
an interest in a Trust Fund consisting of Mortgage Loans that are "real estate
assets" within the meaning of Code Section 856(c)(A), and "loans . . . secured
by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v), and the interest (including original issue discount) income
on which is an "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B), it is unclear whether the
Strip Certificates, and the income therefrom, will be so characterized.
However, the policies underlying such sections (namely, to encourage or require
investments in mortgage loans by thrift institutions and real estate investment
trusts) may suggest that such characterization is appropriate. Counsel to the
Depositor will not deliver any opinion on these questions. Prospective
purchasers to which such characterization of an investment in Strip
Certificates in material should consult their tax advisors regarding whether
the Strip Certificates, and the income therefrom, will be so characterized.
The Strip Certificates will be "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which . . . [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
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TAXATION OF STRIPPED CERTIFICATES
Original Issue Discount. Except as described above under " --
General," each Stripped Certificate will be considered to have been issued (i)
on the date that the stripped interest is purchased and (ii) at a price equal
to its purchase price or, if more than one stripped interest is purchased, the
share of the purchase price allocable to such stripped interest. Each stripped
interest generally will have original issue discount equal to the excess of its
stated redemption price at maturity (or, in the case of a stripped coupon, the
amount payable on the due date of such coupon) over its issue price. Original
issue discount with respect to a Stripped Certificate must be included in
ordinary income as it accrues, in accordance with a constant yield method that
takes into account the compounding of interest, which may be prior to the
receipt of the cash attributable to such income. Based in part on the OID
Regulations and the amendments to the original issue discount sections of the
Code made by the 1986 Act, counsel has advised the Depositor that the amount of
original issue discount required to be included in the income of a holder of a
Stripped Certificate (referred to in this discussion as a "Stripped
Certificateholder") in any taxable year likely will be computed generally as
described above under "-- Federal Income Tax Consequences for REMIC
Certificates -- Taxation of Regular Certificates -- Original Issue Discount."
However, with the apparent exception of a Stripped Certificate issued with de
minimis original issue discount, as described above under "-- General," the
issue price of a Stripped Certificate will be the purchase price paid by each
holder thereof, and the stated redemption price at maturity will include the
aggregate amount of the payments to be made on the Stripped Certificate to such
Stripped Certificateholder, presumable under the Prepayment Assumption, other
than amounts treated as qualified stated interest.
If the Mortgage Loans prepay at a rate either faster or slower than
that under the Prepayment Assumption, a Stripped Certificateholder's
recognition of original issue discount will be either accelerated or
decelerated and the amount of such original issue discount will be either
increased or decreased depending on the relative interests in principal and
interest on each Mortgage Loan represented by such Stripped Certificateholder's
Stripped Certificate. While the matter is not free from doubt, the holder of a
Stripped Certificate should be entitled in the year that it becomes certain
(assuming no further prepayments) that the holder will not recover a portion of
its adjusted basis in such Stripped Certificate to recognize an ordinary loss
equal to such portion of unrecoverable basis.
Possible Alternative Characterizations. As an alternative to the
method described above, the fact that some or all of the interest payments with
respect to the Stripped Certificates will not be made if the Mortgage Loans are
prepaid could lead to the interpretation that such interest payments are
"contingent" within the meaning of the OID Regulations. Under the rules of the
OID Regulations relating to contingent payments, a projected payment schedule
for the Stripped Certificates would be constructed by the Depositor. Interest
accrual and adjustments relating to the Stripped Certificates would be
determined under the general rules of the noncontingent bond method described
above. While not free from doubt, counsel for the Depositor believes that
uncertainty as to the payment of interest arising as a result of the
possibility of prepayment of the Mortgage Loans should not cause the contingent
payment rules under the OID Regulations to apply to interest with respect to
the Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a
Stripped Certificate prior to its maturity will result in gain or loss equal to
the difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Certificates -- Taxation
of Regular Certificates -- Sale or Exchange of Regular Certificates." To the
extent that a subsequent purchaser's purchase price is exceeded by the
remaining payments on the Stripped Certificates, such subsequent purchaser will
be required for federal income tax purposes to accrue and report such excess as
if it were original issue discount in the manner described above. It is not
clear for this purpose whether the assumed prepayment rate that is to be used
in
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the case of a Stripped Certificateholder other than original Stripped
Certificateholder should be the Prepayment Assumption or a new rate based on
the circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. Where an
investor purchases more than one class of Stripped Certificates, it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of the rules described above.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of
each calendar year, to each Certificateholder or Stripped Certificateholder at
any time during such year, such information (prepared on the basis described
above) as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such
information will include the amount of original issue discount accrued on
Certificates held by persons other than Certificateholders exempted from the
reporting requirements. The amounts required to be reported by the Trustee may
not be equal to the proper amount of original issue discount required to be
reported as taxable income by a Certificateholder, other than an original
Certificateholder. The Trustee will also file such original issue discount
information with the IRS. If a Certificateholder fails to supply an accurate
taxpayer identification number or if the Secretary of the Treasury determines
that a Certificateholder has not reported all interest and dividend income
required to be shown on his federal income tax return, 31% backup withholding
may be required in respect of any reportable payments, as described above under
"-- Federal Income Tax Consequences for REMIC Certificates -- Backup
Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-United States Persons
generally will be subject to 30% United States withholding tax, or such lower
rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount recognized by the Certificateholder on the sale or
exchange of such a Certificate also will be subject to federal income tax at
the same rate.
Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a Non-United States Person
evidencing ownership interest in Mortgage Loans issued after July 18, 1984 will
be "portfolio interest" and will be treated in the manner, and such persons
will be subject to the same certification requirements described above under
"-- Federal Income Tax Consequences for REMIC Certificates -- Taxation of
Certain Foreign Investors -- Regular Certificates."
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences" herein, potential investors should
consider the state income tax consequences of the acquisition, ownership, and
disposition of the Offered Certificates. State income tax law may differ
substantially from the corresponding federal tax law, and this discussion does
not purport to describe any
111
<PAGE> 232
aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisors with respect to the various tax
consequences of investment in the Offered Certificates.
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The related
Prospectus Supplement will set forth the terms of offering of a Series of
Certificates, including the public offering or purchase price of each Class of
Certificates of such Series being offered thereby or the method by which such
price will be determined and the net proceeds to the Depositor from the sale of
each such Class. Such Certificates will be acquired by the Underwriters for
their own account and may be resold from time to time in one or more
transactions including negotiated transactions, at fixed public offering prices
or at varying prices to be determined at the time of sale or at the time of
commitment therefor. The managing Underwriter or Underwriters with respect to
the offer and sale of a particular Series of Certificates will be set forth on
the cover of the Prospectus Supplement relating to such Series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement.
In connection with the Sale of the Certificates, Underwriters may
receive compensation from the related Transferor or the Depositor or from
purchasers of the Certificates in the form of discounts, concessions or
commissions. Underwriters and dealers participating in the distribution of the
Certificates may be deemed to be Underwriters in connection with such
Certificates, and any discounts or commissions received by them from the
related Transferor or the Depositor and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act. The Prospectus Supplement will describe any such
compensation paid by the related Transferor or the Depositor.
It is anticipated that the underwriting agreement pertaining to the
sale of any Series of Certificates will provide that the obligations of the
Underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Certificates if any are
purchased and that the related Transferor or the Depositor will indemnify the
underwriters against certain civil liabilities, including liabilities under the
Securities Act, as amended.
LEGAL MATTERS
The legality of the Certificates and certain federal income tax
matters will be passed upon for the Depositor by Andrews & Kurth L.L.P.,
Dallas, Texas, and for the Underwriters by ____________________
______________________________________.
FINANCIAL INFORMATION AND ADDITIONAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Certificates. No Trust Fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related Series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
Copies of the Registration Statement to which this Prospectus forms a
part and the exhibits thereto are on file at the offices of the Securities and
Exchange Commission in Washington, D.C., and may be obtained at rates
prescribed by the Commission upon request to the Commission and inspected,
without charge, at the offices of the Commission.
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<PAGE> 233
Copies of FHLMC's most recent Offering Circular for FHLMC
Certificates, FHLMC's Information Statement and most recent Supplement thereto
and any quarterly report made available by FHLMC can be obtained in writing or
calling FHLMC's Investor Relations Department at 8200 Jones Branch Drive,
McLean, Virginia 22102 (800-336-FMPC). The Depositor did not participate in the
preparation of FHLMC's Offering Circular, Information Statement or any
Supplement thereto or any such quarterly report.
Copies of FNMA's most recent Prospectus for FNMA Certificates and
FNMA's annual report and quarterly financial statements as well as other
financial information are available from the Vice President for Investor
Relations of FNMA, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016
(202-752-7585). The Depositor did not participate in the preparation of FNMA's
Prospectus or any such report, financial statement or other financial
information.
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APPENDIX A
INDEX TO LOCATION OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
"1986 Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
"Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
"Administrator" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Annual Reduction" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
"Applicable Accounting Standards" . . . . . . . . . . . . . . . . . . . . . . 54
"APR" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
"Assets" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 7
"Beneficial Owners" . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 31
"BIF" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
"Book Entry Certificates" . . . . . . . . . . . . . . . . . . . . . . . . 10, 31
"Call Risk" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
"Certificate Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
"Certificate Guaranty Policy" . . . . . . . . . . . . . . . . . . . . . . . . 44
"Certificate Interest Rate" . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Certificateholders" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Charter Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
"Class" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 1
"Clearing Agency Participants" . . . . . . . . . . . . . . . . . . . . . 10, 31
"Clearing Agency" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 31
"Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
"Collateral Value" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
"Commission" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
"Committee Report" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
"Companion Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . 27
"Compound Interest Certificates" . . . . . . . . . . . . . . . . . . . . 2, 27
"Contract Loan Schedule" . . . . . . . . . . . . . . . . . . . . . . . . . . 52
"Contract Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Contracts" . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 7, 8, 40
"Conventional Contracts" . . . . . . . . . . . . . . . . . . . . . . . . 8, 40
"Conventional Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . . . . 8
"Cooperative Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
"Cooperatives" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 33
"Credit Enhancement" . . . . . . . . . . . . . . . . . . . . . . 7, 18, 20, 43
"Depositor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 2, 58
"Disqualified Organization" . . . . . . . . . . . . . . . . . . . . . . . . . 98
"Distribution Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"DOL" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
"Due Period" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"ERISA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 81
"excess servicing" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
"Excess Spread" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
"Exchange Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
"Extension Risk" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
114
<PAGE> 235
<TABLE>
<S> <C>
"FDIC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54, 81
"FFI" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
"FHA Claims Administrator" . . . . . . . . . . . . . . . . . . . . . . . . . 19
"FHA Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
"FHA Reserve" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
"FHLMC Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
"FHLMC Certificate Group" . . . . . . . . . . . . . . . . . . . . . . . . . . 37
"FHLMC Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"FHLMC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 7
"Final REMIC Regulations" . . . . . . . . . . . . . . . . . . . . . . . . . . 83
"FmHA Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
"FNMA Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 9
"FNMA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 7
"GNMA Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 9
"GNMA Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
"GNMA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 7
"Guaranty Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
"Holders" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 10
"Housing Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
"improper knowledge" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
"Interest Only Certificates" . . . . . . . . . . . . . . . . . . . . . . 1, 27
"IRS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
"Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 2, 25
"Manufacturer's Invoice Price" . . . . . . . . . . . . . . . . . . . . . . . 41
"Market Discount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
"Master Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Maximum Variable Interest Rate" . . . . . . . . . . . . . . . . . . . . . . 4
"Minimum Variable Interest Rate" . . . . . . . . . . . . . . . . . . . . . . 4
"Mortgage Asset Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Mortgage Assets" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . . . . . i, 6, 7, 84
"Mortgage Notes" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
"Mortgage Pool Insurance Policy" . . . . . . . . . . . . . . . . . . . . . . 45
"Mortgage Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Mortgage Rates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
"Mortgaged Properties" . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
"Mortgages" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
"NCUA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
"noneconomic residual interest" . . . . . . . . . . . . . . . . . . . . . . . 99
"Notional Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . 25
"Offered Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"OID Regulations" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
"Original Issue Discount" . . . . . . . . . . . . . . . . . . . . . . . . 86, 93
"OTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68, 81
"Parties in Interest" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
"Permitted Investments" . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
"Plan Asset Regulations" . . . . . . . . . . . . . . . . . . . . . . . . . . 81
"Plans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
"Policy Statement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
"Pool Insurer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>
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<TABLE>
<S> <C>
"Prepayment Assumption" . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
"Principal Only Certificates" . . . . . . . . . . . . . . . . . . . . . . 1, 27
"Principal Prepayments" . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
"Priority Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
"Prohibited Transactions" . . . . . . . . . . . . . . . . . . . . . . . . 26, 81
"Prospectus Supplement" . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"PTC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
"Rating Agency" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
"Record Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
"Registrar" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
"Regular Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . 11, 83
"Reigle Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
"REIT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
"Relief Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 61, 71
"REMIC Administrator" . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
"REMIC Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
"REMIC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, 10, 84
"Reports" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
"Reserve Fund" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
"Residual Certificates" . . . . . . . . . . . . . . . . . . . . . . . 11, 20, 83
"Residual Holders" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
"Retail Class Certificate" . . . . . . . . . . . . . . . . . . . . . . . . . 86
"SAIF" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
"Scheduled Amortization Certificates" . . . . . . . . . . . . . . . . . . . . 27
"Scheduled Principal" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
"Secured Property" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
"Securities Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
"Senior Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
"Series" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"SMMEA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 80
"Special Allocation Certificates" . . . . . . . . . . . . . . . . . . . . . . 27
"Special Hazard Insurance Policy" . . . . . . . . . . . . . . . . . . . . . . 45
"Startup Day" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
"Subordinated Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . 43
"Subsequent Mortgage Assets" . . . . . . . . . . . . . . . . . . . . . . 9, 41
"Subservicing Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"TAMRA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
"Thrift Institution" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
"TILA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
"Title I Contracts" . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 40
"Title I Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . . . . 8, 33
"Title V" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
"TMP" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
"Transfer Report" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
"Transferor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
"Trust Fund" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 1
"Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"UCC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
"Underlying Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
116
<PAGE> 237
<TABLE>
<S> <C>
"Underwriters" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
"United States Person" . . . . . . . . . . . . . . . . . . . . . . . . 99, 100
"Unsecured Contracts" . . . . . . . . . . . . . . . . . . . . . . . i, 7, 8, 40
"VA Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
"Variable Interest Rate Certificates" . . . . . . . . . . . . . . . . . . . . 2
"Window Period Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
</TABLE>
117
<PAGE> 238
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR, ANY AFFILIATE OF THE DEPOSITOR
OR ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
SHALL NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY IN ANY STATE TO ANY PERSON TO WHO IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH STATE. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DOES NOT IMPLY THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT PAGE
<S> <C>
Summary of Prospectus Supplement . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Mortgage Loan Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of the Certificates . . . . . . . . . . . . . . . . . . . . . . . .
The Guaranty Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHA Insurance for Title I Mortgage Loans . . . . . . . . . . . . . . . . . . .
The Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Transferor and Servicer . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepayment and Yield Considerations . . . . . . . . . . . . . . . . . . . . . .
Description of Book Entry Procedures . . . . . . . . . . . . . . . . . . . . .
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . .
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROSPECTUS
Prospectus Supplement . . . . . . . . . . . . . . . . . . . . . . . . . . . .ii
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
Incorporation of Certain Documents by Reference . . . . . . . . . . . . . . iii
Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Summary of Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Description of the Certificates . . . . . . . . . . . . . . . . . . . . . . .24
Assets Securing or Underlying the Certificates . . . . . . . . . . . . . . .32
Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
Servicing of the Mortgage Loans and Contracts . . . . . . . . . . . . . . . .46
The Pooling and Servicing Agreement . . . . . . . . . . . . . . . . . . . . .50
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
The Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
The Servicer and the Transferor . . . . . . . . . . . . . . . . . . . . . . .58
The Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
Certain Legal Aspects of the Mortgage Assets . . . . . . . . . . . . . . . .60
Legal Investment Matters . . . . . . . . . . . . . . . . . . . . . . . . . .81
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . .81
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . .83
State Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Financial Information and Additional Information . . . . . . . . . . . . . 113
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
-----------
</TABLE>
Until 90 days after the date of this Prospectus Supplement, all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and Prospectus. This obligation is in addition to the obligation of
dealers to deliver a Prospectus Supplement and Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
$
---------------------
FIRSTPLUS
INVESTMENT CORPORATION
FIRSTPLUS FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
-------------------
PROSPECTUS SUPPLEMENT
-------------------
[UNDERWRITER]
, 199
-------------- --
<PAGE> 239
PART II
INFORMATION NOT REQUIRED TO BE IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses in connection with the issuance and distribution of
the securities, other than underwriting discounts and commissions*, are as
follows:
<TABLE>
<S> <C>
Registration Fee -- Securities and Exchange Commission . . . . . . $ 1,515,151.52
-----------------
Printing and Engraving Expenses . . . . . . . . . . . . . . . . . . 125,000
-----------------
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . . 125,000
-----------------
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . 425,000
-----------------
Trustee Fees and Expenses . . . . . . . . . . . . . . . . . . . . . 25,000
-----------------
Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . . . . . --
-----------------
Rating Agency Fees . . . . . . . . . . . . . . . . . . . . . . . . 850,000
-----------------
Miscellaneous Expenses . . . . . . . . . . . . . . . . . . . . . . 25,000
=================
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,090,151.52
=================
</TABLE>
* To be provided for each Series of Securities on the cover page of the
related Prospectus Supplement.
** To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The forms of Underwriting Agreement filed as Exhibits 1.1, 1.2 and 1.3
hereto provide for indemnification of FIRSTPLUS INVESTMENT CORPORATION (the
"Company"), each of its officers who signs this Registration Statement, and
each person who controls the Company within the meaning of the Securities Act
of 1933 (the"Securities Act") or the Securities and Exchange Act of 1934 (the
"Exchange Act") against any and all losses, claims, damages or liabilities,
joint or several, to which they or any of them may become subject under the
Securities Act, the Exchange Act, or other Federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
(a) written information furnished to the Company by or on behalf of the
Underwriter specifically for use in the preparation of the Registration
Statement related to the offered securities of the applicable series as it
became effective or in any amendment or supplement thereof, or in such
Registration Statement, in the related Preliminary Prospectus or the related
Final Prospectus or in any amendment thereof, or in the Form 8-K referred to in
such Final Prospectus or (b) any Computational Materials or ABS Term Sheets (or
amendments or supplements thereof) delivered to prospective investors by such
Underwriter, including any Computational Materials or ABS Term Sheets that are
furnished to the Company by such Underwriter pursuant to the Underwriting
Agreement and incorporated by reference in the Registration Statement, the
related Preliminary Prospectus or the related Final Prospectus or any amendment
or supplement thereof (except that no such indemnity shall be available for any
losses, claims, damages or liabilities, or actions in respect thereof,
resulting from any Mortgage Pool Error, other than a Corrected Mortgage Pool
Error, as such terms are defined in the Underwriting Agreement).
The Articles of Incorporation and By-Laws of the Company (Exhibit 3.1
and 3.2, respectively) provide that the Company shall indemnify its officers
and directors and may, in the discretion of the Board of Directors, indemnify
its other employees and agents to the fullest extent permitted by Nevada
statutory and decisional law if any such person was or is a party, or is
threatened to be made a party, to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, arbitrative or
investigative, by reason of the fact that such person is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, partner, venturer, proprietor, trustee,
employee or agent of another company, partnership, joint venture, trust,
limited liability company or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding.
II-1
<PAGE> 240
ITEM 16. EXHIBITS
Exhibit
Number
-------
1.1 Form of Underwriting Agreement (Pass-Through Certificates) (1)
1.2 Form of Underwriting Agreement (Notes and Certificates) (2)
3.1 Amended and Restated Articles of Incorporation of FIRSTPLUS
INVESTMENT CORPORATION, as amended (3)
3.2 By-Laws (4)
4.1 Form of Pooling and Servicing Agreement (4)
4.2 Form of Indenture (Notes) (2)
4.3 Form of Trust Agreement (2)
5.1 Opinion of Andrews & Kurth L.L.P. regarding the legality of the
Pass-Through Certificates *
5.2 Opinion of Andrews & Kurth L.L.P. regarding the legality of the
Notes *
5.3 Opinion of Andrews & Kurth L.L.P. regarding the legality of the
Certificates *
8.1 Opinion of Andrews & Kurth L.L.P. regarding tax matters
(Pass-Through Certificates) *
10.1 Representative Form of Mortgage Note (5)
10.2 Representative Form of Mortgage (5)
10.3 Representative Form of Retail Installment Contract, Note and
Disclosure Statement (5)
10.4 Specimen of Certificate Insurance Policy (4)
10.5 Form of Subservicing Agreement (4)
10.6 Form of Loan Sale Agreement (4)
10.7 Form of Sale and Servicing Agreement (2)
10.8 Form of Administration Agreement (2)
10.9 Form of Agreement with Clearing Agency (4)
23.1 Consent of Andrews & Kurth L.L.P. (included as part of Exhibits
5.1, 5.2, 5.3 and 8.1)
24.1 Power of Attorney (6)
25.1 Statement of Eligibility of Trustee (7)
99.1 Form of Prospectus Supplement for Asset-Backed Certificates (8)
99.2 Form of Prospectus Supplement for Asset-Backed Securities (8)
- ---------------
* Filed herewith.
(1) Previously filed with the Commission as Exhibit 1.1 to the
Registrant's Current Report on Form 8-K dated as of July 9, 1996 and
incorporated by reference herein.
II-2
<PAGE> 241
(2) Previously filed with the Commission as an exhibit to the Registrant's
Form S-3 Registration Statement (File No. 333-11855) on September 12,
1996 and incorporated by reference herein.
(3) Previously filed with the Commission as an exhibit to the Registrant's
Amendment No. 2 to Form S-3 Registration Statement (File No. 33-65373)
on May 10, 1996 and incorporated by reference herein.
(4) Previously filed with the Commission as an exhibit to the Registrant's
Form S-3 Registration Statement (File No. 33-65373) on December 22,
1995 and incorporated by reference herein.
(5) Previously filed with the Commission as an exhibit to the Registrant's
Amendment No. 1 to Form S-3 Registration Statement (File No. 33-65373)
on April 23, 1996 and incorporated by reference herein.
(6) Previously filed with the Commission as an Exhibit to the Registrant's
Form S-3 Registration Statement (File No. 333-26527) on May 5, 1997 and
incorporated by reference herein.
(7) Previously filed with the Commission under cover of Form 305B2 on
September 10, 1996 and incorporated by reference herein.
(8) Previously filed with the Commission as an exhibit to the Registrant's
Form S-3 Registration Statement (File No. 333-10451) on August 19,
1996 and incorporated by reference herein.
ITEM 17. UNDERTAKINGS
(a) The Company hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or
events arising after the effective date of this Registration
Statement (or the most recent post-effective amendment hereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in this
Registration Statement; notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration
statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in this Registration Statement or any material change to such
information in this Registration Statement;
provided, however, that paragraphs (i) and (ii) above do not apply if this
Registration Statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment to those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Company pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act") that are incorporated by
reference in this Registration Statement.
(2) That for the purpose of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
II-3
<PAGE> 242
(b) The Company hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Company's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of competent jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
<PAGE> 243
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Dallas, State of Texas,
on the 22nd day of May, 1997.
FIRSTPLUS INVESTMENT CORPORATION
By: /s/ KIRK R. PHILLIPS
---------------------------------
Kirk R. Phillips, President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ KIRK R. PHILLIPS Director and President May 22, 1997
- --------------------------- (Principal Executive Officer)
Kirk R. Phillips
* Director, Treasurer and Chief May 22, 1997
- --------------------------- Financial Officer (Principal
Mark J. Landry Financial Officer and Principal
Accounting Officer)
* Director May 22, 1997
- ---------------------------
Larry G. Studinski
* Director May 22, 1997
- ---------------------------
Steven A. Rubin
* By: /s/ KIRK R. PHILLIPS
----------------------
Kirk R. Phillips,
Attorney-in-Fact
II-5
<PAGE> 244
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1 Form of Underwriting Agreement (Pass-Through Certificates) (1)
1.2 Form of Underwriting Agreement (Notes and Certificates) (2)
3.1 Amended and Restated Articles of Incorporation of FIRSTPLUS
INVESTMENT CORPORATION, as amended (3)
3.2 By-Laws (4)
4.1 Form of Pooling and Servicing Agreement (4)
4.2 Form of Indenture (Notes) (2)
4.3 Form of Trust Agreement (2)
5.1 Opinion of Andrews & Kurth L.L.P. regarding the legality of the
Pass-Through Certificates *
5.2 Opinion of Andrews & Kurth L.L.P. regarding the legality of the
Notes *
5.3 Opinion of Andrews & Kurth L.L.P. regarding the legality of the
Certificates *
8.1 Opinion of Andrews & Kurth L.L.P. regarding tax matters
(Pass-Through Certificates) *
10.1 Representative Form of Mortgage Note (5)
10.2 Representative Form of Mortgage (5)
10.3 Representative Form of Retail Installment Contract, Note and
Disclosure Statement (5)
10.4 Specimen of Certificate Insurance Policy (4)
10.5 Form of Subservicing Agreement (4)
10.6 Form of Loan Sale Agreement (4)
10.7 Form of Sale and Servicing Agreement (2)
10.8 Form of Administration Agreement (2)
10.9 Form of Agreement with Clearing Agency (4)
23.1 Consent of Andrews & Kurth L.L.P. (included as part of Exhibits
5.1, 5.2, 5.3 and 8.1)
24.1 Power of Attorney (6)
25.1 Statement of Eligibility of Trustee (7)
99.1 Form of Prospectus Supplement for Asset-Backed Certificates (8)
99.2 Form of Prospectus Supplement for Asset-Backed Securities (8)
- ---------------
* Filed herewith.
(1) Previously filed with the Commission as Exhibit 1.1 to the
Registrant's Current Report on Form 8-K dated as of July 9, 1996 and
incorporated by reference herein.
(2) Previously filed with the Commission as an exhibit to the Registrant's
Form S-3 Registration Statement (File No. 333-11855) on September 12,
1996 and incorporated by reference herein.
(3) Previously filed with the Commission as an exhibit to the Registrant's
Amendment No. 2 to Form S-3 Registration Statement (File No. 33-65373)
on May 10, 1996 and incorporated by reference herein.
(4) Previously filed with the Commission as an exhibit to the Registrant's
Form S-3 Registration Statement (File No. 33-65373) on December 22,
1995 and incorporated by reference herein.
(5) Previously filed with the Commission as an exhibit to the Registrant's
Amendment No. 1 to Form S-3 Registration Statement (File No. 33-65373)
on April 23, 1996 and incorporated by reference herein.
(6) Previously filed with the Commission as an Exhibit to the Registrant's
Form S-3 Registration Statement (File No. 333-26527) on May 5, 1997 and
incorporated by reference herein.
(7) Previously filed with the Commission under cover of Form 305B2 on
September 10, 1996 and incorporated by reference herein.
(8) Previously filed with the Commission as an exhibit to the Registrant's
Form S-3 Registration Statement (File No. 333-10451) on August 19,
1996 and incorporated by reference herein.
<PAGE> 1
Exhibit 5.1
[Andrews & Kurth L.L.P. Letterhead]
May 22, 1997
FIRSTPLUS INVESTMENT CORPORATION
3773 Howard Hughes Parkway, Suite 300N
Las Vegas, Nevada 89109
Re: FIRSTPLUS INVESTMENT CORPORATION
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as special counsel for FIRSTPLUS INVESTMENT CORPORATION,
a corporation organized under the laws of the State of Nevada (the "Company"),
in connection with the proposed issuance by the Company of its asset-backed
certificates (the "Certificates"). The Certificates of a series are to be
issued pursuant to a Pooling and Servicing Agreement (the "Pooling and
Servicing Agreement") for such series, each between the Company, a servicer to
be specified therein (the "Servicer") and a trustee to be specified therein
(the "Trustee"). A form of the Pooling and Servicing Agreement has been filed
with the Securities and Exchange Commission as an exhibit to the Company's
Registration Statement on Form S-3 (the "Registration Statement") filed on May
5, 1997, pursuant to the Securities Act of 1933, as amended (the "Securities
Act"). This opinion is also to be filed as an exhibit to the Registration
Statement.
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of the Company's organizational documents, the form of
Pooling and Servicing Agreement and the form of Certificates included therein
and such other documents, records, certificates of the Company and public
officials and other instruments as we have deemed necessary for the purposes of
rendering this opinion. In addition, we have assumed that the Pooling and
Servicing Agreement as completed for each series will be duly executed and
delivered by each of the parties thereto; that the Certificates as completed
for each series will be duly executed and delivered substantially in the forms
contemplated by the Pooling and Servicing Agreement; and that the Certificates
for each series will be sold as described in the Registration Statement.
<PAGE> 2
FIRSTPLUS INVESTMENT CORPORATION
May 22, 1997
Page 2
Based upon the foregoing and subject to the limitations and
qualifications set forth below, we are of the opinion that the Certificates are
in due and proper form, and assuming the due authorization, execution and
delivery of the Pooling and Servicing Agreement for each series by the Company,
the Servicer and the Trustee and the due authorization of the Certificates for
each series by all necessary action on the part of the Company, when the
Certificates for each series have been validly executed, authenticated and
issued in accordance with the applicable Pooling and Servicing Agreement and
delivered against payment therefor, the Certificates for each series will be
legally issued and will be fully paid and non-assessable, and entitled to the
benefits of the Pooling and Servicing Agreement in accordance with their terms.
The opinion expressed above is subject to the qualification that we do
not purport to be experts as to the laws of any jurisdiction other than the
federal laws of the United States of America and the laws of the States of
Texas and New York, and we express no opinion herein as to the effect that the
laws and decisions of courts of any such other jurisdiction may have upon such
opinions.
We consent to the use and filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus Supplement and the Prospectus contained
therein. In giving such consent, we do not imply or admit that we are an
expert with respect to any part of the Registration Statement, including this
exhibit, within the meaning of the term "expert" as used in the Securities Act
or the rules and regulations of the Securities and Exchange Commission
thereunder. This opinion is delivered as of the date hereof and we disclaim
any responsibility to update this opinion at any time following the date
hereof.
Very truly yours,
/s/ Andrews & Kurth L.L.P.
<PAGE> 1
Exhibit 5.2
[Andrews & Kurth L.L.P. Letterhead]
May 22, 1997
FIRSTPLUS INVESTMENT CORPORATION
3773 Howard Hughes Parkway
Suite 300N
Las Vegas, Nevada 89109
Re: FIRSTPLUS INVESTMENT CORPORATION
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as special counsel for FIRSTPLUS INVESTMENT CORPORATION,
a corporation organized under the laws of the State of Nevada (the "Company"),
and certain trusts, all of the beneficial ownership of which will be initially
owned by the Company (each, a "Trust", and either the Company or a Trust, as
applicable, the "Issuer"), in connection with the proposed issuance by each
Issuer of Asset Backed Notes (the "Notes"). The Notes of a series are to be
issued and secured pursuant to an Indenture (the "Indenture") for such series,
each between the applicable Issuer and an indenture trustee to be specified
therein (the "Indenture Trustee"). A form of the Indenture has been filed with
the Securities and Exchange Commission as an exhibit to the Company's
registration statement on Form S-3 (the "Registration Statement") filed on May
5, 1997, pursuant to the Securities Act of 1993, as amended (the "Securities
Act"). This opinion is also to be filed as an exhibit to the Registration
Statement.
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of the Company's organizational documents, the Trust's
form of organizational documents, the form of Indenture and the form of Notes
included therein and such other documents, records, certificates of the Issuer
and public officials and other instruments as we have deemed necessary for the
purposes of rendering this opinion. In addition, we have assumed that the
Indenture as completed for each series will be duly executed and delivered by
each of the parties thereto; that the Notes as completed for each series will
be duly executed and delivered substantially in the forms contemplated by the
Indenture; and that the Notes for each series will be sold as described in the
Registration Statement.
<PAGE> 2
FIRSTPLUS INVESTMENT CORPORATION
May 22, 1997
Page 2
Based upon the foregoing and subject to the limitations and
qualifications set forth below, we are of the opinion that the Notes are in due
and proper form and, assuming the due authorization, execution and delivery of
the Indenture of each series by the applicable Issuer and the Indenture Trustee
and the due authorization of the Notes for each series by all necessary action
on the part of the applicable Issuer, when the Notes for each series have been
validly executed, authenticated and issued in accordance with the applicable
Indenture and delivered against payment therefor, the Notes for each series
will be legally issued and fully paid and non-assessable, and will be valid and
binding obligations of the applicable Issuer, enforceable against the
applicable Issuer in accordance with their terms, except that the
enforceability thereof may be subject to (a) bankruptcy, insolvency,
reorganization, arrangement, moratorium, fraudulent or preferential conveyance
or other similar laws now or hereinafter in effect relating to creditors'
rights generally and (b) general principles of equity (regardless of whether
such enforceability is considered in a proceeding in equity or at law).
The opinion expressed above is subject to the qualification that we do
not purport to be experts as to the laws of any jurisdiction other than the
federal laws of the United States of America and the laws of the States of
Texas and New York, and we express no opinion herein as to the effect that the
laws and decisions of courts of any such other jurisdiction may have upon such
opinions.
We consent to the use and filing of this opinion as Exhibit 5.2 to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus Supplement and the Prospectus contained
therein. In giving such consent we do not imply or admit that we are an expert
with respect to any part of the Registration Statement, including this exhibit,
within the meaning of the term "expert" as used in the Securities Act or the
rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Andrews & Kurth L.L.P.
<PAGE> 1
Exhibit 5.3
[Andrews & Kurth L.L.P. Letterhead]
May 22, 1997
FIRSTPLUS INVESTMENT CORPORATION
3773 Howard Hughes Parkway
Suite 300N
Las Vegas, Nevada 89109
Re: FIRSTPLUS INVESTMENT CORPORATION
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as special counsel for FIRSTPLUS INVESTMENT CORPORATION,
a corporation organized under the laws of the State of Nevada (the "Company"),
and certain trusts, all of the beneficial ownership of which will be initially
owned by the Company (each, an "Issuer"), in connection with the proposed
issuance by each Issuer of Asset Backed Certificates (the "Certificates"). The
Certificates of a series are to be issued pursuant to a Trust Agreement (the
"Trust Agreement") for such series, each between the applicable Issuer, a
special purpose entity to be specified therein (the "SPV"), and an owner
trustee to be specified therein (the "Owner Trustee"). A form of the Trust
Agreement has been filed with the Securities and Exchange Commission as an
exhibit to the Company's registration statement on Form S-3 (the "Registration
Statement") filed on May 5, 1997, pursuant to the Securities Act of 1933, as
amended (the "Securities Act"). This opinion is also to be filed as an exhibit
to the Registration Statement.
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of the Company's organizational documents, the Trust's
form of organizational documents, the form of Trust Agreement and the form of
Certificates included therein and such other documents, records, certificates
of the Issuer and public officials and other instruments as we have deemed
necessary for the purposes of rendering this opinion. In addition, we have
assumed that the Trust Agreement as completed for each series will be duly
executed and delivered by each of the parties thereto; that the Certificates as
completed for each series will be duly executed and delivered substantially in
the forms contemplated by the Trust Agreement; and that the Certificates for
each series will be sold as described in the Registration Statement.
<PAGE> 2
FIRSTPLUS INVESTMENT CORPORATION
May 22, 1997
Page 2
Based upon the foregoing and subject to the limitations and
qualifications set forth below, we are of the opinion that the Certificates are
in due and proper form and, assuming the due authorization, execution and
delivery of the Trust Agreement of each series by the applicable Issuer, the
SPV and the Owner Trustee and the due authorization of the Certificates for
each series by all necessary action on the part of the applicable Issuer, when
the Certificates for each series have been validly executed, authenticated and
issued in accordance with the applicable Trust Agreement and delivered against
payment therefor, the Certificates for each series will be legally issued and
will be fully paid and non-assessable, and entitled to the benefits of the
related Trust Agreement in accordance with their terms.
The opinion expressed above is subject to the qualification that we do
not purport to be experts as to the laws of any jurisdiction other than the
federal laws of the United States of America and the laws of the States of
Texas and New York, and we express no opinion herein as to the effect that the
laws and decisions of courts of any such other jurisdiction may have upon such
opinions.
We consent to the use and filing of this opinion as Exhibit 5.3 to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus Supplement and Prospectus contained therein.
In giving such consent we do not imply or admit that we are an expert with
respect to any part of the Registration Statement, including this exhibit,
within the meaning of the term "expert" as used in the Securities Act or the
rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Andrews & Kurth L.L.P.
<PAGE> 1
Exhibit 8.1
[Andrews & Kurth L.L.P. Letterhead]
May 22, 1997
FIRSTPLUS INVESTMENT CORPORATION
3773 Howard Hughes Parkway, Suite 300N
Las Vegas, Nevada 89109
Re: FIRSTPLUS INVESTMENT CORPORATION
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as special counsel for FIRSTPLUS INVESTMENT CORPORATION,
a corporation organized under the laws of the State of Nevada (the "Company"),
and certain trusts, all of the beneficial ownership of which will be initially
owned by the Company (each, an "Issuer"), in connection with the proposed
issuance by each Issuer or the Company of Asset Backed Certificates (the
"Certificates") or Asset Backed Notes (the "Notes"). The Certificates of a
series are to be issued pursuant to (i) a Pooling and Servicing Agreement
(each, a "Pooling and Servicing Agreement") between the Company, the servicer
(the "Servicer") and the trustee (the "Trustee") or (ii) a Trust Agreement
(each, a "Trust Agreement") between the Issuer, a special purpose entity to be
specified in such Trust Agreement (the "SPV"), and an owner trustee to be
specified therein (the "Owner Trustee"). The Notes of a series are to be
issued pursuant to an Indenture (each, an "Indenture") for such series, between
the applicable Issuer or the Company and the indenture trustee specified
therein (the "Indenture Trustee"). Forms of the Pooling and Servicing
Agreement, the Trust Agreement, and the Indenture have been filed with the
Securities and Exchange Commission as exhibits to the Company's registration
statement on Form S-3 (the "Registration Statement") filed on May 5, 1997
pursuant to the Securities Act of 1933, as amended (the "1933 Act"). This
opinion is also to be filed as an exhibit to the Registration Statement.
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of the Company's organizational documents; the Issuer's
form of organizational documents; the form of Pooling and Servicing Agreement
and the form of Certificates included therein; the form of Trust Agreement and
the form of Certificates included therein; the form of Indenture and the form
of Notes included therein; and such other documents, records, certificates of
the Company and the Issuer and public officials and other instruments as we
have deemed necessary for the purposes of
<PAGE> 2
FIRSTPLUS INVESTMENT CORPORATION
May 22, 1997
Page 2
rendering this opinion. In addition, we have assumed that the Pooling and
Servicing Agreement or the Trust Agreement, as applicable, as completed for
each series will be duly executed and delivered by each of the parties thereto;
that the Certificates as completed for each series will be duly executed and
delivered substantially in the forms contemplated by the Pooling and Servicing
Agreement or the Trust Agreement, as applicable; and that the Certificates for
each series will be sold as described in the Registration Statement. We have
also assumed that the Indenture as completed for each series will be duly
executed and delivered by each of the parties thereto; that the Notes as
completed for each series will be duly executed and delivered substantially in
the forms contemplated by the Indenture; and that the Notes for each series
will be sold as described in the Registration Statement.
On the basis of the foregoing and subject to the limitations and
qualifications set forth below, we are of the opinion that (i) the description
of federal income tax consequences appearing under the heading "Certain Federal
Income Tax Consequences" in the Prospectus contained in the Registration
Statement relating to Asset Backed Notes and Asset Backed Certificates
accurately describes the material federal income tax consequences to holders of
Certificates or Notes, as applicable, under existing law and subject to the
qualifications and assumptions stated therein and (ii) the description of
federal income tax consequences appearing under the heading "Certain Federal
Income Tax Consequences" in the Prospectus contained in the Registration
Statement relating to Asset Backed Certificates accurately describes the
material federal income tax consequences to holders of Certificates under
existing law and subject to the qualifications and assumptions stated therein.
The opinions herein are based upon our interpretations of current law,
including court authority and existing Final and Temporary Regulations, which
are subject to change both prospectively and retroactively, and upon the facts
and assumptions discussed herein. This opinion letter is limited to the
matters set forth herein, and no opinions are intended to be implied or may be
inferred beyond those expressly stated herein. Our opinion is rendered as of
the date hereof and we assume no obligation to update or supplement this
opinion or any matter related to this opinion to reflect any change of fact,
circumstances, or law after the date hereof. In addition, our opinion is based
on the assumption that the matter will be properly presented to the applicable
court. Furthermore, our opinion is not binding on the Internal Revenue Service
or a court. In addition, we must note that our opinion represents merely our
best legal judgment on the matters presented and that others may disagree with
our conclusion. There can be no assurance that the Internal Revenue Service
will not take a contrary position or that a court would agree with our opinion
if litigated. In the event any one of the statements, representations or
assumptions we have relied upon to issue this opinion is incorrect, our opinion
might be adversely affected and may not be relied upon.
We consent to the use and filing of this opinion as Exhibit 8.1 to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus Supplement and
<PAGE> 3
FIRSTPLUS INVESTMENT CORPORATION
May 22, 1997
Page 3
the Prospectus contained therein. In giving such consent we do not imply or
admit that we are an expert with respect to any part of the Registration
Statement, including this exhibit, within the meaning of the term "expert" as
used in the Securities Act or the rules and regulations of the Securities and
Exchange Commission thereunder. This opinion is delivered as of the date
hereof and we disclaim any responsibility to update this opinion at any time
following the date hereof.
Very truly yours,
/s/ Andrews & Kurth L.L.P.
