<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-28829
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 STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED JULY 14, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 6, 1997)
$66,891,200
NATIONAL AUTO FINANCE 1997-1 TRUST
% AUTOMOBILE RECEIVABLES-BACKED NOTES
NATIONAL FINANCIAL AUTO FUNDING TRUST
(SELLER)
NATIONAL AUTO FINANCE COMPANY, INC.
(SERVICER)
---------------------
National Auto Finance 1997-1 Trust (the "Trust" or the "Issuer") will be
formed pursuant to a Trust Agreement among National Financial Auto Funding Trust
(the "Seller"), a trust the beneficial interests in which are wholly-owned by
National Auto Finance Company, Inc. ("NAFI") and affiliates of NAFI, and
Wilmington Trust Company, as Owner Trustee (the "Owner Trustee"). The %
Automobile Receivables-Backed Notes, Series 1997-1 (the "Notes") will be issued
pursuant to an Indenture, to be dated as of June 29, 1997 (the "Indenture"),
among the Trust and Harris Trust and Savings Bank, as Indenture Trustee and as
Trust Collateral Agent (the "Indenture Trustee" and "Trust Collateral Agent").
The Trust will also issue $6,615,613.19 aggregate principal amount of Automobile
Receivables-Backed Certificates (the "Certificates" and, together with the
Notes, the "Securities") that are not offered hereby but will initially be
retained by the Seller. Payments of principal of and interest on the
Certificates will be subordinated to payments of principal of and interest on
the Notes to the extent described herein.
The assets of the Trust (the "Trust Property") will include a pool of
non-prime motor vehicle retail installment sale contracts (the "Receivables"),
all monies paid or payable thereunder on or after the applicable Cut-off Date
(as defined herein), security interests in the new and used automobiles,
light-duty trucks, vans and minivans financed thereby, certain bank accounts
described herein, all proceeds of the foregoing, and certain other property. In
addition, the Trust Property will include funds on deposit in a prefunding
account (a "Pre-Funding Account") established by and maintained with the Trust
Collateral Agent. Approximately $6,689,091.18 will be deposited in the
Pre-Funding Account on the date of the issuance of the Notes. Funds on deposit
in the Pre-Funding Account will be paid to the Seller in exchange for the
transfer to the Trust of Additional Receivables (as defined herein) from time to
time during the period from and including the Closing Date (as defined herein)
until the earliest of (i) the date on which the balance of funds on deposit in
the Pre-Funding Account is reduced to an amount less than $100,000, (ii) the
date on which an Event of Default (as defined herein) occurs under the Indenture
or a Servicer Termination Event (as defined herein) occurs under the Sale and
Servicing Agreement (as defined herein) and (iii) the close of business on
October 30, 1997 (the "Pre-Funding Period").
Interest on the Notes will accrue at a rate of % per annum (the
"Interest Rate"). Interest on and principal of the Notes will be payable on the
twenty first day of each month (or, if such day is not a Business Day, the next
succeeding Business Day), beginning on August 21, 1997 (each, a "Distribution
Date"). To the extent not previously distributed to the holders of the Notes
(each, a "Noteholder" or "Holder"), the remaining outstanding principal balance
of such Notes will be distributed to such Holders on the Distribution Date
occurring in November 21, 2003 (the "Final Scheduled Distribution Date").
However, payment in full of the Notes could occur earlier than such date as
described herein.
Full and complete payment of the Scheduled Payments (as defined herein) with
respect to the Notes on each Distribution Date is unconditionally and
irrevocably guaranteed pursuant to a financial guaranty insurance policy (the
"Policy") to be issued by:
[LOGO]
There currently is no secondary market for the Notes. The Underwriter
expects, but is not obligated, to make a market in the Notes. There is no
assurance that any such market will develop or continue.
---------------------
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE NOTES,
SEE "RISK FACTORS" ON PAGE S-14 HEREIN AND ON PAGE 24 OF THE ACCOMPANYING
PROSPECTUS.
---------------------
THE NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT
OBLIGATIONS OF OR INTERESTS IN NAFI, THE SELLER OR ANY AFFILIATE OF EITHER. NONE
OF THE NOTES, THE CERTIFICATES OR THE RECEIVABLES ARE INSURED OR GUARANTEED BY
ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO THE
PUBLIC(1) DISCOUNT(2) SELLER(1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note....................................
- -----------------------------------------------------------------------------------------------------------------------
Total.......................................
=======================================================================================================================
</TABLE>
(1) Before deducting estimated expenses of $ payable by the Seller.
(2) In connection with the offering contemplated by this Prospectus Supplement,
First Union Corporation has received a fee from the Seller in respect of
certain advisory services relating to the structuring of the transaction.
See "Underwriting" herein.
---------------------
The Notes are offered hereby by the Underwriter named below, subject to
receipt and acceptance by the Underwriter and its right to reject any order in
whole or in part. It is expected that delivery of the Notes will be made in
book-entry form only through the Same-Day Funds Settlement System of The
Depository Trust Company ("DTC"), CEDEL S.A. and the Euroclear System against
payment therefor in immediately available funds in New York, New York on or
about July 23, 1997 the "Closing Date".
FIRST UNION CAPITAL MARKETS CORP.
The date of this Prospectus Supplement is July , 1997.
<PAGE> 2
This Prospectus Supplement and the accompanying Prospectus may be used by
First Union Capital Markets Corp., affiliates of which have an ownership
interest in, or participate in banking transactions with, NAFI, in connection
with offers and sales related to market making transactions of the Notes. First
Union Capital Markets Corp. may act as principal or agent in such transactions.
Such sales will be made at prices related to prevailing market prices at the
time of the sale or otherwise.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE NOTES. ADDITIONAL INFORMATION IS CONTAINED IN THE PROSPECTUS
AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS IN FULL. SALES OF THE NOTES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
PURCHASES OF NOTES TO COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF
THESE TRANSACTIONS, SEE "UNDERWRITING."
REPORTS TO NOTEHOLDERS
Unless and until Definitive Notes are issued, unaudited monthly and annual
reports, containing information concerning the Trust and prepared by the
Servicer, will be sent on behalf of the Trust to the Indenture Trustee and Cede
& Co., as registered holder of the Notes and the nominee of DTC. See "Certain
Information Regarding the Securities - Book-Entry Registration" and " - Reports
to Securityholders" in the accompanying Prospectus. Note Owners may receive
such reports, upon written request, together with a certification that they are
Note Owners and payment of any expenses associated with the distribution of
such reports, from the Indenture Trustee at its address at 311 West Monroe
Street, 12th Floor, Chicago, Illinois 60606. Such reports will not constitute
financial statements prepared in accordance with generally accepted accounting
principles. Neither the Seller, NAFI nor the Insurer intends to send any of its
financial reports to Noteholders. The Servicer, on behalf of the Trust, will
file with the Commission periodic reports concerning the Trust to the extent
required under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations of the Commission thereunder.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed with the Commission by the Seller on
behalf of the Trust pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act, as amended, after the date of this Prospectus Supplement and
prior to the termination of the offering of the Notes offered hereby, shall be
deemed to be incorporated by reference in this Prospectus Supplement and to be
a part of this Prospectus Supplement from the date of the filing of such
documents. 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 Supplement to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein, modifies or
replaces 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 Supplement.
S-2
<PAGE> 3
In addition to the documents described above and in the accompanying
Prospectus under "Incorporation of Certain Documents by Reference", the
consolidated financial statements of Financial Security Assurance Inc. and
Subsidiaries included in, or as exhibits to, the following documents, which
have been filed with the Commission by Financial Security Assurance Holdings
Ltd. ("Holdings"), are hereby incorporated by reference in this Prospectus
Supplement:
(a) Annual Report on Form 10-K for the year ended December 31, 1996, and
(b) Quarterly Report on Form 10-Q for the three month period ended March
31, 1997.
All financial statements of Financial Security Assurance Inc. ("Financial
Security") included in documents filed by Holdings pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the Notes
shall be deemed to be incorporated by reference into this Prospectus Supplement
and to be part hereof from the respective dates of filing of such documents.
The Seller will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon the oral or written request of such
person, a copy of any or all of the reports and financial statements
incorporated herein by reference. Requests for such copies should be directed
to National Financial Auto Funding Trust, c/o National Auto Finance Company,
Inc., One Park Place, Suite 200, 621 N.W. 53rd Street, Boca Raton, Florida
33487 (telephone (800) 999-7535), Attention: Chief Financial Officer.
S-3
<PAGE> 4
SUMMARY OF THE TERMS OF THE NOTES
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings ascribed to such terms
elsewhere in this Prospectus Supplement on the pages indicated in the "Index of
Defined Terms" herein or, to the extent not defined herein, in the accompanying
Prospectus on the pages indicated under the caption "Index of Defined Terms" in
the Prospectus.
Issuer ................................ National Auto Finance 1997-1 Trust
(the "Trust" or the "Issuer"),
formed pursuant to a Trust
Agreement, dated as of June 29,
1997 (the "Agreement"), between the
Seller and the Owner Trustee.
Seller................................. National Financial Auto Funding
Trust, a trust the beneficial
interests in which are wholly-owned
by NAFI and affiliates of NAFI. See
"The Seller" in the accompanying
Prospectus.
Servicer............................... National Auto Finance Company, Inc.
See "National Auto Finance Company,
Inc." in the accompanying
Prospectus.
Indenture Trustee...................... Harris Trust and Savings Bank, an
Illinois banking corporation, as
trustee under the Indenture (the
"Indenture Trustee").
Owner Trustee.......................... Wilmington Trust Company, a
Delaware banking corporation, as
trustee under the Trust Agreement
(the "Owner Trustee").
Backup Servicer and
Collateral Agent..................... In addition to acting as Indenture
Trustee under the Indenture, Harris
Trust and Savings Bank will agree
to act as backup servicer (in such
capacity, the "Backup Servicer")
under the Sale and Servicing
Agreement and to service the
Receivables in the event NAFI
resigns or is removed as Servicer.
Harris Trust and Savings Bank will
also agree in the Spread Account
Agreement to act as collateral
agent (in such capacity, the
"Collateral Agent") on behalf of
the Noteholders and the Insurer
with respect to the Spread Account
and the amounts deposited thereto.
Insurer................................ Financial Security Assurance Inc.,
a financial guaranty insurance
company incorporated under the laws
of the State of New York (the
"Insurer" or "Financial Security").
See "The Insurer" herein.
Terms of the Notes..................... The principal terms of the Notes
will be as described below:
S-4
<PAGE> 5
A. Distribution Dates................ The 21st day of each month (or if
the 21st day is not a Business Day,
the next succeeding Business Day)
commencing August 21, 1997 (each, a
"Distribution Date"). A "Business
Day" is a day other than a
Saturday, Sunday or other day on
which commercial banks located in
New York, Illinois or Florida are
authorized or obligated to be
closed.
B. Interest Rate..................... The Notes will bear interest at the
rate of % per annum (the "Interest
Rate"), calculated on the basis of
a 360-day year consisting of twelve
30-day months.
C. Interest.......................... Interest on the outstanding
principal amount of the Notes will
accrue at the Interest Rate from
the Closing Date (in the case of
the first Distribution Date) or
from the most recent Distribution
Date on which interest has been
paid to but excluding the following
Distribution Date (each an
"Interest Period"). Interest on the
Notes for any Distribution Date due
but not paid on such Distribution
Date will be due on the next
Distribution Date together with
interest on such amount at the
Interest Rate, to the extent
permitted by law. The amount of
interest due and payable on the
Notes on each Distribution Date
will equal 30 days' interest (or,
in the case of the first
Distribution Date, interest accrued
from and including the Closing Date
to but excluding such Distribution
Date) and will be distributed by
the Indenture Trustee on a pro rata
basis to the Noteholders of record
on the last day of the preceding
calendar month (the "Record Date").
See "The Notes - Payments of
Interest" herein.
D. Principal......................... Principal distributions will be
made to the Holders of the Notes on
each Distribution Date (other than
the Final Scheduled Distribution
Date) in an amount equal to the sum
of (i) 91% of the Principal
Distributable Amount for such
Distribution Date and (ii) the
aggregate shortfalls in principal
distributions due and payable to
the Noteholders for all prior
Distribution Dates. The Principal
Distributable Amount for any
Distribution Date generally will
equal the sum of the following,
without duplication: (i) that
portion of all collections on the
Receivables (other than Liquidated
Receivables, Receivables
retransferred to the Seller or NAFI
("Retransferred Receivables") and,
to the extent included in clause
(iv) below, the outstanding
principal balance of Retransfer
Default Receivables) allocable to
principal, including all full and
partial principal prepayments
deposited into the Collection
Account during the calendar month
preceding the calendar month in
which such Distribution Date occurs
(the "Due Period"), (ii) the
outstanding principal balance of
all Receivables that became
Liquidated Receivables during the
related Due Period (other than
Liquidated Receivables that became
Retransferred Receivables during
such
S-5
<PAGE> 6
Due Period), (iii) the portion
allocable to principal of the
Purchase Amount paid by the Seller
or NAFI, as the case may be, in
respect of all Receivables that
became Retransferred Receivables on
or prior to the related Reporting
Date and subsequent to the
preceding Reporting Date, (iv) in
the sole discretion of the Insurer,
the outstanding principal balance
as of the related Reporting Date of
all Retransfer Default Receivables,
and (v) the aggregate amount of
Bankruptcy Losses that occurred
during the related Due Period. To
the extent not previously paid, the
remaining outstanding principal
amount of the Notes will be paid in
full on the Final Scheduled
Distribution Date. See "The Notes -
Distributions and Payments "
herein. The Policy guaranties
payment of any principal of the
Notes remaining unpaid on the Final
Scheduled Distribution Date. See
"The Policy" herein. In addition to
the distributions of principal
described above, Noteholders may
also receive distributions of
principal in connection with an
Optional Redemption or Mandatory
Redemption, as described below.
E. Optional Redemption............... The Notes will be redeemed in
whole, but not in part, on any
Distribution Date on which the
Seller exercises its option to
purchase the Receivables, which,
subject to certain conditions, may
occur on any Distribution Date on
which the aggregate of the
outstanding principal balances of
the Receivables (the "Pool
Outstanding Principal Balance") is
less than 10% of the Original Pool
Outstanding Principal Balance of
the Receivables. The "Original Pool
Outstanding Principal Balance" will
equal the aggregate outstanding
principal balance of all of the
Receivables, including Additional
Receivables, as of their respective
Cut-off Dates. Such right may be
exercised only with the prior
written consent of the Insurer if a
claim has previously been made
under the Policy and remains
unreimbursed to the Insurer or if
such redemption would result in a
claim under the Policy or would
result in any amount owing to the
Insurer or the Noteholders
remaining unpaid. In connection
with any such redemption, the
Seller will deliver to the
Indenture Trustee an amount equal
the sum of (i) 100% of the
aggregate outstanding principal
balance of the Notes on such
Distribution Date and (ii) all
accrued and unpaid interest thereon
at the Interest Rate.
F. Mandatory Redemption.............. The Notes will be redeemed in part
on the Distribution Date relating
to the Reporting Date next
succeeding the last day of the
Pre-Funding Period in the event
that any amount remains on deposit
in the Pre-Funding Account after
giving effect to the purchase of
all Additional Receivables,
including any such purchase on such
date (a "Mandatory Redemption").
The aggregate principal amount of
the Notes to be redeemed will be an
amount equal to the amount then on
deposit in the Pre-
S-6
<PAGE> 7
Funding Account less any
undistributed investment earnings
on deposit in the Pre-Funding
Account (the "Note Redemption
Amount"). The Policy does not
guaranty any such principal payment
on the Notes from funds on deposit
in the Pre-Funding Account. See
"The Policy" herein.
The Notes may be accelerated and
subject to immediate payment at par
upon the occurrence of an Event of
Default under the Indenture. So
long as no Insurer Default shall
have occurred and be continuing, an
Event of Default under the
Indenture will occur only upon
delivery by the Insurer to the
Indenture Trustee of notice of the
occurrence of certain events of
default under the Insurance and
Indemnity Agreement, dated as of
the Closing Date (the "Insurance
Agreement"), among the Insurer, the
Trust, the Seller and NAFI. In the
case of such an Event of Default,
the Notes will automatically be
accelerated and subject to
immediate payment at par. See "The
Notes Events of Default" herein.
The Policy does not guarantee
payment of any amounts that become
due on an accelerated basis unless
the Insurer elects, in its sole
discretion, to pay such amounts in
whole or in part.
See "The Policy" herein.
The Trust Property..................... Each Note will represent an
obligation of the Trust secured by
the Trust Property. The assets of
the Trust (the "Trust Property")
will include (i) non-prime motor
vehicle retail installment sale
contracts transferred to the Trust
on the Closing Date (the "Initial
Receivables") and on subsequent
transfer dates (the "Additional
Receivables" and, together with the
Initial Receivables, the
"Receivables"), (ii) all monies
paid or payable thereunder on or
after the applicable Cut-off Date,
(iii) an assignment of the security
interests of NAFI in the new and
used automobiles, light-duty
trucks, vans and minivans financed
thereby (the "Financed Vehicles"),
(iv) the Receivable Files, (v) such
assets as shall from time to time
be deposited in the Collection
Account (the "Collection Account"),
the Distribution Account (the
"Distribution Account"), the Note
Distribution Account (the "Note
Distribution Account"), the
Pre-Funding Account and the
Pre-Funding Period Reserve Account
(as defined herein), each
established pursuant to the Sale
and Servicing Agreement or the
Indenture, (vi) property that
secured a Receivable and that has
been acquired by repossession or
otherwise, (vii) all rights to
insurance proceeds and liquidation
proceeds with respect to the
Receivables and the Financed
Vehicles, (viii) certain rights of
NAFI against Dealers under the
Dealer Agreements and against
Originators under the Originator
Agreements, (ix) all right, title
and interest of the Seller in and
to the Purchase Agreements, (x)
certain other rights under the Sale
and Servicing Agreement in respect
of
S-7
<PAGE> 8
representations and warranties made
by the Seller regarding the
Receivables in the Sale and
Servicing Agreement and (xi) the
income and proceeds of the
foregoing and rights to enforce the
foregoing.
The Receivables........................ The Initial Receivables had an
aggregate outstanding principal
balance of $66,156,163.54 as of
June 29, 1997 (the "Initial Cut-off
Date"). Pursuant to the Sale and
Servicing Agreement, the Seller
may, subject to the prior written
consent of the Insurer and
satisfaction of certain conditions
contained in the Sale and Servicing
Agreement, transfer Additional
Receivables to the Trust from time
to time during the Pre-Funding
Period to the extent that funds are
then on deposit in the Pre-Funding
Account. During the Pre-Funding
Period, upon the Seller's written
direction to the Trust Collateral
Agent and the Servicer from time to
time (but not more than once during
each calendar month or as more
frequently consented to in writing
by the Insurer), the Trust will
release funds in the Pre-Funding
Account on the date of any such
transfer (each, a "Subsequent
Transfer Date") to the Seller in an
amount equal to 91% of the
aggregate principal balance of the
Additional Receivables so
transferred as of the close of
business on the third Business Day
(as defined below) prior to the
applicable Subsequent Transfer Date
(each, a "Subsequent Cut-off Date";
the Initial Cut-Off Date and all
Subsequent Cut-off Dates are
collectively referred to as the
"Cut-off Dates").
The Seller will acquire (i) the
Initial Receivables from National
Financial Auto Funding Trust II
("Funding Trust II"), a Delaware
business trust wholly-owned by NAFI
and affiliates of NAFI, pursuant to
the Sale Agreement, dated as of
June 29, 1997 (the "Sale
Agreement"), between the Seller and
Funding Trust II, and (ii) the
Additional Receivables from NAFI
pursuant to a Purchase and
Contribution Agreement, dated as of
the Closing Date (the "Purchase
Agreement" and, together with the
Sale Agreement, the "Purchase
Agreements") between the Seller and
NAFI. NAFI and Funding Trust II, in
their capacities as transferors of
the Receivables to the Seller, are
herein referred to collectively as
the "NAFI Transferors." The Initial
Receivables constitute, as of the
Initial Cut-off Date, and the
Additional Receivables will
constitute, as of the applicable
Subsequent Cut-off Date, a
substantial portion of the
non-prime motor vehicle retail
installment sale contracts
originated by NAFI satisfying the
selection criteria described
herein. The Additional Receivables
to be transferred to the Trust on
each Subsequent Transfer Date will
be comprised of non-prime motor
vehicle retail installment sale
contracts acquired by NAFI on or
prior to the related Subsequent
Cut-off Date and after the
S-8
<PAGE> 9
preceding Cut-off Date. See "The
Receivables Pool,General" herein.
As of the Initial Cut-off Date, the
weighted average annual percentage
rate, as such term is used with
respect to the Federal
Truth-in-Lending Act ("APR") of the
Initial Receivables was
approximately 19.38% and the
weighted average remaining
scheduled maturity on the Initial
Receivables was approximately 50.31
months and the percentage of the
aggregate principal balance of the
Initial Receivables as of the
Initial Cut-off Date relating to
the financing of used Financed
Vehicles was 80.45%. The final
scheduled payment date on the
Initial Receivable with the latest
maturity is June 29, 2002. The
maturity dates of the Receivables
may be extended under certain
circumstances. The actual final
payment date of the Notes may be
earlier than the final scheduled
payment date of the Receivables due
to prepayments on the Receivables.
See "Risk Factors - Yield and
Prepayment Considerations" herein
and "The Receivables Pool - Average
Life of the Receivables" herein.
Following the transfer of any
Additional Receivables to the
Trust, the weighted average APR of
the Receivables may be as low as
18.00%, the weighted average
remaining term of the Receivables
may be as high as 55 months, the
percentage of the aggregate
outstanding principal balance of
the Receivables represented by
Receivables relating to loans for
the purchase of used Financed
Vehicles may be as high as 80% and
the final scheduled payment date on
the Receivable with the latest
maturity may be as late as October
30, 2002. See "The Receivables
Pool" herein and "The Receivables"
in the accompanying Prospectus.
Final Scheduled
Distribution Date .................... The Distribution Date occurring in
November, 2003 (the "Final
Scheduled Distribution Date").
Subordination of the
Certificates ....................... The Certificates represent the
right to receive distributions of
funds remaining in the Distribution
Account on each Distribution Date
after all other payments required
to be made on such Distribution
Date that are described under "The
Notes - Distributions and Payments"
have been made. To the extent that
the amount on deposit in the Spread
Account on any Distribution Date is
less than as required under the
Spread Account Agreement, amounts
remaining in the Distribution
Account after distribution of the
Servicing Fee and certain other
fees payable by the Trust,
principal and interest in respect
of the Notes and any amounts
payable to the Insurer will be
deposited in the
S-9
<PAGE> 10
Spread Account in the amount of
such deficiency. Because the amount
required to be on deposit in the
Spread Account or the existence
thereof may be modified or
terminated by the Insurer prior to
the occurrence and continuation of
an Insurer Default with the consent
of the Seller but without the
consent of the Indenture Trustee or
the Noteholders, Noteholders should
not rely on the Spread Account for
payments of principal of, or
interest on, the Notes. See "The
Notes - Subordination of the
Certificates; Spread Account"
herein.
Pre-Funding Account.................... The Pre-Funding Account will be
established by and maintained with
the Trust Collateral Agent. The
Pre-Funding Account will be funded
on the Closing Date with a portion
of the proceeds of the offering of
the Notes in the amount of
$6,689,091.18 (the "Pre-Funded
Amount"). During the period (the
"Pre-Funding Period") from and
including the Closing Date until
the earlier of (i) the date on
which the balance of funds on
deposit in the Pre-Funding Account
is reduced to an amount less than
$100,000, (ii) the date on which an
Event of Default occurs under the
Indenture or a Servicer Termination
Event occurs under the Sale and
Servicing Agreement and (iii) the
close of business on October 30,
1997, the Pre-Funded Amount will be
reduced by amounts released to the
Seller in connection with the
transfer of Additional Receivables
to the Trust in accordance with the
Sale and Servicing Agreement. On
the Distribution Date related to
the Reporting Date next succeeding
termination of the Pre-Funding
Period, the Notes will be subject
to Mandatory Redemption in a
principal amount equal to the
amount, if any, remaining on
deposit in the Pre-Funding Account
at the close of business on the
last day of the Pre-Funding Period
less any undistributed investment
earnings therein. Earnings on
reinvestment of amounts on deposit
in the Pre-Funding Account will be
deposited monthly into the
Collection Account. Amounts on
deposit in the Pre-Funding Account
will be applied to the purchase of
Additional Receivables not more
frequently than monthly during the
Pre-Funding Period unless the
Insurer consents to more frequent
transfers. See "The Trust
Agreements,Sale and Assignment of
Receivables" herein.
Pre-Funding Period
Reserve Account........................ On the Closing Date, the Indenture
Trustee at the direction of the
Seller will deposit approximately
$86,824.40 from the proceeds of the
sale of the Notes into the
Pre-Funding Period Reserve Account.
Amounts deposited therein will be
transferred to the Note
Distribution Account by the Trust
Collateral Agent on each
Distribution Date occurring on or
prior to the Distribution Date next
succeeding termination of the
Pre-Funding Period in an amount
equal to the excess of (i) interest
accrued at the Interest Rate on the
amount of funds on
S-10
<PAGE> 11
deposit in the Pre-Funding Account
for the period from and including
the preceding Distribution Date
(or, in the case of the first
Distribution Date, the Closing
Date) to but not including the
current Distribution Date over (ii)
the actual amount of investment
earnings on amounts on deposit in
the Pre-Funding Account from and
including the preceding
Distribution Date (or, in the case
of the first Distribution Date, the
Closing Date) to the current
Distribution Date. If after making
any required transfers to the Note
Distribution Account on any
Distribution Date the amount on
deposit in the Pre-Funding Period
Reserve Account exceeds the
Required Reserve Amount (as defined
herein), the Trust Collateral Agent
will distribute such excess to the
Seller. On the Distribution Date
related to the Reporting Date
immediately following termination
of the Pre-Funding Period, any
amounts remaining in the
Pre-Funding Period Reserve Account
(after application to interest
payable on the Notes as described
above) shall be paid to the Seller
pursuant to the Sale and Servicing
Agreement. Thereafter, the
Pre-Funding Period Reserve Account
shall be closed.
Spread Account......................... The Spread Account will be
established and maintained by
Harris Trust and Savings Bank, as
collateral agent (the "Collateral
Agent") under the Spread Account
Agreement, dated as of the Closing
Date, among the Seller, the Insurer
and the Collateral Agent (the
"Spread Account Agreement"). The
Spread Account will not be property
of the Trust, but will be held by
the Collateral Agent for the
benefit of the Noteholders and the
Insurer. The Spread Account will be
funded on the Closing Date with a
portion of the proceeds of the sale
of the Notes in the amount of
$1,470,136.26 and, on each
Distribution Date, from amounts
otherwise distributable in respect
of deposits to the Pre-funding
Period Reserve Account, payment of
certain expenses payable by the
Trust and the Certificates. See
"The Notes - Distributions and
Payments" herein. Pursuant to the
Spread Account Agreement, amounts
on deposit in the Spread Account
will be available to pay the
Servicing Fee and certain other
fees payable by the Trust, to make
distributions of the Note
Distributable Amount on any
Distribution Date to the
Noteholders and to make payments
due to the Insurer pursuant to the
Sale and Servicing Agreement, the
Insurance Agreement or the
Indenture. Because the amount
required to be on deposit in the
Spread Account or the existence
thereof may be modified or
terminated by the Insurer prior to
the occurrence and continuation of
an Insurer Default with the consent
of the Seller but without the
consent of the Indenture Trustee or
the Noteholders, Noteholders should
not rely on the Spread Account for
payments of principal of, or
interest on, the Notes. See "The
Notes - Subordination of the
Certificates; Spread Account"
herein.
S-11
<PAGE> 12
The Policy............................. On the Closing Date, the Insurer
will issue the Policy to the Trust
Collateral Agent for the benefit of
the Noteholders pursuant to which
the Insurer will unconditionally
and irrevocably guarantee to the
Noteholders the payment of interest
due on the Notes on each
Distribution Date and the ultimate
payment in full of the principal
amount of the Notes remaining
outstanding on the Final Scheduled
Distribution Date, in each case in
accordance with the terms and
conditions of the Policy. See "The
Policy." The Insurer will have the
right to terminate the Servicer
upon the occurrence of a Servicer
Termination Event. See "The Policy"
and "The Sale and Servicing
Agreement - Servicer Termination
Event" herein.
Mandatory Retransfer of Certain
Receivables........................... The Seller will make certain
warranties in the Sale and
Servicing Agreement with respect to
the Receivables. If (i) the Seller
breaches any such warranty with
respect to a Receivable, (ii) such
breach materially and adversely
affects the interests of the
Noteholders, the Certificateholders
or the Insurer in such Receivable,
and (iii) the Seller does not
correct or cure such breach by the
Reporting Date occurring during the
second full calendar month
following discovery by the
Servicer, any subservicer or the
Seller or the date the Trust
Collateral Agent received notice of
such breach pursuant to the Sale
and Servicing Agreement, the Seller
will be required to repurchase such
Receivable pursuant to the Sale and
Servicing Agreement. NAFI will
generally be obligated to
repurchase such Receivable from the
Seller pursuant to the Purchase
Agreement contemporaneously with
the Seller's repurchase from the
Trust. In addition, the repurchase
obligations of NAFI under the
Purchase Agreements will be
assigned by the Seller to the Trust
and by the Trust to the Trust
Collateral Agent for the benefit of
the Noteholders and the Insurer and
may be enforced by the Trust
Collateral Agent in the event the
Seller defaults in its repurchase
obligation. No assurance can be
given that the Seller or NAFI will
at any time have sufficient funds
to satisfy any such retransfer
requirement. Mandatory retransfers
to the Seller of the Receivables
will reduce the average life of the
Notes and could result in the
Holders of the Notes receiving
unexpected principal payments at a
time when such Holders are unable
to reinvest such payments in
investments having a yield and
rating comparable to the yield and
rating on the Notes. See "Risk
Factors - Yield and Prepayment
Considerations."
Tax Status ............................ Subject to the discussion below
(See "Certain Federal Income Tax
Consequences"), under the Internal
Revenue Code of 1986 (the "Code"),
as amended, and existing
regulations, administrative rules
and judicial decisions, counsel to
the Seller
S-12
<PAGE> 13
is of the opinion that the Notes
will be characterized as
indebtedness for federal income tax
purposes and the Trust will not be
characterized as an association (or
a publicly traded partnership) that
is taxable as a corporation. Each
Noteholder, by the acceptance of a
Note, will agree to treat the Notes
as indebtedness for federal income
tax purposes. See "Certain Federal
Income Tax Consequences" herein and
in the accompanying Prospectus.
ERISA Considerations .................. Subject to the conditions and
considerations discussed under
"ERISA Considerations," the Notes
are eligible for purchase by
pension, profit-sharing or other
employee benefit plans as well as
individual retirement accounts and
certain types of Keogh Plans (each,
a "Benefit Plan"). See "ERISA
Considerations" herein.
Rating ................................ As a condition of issuance, the
Notes will be rated "AAA" by
Standard & Poor's Ratings Services
("S&P") and "Aaa" by Moody's
Investors Service, Inc. ("Moody's"
and, together with S&P, the "Rating
Agencies") on the basis of the
issuance of the Policy by the
Insurer. There is no assurance that
the ratings initially assigned to
the Notes will not subsequently be
lowered or withdrawn by the Rating
Agencies. Such ratings will not
constitute an assessment of the
likelihood that principal
prepayments on the Receivables
underlying the Notes will be made
by the Obligors thereon or of the
degree to which the rate of such
prepayments might differ from that
originally anticipated. See "Risk
Factors - Ratings on Notes" herein.
S-13
<PAGE> 14
RISK FACTORS
Prospective Noteholders should consider, in addition to the factors
described under "Risk Factors" in the Prospectus, the following factors in
connection with the purchase of the Notes:
GEOGRAPHIC CONCENTRATION OF RECEIVABLES
As of the Initial Cut-off Date, Obligors with respect to approximately
25.15%, 17.28% and 10.16% of the Receivables (based on Cut-off Date principal
balance and mailing addresses) were located in Georgia, North Carolina and
Florida, respectively. See "The Receivables Pool." Accordingly, adverse
economic conditions or other factors particularly affecting any of these states
could adversely affect the delinquency, loan loss or repossession experience of
the Trust with respect to the Receivables.
DELINQUENCY, LOAN LOSS AND REPOSSESSION EXPERIENCE
NAFI commenced operations in October 1994. Although NAFI has
calculated and presented herein its net loss experience with respect to its
servicing portfolio of Receivables, there can be no assurance that the
information presented will reflect actual future experience with respect to the
Receivables. In addition, there can be no assurance that the future
delinquency, loan loss or repossession experience of the Trust with respect to
the Receivables will be better or worse than that set forth herein with respect
to NAFI's servicing portfolio. See "The Receivables Pool - Delinquency,
Repossession and Loss Information" herein.
RATINGS ON NOTES
It is a condition to the issuance of the Notes that they be rated
"AAA" by S&P and "Aaa" by Moody's on the basis of the issuance of the Policy by
the Insurer. A rating is not a recommendation to purchase, hold or sell the
Notes. There is no assurance that a rating will remain in effect for any given
period of time or that a rating will not be lowered or withdrawn entirely by a
Rating Agency if in its judgment circumstances in the future so warrant. In the
event that the rating initially assigned to the Notes is subsequently lowered
or withdrawn for any reason, including by reason of a downgrading of the
Insurer's claims-paying ability, no person or entity will be obligated to
provide any additional credit enhancement with respect to the Notes. Any
reduction or withdrawal of a rating may have an adverse effect on the liquidity
and market price of the Notes.
YIELD AND PREPAYMENT CONSIDERATIONS
The Notes will be redeemed in part on the Distribution Date following
the end of the Pre-Funding Period if and to the extent that Additional
Receivables are not transferred to the Trust in amounts sufficient to fully
utilize the Pre-Funded Amount.
On the Closing Date, $66,156,163.54 in aggregate outstanding principal
amount of Initial Receivables will be transferred and assigned to the Trust by
the Seller. In addition, on the Closing Date the Pre-Funded Amount will be
deposited by the Indenture Trustee in the Pre-Funding Account from the proceeds
of the sale of the Notes. NAFI's inability to generate Additional Receivables
during the Pre-Funding Period in an amount sufficient to permit application of
the entire Pre-Funded Amount to
S-14
<PAGE> 15
the purchase of Additional Receivables will result in a Mandatory Redemption on
the Distribution Date relating to the Reporting Date next succeeding the
termination of the Pre-Funding Period in an amount equal to the amount
remaining on deposit in the Pre-Funding Account less any undistributed
investment earnings on deposit therein. In addition, any transfer and
assignment of Additional Receivables to the Trust will be subject to the
satisfaction, on or before the related Subsequent Transfer Date, of the
following conditions, among others: (i) each such Additional Receivable must
satisfy the eligibility criteria with respect to the Receivables specified in
the Sale and Servicing Agreement; (ii) as of such Subsequent Transfer Date, the
Receivables in the Trust, together with the Additional Receivables to be
transferred and assigned by the Seller to the Trust on such Subsequent Transfer
Date, must meet the following criteria (computed based on the characteristics
of the Initial Receivables on the Initial Cut-off Date and any Additional
Receivable as of the related Subsequent Cut-off Date): (a) the weighted average
APR of such Receivables must not be less than 18.00%, (b) the weighted average
remaining term of such Receivables must not be greater than 55 months, (c) not
more than 80% of the aggregate outstanding principal balance of such
Receivables may relate to loans for the purchase of used Financed Vehicles, and
(d) the final scheduled payment date on the Receivable with the latest maturity
will not be later than October 30, 2002; (iii) the Seller shall have executed
and delivered to the Owner Trustee a written assignment (a "Subsequent Transfer
Agreement") conveying such Additional Receivables to the Trust (including a
schedule identifying such Additional Receivables); and (iv) the Insurer shall,
in its sole and absolute discretion, have consented in writing to the transfer
and assignment of such Additional Receivables to the Trust.
It is anticipated that the Additional Receivables Purchase Price of
Additional Receivables transferred and assigned to the Trust will not be
exactly equal to the amounts on deposit in the Pre-Funding Account and,
therefore, that there will be at least a nominal amount of principal prepaid to
the Noteholders on the Distribution Date immediately following the end of the
Pre-Funding Period.
DEPENDENCE ON NAFI FOR THE TRANSFER OF ADDITIONAL RECEIVABLES
None of the Seller, NAFI or any affiliate of either is generally
obligated to make any payments in respect of the Notes or the Receivables.
However, the ability of the Seller to transfer and assign Additional
Receivables to the Trust on Subsequent Transfer Dates is completely dependent
upon the generation or acquisition of additional motor vehicle retail
installment sale contracts by NAFI. If, during the Pre-Funding Period, NAFI is
unable to generate or acquire sufficient additional motor vehicle retail
installment sale contracts to the Seller, or if such contracts do not satisfy
the eligibility criteria described herein, the ability of the Seller to
transfer and assign Additional Receivables to the Trust will be adversely
affected. There can be no assurance that NAFI will continue to generate or
acquire motor vehicle installment sale contracts that satisfy the criteria set
forth in the Sale and Servicing Agreement at the same rate that they have
generated or acquired such contracts in recent months or that the Insurer will
consent to the transfer of such contracts to the Trust.
EVENTS OF DEFAULT UNDER THE INDENTURE
So long as no Insurer Default shall have occurred and be continuing,
neither the Indenture Trustee nor the Noteholders may declare an Event of
Default under the Indenture and an Event of Default will occur only upon
delivery by the Insurer to the Indenture Trustee of notice of the occurrence of
certain events of default under the Insurance Agreement. Upon the occurrence of
an Event of Default under the Indenture (so long as an Insurer Default shall
not have occurred and be continuing), the Insurer will have the right, but not
the obligation, to cause the liquidation, in whole or in part, of the Trust
Property, which will result in redemption, in whole or in part, of the Notes.
S-15
<PAGE> 16
Following the occurrence of an Event of Default, the Indenture Trustee will
continue to submit claims as necessary under the Policy to enable the Trust to
continue to make payments of the Scheduled Payments with respect to the Notes.
Following the occurrence of an Event of Default, however, the Insurer may, in
its sole discretion, elect to pay all or any portion of the outstanding
principal amount of the Notes, plus accrued interest thereon.
THE TRUST
The following information supplements the information contained in the
accompanying Prospectus. Prospective Noteholders should consider, in addition
to the information below, the information under "The Trusts" in the
accompanying Prospectus.
The Issuer, National Auto Finance 1997-1 Trust, is a business trust
formed under the laws of the State of Delaware. The Seller will establish the
Trust pursuant to the Trust Agreement and will transfer and assign the
Receivables and the other Trust Property to the Trust in exchange for the
Certificates. Prior to such sale and assignment, the Trust will have no assets
or obligations. The Trust will not engage in any business activity other than
acquiring and holding the Trust Property, issuing the Certificates and the
Notes, distributing payments thereon and engaging in other activities that are
necessary, suitable or convenient to accomplish the foregoing or are incidental
thereto.
Each Note will be secured by the pledge of the Trust Property by the
Trust to the Trust Collateral Agent for the benefit of the Indenture Trustee,
on behalf of the Noteholders, and the Insurer. The Trust Property will include
(i) the Receivables, (ii) all monies paid or payable thereunder on or after the
applicable Cut-off Date, (iii) an assignment of the security interests of NAFI
in the Financed Vehicles, (iv) the Receivable Files, (v) such assets as shall
from time to time be deposited in the Collection Account (the "Collection
Account"), the Distribution Account (the "Distribution Account"), the Note
Distribution Account (the "Note Distribution Account"), the Pre-Funding Account
and the Pre-Funding Period Reserve Account (as defined herein), each
established pursuant to the Sale and Servicing Agreement or the Indenture, (vi)
property that secured a Receivable and that has been acquired by repossession
or otherwise, (vii) all rights to insurance proceeds and liquidation proceeds
with respect to the Receivables and the Financed Vehicles, (viii) certain
rights of NAFI against Dealers under the Dealer Agreements and against
Originators under the Originator Agreements, (ix) all right, title and interest
of the Seller in and to the Purchase Agreements, (x) certain other rights under
the Sale and Servicing Agreement in respect of representations and warranties
made by the Seller regarding the Receivables and (xi) the income and proceeds
of the foregoing and any and all rights to enforce the foregoing. See "The
Receivables" and "Description of the Purchase Agreements and the Trust
Documents - Collections" in the accompanying Prospectus.
Prior to the Servicing Transfer Date, OFSA, as custodian on behalf of
the Trust (the "Custodian"), will hold the original installment sales contract
as well as copies of documents and instruments relating to each Receivable and
evidencing the security interest in the Financed Vehicle securing each
Receivable (the "Receivable Files"). In connection with the Servicing Transfer
Date, OFSA will transfer the Receivable Files to the Trust Collateral Agent,
and the Trust Collateral Agent, or a custodian on behalf of the Trust
Collateral Agent, will thereafter maintain possession of the Receivable Files.
In order to protect the Trust's ownership interest in the Receivables and the
Trust Collateral Agent's security interest in the Receivables, the NAFI
Transferors and the Seller will each file UCC-1 financing statements in Florida
and Delaware to give notice of the Trust's ownership of the Receivables and the
related Trust Property and the Trust will file UCC-1 financing statements in
S-16
<PAGE> 17
Florida and Delaware to give notice of the Trust Collateral Agent's security
interest in the Trust Property for the benefit of the Indenture Trustee and the
Certificate Insurer.
THE OWNER TRUSTEE
Wilmington Trust Company, the Owner Trustee under the Trust Agreement,
is a Delaware banking corporation and its principal offices are located at 1100
North Market Street, Rodney Square North, Wilmington, DE, 19890. The Owner
Trustee will perform limited administrative functions under the Trust
Agreement. The Owner Trustee's duties in connection with the issuance and sale
of the Notes is limited solely to the express obligations of the Owner Trustee
set forth in the Trust Agreement and the Sale and Servicing Agreement.
THE INDENTURE TRUSTEE
Harris Trust and Savings Bank is the Indenture Trustee (the "Indenture
Trustee") under the Indenture, the Trust Collateral Agent (the "Trust
Collateral Agent") under the Sale and Servicing Agreement and the Collateral
Agent (the "Collateral Agent")) under the Spread Account Agreement. Harris
Trust and Savings Bank is an Illinois banking association the principal offices
of which are located at 311 West Monroe Street, Chicago, Illinois 60606
(telephone (312) 461-4662).
USE OF PROCEEDS
The net proceeds to be received by the Seller from the sale of the
Notes will be applied (i) to the purchase of the Receivables from Funding Trust
II, (ii) to make the initial deposit to the Spread Account, (iii) to make the
deposit of the Pre-Funded Amount to the Pre-Funding Account and (iv) to make
the initial deposit to the Pre-Funding Period Reserve Account. Substantially
all of the proceeds of the sale of the Initial Receivables by Funding Trust II
to the Seller will be distributed to First Union National Bank of North
Carolina as holder of the most senior class of certificates issued by a trust
with respect to which Funding Trust II acts as depositor. First Union National
Bank of North Carolina is an affiliate of the Underwriter.
THE RECEIVABLES POOL
GENERAL
The Seller will acquire (i) the Initial Receivables from National
Financial Auto Funding Trust II ("Funding Trust II"), a Delaware business trust
wholly-owned by NAFI and affiliates of NAFI, on the Closing Date pursuant to
the Sale Agreement and (ii) the Additional Receivables from NAFI pursuant to a
Purchase and Contribution Agreement, dated as of the Closing Date (the
"Purchase Agreement" and, together with the Sale Agreement, the "Purchase
Agreements") between the Seller and NAFI. NAFI and Funding Trust II, in their
capacities as transferors of the Receivables to the Seller, are herein referred
to collectively as the "NAFI Transferors." The Initial Receivables represent,
as of the Initial Cut-off Date, and the Subsequent Receivables will represent,
as of the related Subsequent Cut-off Date, a substantial portion of NAFI's
retail motor vehicle installment sale contracts which (a) are secured by a new
or used automobile, light-duty truck, van or minivan, (b) have a remaining
maturity, original maturity and an APR at origination within the ranges set
forth in this paragraph, (c) are dated on or after January 28, 1995, (d) were
not more than 30 days delinquent as of the Initial Cut-off Date or the
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<PAGE> 18
Subsequent Cut-off Date, as the case may be, and (e) satisfy the
representations and warranties required to be made with respect thereto under
the Sale and Servicing Agreement. Approximately 80.25% of the Receivables (by
outstanding principal balance as of the Initial Cut-off Date) were acquired by
NAFI from Dealers pursuant to Dealer Agreements and the balance of the
Receivables were acquired by NAFI from other Originators pursuant to Originator
Agreements. As of the Initial Cut-off Date, approximately 97.83% of the
Receivables (by outstanding principal balance) were fully amortizing with level
payments over their terms. As of the Initial Cut-off Date, Initial Receivables
representing approximately 80.45% of the outstanding principal balance of the
Initial Receivables were secured by Financed Vehicles that were used vehicles
at the time of origination and the remainder were secured by Financed Vehicles
that were new at such time. All Initial Receivables have an APR of at least
14.00% and not more than 29.00% and the weighted average APR of the Initial
Receivables is approximately 19.38%. The Initial Receivables had remaining
scheduled maturities as of the Initial Cut-off Date of at least 5 months but
not more than 60 months and original maturities of at least 10 months but not
more than 60 months. The final scheduled payment date on the Initial Receivable
with the latest maturity is June 29, 2002. The weighted average remaining
scheduled maturity of the Initial Receivables as of the Initial Cut-off Date
was approximately 50.31 months. The average outstanding principal balance per
Initial Receivable as of the Initial Cut-off Date was approximately $11,618.57.
Initial Receivables providing for payment according to the simple interest and
the actuarial method represent approximately 99.93% and 0.07%, respectively, of
the aggregate principal balance of the Initial Receivables as of the Initial
Cut-off Date. Based upon the Servicer's billing records, the Dealers and
Originators with respect to the Initial Receivables were domiciled in 31 states
as of the Initial Cut-off Date.
COMPOSITION OF INITIAL RECEIVABLES AS OF THE INITIAL CUT-OFF DATE
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
ANNUAL PERCENTAGE NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE
RATE OF RECEIVABLES AGGREGATE PRINCIPAL RECEIVABLES IN AVERAGE PRINCIPAL ORIGINAL TERM TO REMAINING TERM TO
(RANGE)(1) BALANCE POOL BALANCE MATURITY (RANGE)(1) MATURITY (RANGE)(1)
------------------- ------------------- -------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
19.38% $66,156,163.54 5,694 $11,618.57 53.88 Mo. 50.31 Mo.
(14.00 - 29.00%) (10 - 60 Mo.) (5 - 60 Mo.)
</TABLE>
- --------------------------------------------------------
(1) Based on outstanding principal balance of Initial Receivables as of the
Initial Cut-off Date.
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<PAGE> 19
The following table sets forth information, as of the Initial Cut-off Date,
regarding the number, outstanding principal balances and percentages of the
Pool Outstanding Principal Balance of the Initial Receivables in each of the
states listed below, determined on the basis of the geographic location of the
applicable Dealer or Originator as reflected in the records of the Servicer.
<TABLE>
<CAPTION>
OUTSTANDING WEIGHTED AVERAGE
NUMBER OF PRINCIPAL PERCENTAGE OF POOL ORIGINAL TERM TO
STATE LOANS BALANCE OUTSTANDING PRINCIPAL BALANCE MATURITY IN MONTHS
----- --------- --------- ----------------------------- ------------------
<S> <C> <C> <C> <C>
Arizona 132 $ 1,245,220 1.88% 53.55
California 345 3,601,246 5.44% 52.60
Connecticut 8 107,807 0.16% 52.18
Florida 586 6,724,396 10.16% 53.72
Georgia 1,328 16,638,114 25.15% 54.91
Idaho 2 18,463 0.03% 49.76
Illinois 18 153,637 0.23% 54.04
Indiana 59 502,850 0.76% 49.50
Iowa 11 84,159 0.13% 47.85
Kansas 9 98,993 0.15% 55.01
Kentucky 5 39,605 0.06% 42.24
Louisiana 16 212,504 0.32% 56.98
Massachusetts 4 25,515 0.04% 42.68
Maryland 130 1,517,515 2.29% 54.37
Maine 2 23,502 0.04% 48.00
Missouri 80 978,301 1.48% 55.04
Mississippi 15 155,305 0.23% 50.99
North Carolina 889 11,428,813 17.28% 55.33
New Hampshire 2 10,332 0.02% 30.00
New Jersey 75 1,106,737 1.67% 56.37
New Mexico 1 9,835 0.01% 48.00
New York 22 320,258 0.48% 57.72
Ohio 22 263,516 0.40% 53.45
Oklahoma 31 323,336 0.49% 49.84
Pennsylvania 567 3,761,576 5.69% 41.63
South Carolina 418 5,159,059 7.80% 54.97
South Dakota 1 3,620 0.01% 30.00
Tennessee 129 1,830,102 2.77% 56.89
Texas 463 5,717,232 8.64% 54.15
Virginia 323 4,087,159 6.18% 55.19
Washington 1 7,454 0.01 48.00
-------- ----------- ------ -----
Total 5,694 $66,156,164 100.00% 53.88
</TABLE>
<TABLE>
<CAPTION>
FINAL SCHEDULED
WEIGHTED AVERAGE AVERAGE OUTSTANDING WEIGHTED PAYMENT DATE OF
REMAINING MATURITY OF PRINCIPAL BALANCE AVERAGE RECEIVABLE WITH
RECEIVABLES IN MONTHS OF RECEIVABLES APR LATEST MATURITY
--------------------- ------------------- -------- ---------------
<S> <C> <C> <C> <C>
Arizona 44.47 $ 9,433 23.97% 11/29/2001
California 46.73 10,438 20.16% 06/17/2002
Connecticut 51.78 13,476 16.70% 06/20/2002
Florida 49.98 11,475 20.05% 06/22/2002
Georgia 51.77 12,529 19.11% 06/28/2002
Idaho 38.76 9,231 21.00% 01/13/2001
Illinois 43.24 8,535 23.05% 11/07/2001
Indiana 40.78 8,523 20.77% 06/16/2002
Iowa 36.18 7,651 21.47% 02/28/2001
Kansas 53.89 10,999 18.00% 05/27/2002
Kentucky 34.26 7,921 21.00% 11/29/2000
Louisiana 55.32 13,282 18.62% 05/27/2002
Massachusetts 33.74 6,379 18.77% 11/13/2000
Maryland 50.48 11,673 19.78% 06/17/2002
Maine 47.00 11,751 18.00% 05/29/2001
Missouri 52.83 12.229 18.29% 06/20/2002
Mississippi 45.16 10,354 20.02% 04/29/2002
North Carolina 52.53 12,856 18.75% 06/27/2002
New Hampshire 28.03 5,166 21.00% 12/17/1999
New Jersey 55.49 14,756 19.58% 06/28/2002
New Mexico 48.00 9,835 18.00% 06/10/2001
New York 57.15 14,557 18.96% 06/20/2002
Ohio 48.89 11,978 20.99% 06/25/2002
Oklahoma 47.56 10,430 19.01% 06/09/2002
Pennsylvania 38.77 6,634 20.04% 06/20/2002
South Carolina 52.01 12,342 19.22% 06/28/2002
South Dakota 16.00 3,620 21.00% 10/15/1998
Tennessee 54.07 14,187 18.42% 06/25/2002
Texas 49.17 12,348 18.96% 06/28/2002
Virginia 51.78 12,654 19.49% 06/29/2002
Washington 36.00 7,454 21.00% 05/22/2000
----- --------- ----- ----------
Total 50.31 $ 11,619 19.38% 06/29/2002
</TABLE>
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<PAGE> 20
DISTRIBUTION OF THE INITIAL RECEIVABLES BY APR AS OF THE INITIAL CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENTAGE OF WEIGHTED AVERAGE
POOL WEIGHTED AVERAGE ORIGINAL REMAINING TERM TO
OUTSTANDING OUTSTANDING TERM TO MATURITY IN MATURITY OF
NUMBER OF PRINCIPAL PRINCIPAL ------------------- RECEIVABLES IN
APR RECEIVABLES BALANCE BALANCE MONTHS MONTHS
--- ----------- ----------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
14.000 1 $ 14,779 0.02% 60.00 56.00
14.001 - 15.000 5 86,057 0.13% 60.00 56.30
15.001 - 16.000 8 126,023 0.19% 60.00 57.71
16.001 - 17.000 665 10,425,615 15.76% 59.61 56.98
17.001 - 18.000 1,143 15,634,364 23.63% 57.30 54.28
18.001 - 19.000 1,292 16,583,053 25.07% 56.13 52.94
19.001 - 20.000 313 3,554,659 5.37% 51.17 47.62
20.001 - 21.000 1,089 8,499,141 12.85% 45.17 39.14
21.001 - 22.000 428 4,680,979 7.08% 50.12 47.46
22.001 - 23.000 23 230,738 0.35% 50.93 45.97
23.001 - 24.000 184 1,753,953 2.65% 52.07 44.32
24.001 - 25.000 390 3,461,555 5.23% 44.75 41.73
25.001 - 26.000 64 500,129 0.76% 44.71 36.72
26.001 - 27.000 33 234,677 0.35% 38.24 33.94
27.001 - 28.000 46 297,724 0.45% 34.17 31.73
28.001 - 29.000 10 72,719 0.11% 38.63 32.00
Total 5,694 $66,156,164 100.00% 53.88 50.31
</TABLE>
<TABLE>
<CAPTION>
AVERAGE
OUTSTANDING FINAL SCHEDULED PAYMENT DATE
PRINCIPAL BALANCES OF RECEIVABLE WITH LATEST
APR OF RECEIVABLES MATURITY
--- ----------- -----------------------
<S> <C> <C>
14.000 $14,779 02/28/2002
14.001 - 15.000 17,211 06/20/2002
15.001 - 16.000 15,753 05/18/2002
16.001 - 17.000 15,678 06/29/2002
17.001 - 18.000 13,678 06/28/2002
18.001 - 19.000 12,835 06/27/2002
19.001 - 20.000 11,357 06/25/2002
20.001 - 21.000 7,805 06/17/2002
21.001 - 22.000 10,937 06/28/2002
22.001 - 23.000 10,032 05/21/2002
23.001 - 24.000 9,532 06/22/2002
24.001 - 25.000 8,876 06/14/2002
25.001 - 26.000 7,815 04/19/2001
26.001 - 27.000 7,111 03/14/2002
27.001 - 28.000 6,472 05/13/2002
28.001 - 29.000 7,272 09/05/2000
Total $11,619 06/29/2002
</TABLE>
S-20
<PAGE> 21
ORIGINATOR CONCENTRATION
Two Originators originated approximately 4.42% and 4.38%,
respectively, of the aggregate principal balance of the Initial Receivables as
of the Initial Cut-off Date. No other Originator, Dealer or group of affiliated
Dealers originated more than 3.24% of the aggregate principal balance of the
Initial Receivables as of the Initial Cut-off Date. The failure of any one or
more Originators or Dealers to repurchase Receivables under an Originator
Agreement or Dealer Agreement with NAFI upon breaches of representations or
warranties made with respect thereto could materially and adversely impact
NAFI's ability to honor any corresponding repurchase obligation under the Trust
Documents and consequently the Seller's ability to honor any corresponding
retransfer obligation under the Trust Documents. Although NAFI historically has
not had any material problems with Originators or Dealers failing to honor
their repurchase obligations, no representations are made as to the financial
condition of any Originator or Dealer and no assurance can be given that any
Originator or Dealer from whom NAFI purchased Receivables will have the
financial ability to perform its repurchase obligations, if any, under its
Originator Agreement or Dealer Agreement, as applicable. In the event that full
payment of a Receivable required to be retransferred to the Seller is not
received, the Seller defaults in its obligation to accept a retransfer of such
Receivable, the obligor under such Receivable defaults thereon and the Insurer
fails to pay any claim under the Policy, Noteholders may sustain a loss of
principal and interest on their Notes.
AVERAGE LIFE OF THE RECEIVABLES
As of the Initial Cut-off Date, the weighted average remaining
scheduled maturity of the Initial Receivables was approximately 50.31 months,
based on the following assumptions: (i) the Initial Receivables have the
characteristics described herein, (ii) all scheduled payments on the Initial
Receivables will be made on the last day of each month, and (iii) no principal
prepayments in full (including prepayments resulting from defaults, from
repurchases of Initial Receivables by the Seller or the Servicer and from the
application of insurance proceeds) will be made on the Initial Receivables.
As described in the related Prospectus under the caption "The
Receivables - Types of Receivables - Simple Interest Receivables," additional
payments may be scheduled at the maturity dates of certain Receivables as a
result of late payments thereon, which could have the effect of extending the
weighted average remaining scheduled maturity of the Receivables at any given
time. In addition, the maturity dates of the Receivables may be extended under
the circumstances described in the accompanying Prospectus under the caption
"Description of the Purchase Agreements and the Trust Documents - Collection
and Servicing Procedures."
Prepayments on automobile receivables can be measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
Absolute Prepayment Model ("ABS"), represents an assumed rate of prepayment
each month relative to the original number of receivables in a pool of
receivables. ABS further assumes that all the receivables are the same size in
a given assumed pool and amortize at the same rate and that each receivable in
each month of its life will either be paid as scheduled or be prepaid in full.
For example, in a pool of receivables originally containing 10,000 receivables,
a 1% ABS rate means that 100 receivables prepay each month. ABS does not
purport to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of receivables, including the
Receivables.
The table captioned "Percent of Initial Note Principal Balance at
Various ABS Percentages" (the "ABS Table") has been prepared on the basis of
the following assumptions: (i) the closing date for
S-21
<PAGE> 22
the Notes occurs on July 23, 1997, (ii) distributions on the Notes are made on
the 21st day of each month regardless of the day on which the Distribution Date
actually occurs, commencing on August 21, 1997, (iii) no delinquencies or
defaults in the payment of principal and interest on the Receivables are
experienced, (iv) no Receivable is repurchased for breach of representation and
warranty or otherwise, (v) the Cut-off Date for the Initial Receivables is June
29, 1997, (vi) the Due Period related to each Distribution Date is the calendar
month preceding the month in which such Distribution Date occurs (or, in the
case of the initial Distribution Date, from and including the Initial Cut-off
Date to July 31, 1997), (vii) during the Pre-Funding Period new Receivables are
transferred to the trust with an Additional Receivables Purchase Price equal to
the Pre-Funded Amount in four equal monthly transfers, with a term of 51 months
and an APR of 19.38% per annum, (viii) prepayments on the Receivables are
received on the last day of each month at the indicated ABS prepayment speed,
(ix) the Interest Rate is % per annum, (x) the Servicing Fee is 2% per annum,
(xi) no Event of Default under the Indenture occurs, (xii) the fees of the
Indenture Trustee, the Owner Trustee, the Trust Collateral Agent and the
Collateral Agent are cumulatively $6,000 per annum, (xiii) the Insurer receives
a monthly fee based on the outstanding insured Note balance, (xiv) the contract
pool is comprised of 69 pools stratified by the remaining term (i.e., the
period from the payment date with respect to which the most recent payment on
the Receivable was received to the maturity of such Receivable) of the
Receivables, and whether they are fully amortizing or balloon loans, (xv)
scheduled payments on each of the Receivables are timely received and (xvi) no
Servicer Termination Event, Optional Redemption or Mandatory Redemption occurs
(collectively, the "Modeling Assumptions").
The ABS Table indicates, based on the assumptions set forth above, the
percentages of the initial principal amount of Note Balance of the Notes that
would be outstanding after each of the Distributions Dates shown at various
percentages of ABS and the corresponding weighted average lives of such Notes.
The actual characteristics and performance of the Receivables will differ from
the assumptions used in constructing the ABS Table. The assumptions used are
hypothetical and have been provided only to give a general sense of how the
principal cash flows might behave under varying prepayment scenarios. For
example, it is very unlikely that the Receivables will prepay at a constant
level of ABS until maturity or that all of the Receivables will prepay at the
same level of ABS. Moreover, the diverse terms of the Receivables could produce
slower or faster principal distributions than indicated in the ABS Table at the
various constant percentages of ABS specified, even if the original and
remaining terms to maturity of the Receivables are as assumed. Any difference
between such assumptions and the actual characteristics and performance of the
Receivables, or actual prepayment experience, will affect the percentages of
initial balances outstanding over time and the weighted average lives of the
Notes.
S-22
<PAGE> 23
PERCENT OF INITIAL NOTE BALANCE AT VARIOUS ABS PERCENTAGES
<TABLE>
<CAPTION>
Distribution Date 0.0% 1.0% 1.5% 1.7% 2.0%
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Closing Date............... 100.00% 100.00% 100.00% 100.00% 100.00%
8/21/97.................... 98.73 97.80 97.31 97.10 96.79
11/21/97................... 94.62 90.90 88.94 88.13 86.90
2/21/98.................... 90.10 83.73 80.37 79.00 76.89
5/21/98.................... 85.36 76.64 72.05 70.17 67.30
8/21/98.................... 80.39 69.65 64.01 61.70 58.18
11/21/98................... 75.19 62.78 56.28 53.62 49.56
2/21/99.................... 69.79 56.08 48.90 45.97 41.50
5/21/99.................... 64.16 49.55 41.91 38.79 34.04
8/21/99.................... 58.37 43.24 35.36 32.14 27.24
11/21/99................... 52.41 37.19 29.27 26.05 21.15
2/21/2000.................. 46.35 31.44 23.70 20.56 15.79
5/21/2000.................. 40.24 26.04 18.70 15.72 11.22
8/21/2000.................. 34.14 21.03 14.28 11.55 7.43
11/21/2000................. 28.17 16.48 10.48 8.06 4.43
2/21/2001.................. 22.39 12.39 7.29 5.25 2.20
5/21/2001.................. 16.90 8.83 4.72 3.08 0.74
8/21/2001.................. 11.79 5.78 2.74 1.54 0.11
11/21/2001................. 7.00 3.20 1.30 0.56 0.01
02/21/2002................. 3.22 1.36 0.45 0.11 0.00
05/21/2002................. 0.81 0.32 0.08 0.00 0.00
08/21/2002................. 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ----- -----
Weighted Average Life (1) 2.44 1.98 1.74 1.64 1.50
</TABLE>
(1) The weighted average life of a Note is determined by (i) multiplying
the amount of each principal payment on a Note by the number of years
from the date of the issuance of the Note to the related Distribution
Date, (ii) adding the results and (iii) dividing the sum by the
related initial principal amount of the Note.
The Seller does not believe that the timing of principal payments on
the Receivables will have a material impact on the yield to the initial
purchasers of the Notes, unless the Notes initially are purchased at a premium
or a discount. No assurance can be given, and no prediction can be made, as to
the actual prepayment experience on the Receivables.
CHARACTERISTICS OF SUBSEQUENT RECEIVABLES
After the transfer of Subsequent Receivables to the Trust during the
Pre-Funding Period, the weighted average APR of the Receivables may be as low
as 18.00%, the weighted average remaining term of the Receivables may be as
high as 55 months, the percentage of the aggregate outstanding principal
balance of the Receivables represented by Receivables relating to loans for the
purchase of used Financed Vehicles may be as high as 80% and the final
scheduled payment date on the Receivable with the latest maturity date may be
as late as October 30, 2002.
S-23
<PAGE> 24
DELINQUENCY, REPOSSESSION AND LOSS INFORMATION
The following table sets forth delinquency, repossession and loss
information since the month following NAFI's commencement of operations in
October 1994 to March 31, 1997, with respect to NAFI's serviced portfolio of
motor vehicle retail installment sale contracts (including those previously
sold by NAFI to or held by the Seller or transferred to Funding Trust II). The
sum of the individual balances and percentages set forth on the following table
may not equal the total due to rounding.
DELINQUENCY AND LOSS EXPERIENCE
(dollars in thousands)
<TABLE>
<CAPTION>
12/31/94 3/31/95 6/30/95 9/30/95 12/31/95
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Cumulative Principal Amount Outstanding $3,808 $13,112 $23,237 $35,001 $43,145
Average Principal Amount Outstanding
For the Quarter Ended $1,904 $ 8,460 $18,175 $29,119 $39,073
Cumulative Number of Loans Outstanding 300 1,081 1,957 2,877 3,586
Average Number of Loans Outstanding 150 691 1,519 2,417 3,232
Number of Repossessions For the Quarter
Ended 0 5 23 47 96
Principal Amount of Repossessions For the
Quarter Ended 0 $ 65 $ 279 $ 591 $ 1,097
Number of Repossessions as a Percent of
Average Number of Loans Outstanding 0.00% 0.72% 1.51% 1.94% 2.97%
Principal Amount of Repossessions as a
Percent of Average Principal Amount Outstanding 0.00% 0.77% 1.53% 2.03% 2.81%
Net Losses For the Quarter Ended (2) $ 0 $ 2 $ 30 $ 212 $ 438
Net Losses as a Percent of Principal
Amount Outstanding (Annualized) (2) 0.00% 0.06% 0.51% 2.43% 4.06%
Delinquencies (1)
31 to 60 days $ 0 $ 140 $ 352 $ 785 $ 2,148
61 to 90 days 0 0 22 137 157
91 days or over 0 0 0 17 46
------ ------- ------- ------- -------
Total Delinquencies over 30 days $ 0 $ 140 $ 374 $ 939 $ 2,351
Delinquencies as a Percentage of the
Cumulative Principal Amount Outstanding
For the Quarter Ended (1)
31 to 60 days 0.00% 1.06% 1.52% 2.24% 4.98%
61 to 90 days 0.00% 0.00% 0.09% 0.39% 0.36%
91 days or over 0.00% 0.00% 0.00% 0.05% 0.11%
Total 0.00% 1.06% 1.61% 2.68% 5.45%
</TABLE>
<TABLE>
<CAPTION>
3/31/96 6/30/96 9/30/96 12/31/96 3/31/97
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Cumulative Principal Amount Outstanding $53,534 $66,397 $82,792 $102,852 $127,094
Average Principal Amount Outstanding
For the Quarter Ended $48,340 $59,966 $74,595 $ 92,822 $114,793
Cumulative Number of Loans Outstanding 4,567 5,774 7,286 9,063 11,321
Average Number of Loans Outstanding 4,077 5,171 6,530 8,175 10,192
Number of Repossessions For the Quarter
Ended 113 117 196 287 352
Principal Amount of Repossessions For the
Quarter Ended $ 1,298 $ 1,451 $ 2,180 $ 3,066 $ 3,892
Number of Repossessions as a Percent of
Average Number of Loans Outstanding 2.77% 2.26% 3.00% 3.51% 3.45%
Principal Amount of Repossessions as a
Percent of Average Principal Amount Outstanding 2.68% 2.42% 2.92% 3.30% 3.39%
Net Losses For the Quarter Ended (2) $ 665 $ 460 $ 763 $ 958 $ 1,864
Net Losses as a Percent of Principal
Amount Outstanding (Annualized) (2) 4.97% 2.77% 3.69% 3.73% 5.87%
Delinquencies (1)
31 to 60 days $ 2,057 $ 2,663 $ 4,481 $ 6,104 $ 6,816
61 to 90 days 212 587 1,151 1,596 1,500
91 days or over 164 64 295 487 1,854
------- ------- ------- -------- --------
Total Delinquencies over 30 days $ 2,433 $ 3,314 $ 5,927 $ 8,187 $ 10,170
Delinquencies as a Percentage of the
Cumulative Principal Amount Outstanding
For the Quarter Ended (1)
31 to 60 days 3.84% 4.01% 5.41% 5.93% 5.36%
61 to 90 days 0.40% 0.88% 1.39% 1.55% 1.18%
91 days or over 0.31% 0.10% 0.36% 0.47% 1.46%
Total 4.54% 4.99% 7.16% 7.95% 8.00%
</TABLE>
- ---------------
(1) Delinquent figures reported exclude contracts as to which the cumulative
amount of payments over 30 days delinquent is less than or equal to $40.
(2) A "Net Loss" with respect to a contract charged off during a period equals
the outstanding principal balance thereof, together with earned interest
thereon to the date of default and the expenses of liquidation, less recoveries
in respect of such Receivable.
S-24
<PAGE> 25
NAFI commenced operations in September of 1994. Accordingly, its
historical delinquency, repossession and loss experience is limited. No
assurance can be given that the delinquency, repossession and loss experience
on the Receivables will be as favorable as the experience indicated in the
foregoing tables, especially in light of such limited historical experience. In
addition, factors that may have a material impact upon loss and delinquency
experience may vary over time. For example, NAFI has over time (a) placed an
increased emphasis on credit scoring in its underwriting process, (b)
significantly expanded its geographic and Dealer origination base and (c)
financed an increasing percentage of used versus new motor vehicles.
The delinquency and loan loss experience described above should be
considered in light of the average maturity of the Receivables in each of the
respective periods, which reflect the addition of new Receivables in such
periods. NAFI's experience, and the experience of the non-prime auto finance
industry as a whole, has been that the rate of losses and delinquencies for
non-prime motor vehicle installment sale contracts generally will increase for
a period following origination before levelling and declining as such contracts
approach maturity. Accordingly, the annual loss and delinquency rates reflected
in the preceding table would be higher but for the effect of recently
originated contracts which exhibit relatively low loss and delinquency rates
early in their terms. Following the Pre-Funding Period, the rate of losses and
delinquencies on the Receivables pool as a whole will likely increase and
exceed the rates reflected in the preceding table for the period during which
the median age of the Receivables approximates the aging of non-prime motor
vehicle retail installment sale contracts during their period of maximum
expected losses and delinquencies.
NAFI and the Seller have agreements with the Insurer in connection
with certain prior securitizations that permit the Insurer to exercise certain
remedies in the event that delinquencies, defaults or net losses on the related
portfolio of receivables exceed established levels (such events, "portfolio
performance defaults"). Such remedies include the deposit to the related spread
account of funds otherwise distributable to the Seller, termination of the
Servicer and, in certain instances, liquidation of the receivables and
prepayment of the related securities. There have occurred certain portfolio
performance defaults with respect to one of the prior securitizations. As a
consequence, the reserve level required to be maintained in the related spread
account has increased in accordance with the terms of the related spread
account agreement. NAFI believes that such increase has not had and will not
have a material effect on its business or its expansion plans, including its
securitization program. The Insurer has waived certain other remedies available
to it in respect of such portfolio performance defaults. However, an increase
in delinquencies, defaults or net losses on the portfolios of receivables
relating to such prior securitizations may result in an Insurance Agreement
Event of Default under both the prior securitizations and the securitization
described in this Prospectus Supplement.
SERVICING TRANSFER
NAFI is in the process of establishing a servicing center in
Jacksonville, Florida that will assume all servicing functions currently
performed by OFSA. Upon the commencement of operations of the servicing center
(the "Servicing Transfer Date") OFSA will be terminated as subservicer and will
have no further obligation to subservice NAFI portfolio of motor vehicle retail
installment sale contracts (including the Receivables) other than certain
limited transitional obligations. NAFI anticipates that certain of the
servicing procedures that it will employ following the Servicing Transfer Date
may be different than those employed by OFSA. There can be no assurance that
NAFI will be able to successfully implement such servicing procedures or that
such procedures will result in a level of servicing comparable to that provided
by OFSA during the periods reflected in the delinquency, repossession and loss
data included herein under the caption "The Receivables Pool". Even if NAFI is
ultimately able to successfully establish its servicing
S-25
<PAGE> 26
center, the transfer of certain servicing functions from OFSA to NAFI could
encounter operational and logistical difficulties that would impair servicing
of the Receivables during the servicing transition period. Industry experience
indicates that increases in delinquencies and defaults are likely to result
immediately following servicing transfers.
Commencing in January 1997 NAFI increased its involvement in the
management and servicing of delinquent accounts and the liquidation of
repossessed vehicles. NAFI currently has 26 employees devoted exclusively to
supplementing OFSA's servicing activities for the NAFI'S portfolio. NAFI
believes that this pre-transition assumption of certain servicing functions
previously performed by OFSA may help mitigate any increase in delinquencies
and defaults associated with the transfer of servicing from OFSA to NAFI.
NAFI anticipates that its servicing center will become fully
operational during the fourth quarter of the calendar year 1997 and that all
servicing functions currently provided by OFSA will be transferred to NAFI on
or about such date. However, there can be no assurance that the servicing
center will be fully operational by such date or that delays in the servicing
transfer (and consequently an extension of the transition period) will not
adversely affect the servicing of the Receivables. As of the date of this
Prospectus Supplement, NAFI remains substantially dependent upon OFSA to
provide day-to-day servicing functions with respect to its portfolio of motor
vehicle retail installment sale contracts. In connection with the Servicing
Transfer Date, OFSA will transfer the Receivable Files to the Trust Collateral
Agent and the Trust Collateral Agent, or a custodian on behalf of the Trust
Collateral Agent, will thereafter maintain possession of the Receivable Files.
THE SELLER
National Financial Auto Funding Trust (the "Seller") is a Delaware
business trust 100% of the beneficial ownership of which is owned by NAFI and
affiliates of NAFI. The Seller is organized for the limited purposes of
purchasing motor vehicle retail installment sale contracts, transferring such
contracts to third parties, forming trusts and engaging in related activities.
The principal office of the Seller is located at One Park Place, Suite 200, 621
N.W. 53rd Street, Boca Raton, Florida, 33487, and its telephone number at such
office is (800) 999-7535.
NATIONAL AUTO FINANCE COMPANY, INC.
NAFI will act as servicer (in such capacity, the "Servicer") of the
Receivables pursuant to the Sale and Servicing Agreement. NAFI is a corporation
organized under the laws of the State of Delaware. Prior to January 1997 the
business of NAFI was conducted by two affiliated limited partnerships: National
Auto Finance Company L.P., organized under the laws of the State of Delaware in
September 1994, and Auto Credit Clearinghouse L.P., organized under the laws of
the State of Delaware in September 1995. NAFI was incorporated in October 1996.
The principal business of NAFI is to acquire from automobile dealers
and service motor vehicle retail installment sale and lease contracts. In
addition, NAFI has initiated a program for the strategic purchase of bulk
portfolios of non-prime motor vehicle retail installment sales contracts from
third party consumer finance companies and financial institutions. As of May
31, 1997 NAFI had purchased approximately $19,040,244.31 million aggregate
principal amount of motor vehicle retail installment sales contracts pursuant
to this portfolio acquisition program. As of March 31, 1997, NAFI had gross
assets of $44,304,000 and total stockholders equity of $23,175,000. Receivables
transferred by NAFI to the Seller and Funding Trust II in connection with
securitization
S-26
<PAGE> 27
of such Receivables are deemed to have been sold by NAFI under generally
accepted accounting principles and accordingly are not included among NAFI's
assets (other than the ratable portion of such Receivables represented by the
Seller's and Funding Trust II's respective retained interests in such
securitizations). The common stock of NAFI is quoted on The Nasdaq Stock
Market's National Market under the symbol "NAFI." NAFI is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith files reports and other information with the
Securities and Exchange Commission. NAFI's principal office is located at One
Park Place, 621 N.W. 53rd Street, Suite 200, Boca Raton, Florida 33487, and its
telephone number at such office is (800) 999-7535.
OMNI FINANCIAL SERVICES OF AMERICA, INC. ("OFSA)
Prior to the Servicing Transfer Date, Omni Financial Services of
America, Inc., a Delaware corporation ("OFSA"), will act as subservicer of the
Receivables pursuant to a subservicing agreement between OFSA and NAFI. Prior
to the Servicing Transfer Date, the Servicer and OFSA will maintain files
relating to the Receivables at the Memphis service center and will coordinate
servicing for the Receivables at such office.
OFSA is a wholly-owned subsidiary of World Omni Financial Corp., a
Florida corporation ("World Omni"). OFSA was incorporated in July 1995
primarily to service subprime retail motor vehicle contracts, including the
Receivables. OFSA currently has 168 employees operating at a new service center
in Memphis, Tennessee and was servicing approximately 63,700 retail and lease
contracts with an aggregate outstanding principal balance of approximately
$722,900,000 million. The address of the Memphis service center is 1769 Paragon
Avenue, Memphis, Tennessee 38132, and its telephone number is (901) 344-7200.
The information provided in the preceding paragraph was provided by
OFSA. The Issuer has made no independent verification of the accuracy or
completeness of such information.
THE INSURER
GENERAL
Financial Security is a monoline insurance company incorporated in
1984 under the laws of the State of New York. Financial Security is licensed to
engage in financial guaranty insurance business in all 50 states, the District
of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities--thereby enhancing the credit rating of those
securities--in consideration for the payment of a premium to the insurer.
Financial Security and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are generally
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of
general obligation bonds, special revenue bonds and other special obligations
of state and local governments. Financial Security insures both newly issued
securities sold in the primary market
S-27
<PAGE> 28
and outstanding securities sold in the secondary market that satisfy Financial
Security's underwriting criteria.
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings,
Inc., U S WEST Capital Corporation and The Tokio Marine and Fire Insurance Co.,
Ltd. No shareholder of Holdings is obligated to pay any debt of Financial
Security or any claim under any insurance policy issued by Financial Security
or to make any additional contribution to the capital of Financial Security.
The principal executive offices of Financial Security are located at
350 Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by Financial
Security or any of its domestic operating insurance company subsidiaries are
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, Financial Security
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with other reinsurers under various quota share treaties and
on a transaction-by-transaction basis. Such reinsurance is utilized by
Financial Security as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit Financial
Security's obligations under any financial guaranty insurance policy.
RATINGS OF CLAIMS-PAYING ABILITY
Financial Security's claims-paying ability is rated "Aaa" by Moody's
and "AAA" by S&P, Nippon Investors Service Inc. and Standard & Poor's
(Australia) Pty. Ltd. Such ratings reflect only the views of the respective
rating agencies, are not recommendations to buy, sell or hold securities and
are subject to revision or withdrawal at any time by such rating agencies. See
"Risk Factors - Ratings on Notes" herein.
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CAPITALIZATION
The following table sets forth the capitalization of Financial
Security and its wholly owned subsidiaries on the basis of generally accepted
accounting principles as of March 31, 1997 (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------
(UNAUDITED)
<S> <C>
Deferred Premium Revenue (net of
prepaid reinsurance premiums) $ 361,589
-----------
Shareholder's Equity:
Common Stock 15,000
Additional Paid-In Capital 654,127
Unrealized Loss on Investments
(net of deferred income taxes) (2,030)
Accumulated Earnings 157,842
-----------
Total Shareholder's Equity 824,939
-----------
Total Deferred Premium Revenue
and Shareholder's Equity $ 1,186,528
===========
</TABLE>
For further information concerning Financial Security, see the
Consolidated Financial Statements of Financial Security and Subsidiaries, and
the notes thereto, incorporated by reference herein. Copies of the statutory
quarterly and annual statements filed with the State of New York Insurance
Department by Financial Security are available upon request to the State of New
York Insurance Department.
INSURANCE REGULATION
Financial Security is licensed and subject to regulation as a
financial guaranty insurance corporation under the laws of the State of New
York, its state of domicile. In addition, Financial Security and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial
guaranty insurance corporation licensed to do business in the State of New
York, Financial Security is subject to Article 69 of the New York Insurance Law
which, among other things, limits the business of each such insurer to
financial guaranty insurance and related lines, requires that each such insurer
maintain a minimum surplus to policyholders, establishes contingency, loss and
unearned premium reserve requirements for each such insurer, and limits the
size of individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as Financial Security, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability for
borrowings.
THE NOTES
The following information supplements the information contained in the
accompanying Prospectus. Prospective Noteholders should consider, in addition
to the information below, the
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information in the accompanying Prospectus under "The Notes," "Certain
Information Regarding the Securities," and "Description of the Purchase
Agreements and the Trust Documents."
The Notes offered hereby will be issued pursuant to the Indenture, a
form of which has been filed as an exhibit in the Registration Statement of
which the accompanying Prospectus forms a part. The following summary of the
Notes and the Indenture does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, all of the provisions of the
Notes, the Indenture and the Prospectus. Where particular provisions of or
terms used in the Indenture are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summary.
GENERAL
The Notes will represent obligations solely of the Trust and will be
secured by the Trust Property pursuant to the Indenture. The assets of the
Trust (the "Trust Property") will include (i) non-prime motor vehicle retail
installment sale contracts transferred to the Trust on the Closing Date (the
"Initial Receivables") and on subsequent transfer dates (the "Additional
Receivables" and, together with the Initial Receivables, the "Receivables"),
(ii) all monies paid or payable thereunder on or after the applicable Cut-off
Date, (iii) an assignment of the security interests of NAFI in the new and used
automobiles, light-duty trucks, vans and minivans financed thereby (the
"Financed Vehicles"), (iv) the Receivable Files, (v) such assets as shall from
time to time be deposited in the Collection Account, the Distribution Account,
the Note Distribution Account, the Pre-Funding Account and the Pre-Funding
Period Reserve Account, each established pursuant to the Sale and Servicing
Agreement or the Indenture, (vi) property that secured a Receivable and that
has been acquired by repossession or otherwise, (vii) all rights to insurance
proceeds and liquidation proceeds with respect to the Receivables, (viii)
certain rights of NAFI against the Dealers under the Dealer Agreements and
against the Originators under the Originator Agreements, (ix) all right, title
and interest of the Seller in and to the Purchase Agreements, (x) certain other
rights under the Sale and Servicing Agreement in respect of representations and
warranties made by the Seller regarding the Receivables in the Sale and
Servicing Agreement and (xi) the income and proceeds of the foregoing and any
and all rights to enforce the foregoing. Holders of the Notes also will have
the benefit of the Policy subject to the terms and conditions set forth
therein. See "The Policy" herein.
The Notes will be offered for purchase in denominations of $20,000 and
integral multiples of $1,000 in excess thereof, in book-entry form only.
Persons acquiring benenficial interests in the Notes will hold their interests
through DTC in the United States or Cedel or Euroclear in Europe. See "Certain
Information Regarding the Securities--Book-Entry Registration" in the
Prospectus.
PAYMENTS OF INTEREST
Interest on the principal balance of the Notes will accrue at the
Interest Rate and will be due and payable to the Noteholders monthly on each
Distribution Date, commencing August 21, 1997, in an amount equal to the Note
Interest Distributable Amount. The "Note Interest Distributable Amount" for a
Distribution Date will be the sum of (i) thirty (30) days of interest (or, in
the case of the initial Distribution Date, the number of days from and
including the Closing Date to but not including such initial Distribution Date)
at the Interest Rate on the aggregate outstanding principal balance of the
Notes on such Distribution Date (before reduction by any principal
distributions made on such Distribution Date) (the "Monthly Interest"), and
(ii) the aggregate shortfalls in interest distributions to the Noteholders on
prior Distribution Dates, together with interest on such shortfalls at the
Interest Rate from the applicable preceding Distribution Date through but not
including the current Distribution Date, to the extent permitted by law.
Interest payments on the Notes will be
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made from Available Amounts (as hereinafter defined) after payment of accrued
and unpaid trustees' fees, collateral agent fees and other administrative fees
of the Trust and payment of the Servicing Fee.
PAYMENTS OF PRINCIPAL
Monthly Principal Distributions
Principal payments will be made to the Noteholders on each
Distribution Date in an amount equal to the Note Principal Distributable
Amount. The "Note Principal Distributable Amount" for any Distribution Date
prior to the Final Scheduled Distribution Date will be the sum of (i) 91% of
the Principal Distributable Amount for such Distribution Date and (ii) the
aggregate shortfalls in principal distributions to the Noteholders on prior
Distribution Dates. The Note Principal Distributable Amount for the Final
Scheduled Distribution Date will be the aggregate outstanding principal balance
of the Notes on such date (before giving effect to any distribution on the
Notes on such Final Scheduled Distribution Date).
The "Principal Distributable Amount" for any Distribution Date (other
than the Final Scheduled Distribution Date), will equal the sum of the
following, without duplication: (i) that portion of all collections on the
Receivables (other than Liquidated Receivables, Retransferred Receivables and,
to the extent included in clause (iv) below, the outstanding principal balance
of Retransfer Default Receivables) allocable to principal, including all full
and partial principal prepayments, deposited into the Collection Account during
the related Due Period, (ii) the outstanding principal balance of all
Receivables that became Liquidated Receivables during the related Due Period
(other than Liquidated Receivables that became Retransferred Receivables during
such Due Period), (iii) the portion of the Purchase Amount allocable to
principal of all Receivables that became Retransferred Receivables on or prior
to the related Reporting Date and subsequent to the preceding Reporting Date,
(iv) in the sole discretion of the Insurer, the outstanding principal balance
as of the related Reporting Date of all Retransfer Default Receivables, and (v)
the aggregate amount of Bankruptcy Losses that occurred during the related Due
Period. In addition to the principal distributions described above, Noteholders
may also receive distributions of principal in connection with an Optional
Redemption or Mandatory Redemption, as further described herein.
The principal balance of the Notes, to the extent not previously paid,
will be due and payable on the Final Scheduled Distribution Date. The actual
date on which the aggregate outstanding principal amount of the Notes is paid
may be earlier than the Final Scheduled Distribution Date set forth above based
on a variety of factors.
Optional Redemption
The Notes, to the extent still outstanding, may be redeemed in whole,
but not in part, on any Distribution Date on which the Seller or the Servicer
exercises its option to purchase the Receivables (with the prior written
consent of the Insurer, if a claim has previously been made under the Policy
and has not been reimbursed to the Insurer or if such redemption would result
in a claim under the Policy, or if such redemption would result in any amount
owing to the Insurer or the Noteholders remaining unpaid). The Sale and
Servicing Agreement will provide that either the Seller or the Servicer will
have the right to require the Trust to retransfer all of the Receivables
included in the Trust, subject to the Insurer's prior written consent if any of
the circumstances described in the preceding sentence exist or will result from
such retransfer, on or after any Distribution Date on which the aggregate of
the outstanding principal balances of the Receivables
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<PAGE> 32
(the "Pool Outstanding Principal Balance") is less than 10% of the Original
Pool Outstanding Principal Balance (as hereinafter defined) of such
Receivables. Such redemption will effect early retirement of the Notes. The
redemption price will be equal to the unpaid principal amount of the Notes plus
accrued and unpaid interest thereon (the "Redemption Price").
Mandatory Redemption
The Notes will be redeemed in part on the Distribution Date relating
to the Reporting Date next succeeding the last day of the Pre-Funding Period in
the event that the Additional Receivables Purchase Price of Additional
Receivables transferred to the Trust during the Pre-Funding Period is less than
the Pre-Funded Amount (a "Mandatory Redemption"). The aggregate principal
amount of the Notes to be redeemed will be an amount equal to the amount then
on deposit in the Pre-Funding Account less any undistributed investment
earnings then on deposit in the Pre-Funding Account (the "Note Redemption
Amount"). The Policy does not guaranty any such principal payment on the Notes
from funds on deposit in the Pre-Funding Account. See "The Policy" herein.
DISTRIBUTIONS AND PAYMENTS
The Servicer will provide to the Trust Collateral Agent, the Owner
Trustee, the Indenture Trustee and the Insurer not later than each Reporting
Date a certificate (the "Servicer Certificate") setting forth, among other
things, the Available Amount and the Note Distributable Amount for the related
Distribution Date and, based upon such determinations and the distributions to
be made on such Distribution Date, as described below, the amount of any
withdrawal required to be made from the Spread Account and/or any Policy Claim
Amount, in each case with respect to such Distribution Date. On the twenty
first day of each month (or, if such day is not a Business Day, the next
succeeding Business Day (each a "Distribution Date"), beginning on August 21,
1997, the Trust Collateral Agent will, to the extent of the Available Amount
together with funds withdrawn from the Spread Account, if any, make the
following payments (in the case of withdrawals from the Spread Account, solely
for payment of the amounts described in clauses (i) through (iv) below) from
the Distribution Account in the following order of priority:
(i) first, to the Servicer, the amount of the Servicing Fee payable
in respect of the related Due Period and any Servicing Fees from prior Due
Periods to the extent not previously paid;
(ii) second, accrued and unpaid fees owing to the Indenture Trustee,
the Owner Trustee, the Trust Collateral Agent, the Collateral Agent or the
Custodian, to the extent not paid by the Servicer;
(iii) third, to the Note Distribution Account, the Note Distributable
Amount, to be distributed to the Noteholders, together with the Policy Claim
Amount, if any, first to the Note Interest Distributable Amount and then to the
Note Principal Distributable Amount;
(iv) fourth, to the Insurer (or any designee thereof), any amounts
then due to the Insurer under the Insurance Agreement, the Indenture or the
Sale and Servicing Agreement;
(v) fifth, to the Collateral Agent for deposit in the Spread
Account, the amount, if any, required to be deposited therein pursuant to the
Spread Account Agreement;
(vi) sixth, to the Pre-Funding Period Reserve Account, the amount by
which the Required Reserve Amount exceeds the amount of funds on deposit
therein after giving effect to any withdrawals from the Pre-Funding Period
Reserve Account on such Distribution Date;
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(vii) seventh, to the Indenture Trustee and the Owner Trustee for any
unreimbursed expenses and to pay any indemnities owed by the Seller to the
Indenture Trustee under the Indenture or to the Owner Trustee under the Trust
Agreement;
(viii) eighth, to reimburse the Servicer for any expense of an opinion
of counsel incurred in connection with an amendment to the Indenture, and any
expenses incurred by the Servicer in connection with a realization upon a
Defaulted Receivable;
(ix) ninth, to reimburse the Backup Servicer for expenses incurred
by the Backup Servicer and to reimburse the Servicer for expenses incurred by
and reimbursable, or any indemnities payable by the Seller, to the Servicer
pursuant to the Sale and Servicing Agreement;
(x) tenth, to reimburse the Seller for expenses incurred by and
reimbursable to the Seller pursuant to the Indenture and the Sale and Servicing
Agreement; and
(xi) eleventh, to the holder of the Certificates, the balance of any
funds remaining in the Distribution Account after application pursuant to the
preceding clauses (i) through (x).
The following sets forth an example of the application of the
foregoing to a hypothetical monthly distribution:
February 1 -
February 28................ Due Period. Scheduled payments and any
prepayments and other collections on the
Receivables are received and deposited into
the Collection Account.
February 28 ............... Record Date. Distributions on the
Distribution Date will be made to
Noteholders of record at the close of
business on this date.
March 15 .................. Reporting Date. On or before this date, the
Servicer will notify the Indenture Trustee,
the Owner Trustee, the Trust Collateral
Agent, the Insurer and the Collateral Agent
of, among other things, the amounts
available in the Collection Account and the
amounts required to be distributed on the
Distribution Date, and the Seller, NAFI and
the Servicer, as the case may be, will make
required payments of Purchase Amounts to
the Collection Account.
March 15.......... Draw Date. On this date, the Trust
Collateral Agent will make any required
claims under the Policy if the Available
Amount in the Collection Account (plus any
amounts deposited therein by the Trust
Collateral Agent from the Spread Account),
after giving effect to all of the other
distributions having a higher priority as
set forth above, are insufficient to pay in
full the Scheduled Payments for the related
Distribution Date.
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March 21.......... Distribution Date. The Trust Collateral
Agent will distribute the Available Amount
together with funds withdrawn from the
Spread Account, if any, and the Policy
Claim Amount, if any, in the manner and
priority set forth above under the caption
" - Distributions and Payments".
The "Note Distributable Amount" for a Distribution Date will be the
sum of the Note Interest Distributable Amount and the Note Principal
Distributable Amount.
A "Liquidated Receivable" is any Receivable with respect to which any
of the following has occurred: (i) 90 days have elapsed since repossession of
the related Financed Vehicle, (ii) the Servicer (or a subservicer) has in good
faith determined that all amounts that it expects to recover under such
Receivable have been received, or (iii) 90% of any scheduled payment on such
Receivable is 120 days or more (or, if the related Obligor is a debtor under
Chapter 13 of the U.S. Bankruptcy Code, 180 days or more) delinquent as of the
end of such Due Period.
A "Retransfer Default Receivable" is any Receivable with respect to
which NAFI or the Seller, as the case may be, has failed to deposit in the
Collection Account the Retransfer Amount for such Receivable following
discovery by the Seller or receipt by the Seller of notice from the Trust
Collateral Agent, the Owner Trustee or the Indenture Trustee that such
Receivable is in breach of a representation or warranty made with respect to
such Receivable in the Sale and Servicing Agreement.
A "Bankruptcy Loss" with respect to any Receivable is an amount equal
to the excess of the principal balance of such Receivable immediately prior to
issuance of an order in a bankruptcy or insolvency proceeding reducing the
amount owed on a Receivable or otherwise modifying or restructuring the
scheduled payments to be made on a Receivable over the principal balance of
such Receivable as so reduced by such order or the net present value (using as
the discount rate the higher of the APR on such Receivable or the rate of
interest, if any, specified by the court in such order) of the scheduled
payments as so modified or restructured. A "Bankruptcy Loss" will be deemed to
have occurred on the date of issuance of such order.
EVENTS OF DEFAULT
"Events of Default" under the Indenture ("Indenture Events of
Default") will consist of: (i) a default for five days or more in the payment
of any interest on any Note when the same becomes due and payable; (ii) a
default in the payment of the outstanding principal balance of any Note on the
Final Scheduled Distribution Date; (iii) a default in the observance or
performance in any material respect of any covenant or agreement of the Trust
made in the Indenture (other than a default in the payment of interest or
principal on any Note when due) or any certificate or other writing delivered
in connection therewith, and the continuation of any such default for a period
of 30 days after notice thereof is given to the Trust by the Insurer or the
Indenture Trustee or to the Trust, the Indenture Trustee and the Insurer by the
holders of 25% of the aggregate outstanding principal amount of the Notes; (iv)
any representation or warranty made by the Trust in the Indenture or in any
certificate or other writing delivered pursuant thereto or in connection
therewith having been incorrect in a material respect as of the time made if
such breach is not cured within 30 days after notice thereof is given to the
Trust by the Insurer or the Indenture Trustee or to the Trust, the Indenture
Trustee and the Insurer by the holders of 25% of the aggregate outstanding
principal amount of the Notes; or (v) certain events of bankruptcy, insolvency,
receivership or liquidation with respect to the Trust, and certain actions by
the Trust indicating its insolvency or inability to pay
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<PAGE> 35
its obligations. Unless an Insurer Default has occurred, Indenture Events of
Default also will include certain Events of Default under the Insurance
Agreement designated as Cross Defaults, but only if the Insurer delivers to the
Trust and the Indenture Trustee, and does not rescind, a written notice
specifying that such Insurance Agreement Event of Default constitutes an
Indenture Event of Default. A "Cross Default" may result from: (i) a demand for
payment under the Policy, (ii) the financial insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings with respect to
NAFI, the Servicer or the Seller and certain actions by NAFI, the Servicer or
the Seller, indicating its insolvency or inability to pay its obligations; or
(iii) the Trust becoming taxable as an association (or publicly traded
partnership) or taxable as a corporation for federal or state income tax
purposes.
If an Indenture Event of Default occurs and is continuing, the right
of the Indenture Trustee or holders of a majority in principal amount of the
Notes to declare the Notes to be immediately due and payable will depend upon
whether or not an Insurer Default has also occurred. If an Indenture Event of
Default occurs and an Insurer Default has not occurred, the Insurer, and not
the Indenture Trustee or the Noteholders, will have the right, but not the
obligation, to cause the Trust Collateral Agent to foreclose on the Trust
Property, in whole or in part, on any date or dates following the acceleration
of the Notes due to such Indenture Event of Default as the Insurer, in its sole
discretion, shall elect, and to deliver the proceeds of the liquidation thereof
in accordance with the terms of the Sale and Servicing Agreement. If the
Insurer does not so cause the Trust Collateral Agent to liquidate the Trust
Property and to prepay the Notes, or if the proceeds of such liquidation of the
Trust Property are not sufficient to reduce the outstanding principal amount of
Notes to zero, and the Insurer does not elect to otherwise prepay the Notes in
full, following the occurrence of an Indenture Event of Default the Indenture
Trustee will continue to submit claims under the Policy for any shortfalls in
the Noteholders' Interest Distributable Amount or the Noteholders' Principal
Distributable Amount. The Insurer may elect, upon receipt of a claim under the
Policy following an Indenture Event of Default, to pay all or any portion of
the outstanding principal amount of the Notes plus accrued interest thereon.
See "The Policy" herein.
If both an Indenture Event of Default and an Insurer Default occur and
are continuing, then the Indenture Trustee (or the holders of not less than a
majority of the outstanding principal amount of the Notes) may declare the
Notes to be immediately due and payable. Under such circumstances, the
Indenture Trustee may cause the Trust Collateral Agent to institute proceedings
to foreclose on the Trust Property, may exercise any other remedies as a
secured party, including liquidating the Trust Property, or may elect to
maintain possession of the Trust Property and continue to apply collections on
the Receivables as if there had been no declaration of acceleration. The Trust
Collateral Agent will be prohibited from selling the Receivables following both
an Indenture Event of Default and an Insurer Default, however, unless (i) the
holders of all the outstanding Notes consent to such sale; (ii) the proceeds of
such sale are sufficient to pay in full the principal of and accrued interest
on such outstanding Notes at the date of such sale; or (iii) the Indenture
Trustee determines that the proceeds of the Receivables would not be sufficient
on an ongoing basis to make all payments on the Notes as such payments would
have become due if such obligations had not been declared due and payable and
the Indenture Trustee obtains the consent of the Holders of Notes representing
a majority of the aggregate outstanding principal amount of the Notes.
STATEMENTS TO NOTEHOLDERS
Concurrently with each distribution to the Holders of the Notes, the
Servicer will provide to the Trust Collateral Agent (with a copy to the
Insurer) for the Indenture Trustee to forward by mail to each registered Holder
of a Note a statement setting forth: (i) the amount of the distribution to the
holders of the Notes (detailed with respect to each component of the Note
Distributable Amount),
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(ii) if the distribution is less than the amount required to be distributed
under the Indenture, the amount of the shortfall and an allocation thereof to
principal and interest on the Notes, (iii) the Pool Outstanding Principal
Balance and the amount, if any, in the Collection Account, Distribution
Account, Pre-Funding Account and Pre-Funding Period Reserve Account at the end
of the calendar month preceding such Distribution Date, (iv) the number and
aggregate outstanding principal balances of Receivables delinquent one or more
months as of the end of the preceding calendar month, (v) the amount withdrawn
from the Spread Account and included in the amounts distributed to the
Noteholders, (vi) the outstanding principal balance of all Receivables that
became Liquidated Receivables during the related Due Period (other than
Liquidated Receivables that became Retransferred Receivables during such Due
Period), (vii) the amount remaining in the Spread Account after giving effect
to any withdrawals therefrom or additions thereto on such Distribution Date and
the amount, if any, by which the amount required to be on deposit in the Spread
Account pursuant to the Spread Account Agreement exceeds the amount in such
Spread Account, (viii) the amount, if any, drawn under the Policy included in
amounts actually distributed to the Noteholders; (ix) the amount of any
Purchase Amounts paid, or required to be paid, during the related Due Period
and (x) the Pool Factor. In the case of information described in clauses (i),
(ii) and (viii) above, the amounts shall also be expressed as a dollar amount
per $1,000 denomination of Notes.
Unless and until Definitive Notes are issued, such reports will be
sent on behalf of the Trust to the Indenture Trustee and Cede & Co., as
registered holder of the Notes and the nominee of DTC. Note Owners may receive
copies of such reports upon written request, together with a certification that
they are Note Owners and payment of any expenses associated with the
distribution of such reports, from the Indenture Trustee. See "Certain
Information Regarding the Securities - Reports to Securityholders" in the
accompanying Prospectus.
Within the required period of time after the end of each calendar
year, the Trust Collateral Agent will furnish to each person who at any time
during such calendar year was a Noteholder, a statement as to the aggregate
amounts of interest and principal paid to such Noteholder, information
regarding the amount of servicing compensation received by the Servicer and
such other information as the Seller deems necessary to enable such Noteholder
to prepare its tax returns. See "Certain Federal Income Tax Consequences" in
the accompanying Prospectus.
CLAIMS UNDER POLICY
If, as of the fourth Business Day prior to a Distribution Date (each,
a "Draw Date") the sum of (i) the Available Amount for the related Distribution
Date and (ii) the amount, if any, required to be withdrawn by the Collateral
Agent from the Spread Account on or prior to such Distribution Date as provided
below, is not sufficient to pay the Scheduled Payments for such Distribution
Date, the Trust Collateral Agent will deliver to the Insurer, no later than
noon, New York City time, on such Draw Date, a completed notice of claim under
the Policy in the amount of the shortfall (the amount of any such shortfall
being hereinafter referred to as the "Policy Claim Amount"). Amounts paid by
the Insurer pursuant to a claim submitted by the Trust Collateral Agent as
described above will be deposited by the Trust Collateral Agent into the Note
Distribution Account for payment to Noteholders on the related Distribution
Date. Any payment made by the Insurer under the Policy will be applied solely
to the payment of the Notes, and for no other purpose.
INSURANCE AGREEMENT
The Seller, the Trust, NAFI and the Insurer will enter into an
Insurance and Indemnity Agreement (the "Insurance Agreement") pursuant to which
the Seller will agree to reimburse, with interest, Financial Security for
amounts paid pursuant to claims under the Policy. The Seller will
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further agree (i) to pay Financial Security (or its designee) all reasonable
charges and expenses which Financial Security may pay or incur relative to any
amounts paid under the Policy or otherwise in connection with the transaction,
(ii) to indemnify Financial Security against certain liabilities, and (iii) to
pay Financial Security the amount of any unpaid premium owing in respect of the
Policy.
SUBORDINATION OF THE CERTIFICATES; SPREAD ACCOUNT
The rights of the holder of the Certificates to receive distributions
with respect to the Receivables will be subordinated to the rights of the
Noteholders to the extent provided in the Sale and Servicing Agreement. This
subordination is intended to enhance the likelihood of timely receipt by
Noteholders of the full amount of interest and principal required to be
distributed to them, and to afford such Noteholders limited protection against
losses in respect of the Receivables. Neither the Seller nor the Servicer will
be required to refund any amounts properly paid to them, whether or not there
are sufficient funds on any subsequent Distribution Date to make full payments
to the Noteholders.
The Collateral Agent will establish and maintain the Spread Account
pursuant to the Spread Account Agreement as an Eligible Account. The Spread
Account Agreement will authorize the Collateral Agent, pursuant to written
instructions from the Seller, to invest all funds in the Spread Account in
Eligible Investments generally maturing not later than the Business Day
preceding the Distribution Date next following the date of investment. The
Spread Account will be created with an initial deposit by the Collateral Agent
in the amount of $1,470,136.26 (the "Spread Account Initial Amount"). The
Spread Account will thereafter be funded by the deposit therein of amounts
remaining in the Distribution Account after distribution of the Servicing Fee,
amounts payable to the Insurer, certain other fees and amounts payable by the
Trust and principal and interest in respect of the Notes, until the monies in
the Spread Account reach the amount required to be maintained on deposit
therein accordance with the Spread Account Agreement. Thereafter, amounts
otherwise distributable in respect of deposits to the Pre-Funding Period
Reserve Account, certain expenses payable by the Trust and the Certificates
will be deposited in the Spread Account to the extent necessary to maintain the
amount in the Spread Account at such required amount.
If the Available Amount with respect to any Distribution Date is not
sufficient to pay to the Noteholders the Note Distributable Amount, to pay to
the Servicer the Servicing Fee, to pay certain other fees payable by the Trust
or to pay the Insurer amounts owing to it under the Insurance Agreement, the
Sale and Servicing Agreement or the Indenture, the Trust Collateral Agent will
notify the Collateral Agent, the Owner Trustee, the Servicer and the Insurer of
such deficiency and will direct the Collateral Agent to withdraw from the
Spread Account (to the extent of funds on deposit therein) and transfer to the
Trust Collateral Agent for deposit in the Collection Account the amount of such
deficiency. The Trust Collateral Agent will deposit the amounts so transferred
from the Spread Account to the Collection Account for distribution to the
Noteholders, the Servicer or the Insurer, as the case may be, on the related
Distribution Date.
So long as an Insurer Default shall not have occurred and be
continuing, the Insurer will be entitled to exercise in its sole discretion all
rights under the Spread Account Agreement with respect to the Spread Account
and any amounts on deposit therein and will have no liability to the Indenture
Trustee or the Noteholders for the exercise of such rights. The Insurer may (so
long as an Insurer Default shall not have occurred and be continuing) amend or
modify any term of the Spread Account Agreement (including terminating such
agreement and releasing all funds on deposit in the Spread Account) with the
written consent of the Seller and will not be required to obtain the consent of
the Indenture Trustee or any Noteholder to such amendment or modification.
Accordingly, there
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can be no assurance that funds deposited to the Spread Account will be
available in the event collections on the Receivables and other amounts
available under the Indenture are insufficient to make distributions of the
Note Distributable Amount on any Distribution Date.
THE ACCOUNTS
The Trust Collateral Agent will establish and maintain in the name of
the Trust Collateral Agent, (i) for the benefit of the Securityholders and the
Insurer, the Collection Account and the Distribution Account and (ii) for the
benefit of the Noteholders and the Insurer, the Pre-Funding Account and the
Pre-Funding Period Reserve Account, each of which will be an Eligible Account.
The Indenture Trustee will establish and maintain in its own name, for the
benefit of the Noteholders and the Insurer, an Eligible Account designated the
Note Distribution Account. The Collateral Agent will establish and maintain,
for the benefit of the Insurer and the Indenture Trustee, on behalf of the
Noteholders, an Eligible Account designated the Spread Account.
Collection Account. On or prior to each Distribution Date, the Trust
Collateral Agent, in accordance with the instructions of the Servicer set forth
in the Servicer Certificate, will withdraw from the Collection Account and
deposit into the Distribution Account any funds on deposit therein constituting
part of the Available Amount for such Distribution Date, which funds, together
with funds deposited by the Servicer, NAFI, the Seller or the Trust Collateral
Agent directly to the Distribution Account in connection with such Distribution
Date will be available to make distributions to the Noteholders on such
Distribution Date. The "Available Amount" for any Distribution Date will equal
the sum of (i) the amount on deposit in the Distribution Account on the
preceding Distribution Date after withdrawals therefrom on such preceding
Distribution Date, (ii) the amount on deposit in the Collection Account as of
the close of business on the last day of the related Due Period (the
"Determination Date"), which generally will include collections and other
recoveries in respect of the Receivables deposited to the Collection Account
during the related Due Period, (iii) Purchase Amounts deposited to the
Collection Account on or prior to the related Reporting Date, (iv) the amounts,
if any, required to be transferred from the Pre-Funding Account and/or the
Pre-Funding Period Reserve Account, if any, to the Distribution Account on such
Distribution Date as described below, (v) any collections or recoveries in
respect of the Receivables received by the Servicer or Seller remitted to the
Trust Collateral Agent for deposit to the Distribution Account, including any
extension fees, and (vi) any amounts delivered by the Insurer, at its sole
option, to the Trust Collateral Agent for deposit into the Collection Account
and not constituting Scheduled Payments (the "Insurer Optional Deposit"), if
any, less the sum of (a) collections on Receivables previously retransferred to
the Seller that are payable to the Seller, (b) income and gain on investments
of funds in the Collection Account, and (c) certain other fees and charges on
the Receivables on deposit in the Collection Account not representing principal
or interest collections other than extension fees. The "Reporting Date" with
respect to any Distribution Date will be the earlier of (i) the 15th day of the
calendar month in which such Distribution Date occurs and (ii) the fourth
Business Day preceding such Distribution Date. Income and gain on investments
of funds in the Collection Account and late payment penalties on deposit in the
Collection Account will be paid to the Servicer on each Distribution Date as
provided in the Sale and Servicing Agreement and will not be available to make
payments to Noteholders.
The Sale and Servicing Agreement will authorize the Trust Collateral
Agent to invest all funds in the Collection Account in Eligible Investments (as
hereinafter defined) maturing not later than the Distribution Date next
following the date of investment. "Eligible Investments" will include United
States government securities and certain other high-quality investments
acceptable to the Insurer. An "Eligible Account" is (i) a segregated trust
account maintained with the corporate trust department of a depository
institution or trust company (A) during such time as an Insurer Default
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has not occurred and is not continuing, acceptable to the Insurer or (B) at any
other time, subject to regulations on fiduciary funds on deposit substantially
similar to 12 CFR 9.10(b); or (ii) a segregated demand deposit account
maintained with a depository institution or trust company organized under the
laws of the United States of America, or any of the states thereof, or the
District of Columbia, that has a certificate of deposit, short-term deposit or
commercial paper rating of at least A-1+ by S&P and P-1 by Moody's and (unless
an Insurer Default has occurred and is continuing) acceptable to the Insurer.
The Distribution Account. In addition to amounts withdrawn from the
Collection Account and deposited to the Distribution Account, the Trust
Collateral Agent also will deposit into the Distribution Account (i) amounts
received by it from the Seller for deposit into the Distribution Account, (ii)
amounts withdrawn from the Spread Account as described below, and (iii) all
income and gain from investments of funds in the Distribution Account. Funds on
deposit in the Distribution Account on a Distribution Date will be used to make
distributions to Noteholders and certain other payments as more fully described
under "The Notes - Distributions and Payments" herein.
The Sale and Servicing Agreement will authorize the Trust Collateral
Agent to invest all funds in the Distribution Account in Eligible Investments
maturing not later than the Distribution Date next following the date of
investment. Income earned from the investment of funds in the Distribution
Account will be paid to the Seller on each Distribution Date and will not be
available to make payments to Noteholders.
The Pre-Funding Account. On the date of the initial issuance of the
Notes, the Indenture Trustee will deposit on behalf of the Seller approximately
$6,689,091.18 in the Pre-Funding Account (the "Initial Pre-Funded Amount").
Funds on deposit in the Pre-Funding Account will be withdrawn from time to time
during the Pre-Funding Period for delivery to the Seller in exchange for the
transfer and assignment of Additional Receivables to the Trust. In addition, on
the Distribution Date related to the Reporting Date next succeeding the end of
the Pre-Funding Period, the Trust Collateral Agent will transfer the amount, if
any, on deposit in the Pre-Funding Account upon termination of the Pre-Funding
Period, less any investment earnings on deposit therein, to the Note
Distribution Account for distribution to the Noteholders pro rata in accordance
with their respective outstanding principal amounts on such Distribution Date.
Amounts on deposit in the Pre-Funding Account will be withdrawn and applied to
the purchase of Additional Receivables not more frequently than monthly during
the Pre-Funding Period unless the Insurer consents to more frequent transfers.
The Sale and Servicing Agreement will authorize the Trust Collateral
Agent to invest all funds in the Pre-Funding Account in Eligible Investments
maturing not later than the earlier of the Distribution Date next following the
date of investment and the date on which funds on deposit therein are expected
to be needed. Income earned from the investment of funds in the Pre-Funding
Account will be deposited monthly into the Collection Account.
The Pre-Funding Period Reserve Account. On the Closing Date, the
Indenture Trustee will deposit on behalf of the Seller in the Pre-Funding
Period Reserve Account from the proceeds of the sale of the Notes an amount
equal to $86,824.40. On each Distribution Date occurring on or prior to the
Distribution Date related to the Reporting Date next succeeding termination of
the Pre-Funding Period, the Trust Collateral Agent will transfer from the
Pre-Funding Period Reserve Account to the Note Distribution Account an amount
equal to the excess of (i) interest accrued at the Interest Rate on the amount
of funds on deposit in the Pre-Funding Account for the period from and
including the preceding Distribution Date (or, in the case of the first
Distribution Date, the Closing
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Date) to but not including the current Distribution Date over (ii) the actual
amount of investment earnings on amounts on deposit in the Pre-Funding Account
from and including the preceding Distribution Date (or, in the case of the
first Distribution Date, the Closing Date) to the current Distribution Date. On
the Distribution Date related to the Reporting Date immediately following the
end of the Pre-Funding Period, any amounts remaining in the Pre-Funding Period
Reserve Account (after application to interest payable on the Notes as
described above) shall be paid to the Seller pursuant to the Sale and Servicing
Agreement. Thereafter, the Pre-Funding Period Reserve Account shall be closed.
The "Required Reserve Amount" as of any Distribution Date during the
Pre-Funding Period will equal the product of (i) the Interest Rate less 2.5%,
(ii) the balance of funds on deposit in the Pre-Funding Account as of such
Distribution Date and (iii) a fraction, the numerator of which is the number of
days remaining until the Distribution Date immediately following the
Pre-Funding Period and the denominator of which is 360.
The Sale and Servicing Agreement will authorize the Trust Collateral
Agent pursuant to written instructions from the Seller to invest all funds in
the Pre-Funding Period Reserve Account in Eligible Investments maturing not
later than the earlier of the Distribution Date next following the date of
investment and the date on which funds on deposit therein are expected to be
needed. Income earned from the investment of funds in the Pre-Funding Period
Reserve Account will be deposited monthly into the Collection Account.
The Note Distribution Account. On each Distribution Date, the Trust
Collateral Agent will deposit to the Note Distribution Account and distribute
to Noteholders (i) amounts withdrawn by the Trust Collateral Agent from the
Distribution Account and distributed to the Indenture Trustee in respect of the
Note Distributable Amount, (ii) amounts withdrawn by the Collateral Agent from
the Spread Account and (iii) amounts received by it from the Insurer in payment
of claims under the Policy, as described below.
THE SALE AND SERVICING AGREEMENT
The following summary describes certain terms of the Sale and
Servicing Agreement. A form of the Sale and Servicing Agreement has been filed
as an exhibit to the Registration Statement. The summary does not purport to be
complete and is subject to, and qualified in its entirety by reference to, all
the provisions of the Sale and Servicing Agreement. The following summary
supplements the description of the general terms and provisions of the Sale and
Servicing Agreement set forth in the accompanying Prospectus, to which
description reference is hereby made.
SALE AND ASSIGNMENT OF RECEIVABLES
The Seller will acquire (i) the Initial Receivables from Funding
Trust II, a Delaware business trust wholly-owned by NAFI and affiliates of
NAFI, pursuant to the Sale Agreement and (ii) the Additional Receivables from
NAFI pursuant to the Purchase and Contribution Agreement. NAFI and Funding
Trust II, in their capacities as transferors of the Receivables to the Seller,
are herein referred to collectively as the "NAFI Transferors." The Initial
Receivables constitute, as of the Initial Cut-off Date, and the Additional
Receivables will constitute, as of the applicable Subsequent Cut-off Date, a
substantial portion of the non-prime motor vehicle retail installment sale
contracts originated by NAFI satisfying the selection criteria described
herein. See "The Receivables Pool - General" herein.
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Pursuant to the Sale and Servicing Agreement, the Seller may, during
the Pre-Funding Period, transfer and assign Additional Receivables to the Trust
to the extent that (i) funds are available in the Pre-Funding Account, and (ii)
Additional Receivables are available for purchase from NAFI. Transfer of
Additional Receivables will be subject to the satisfaction of certain
conditions, including the prior written consent of the Insurer to the transfer
of such Additional Receivables. Upon transfer to the Trust of such Additional
Receivables the Trust Collateral Agent will acquire pursuant to the Indenture a
first priority security interest in such Additional Receivables for the benefit
of the Noteholders.
During the Pre-Funding Period, upon the Seller's written direction
to the Servicer and the Trust Collateral Agent from time to time (but not more
often than once during each such period or as more frequently consented to in
writing by the Insurer), the Trust Collateral Agent will release funds in the
Pre-Funding Account to the Seller in an amount equal to 91% of the aggregate
outstanding principal balance of the Additional Receivables so transferred as
of the related Subsequent Cut-off Date (the "Additional Receivables Purchase
Price") and the Seller will transfer and assign to the Trust, without recourse,
the Seller's entire right, title and interest in and to such Additional
Receivables. Upon the transfer and assignment of Additional Receivables to the
Trust on a Subsequent Transfer Date, the Pool Outstanding Principal Balance
will increase in an amount equal to the aggregate Outstanding Principal Balance
of the Additional Receivables so transferred as of the applicable Subsequent
Cut-off Date.
Any transfer and assignment of Additional Receivables to the Trust
will be subject to the satisfaction, on or before the related Subsequent
Transfer Date, of the following conditions, among others: (i) each such
Additional Receivable must satisfy the eligibility criteria with respect to the
Receivables specified in the Sale and Servicing Agreement; (ii) as of such
Subsequent Transfer Date, the Receivables in the Trust, together with the
Additional Receivables to be transferred and assigned by the Seller to the
Trust on such Subsequent Transfer Date, must meet the following criteria
(computed based on the characteristics of the Initial Receivables on the
Initial Cut-off Date and any Additional Receivables on the related Subsequent
Cut-off Date): (a) the weighted average APR of such Receivables will not be
less than 18.00%, (b) the weighted average remaining term of such Receivables
will not be greater than 55 months, (c) not more than 80% of the aggregate
outstanding principal balance of such Receivables will be attributable to loans
for the purchase of used Financed Vehicles and (d) the final scheduled payment
date on the Receivable with the latest maturity will not be later than October
30, 2002; (iii) the Seller shall have executed and delivered to the Owner
Trustee a Subsequent Transfer Agreement conveying such Additional Receivables
to the Trust; and (iv) the Insurer shall, in its sole and absolute discretion,
have consented in writing to the transfer and assignment of such Additional
Receivables to the Trust. The representations and warranties with respect to
the Initial Receivables made by the Seller in the Sale and Servicing Agreement,
and the representations and warranties with respect to the Initial Receivables
made by NAFI and assigned to the Trust, will be deemed to have been made with
respect to the Additional Receivables as of the respective dates of their
transfer to the Trust.
RETRANSFER OF RECEIVABLES
The Sale and Servicing Agreement will provide that the Seller will
have the right to require the Trust to retransfer to the Seller all of the
Receivables included in the Trust on or after any Distribution Date on which
the Pool Outstanding Principal Balance is less than 10% of the Original Pool
Outstanding Principal Balance of such Receivables. The "Original Pool
Outstanding Principal Balance" will equal the aggregate outstanding principal
balance of all of the Receivables, including Additional Receivables, as of
their respective Cut-off Dates. In connection with any such
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retransfer, the Seller will deliver to the Trust Collateral Agent an amount
equal to the sum of (i) 100% of the aggregate outstanding principal balance of
the Notes on such Distribution Date and (ii) accrued and unpaid interest at the
Interest Rate on the aggregate outstanding principal balance of the Notes on
such Distribution Date. Such right may be exercised only with the prior written
consent of the Insurer, if a claim has previously been made under the Policy
and remains unreimbursed to the Insurer or if such retransfer would result in a
claim under the Policy or would result in any amount owing to the Noteholders
or the Insurer remaining unpaid. Upon the exercise by the Seller to require
such retransfer, the Trust shall exercise its right under the Indenture to
effect an Optional Redemption of the Notes. See "The Notes -- Optional
Redemption" herein.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will service and administer the Receivables in the
Trust on behalf of the Trust and will have full power and authority, acting
alone and/or through subservicers, to do any and all things which it may deem
necessary or desirable in connection with such servicing and administration and
which are consistent with the Sale and Servicing Agreement. In the Sale and
Servicing Agreement, the Servicer will acknowledge that it is holding any
Receivable documents in its possession and any other property constituting part
of the Trust Property held by it in trust for the benefit of the Noteholders
and the Insurer.
Servicing activities required to be performed pursuant to the Sale
and Servicing Agreement will include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Receivable.
The Servicer will be required to take all actions that are necessary
or desirable to maintain continuous perfection and first priority of security
interests granted by the Obligors in the Financed Vehicles. These actions
include, but are not limited to, using reasonable efforts to obtain the
execution by the Obligors and the recording, registering, filing, re-recording,
re-registering and refiling of all title documents, security agreements,
financing statements, continuation statements or other instruments as are
necessary to maintain the security interests granted by the respective Obligors
under the Receivables. Neither the Servicer nor any subservicer will be
required, however, to expend its own funds to remove any security interest,
lien or other encumbrance on a Financed Vehicle.
If a Receivable becomes and continues to be a Defaulted Receivable,
the Servicer will be required to take all reasonable and lawful steps necessary
for repossession. Following repossession, Financed Vehicles are currently sold
almost entirely at regularly scheduled wholesale auctions conducted by third
parties. NAFI is considering alternatives to this method of realization on
certain Financed Vehicles and may in the future use other methods of
disposition if in its judgment such methods will increase net proceeds from the
sale of the Financed Vehicles. However, neither the Servicer nor any
subservicer will be obligated to institute any action for repossession through
judicial proceedings unless it determines in its good faith judgment that the
liquidation proceeds that would be realized in connection therewith would be
sufficient for the reimbursement in full of its out-of-pocket expenses in
connection therewith. A Receivable will become a "Defaulted Receivable" in the
calendar month in which any of the following has occurred with respect to such
Receivable: (i) all or part of any scheduled payment is 90 days or more
delinquent, (ii) the Servicer (or a subservicer) has in good faith determined
that all amounts that it expects to recover under such Receivable have been
received or (iii) the Financed Vehicle that secures the Receivable has been
repossessed without reinstatement of the Receivable on or before the last day
of such calendar month and any applicable redemption period has expired.
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SERVICER TERMINATION EVENT
A "Servicer Termination Event" under the Sale and Servicing
Agreement will occur if:
(a) the Servicer shall fail, or fail to cause any subservicer, to
deliver to the Trust Collateral Agent for distribution to Noteholders any
proceeds or payments required to be so delivered by the Servicer or subservicer
under the terms of the Notes or the Sale and Servicing Agreement and such
failure shall continue unremedied for two Business Days after written notice is
received by the Servicer from the Trust Collateral Agent or (unless an Insurer
Default (as defined below) shall have occurred and be continuing) the Insurer
or after discovery of such failure by the Servicer (but in no event later than
five Business Days after the Servicer is required to make such delivery or
deposit); or
(b) the Servicer shall fail to observe or perform any other of the
covenants or agreements on the part of the Servicer in the Sale and Servicing
Agreement, which failure (i) materially and adversely affects the rights of
Noteholders (determined without regard to the availability of funds under the
Policy) or of the Insurer (unless an Insurer Default shall have occurred and be
continuing), and (ii) continues unremedied for a period of thirty days after
the date on which written notice of such failure, requiring the same to be
remedied, shall have been given to the Servicer by the Trust Collateral Agent,
or to the Servicer and the Trust Collateral Agent by the Insurer (or, if an
Insurer Default has occurred and is continuing, Holders of Notes evidencing in
the aggregate not less than 25% of the aggregate outstanding principal balance
of the Notes); or
(c) there shall have occurred certain events of bankruptcy or
insolvency with respect to the Servicer; or
(d) the Servicer shall have breached any of the representations and
warranties set forth in the Sale and Servicing Agreement which breach
materially and adversely affects the interests of the Noteholders in any
Receivable (determined without regard to the availability of funds under the
Policy) or the Insurer and the Servicer shall have failed to cure such breach
in all material respects within thirty days of its receipt of a notice of such
breach; or
(e) there shall have occurred an Insurance Agreement Event of
Default (as defined below) or an event of default under any other insurance
agreement to which (x) the Insurer and (y) NAFI and/or the Seller or any other
affiliate of NAFI are party; or
(f) a claim is made under the Policy; or
(g) the Servicer fails to deliver the Servicer Certificate and such
failure remains unremedied for five days; or
(h) so long as an Insurer Default shall not have occurred and be
continuing, the Insurer shall not have delivered the notice extending the term
of the Servicer required to be delivered by the Insurer pursuant to the Sale
and Servicing Agreement in the absence of certain events.
An "Insurance Agreement Event of Default" will include (i) the
inaccuracy or incompleteness of any representation or warranty of the Trust,
NAFI, the Servicer or the Seller in the Sale and Servicing Agreement, the
Insurance Agreement or certain other documents, subject to applicable grace
periods, (ii) a failure by the Trust, NAFI, the Servicer or the Seller to
perform or
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to comply with any covenant or agreement in the Sale and Servicing Agreement,
the Insurance Agreement or certain other documents, subject to applicable grace
periods, (iii) a finding or a ruling by a governmental authority or agency that
the Insurance Agreement, the Sale and Servicing Agreement, the Indenture or
certain other documents, or any material provision of any such document, are
not binding on NAFI or the Seller or any of the other parties thereto, (iv)
failure by the Trust, NAFI, the Servicer or the Seller to pay their respective
debts in general or the occurrence of certain events of insolvency or
bankruptcy with respect to the Trust, NAFI, the Servicer or the Seller, (v) a
Servicer Termination Event, (vi) a claim for payment under the Policy, (vii)
certain events of default under any other insurance agreement or similar
agreement entered into among (A) the Insurer and (B) NAFI and/or the Seller or
any other affiliate of NAFI entered into with respect to any other series of
securities issued by NAFI or the Seller or any other affiliate of NAFI, (viii)
a denial by NAFI or the Seller of any liability or obligation under the
Insurance Agreement, the Indenture, the Sale and Servicing Agreement or certain
other documents, (ix) failure by the Trust, NAFI or the Seller to pay when due
any amount owed under the Sale and Servicing Agreement, the Insurance
Agreement, the Indenture or certain other documents, (x) failure of the
Receivables to comply, in the aggregate, with certain limitations on the levels
of delinquent Receivables, Defaulted Receivables and net losses in respect of
Liquidated Receivables set forth in the Insurance Agreement, (xi) any default
in the observance or performance of any covenant or agreement of the Trust made
in the Indenture (other than a default in the payment of the interest or
principal on any Note when due) or any representation or warranty of the Trust
made in the Indenture or certain other documents in any material respect
subject to applicable grace periods and (xii) the Trust becomes an association
(or publicly traded partnership) or taxable as a corporation for federal or
state income tax purposes.
Rights Upon a Servicer Termination Event; Appointment of Successor.
If a Servicer Termination Event occurs under the Sale and Servicing Agreement,
then, so long as such Servicer Termination Event has not been remedied, the
Insurer may (unless an Insurer Default has occurred and is continuing) and the
Indenture Trustee will, at the direction of the Insurer (or, if an Insurer
Default has occurred and is continuing, the Holders of Notes evidencing in the
aggregate not less than 51% of the aggregate outstanding principal balance of
the Notes), by notice in writing to the Servicer, the Backup Servicer and the
Seller, terminate all of the rights and obligations of the Servicer under the
Sale and Servicing Agreement and in and to the related Receivables and the
proceeds thereof and appoint the Backup Servicer or (so long as no Insurer
Default shall have occurred and be continuing) such other Person or entity as
the Insurer shall direct as the successor Servicer. Any such termination will
be subject to compensation, rights of reimbursement, indemnity and limitation
on liability to which the Servicer is then entitled. The Backup Servicer will
agree to act as successor Servicer under the Sale and Servicing Agreement in
the event that the rights and obligations of the Servicer are terminated under
the Sale and Servicing Agreement. On or after the receipt by the Servicer of
written notice of its termination and upon the effective date of the transfer
specified in such notice, all authority and power of the Servicer under the
Sale and Servicing Agreement, whether with respect to the related Notes or the
related Receivables or otherwise, will pass to and be vested in the Backup
Servicer or another successor Servicer. In the Sale and Servicing Agreement,
the Servicer will agree to cooperate with the Backup Servicer or other
successor Servicer in effecting a termination of the Servicer's
responsibilities and rights thereunder.
A "Insurer Default" means the occurrence and continuance of any of
the following events: (a) the Insurer shall fail to make a payment required
under the Policy in accordance with its terms; (b) the Insurer (i) files a
petition or commences any case or proceeding under any provision or chapter of
the United States Bankruptcy Code or any other similar federal or state law
relating to insolvency, bankruptcy, rehabilitation, liquidation or
reorganization, (ii) makes a general assignment
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for the benefit of its creditors, or (iii) has an order for relief entered
against it under the United States Bankruptcy Code or any other similar federal
or state law relating to insolvency, bankruptcy, rehabilitation, liquidation or
reorganization which is final and nonappealable; or (c) a court of competent
jurisdiction, the New York Department of Insurance or other competent
regulatory authority enters a final and nonappealable order, judgment or decree
(1) appointing a custodian, trustee, agent or receiver for the Insurer or for
all or any material portion of its property or (2) authorizing the taking of
possession by a custodian, trustee, agent or receiver of the Insurer (or the
taking of possession of all or any material portion of the property of the
Insurer).
On and after the time the Servicer receives a notice of termination,
the Backup Servicer or other successor Servicer designated by the Insurer (so
long as no Insurer Default shall have occurred and be continuing) will be the
successor in all respects to the Servicer in its capacity as Servicer under the
Sale and Servicing Agreement. In the event that the Insurer has not designated
as successor Servicer a person other than the Backup Servicer and the Backup
Servicer refuses or is unable to take over and assume the responsibilities of
the Servicer, the Trust Collateral Agent may appoint, or petition a court of
competent jurisdiction to appoint, any experienced servicer of motor vehicle
installment sale contracts and notes having a net worth of not less than
$10,000,000 as the successor to the Servicer under the Sale and Servicing
Agreement. The Trust Collateral Agent will consult with the Seller and the
Insurer before appointing a successor Servicer other than the Backup Servicer
under the Sale and Servicing Agreement, and any successor Servicer other than
the Backup Servicer must be satisfactory to the Insurer (unless an Insurer
Default has occurred and is continuing). Pending appointment of a successor to
the Servicer under the Sale and Servicing Agreement, the Trust Collateral Agent
shall act in such capacity. In connection with such appointment and assumption,
the Trust Collateral Agent may make such arrangements for the compensation of
such successor out of payments on related Receivables as it and such successor
agree. However, no such compensation to the Trust Collateral Agent will be in
excess of that permitted the Servicer under the Sale and Servicing Agreement
unless (i) the Trust Collateral Agent and Insurer (or, if an Insurer Default
has occurred and is continuing, the Holders of a majority in percentage
interests of the Notes) agree in writing to a larger Servicing Fee and (ii)
each of S&P and Moody's delivers a letter to the Indenture Trustee to the
effect that such larger Servicing Fee will not result in a reduction or
withdrawal of the rating assigned by it to the Notes. The monthly Servicing Fee
for any successor Servicer may not, however, exceed one-twelfth of two percent
of the Pool Outstanding Principal Balance of the related Receivables as of the
last day of such month. The Seller, the Trust Collateral Agent, any subservicer
and the successor Servicer will take such action, consistent with the Sale and
Servicing Agreement, as shall be necessary to effectuate any such succession.
SERVICING FEE
The Servicer will receive a monthly fee (the "Servicing Fee") as
compensation for its activities under the Sale and Servicing Agreement. As to
any calendar month, the Servicing Fee under the Sale and Servicing Agreement
will equal 1/12 of the product of (a) two percent and (b) the Pool Outstanding
Principal Balance as of the last day of such month. The Servicer will be
required to pay the fees of, and certain expenses of, the Indenture Trustee,
the Owner Trustee, the Trust Collateral Agent, the Collateral Agent, any
subservicer and the Backup Servicer.
THE PURCHASE AGREEMENTS
The Receivables in the Trust will be acquired by the Seller from the
NAFI Transferors pursuant to the Purchase Agreements. The following summary
does not purport to be complete and
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is subject to, and is qualified in its entirety by reference to, the provisions
of the Purchase Agreements. Where particular provisions or terms used in the
Purchase Agreements are referenced to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summary.
TRANSFER AND CONVEYANCE OF RECEIVABLE ASSETS
Pursuant to the Purchase Agreements, the NAFI Transferors will sell,
transfer and convey to the Seller, without recourse except as specifically
provided in the Purchase Agreements, all of their respective right, title and
interest in and to the following assets: (i) the Receivables and all monies
payable thereunder on and after the applicable Cut-Off Date; (ii) the related
Receivable Files; (iii) the security interests in the Financed Vehicles
securing the Receivables and the property which secured any such Receivable and
which has been acquired by repossession or otherwise; (iv) all rights to the
insurance proceeds and liquidation proceeds with respect to such Receivables;
(v) certain rights against Dealers under the related Dealer Agreements and
against Originators under the related Originator Agreements; and (vi) the
proceeds of the foregoing and the rights to enforce the foregoing. Each such
sale, transfer and conveyance of Receivables will be consummated on the Closing
Date other than Additional Receivables that may be sold, transferred and
conveyed by NAFI or Funding Trust II to the Seller on Subsequent Transfer
Dates.
On or prior to the Closing Date, the NAFI Transferors will file Uniform
Commercial Code financing statements, appropriate under applicable law, to
reflect the transfer and conveyance of the Receivables to the Seller.
REPRESENTATIONS AND WARRANTIES
In the Purchase Agreements, NAFI will make representations and
warranties with respect to each Receivable in the Trust (including Receivables
acquired by the Seller from Funding Trust II) as of the date of transfer of
such Receivable to the Trust as to, among other things, the characteristics of
such Receivable, NAFI's or Funding Trust II's interest in such Receivable and
the Financed Vehicle securing such Receivable, the nature of the interest
acquired by the Seller in such Receivable and the related Financed Vehicle,
compliance of such Receivable with consumer finance and other laws and
regulations and certain other matters.
If there has been a breach of any of the foregoing representations or
warranties with respect to a Receivable and such Receivable is retransferred or
required to be retransferred to the Seller pursuant to the Sale and Servicing
Agreement, NAFI will be required under the applicable Purchase Agreement, upon
demand, to repurchase such Receivable from the Seller at the retransfer amount
required by the Sale and Servicing Agreement.
THE POLICY
The following summary of the terms of the Policy does not purport to
be complete and is qualified in its entirety by reference to the provisions of
the Policy.
THE POLICY
Simultaneously with the issuance the Notes, Financial Security will
deliver the Policy to the Trust Collateral Agent as agent for the Indenture
Trustee for the benefit of each Holder of a Note. Under the Policy, Financial
Security will unconditionally and irrevocably guarantee to the Trust
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Collateral Agent for the benefit of each Holder of a Note the full and complete
payment of (i) Scheduled Payments (as defined below) on the Notes and (ii) the
amount of any Scheduled Payment which subsequently is avoided in whole or in
part as a preference payment under applicable law.
"Scheduled Payments" means payments which are scheduled to be made on
the Notes during the term of the Policy in accordance with the original terms
of the Notes when issued and without regard to any subsequent amendment or
modification of the Notes that has not been consented to by the Insurer, which
"Scheduled Payments" are (i) with respect to each Distribution Date, the
Monthly Interest payable on such Distribution Date, and (ii) with respect to
the Final Scheduled Distribution Date, any principal of the Notes remaining
unpaid on such Final Scheduled Distribution Date; Scheduled Payments do not
include payments which become due on an accelerated basis as a result of (a) a
default by the Trust, (b) an election by the Trust to pay principal on an
accelerated basis, (c) the occurrence of an Event of Default under the
Indenture or (d) any other cause, unless the Insurer elects, in its sole
discretion, to pay in whole or in part such principal due upon acceleration,
together with any accrued interest to the date of acceleration. In the event
the Insurer does not so elect, the Policy will continue to guarantee Scheduled
Payments due on the Notes in accordance with its original terms. Scheduled
Payments shall not include (x) any portion of the Note Interest Distributable
Amount due to Noteholders because the appropriate notice and certificate for
payment in proper form was not timely Received (as defined below) by the
Insurer, (y) any portion of the Note Interest Distributable Amount due to
Noteholders representing interest on any overdue interest or (z) any Note
Prepayment Amounts unless, in each case, the Insurer elects, in its sole
discretion, to pay such amount in whole or in part. "Note Prepayment Amounts"
means an amount equal to each Noteholder's share of principal payments from
funds on deposit in the Pre-Funding Account on the date of a Mandatory
Redemption, as described herein. Scheduled Payments shall not include, nor
shall coverage be provided under the Policy in respect of, any taxes,
withholding or other charge imposed by any governmental authority due in
connection with the payment of any Scheduled Payment to a Holder of a Note.
Payment of claims on the Policy made in respect of Scheduled Payments
will be made by Financial Security following Receipt (as defined below) by
Financial Security of the appropriate notice for payment on the later to occur
of (a) 12:00 noon, New York City time, on the third Business Day (as defined
below) following Receipt of such notice for payment, and (b) 12:00 noon, New
York City time, on the Distribution Date such payment was due on the Notes.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made
under the Policy, Financial Security shall cause such payment to be made on the
later of (a) the date when due to be paid pursuant to the Order referred to
below or (b) the first to occur of (i) the fourth Business Day following
Receipt by Financial Security from the Trust Collateral Agent of (A) a
certified copy of the order (the "Order") of the court or other governmental
body which exercised jurisdiction to the effect that the Holder is required to
return the amount of any Scheduled Payment paid on the Notes during the term of
the Policy because such distributions were avoidable as preference payments
under applicable bankruptcy law, (B) a certificate of the Holder that the Order
has been entered and is not subject to any stay, and (C) an assignment duly
executed and delivered by the Holder, in such form as is reasonably required by
Financial Security and provided to the Holder by Financial Security,
irrevocably assigning to Financial Security all rights and claims of the Holder
relating to or arising under the Notes against the debtor which made such
preference payment or otherwise with respect to such preference payment, or
(ii) the date of Receipt by Financial Security from the Trust Collateral Agent
of the items referred to in clauses (A), (B) and (C) above if, at least four
Business Days prior to such date of Receipt, Financial Security shall have
Received (as defined below) written notice from the Trust Collateral Agent that
such items were to be delivered on such date and
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such date was specified in such notice. Such payment shall be disbursed to the
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the Order and not to the Trust Collateral Agent or any Holder directly (unless
a Holder has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which case
such payment will be disbursed to the Trust Collateral Agent for distribution
to such Holder upon proof of such payment reasonably satisfactory to Financial
Security). In connection with the foregoing, the Insurer shall have the rights
provided pursuant to the Indenture.
OTHER PROVISIONS OF THE POLICY
The terms "Receipt" and "Received," with respect to the Policy, shall
mean actual delivery to Financial Security and to its fiscal agent, if any,
prior to 12:00 noon, New York City time, on a Business Day; delivery either on
a day that is not a Business Day or after 12:00 noon, New York City time, shall
be deemed to be Receipt on the next succeeding Business Day. If any notice or
certificate given under the Policy by the Trust Collateral Agent is not in
proper form or is not properly completed, executed or delivered, it shall be
deemed not to have been Received, and Financial Security or its fiscal agent,
if any, shall promptly so advise the Trust Collateral Agent and the Trust
Collateral Agent may submit an amended notice.
Under the Policy, "Business Day" means any day other than (i) a
Saturday or Sunday or (ii) a day on which banking institutions in the City of
New York, New York or Chicago, Illinois, or any other location of any successor
Servicer, successor Owner Trustee or successor Trust Collateral Agent are
authorized or obligated by law or executive order to be closed.
Financial Security's obligations under the Policy in respect of
Scheduled Payments shall be discharged to the extent funds are transferred to
the Trust Collateral Agent as provided in the Policy whether or not such funds
are properly applied by the Trust Collateral Agent.
Financial Security shall be subrogated to the rights of each Holder of
a Note to receive payments of principal and interest under the Notes to the
extent of any payment by Financial Security under the Policy.
Claims under the Policy constitute direct, unsecured and unsubordinated
obligations of Financial Security ranking not less than pari passu with other
unsecured and unsubordinated indebtedness of Financial Security for borrowed
money. Claims against Financial Security under the Policy and claims against
Financial Security under each other financial guaranty insurance policy issued
thereby constitute pari passu claims against the general assets of Financial
Security. The terms of the Policy cannot be modified or altered by any other
agreement or instrument, or by the merger, consolidation or dissolution of the
Seller or the Trust. The Policy may not be canceled or revoked prior to
distribution in full of all Scheduled Payments with respect to the Notes. The
Policy is not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law. The Policy is governed
by the laws of the State of New York.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion, when read in conjunction with the
discussion of "Federal Income Tax Consequences" in the Prospectus, describes
certain federal income tax consequences to the original purchasers of the Notes
of the purchase, ownership and disposition of the Notes. It does not purport to
discuss all federal income tax consequences that may be applicable to
investment in the Notes or to particular categories of investors, some of which
may be subject to special rules.
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<PAGE> 49
The discussion that follows, and the opinions set forth below of
Morrison & Foerster LLP, special tax counsel to the Issuer ("Tax Counsel"), are
based on the provisions of the Internal Revenue Code of 1986, as amended (the
"Code") and Treasury regulations promulgated thereunder as in effect on the
date hereof and on existing judicial and administrative interpretations
thereof. These authorities are subject to change and to differing
interpretations, which could apply retroactively. The opinions of Tax Counsel
are not binding on the courts or the Internal Revenue Service (the "IRS").
Potential investors should 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.
CHARACTERIZATION OF THE NOTES AS INDEBTEDNESS
In the opinion of Tax Counsel, although no transaction closely
comparable to that contemplated herein has been the subject of any Treasury
regulation, revenue ruling or judicial decision, based on the application of
existing law to the facts as set forth in the applicable agreements, the proper
treatment of the Notes is as indebtedness for federal income tax purposes.
Except as described below, interest paid or accrued on a Note will be
treated as ordinary income to the Noteholders and principal payments on a Note
will be treated as a return of capital to the extent of the Noteholder's basis
in the Note allocable thereto. An accrual method taxpayer will be required to
include in income interest on the Notes when earned, even if not paid, unless
it is determined to be uncollectible. It is not anticipated that the Notes will
be issued with original issue discount. See "Federal Income Tax
Consequences--Trusts for which a Partnership Election is Made--Tax Consequences
to Holders of the Notes" in the Prospectus.
ALTERNATIVE CHARACTERIZATIONS OF THE NOTES
Although it is the opinion of Tax Counsel that the Notes are properly
characterized as indebtedness for federal income tax purposes, no assurance can
be given that such characterization of the Notes will prevail. If the Notes
were treated as an ownership interest in the Receivables, all income on such
Receivables would be income to the holders of the Notes, and related fees and
expenses would generally be deductible (subject to certain limitations on the
deductibility of miscellaneous itemized deductions by individuals) and certain
market discount and premium provisions of the Code might apply to a purchase of
the Notes.
If, alternatively, the Notes were treated as an equity interest in the
Trust, the Trust would be treated as a partnership for federal income tax
purposes. As a partnership, the Trust will not be subject to federal income tax
unless treated as a publicly traded partnership taxable as a corporation. Any
such corporate income tax could materially reduce cash available to make
payments on the Notes. Tax Counsel is of the opinion that, although no
transaction closely comparable to that contemplated herein has been the subject
of any Treasury regulation, revenue ruling or judicial decision and, therefore,
is subject to interpretation, the Trust, if treated as a partnership, will not
be treated as a publicly traded partnership taxable as a corporation. This
opinion is based on Tax Counsel's conclusion that the nature of the income of
the Trust exempts it from the rules that certain publicly traded partnerships
are taxable as corporations.
TRUSTS IN WHICH ALL CERTIFICATES ARE RETAINED BY THE SELLER OR AN AFFILIATE OF
THE SELLER
Tax Counsel will deliver its opinion that a Trust which issues one or
more classes of Notes to investors and all the Certificates of which are
retained by the Seller or an affiliate thereof 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
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related documents will be complied with, and on Tax Counsel's conclusions that
the Trust will constitute a mere security arrangement for the issuance of debt
by the single Certificateholder. In the event the Certificates were later
transferred to more than one person, the discussion under "Trusts for which a
Partnership Election is Made" in the Prospectus would apply to the Trust and
the Notes.
In any event, Tax Counsel will advise the Trust that the Notes will be
classified as debt for federal income tax purposes. If, contrary to the opinion
of Tax Counsel, the IRS successfully asserted that one or more classes of Notes
did not represent debt for federal income tax purposes, such class or classes
of Notes might be treated as equity interests in the Trust. If so treated, the
Trust would most likely in the view of Tax Counsel, be treated as a partnership
for federal income tax purposes. See "Alternative Characterizations of the
Notes" above.
STATE TAX CONSIDERATIONS
Potential Noteholders should consider the state and local income tax
consequences of the purchase, ownership and disposition of the Notes. State and
local income tax laws may differ substantially from the corresponding federal
law, and this discussion does not purport to describe any aspect of the income
tax laws of any state or locality. Therefore, potential Noteholders should
consult their own tax advisors with respect to the various state and local tax
consequences of an investment in the Notes.
ERISA CONSIDERATIONS
Section 406 of ERISA, and/or Section 4975 of the Code, prohibits 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 with persons that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
such Benefit Plan. 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. Title I of ERISA also requires that fiduciaries of a
Benefit Plan subject to ERISA make investments that are prudent, diversified
(except if prudent not to do so) and in accordance with governing plan
documents.
Certain transactions involving the Trust might be deemed to constitute
prohibited transactions under ERISA and the Code if assets of the Trust were
deemed to be assets of a Benefit Plan. Under a regulation issued by the United
States Department of Labor (the "Plan Assets Regulation"), the assets of the
Trust would be treated as plan assets of a Benefit Plan for the purposes of
ERISA and the Code only if the Benefit Plan acquires an "Equity Interest" in
the Trust and none of the exceptions contained in the Plan Assets Regulation is
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. Although
there is little guidance on the subject, the Seller believes that the Notes
should be treated as indebtedness without substantial equity features for
purposes of the Plan Assets Regulation. This determination is based in part
upon the traditional debt features of the Notes, including the reasonable
expectation of purchasers of Notes that the Notes will be repaid when due, as
well as the absence of conversion rights, warrants and other typical equity
features. The debt treatment of the Notes for ERISA purposes could change if
the Trust incurred losses. However, without regard to whether the Notes are
treated as an Equity Interest for such purposes, the acquisition or holding of
Notes by or on behalf of a Benefit Plan could be considered to give rise to a
prohibited transaction if the Trust, the
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Owner Trustee or the Indenture Trustee, the owner of collateral, or any of
their respective affiliates is or becomes a party in interest or a disqualified
person with respect to such Benefit Plan. In such case, certain exemptions from
the prohibited transaction rules could be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire a Note.
Included among these exemptions are: Prohibited Transaction Class Exemption
("PTCE") 90-1, regarding investments by insurance company pooled separate
accounts; PTCE 95-60, regarding investments by insurance company general
accounts; PTCE 91-38, regarding investments by bank collective investment
funds; PTCE 96-23, regarding transactions affected by in-house asset managers;
and PTCE 84-14, regarding transactions effected by "qualified professional
asset managers." Each investor using the assets of a Benefit Plan which
acquires the Notes, or to whom the Notes are transferred, will be deemed to
have represented that the acquisition and continued holding of the Notes will
be covered by one of the exemptions listed above or by another Department of
Labor Class Exemption.
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, however, such plans may be subject to
comparable state law restrictions.
A plan fiduciary considering the purchase of Notes should consult its tax
and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Seller and First Union Capital Markets Corp. (the
"Underwriter"), the Notes will be purchased from the Seller by the Underwriter
upon issuance.
The Underwriting Agreement provides that the Underwriter is obligated
to purchase all of the Notes offered hereby, if any of such Notes are
purchased.
The Seller has been advised by First Union Capital Markets Corp. that
it proposes initially to offer the Notes to the public at the public offering
price set forth on the cover page of this Prospectus Supplement and to certain
dealers at such price less a concession not in excess of % of the principal
amount of the Notes, and that the Underwriter and such dealers may re-allow a
discount of not in excess of % of the principal amount of the Notes to other
dealers. The public offering price and the concession and discount to dealers
may be changed by the Underwriter after the initial public offering of the
Notes offered hereby. In addition, certain fees and expenses of the
Underwriter, including fees and expenses of its counsel, will be paid by the
Seller.
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In connection with the offering of the Notes, the Underwriter may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the Notes. Such transactions may include stabilization transactions
effected in accordance with Rule 104 of Regulation M, pursuant to which such
person may bid for or purchase the Notes for the purpose of stabilizing its
market price. In addition, the Underwriter may impose "penalty bids" whereby it
may reclaim from a dealer participating in the offering the selling concession
with respect to the Notes that such dealer distributed in the offering but
subsequently purchased for the account of the Underwriter in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the price of the Notes at a level above that which might
otherwise prevail in the open market. None of the transactions described in
this paragraph is required, and, if they are taken, may be discontinued at any
time without notice.
NAFI and the Seller have agreed to indemnify the Underwriter against
certain liabilities, including certain losses, claims, damages or liabilities
arising under the Securities Act of 1933, as amended, in connection with
certain untrue statements of material fact or material omissions contained in
the Preliminary Prospectus Supplement, the Prospectus or the Registration
Statement.
The Seller does not intend to apply for listing of the Notes on a
national securities exchange, but has been advised by the Underwriter that the
Underwriter currently intends to make a market in the Notes, as permitted by
applicable laws and regulations. The Underwriter is not obligated, however, to
make a market in the Notes and any such market may be discontinued at any time
at the sole discretion of the Underwriters. Accordingly, no assurance can be
given as to the liquidity of, or trading markets for, the Notes.
In the ordinary course of their respective businesses, First Union
Capital Markets Corp. and its affiliates have engaged and may engage in
investment banking and/or commercial banking transactions with NAFI and its
affiliates. See "Use of Proceeds" herein and "Plan of Distribution" in the
accompanying Prospectus. In connection with the offering contemplated by this
Prospectus Supplement, First Union Corporation has received a fee from the
Seller in respect of certain advisory services relating to the structuring of
the transaction.
This Prospectus Supplement and the accompanying Prospectus may be used
by the Underwriter, affiliates of which have an ownership interest in, or
participate in banking transactions with, NAFI, in connection with offers and
sales related to market making transactions in the Notes. The Underwriter may
act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing market prices at the time of the sale or
otherwise.
LEGAL MATTERS
Certain matters with respect to the legality of the Notes and with
respect to the federal income tax matters discussed under "Certain Federal
Income Tax Consequences" will be passed upon for the Seller by Morrison &
Foerster, New York, New York. Certain matters with respect to the Notes will be
passed upon for the Underwriter by Dewey Ballantine, New York, New York.
RATINGS
As a condition of issuance, the Notes will be rated "AAA" by S&P and
"Aaa" by Moody's primarily on the basis of the issuance of the Policy by the
Insurer. There is no assurance that the ratings initially assigned to the Notes
will not subsequently be lowered or withdrawn by the Rating
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Agencies. Such ratings will not constitute an assessment of the likelihood that
principal prepayments on the Receivables underlying the Notes will be made by
the Obligors thereon or of the degree to which the rate of such prepayments
might differ from that originally anticipated. See "Risk Factors - Ratings on
Notes" herein.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc.
and Subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, changes in shareholder's equity and cash flows for each
of the three years in the period ended December 31, 1996, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
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INDEX OF DEFINED TERMS
"ABS Table"......................................21
"ABS"............................................21
"Additional Receivables Purchase Price"..........40
"Additional Receivables"......................7, 29
"aggregate risks"................................28
"Agreement".......................................4
"APR".............................................9
"Available Amount"...............................37
"Backup Servicer".................................4
"Bankruptcy Loss"................................33
"Benefit Plan"...............................13, 49
"Business Day"................................5, 47
"Certificates"....................................1
"Closing Date"....................................1
"Code".......................................13, 48
"Collateral Agent"............................4, 17
"Collection Account"..........................7, 16
"Custodian"......................................16
"Cut-off Dates"...................................8
"Defaulted Receivable"...........................41
"Determination Date".............................37
"Distribution Account"........................7, 16
"Distribution Date"........................1, 5, 31
"Draw Date"......................................35
"DTC".............................................1
"Due Period"......................................5
"Eligible Account"...............................37
"Eligible Investments"...........................37
"Exchange Act"....................................2
"Final Scheduled Distribution Date"............1, 9
"Financed Vehicles"...........................7, 29
"Financial Security"...........................3, 4
"Funding Trust II"............................8, 17
"Holder"..........................................1
"Holdings"....................................3, 27
"Indenture Events of Default"....................33
"Indenture Trustee"........................1, 4, 17
"Initial Cut-off Date"............................8
"Initial Pre-Funded Amount"......................38
"Initial Receivables".........................7, 29
"Insurance Agreement Event of Default"...........42
"Insurance Agreement".........................7, 35
"Insurer Default"................................43
"Insurer Optional Deposit".......................37
"Insurer".........................................4
"Interest Period".................................5
"Interest Rate"...................................5
"IRS"............................................48
"Issuer".......................................1, 4
"Mandatory Redemption"........................6, 31
"Modeling Assumptions"...........................22
"Monthly Interest"...............................30
"Moody's"........................................13
"NAFI Transferors"...............................17
"NAFI"............................................1
"Note Distribution Account"...................7, 16
"Note Prepayment Amounts"........................46
"Note Redemption Amount"......................6, 32
"Notes"...........................................1
"OFSA"...........................................27
"Order"..........................................47
"Owner Trustee"................................1, 4
"Plan Assets Regulation".........................50
"Policy Claim Amount"............................36
"Policy"..........................................1
"Pool Outstanding Principal Balance"..........6, 32
"Pre-Funded Amount"..............................10
"Pre-Funding Account".............................1
"Pre-Funding Period"..........................1, 10
"PTCE"...........................................51
"Purchase Agreement"..........................8, 17
"Purchase Agreements".........................8, 17
"Rating Agencies"................................13
"Receipt"........................................48
"Receivable Files"...............................16
"Receivables"..............................1, 7, 30
"Received".......................................47
"Record Date".....................................5
"Redemption Price"...............................32
"Required Reserve Amount"........................40
"Retransferred Receivables".......................5
"S&P"............................................13
"Sale Agreement"..................................8
"Scheduled Payments".............................47
"Securities"......................................1
"Seller"......................................1, 26
"Servicer Certificate"...........................32
"Servicer Default"...............................43
"Servicing Fee"..................................45
"Servicing Transfer Date"........................25
"single risks"...................................29
"Spread Account Agreement".......................11
"Spread Account Initial Amount"..................37
"Subsequent Cut-off Date..........................8
"Subsequent Transfer Agreement"..................15
"Subsequent Transfer Date"........................8
"Trust Collateral Agent"..................1, 11, 17
"Trust Property"...........................1, 7, 30
"Trust"...........................................1
"Underwriter"....................................51
"World Omni".....................................27
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PROSPECTUS
NATIONAL AUTO AUTOMOBILE RECEIVABLES TRUSTS
AUTOMOBILE RECEIVABLES-BACKED CERTIFICATES
AUTOMOBILE RECEIVABLES-BACKED NOTES
________________________
NATIONAL FINANCIAL AUTO FUNDING TRUST
(Seller)
________________________
The Automobile Receivables-Backed Certificates (the "Certificates")
and the Automobile Receivable-Backed Notes (the "Notes" and, collectively with
the Certificates, the "Securities") described herein may be sold from time to
time in one or more series, in amounts, at prices and on the 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 will include
either one or more classes of Certificates or, if Notes are issued as part of a
series, one or more classes of Notes and, if specified in the related Prospectus
Supplement, one or more classes of Certificates, in each case as set forth in
the related Prospectus Supplement.
The Certificates and the Notes, if any, of any series of Securities
will be issued by a trust (a "Trust") to be formed with respect to such series
by National Financial Auto Funding Trust (the "Seller"), a wholly owned
subsidiary of National Auto Finance Company, Inc. ("NAFI"). The assets of each
Trust (the "Trust Property") will include a pool of retail installment sale
contracts (the "Receivables") purchased by NAFI principally from motor vehicle
dealers and secured by new and used automobiles, light trucks, vans or
minivans, certain monies paid or payable thereunder on or after the Cutoff Date
set forth in the related Prospectus Supplement (the "Cutoff Date"), an
assignment of the security interest of NAFI in the vehicles financed thereby,
rights to receive proceeds from claims on certain insurance policies covering
the vehicles or the obligors on the Receivables, rights to enforce certain
remedies against NAFI in the event of a breach of a representation or warranty
made by NAFI regarding the Receivables, and certain other property, as more
fully described herein and in the related Prospectus Supplement. In addition,
if so specified in the related Prospectus Supplement, the Trust Property will
include monies on deposit in one or more trust accounts to be established with
the Trustee or the Indenture Trustee, which may include a Pre-Funding Account
and/or a Revolving Account, each of which would be used to purchase additional
Receivables (the "Subsequent Receivables") from the Seller from time to time
during the Pre-Funding Period or Revolving Period specified in the related
Prospectus Supplement.
Each Trust will be formed pursuant to either (i) a Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement") to be entered into
among the Seller, NAFI, in its individual capacity and as Servicer, and the
Trustee specified in the related Prospectus Supplement (the "Trustee") or (ii)
a Trust Agreement (the "Trust Agreement") to be entered into among the Seller,
the Trustee and certain other parties as specified in the related Prospectus
Supplement. If the Trust is formed pursuant to a Trust Agreement, a Sale and
Servicing Agreement (the "Sale and Servicing Agreement") will be entered into
among the Seller, NAFI, in its individual capacity and as Servicer, the Trust
and the Backup Servicer (as defined herein). In either case, the Pooling and
Servicing Agreement or the Trust Agreement and the Sale and Servicing Agreement
are collectively referred to herein as the "Trust Documents." The Notes, if
any, of a series will be issued and secured pursuant to an Indenture (the
"Indenture") between the Trust and the Indenture Trustee specified in the
related Prospectus Supplement (the "Indenture Trustee").
(Continued on following page)
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE SECURITIES, SEE "RISK FACTORS"
AT PAGE 24 HEREIN AND AS MAY BE SET FORTH IN THE RELATED
PROSPECTUS SUPPLEMENT.
________________________
THE CERTIFICATES REPRESENT INTERESTS IN AND THE NOTES REPRESENT OBLIGATIONS
OF THE RELATED TRUST AND DO NOT REPRESENT INTERESTS IN OR
OBLIGATIONS OF NAFI, THE SELLER OR ANY AFFILIATE
OF EITHER.
________________________
<PAGE> 56
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
________________________
Retain this Prospectus for future reference. This Prospectus may not
be used to consummate sales of securities offered hereby unless accompanied by
a Prospectus Supplement.
THE DATE OF THIS PROSPECTUS IS JUNE 6, 1997.
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<PAGE> 57
Each class of Securities of any series will represent the right to
receive a specified amount of payments of principal and/or interest on the
related Receivables in the manner described herein and in the related
Prospectus Supplement. The right of each class of Securities to receive
payments may be senior or subordinate to the rights of one or more of the other
classes of such series. A series may include two or more classes of
Certificates or Notes 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 Certificates or Notes
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.
Distributions on Certificates of any series will be subordinated in priority to
payments due on the related Notes, if any, to the extent described herein and
in the related Prospectus Supplement. The Certificates will represent
fractional undivided interests in the related Trust.
Each class of Securities will represent the right to receive
distributions or payments in the amounts, at the rates, and on the dates set
forth in the related Prospectus Supplement. The rate of distributions in
respect of principal on Certificates and payment in respect of principal on
Notes, if any, of any class will depend on the priority of payment of such
class and the rate and timing of payments (including prepayments, liquidations
and repurchases of Receivables) on the related Receivables.
Unless the related Prospectus Supplement provides for physical
delivery of the Securities, the Certificates and the Notes, if any, of any
series initially will be represented by certificates and notes registered in
the name of Cede & Co., the nominee of The Depository Trust Company ("DTC").
The interests of beneficial owners of the Securities will be represented by
book entries on the records of the participating members of DTC. Definitive
Securities will be available only under limited circumstances.
Certain capitalized terms used in this Prospectus are defined
elsewhere herein. A listing of the pages on which such terms are defined is
found in the "Index of Defined Terms" herein on page 89.
There currently is no secondary market for the Securities. There can
be no assurance that any such market will develop or, if it does develop, that
it will continue. The Securities will not be listed on any securities exchange.
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<PAGE> 58
AVAILABLE INFORMATION
The Seller, as originator of each Trust, has filed with the Securities
and Exchange Commission (the "Commission") a Registration Statement (together
with all amendments and exhibits thereto, referred to herein as the
"Registration Statement") under the Securities Act of 1933, as amended, with
respect to the Securities offered pursuant to this Prospectus. For further
information, reference is made to the Registration Statement which is available
for inspection without charge at the office of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission at Seven World Trade Center, Suite 1300, New York, New York 10048
and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511, and copies of which may be obtained from the
Commission at prescribed rates. The Commission maintains a Web site that
contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the Commission. The
address for such Web site is: http://www.sec.gov.
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Certificates or Definitive Notes are
issued, unaudited monthly and annual reports, containing information concerning
each Trust and prepared by the Servicer, will be sent on behalf of the Trust to
the Trustee for the Certificateholders, the Indenture Trustee for the
Noteholders and Cede & Co., as registered holder of the Certificates and the
Notes and the nominee of DTC. See "Certain Information Regarding the Securities
- - Statements to Securityholders" and " - Book-Entry Registration."
Certificateholders and Noteholders are collectively referred to herein as the
"Securityholders." Certificate Owners or Note Owners may receive such reports,
upon written request, together with a certification that they are Certificate
Owners or Note Owners and payment of any expenses associated with the
distribution of such reports, from the Trustee, with respect to Certificate
Owners, or the Indenture Trustee, with respect to Note Owners, at the addresses
specified in the related Prospectus Supplement. Such reports will not
constitute financial statements prepared in accordance with generally accepted
accounting principles. Neither the Seller or NAFI intends to send any of its
financial reports to Securityholders. The Servicer, on behalf of each Trust,
will file with the Commission periodic reports concerning each Trust to the
extent required under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission thereunder.
The Servicer, on behalf of each Trust, will discontinue the filing of such
periodic reports with the Commission upon completion of the reporting period
required by Rule 15d-1 of the Exchange Act.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Servicer on behalf of each Trust pursuant
to Section 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 related
Securities shall be deemed to be incorporated by reference into this Prospectus
and the related Prospectus Supplement and to be a part hereof and thereof from
the respective dates of filing of such documents. Any statement contained in a
document all or any portion of which is deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus and the related Prospectus Supplement to the extent that a statement
contained herein or in any other subsequently filed document which also is
deemed to be incorporated by reference herein modifies or supersedes such
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<PAGE> 59
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus or the
related Prospectus Supplement.
The Servicer will provide without charge to any person to whom this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the foregoing documents incorporated herein by reference
(other than certain exhibits to such documents). Requests for such copies
should be directed to Chief Financial Officer, National Auto Finance Company,
Inc., One Park Place, Suite 200, 621 N.W. 53rd Street, Boca Raton, Florida
33487 (telephone (800) 999-7535).
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<PAGE> 60
PROSPECTUS SUMMARY
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 contained in the related
Prospectus Supplement to be prepared and delivered in connection with the
offering of each series of Securities. Certain capitalized terms in this
Prospectus Summary are defined elsewhere in this Prospectus and in the related
Prospectus Supplement. A listing of the pages on which some of such terms are
defined is found in the "Index of Defined Terms."
Issuer . . . . . . . . . . . . . . . . . . With respect to each
series of Securities, a trust
(the "Trust") will be formed
by National Financial Auto
Funding Trust (the "Seller")
pursuant to either a Pooling
and Servicing Agreement among
the Seller, National Auto
Finance Company, Inc.
("NAFI"), in its individual
capacity and as Servicer (in
such capacity referred to
herein as the "Servicer"),
and the Trustee specified in
the related Prospectus
Supplement, or a Trust
Agreement between the Seller,
the Trustee specified in the
related Prospectus Supplement
and certain other parties as
specified in the related
Prospectus Supplement.
Seller . . . . . . . . . . . . . . . . . . National Financial
Auto Funding Trust, a
Delaware business trust
wholly owned by NAFI and
affiliates of NAFI. See "The
Seller."
Servicer . . . . . . . . . . . . . . . . . National Auto Finance
Company, Inc. See "NAFI."
Trustee . . . . . . . . . . . . . . . . . . The Trustee specified in the
related Prospectus Supplement
(the "Trustee"). See
"Description of the Purchase
Agreements and the Trust
Documents - The Trustee."
Backup Servicer . . . . . . . . . . . . . . NAFI may be terminated as
Servicer under certain
circumstances, at which time
the Backup Servicer specified
in the related Prospectus
Supplement (the "Backup
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<PAGE> 61
Servicer") will automatically
become the Servicer. See
"Description of the Purchase
Agreements and the Trust
Documents - Servicer
Termination Events" and " -
The Backup Servicer."
Indenture Trustee . . . . . . . . . . . . . With respect to any series of
Securities including one or
more classes of Notes, the
Indenture Trustee specified
in the related Prospectus
Supplement (the "Indenture
Trustee").
The Certificates . . . . . . . . . . . . . Each series of Securities
will include one or more
classes of Certificates which
will be issued pursuant to the
related Trust Documents.
Certificates will be
available for purchase in the
denominations specified in
the related Prospectus
Supplement and
will be available in
book-entry form only unless
otherwise provided in the
related Prospectus
Supplement. Holders of
Certificates
("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 - Book-Entry
Registration."
Other than as provided below
with respect to Strip
Certificates, each class of
Certificates will have a
stated Certificate Balance
(as defined in the related
Prospectus Supplement) 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
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<PAGE> 62
the Pass-Through Rate for
each class of Certificates,
or the initial Pass-Through
Rate and the method for
determining subsequent
changes to the
Pass-Through Rate. In
addition, a series may
include one or more classes
of Certificates ("Strip
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.
A series may include two or
more classes of Certificates
which differ as to timing of
distributions, sequential
order, priority of payment,
seniority, allocation of
loss, Pass-Through Rate or
amount of distributions in
respect of principal or
interest, or as to which
distributions in respect of
principal or interest on any
class may or may not be made
upon the occurrence of
specified events or on the
basis of collections from
designated portions of the
Receivables Pool.
With respect to any series of
Securities including one or
more classes of Notes,
distributions in respect of
the Certificates may be
subordinated in priority of
payment to payments on the
Notes, to the extent
specified in the related
Prospectus Supplement.
If the Seller or Servicer
exercises its option to
purchase the Receivables of
a Trust on the terms and
conditions described below
under "Description of the
Purchase Agreements and the
Trust Documents-Termination,"
Certificateholders will
receive an amount in respect
of the Certificates as
specified in the related
Prospectus Supplement. In
addition, if the related
Prospectus Supplement
provides that the property of
a Trust will
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<PAGE> 63
include a Pre-Funding Account
or Revolving Account,
Certificateholders may
receive a distribution in
respect of principal on or
immediately following the end
of the Pre-Funding Period or
Revolving Period, as
applicable, specified in the
related Prospectus Supplement
in an amount and manner
specified in the related
Prospectus Supplement.
The Notes . . . . . . . . . . . . . . . . . . With respect to any
series of Securities
including one or more classes
of Notes, such Notes will be
issued pursuant to an
Indenture.
Notes will be available for
purchase in the denominations
specified in the related
Prospectus Supplement and
will be available in
book-entry form or, if
specified in the related
Prospectus Supplement, in
definitive form. If Notes are
issued in book-entry form,
holders of Notes
("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 -
Book-Entry Registration."
Other than as provided below
with respect to Strip Notes,
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 and the method
for determining subsequent
changes to the Interest Rate.
In addition, a series may
include one or more classes
of Notes ("Strip Notes")
entitled to (i) principal
payments
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<PAGE> 64
with disproportionate,
nominal or no interest
payments or (ii) interest
payments with
disproportionate, nominal or
no principal payments.
A series may include two or
more classes of Notes which
differ as to the timing and
priority of payment,
seniority, allocations of
loss, Interest Rate or amount
of payments of principal or
interest, or as to which
payments of principal or
interest may or may not be
made upon the occurrence of
specified events or on the
basis of collections from
designated portions of the
Receivables Pool. If the
Seller or the Servicer
exercises its option to
purchase the Receivables
of a Trust on the terms and
conditions described below
under "Description of the
Purchase Agreements and the
Trust Documents-Termination,"
the outstanding Notes, if
any, of such series will be
redeemed as set forth in the
related Prospectus
Supplement. In addition, if
the related Prospectus
Supplement provides that the
property of a Trust will
include a Pre-Funding Account
or Revolving Account, the
outstanding Notes, if any, of
such series will be subject
to partial redemption on or
immediately following the end
of the Pre-Funding Period or
Revolving Period, as
applicable, in an amount and
manner specified in the
related Prospectus
Supplement. In the event of
such partial redemption, the
Noteholders may be entitled
to receive a prepayment
premium from the Trust, in
the amount and to the extent
provided in the related
Prospectus Supplement.
Trust Property . . . . . . . . . . . . . . . . . Each Certificate will
represent a fractional
undivided interest in, and
each Note, if any, will
represent an obligation of,
the related Trust. The assets
of each Trust (the "Trust
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<PAGE> 65
Property") will include a
pool (the "Receivables Pool")
of retail installment sale
contracts (the "Receivables")
purchased or to be purchased
primarily from motor vehicle
dealers ("Dealers") by NAFI
and secured by new and used
automobile light trucks, vans
or minivans (the "Financed
Vehicles"), certain monies
paid or payable thereunder on
or after the Cutoff Date (as
specified in the related
Prospectus Supplement), an
assignment of the security
interest of the NAFI
Transferor in the Financed
Vehicles and of the right to
receive proceeds from claims
on certain insurance policies
covering the Financed
Vehicles or the Obligors, the
assignment of certain rights
of NAFI against the Dealers
originating such Receivables
or the Originators from whom
NAFI acquired such
Receivables, the Collection
Account and certain other
trust accounts as may be
established to provide credit
support or liquidity with
respect to the related Trust
assets or Securities,
including in the case of each
such account all investments
therein, all income from the
investment of funds therein
and all proceeds thereof, and
certain other rights under
the Trust Documents. In
addition, if so specified in
the related Prospectus
Supplement, the Trust
Property will include monies
on deposit in a Pre-Funding
Account and/or Revolving
Account to be established
with the Indenture Trustee or
the Trustee, which will be
used to purchase Subsequent
Receivables (as defined
below) from the Seller from
time to time during the
Pre-Funding Period and/or
Revolving Period specified in
the related Prospectus
Supplement, as well as any
Subsequent Receivables so
purchased. See "The Trusts."
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<PAGE> 66
The Receivables of each
Trust will be purchased by
the Seller from NAFI and/or
one or more special-purpose
finance subsidiaries of NAFI
(each of NAFI and any such
subsidiary, in its capacity
as transferor of Receivables
to the Seller, a "NAFI
Transferor") pursuant to a
purchase agreement (the
"Purchase Agreement") between
the Seller and the applicable
NAFI Transferor on or prior
to the date of issuance of
the Securities. If and to the
extent provided in the
related Prospectus
Supplement, the Seller will
be obligated (subject only to
the availability thereof) to
purchase from one or more
NAFI Transferors and to sell
to the related Trust, and the
related Trust will be
obligated to purchase from
the Seller (subject to the
satisfaction of certain
conditions described in the
applicable Purchase
Agreement), additional
Receivables (the "Subsequent
Receivables") from time to
time (as frequently as daily)
during the Pre-Funding Period
specified in the related
Prospectus Supplement having
an aggregate principal
balance approximately equal
to the amount on deposit in
the Pre-Funding Account (the
"Pre-Funded Amount") on such
Closing Date.
The Trust Property of each
Trust will also include an
assignment of the Seller's
rights under the related
Purchase Agreement, including
rights against NAFI upon the
occurrence of certain
breaches of representations
and warranties thereunder (a
"Repurchase Event"). See
"Description of the Purchase
Agreements and Trust
Documents,Sale and Assignment
of the Receivables" and
"-Servicing Procedures."
Pre-Funding Account . . . . . . . . . . . . . . . If and to the extent
specified in the related
Prospectus Supplement, a
portion of the net
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<PAGE> 67
proceeds from the offering of
the Securities of a series
(such amount, the "Pre-Funded
Amount") may be deposited in
a segregated account (the
"Pre-Funding Account") with
the Trustee or Indenture
Trustee, as the case may be,
for the benefit of the
Securityholders. During the
period specified in the
related Prospectus Supplement
(the "Pre-Funding Period")
the Pre-Funded Amount will be
reduced as it is used to
purchase Subsequent
Receivables subject to the
satisfaction of certain
conditions specified under
the related Trust Documents.
The maximum length of the
Pre-Funding Period will be
specified in the related
Prospectus Supplement and
will not exceed one year. The
Pre-Funded Amount will be
specified in the related
Prospectus Supplement and
will not exceed the lesser of
(i) 25% of the gross proceeds
of the offering of the
related series of Securities
and (ii) the aggregate
principal balance of
Subsequent Receivables that
the Seller anticipates it
will be able to acquire and
convey to the Trust during
the Pre-Funding Period.
Funds on deposit in the
Pre-Funding Account will be
invested in Eligible
Investments pending release
of such funds to the Seller
in connection with the
purchase of Subsequent
Receivables.
Prior to the conveyance of any
Subsequent Receivables to the
Trust, the Seller will be
required to give notice of
the Subsequent Receivables to
be conveyed to the Trust to
the Trustee(s), the Rating
Agencies and any third-party
credit enhancement provider.
Upon the satisfaction of the
conditions set forth in the
Trust Documents, including
the receipt by the Trustee
and/or Indenture Trustee, as
applicable, of an executed
assignment, the Trustee
and/or Indenture Trustee, as
applicable, will release from
the
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<PAGE> 68
Pre-Funding Account the
necessary funds to purchase
the Subsequent Receivables to
be conveyed to the Trust on
such date. In no event will
funds be released from the
Pre-Funding Account to
purchase Subsequent
Receivables unless the Rating
Agencies rating the
Securities of such series
confirm that the ratings on
the Securities of such series
have not been withdrawn or
reduced as a result of the
conveyance of the Subsequent
Receivables to the Trustee.
Subsequent Receivables
purchased with funds released
from the Pre-Funding Account
will have been originated in
accordance with NAFI's
general underwriting
guidelines as in effect from
time to time and will not be
selected on the basis of any
adverse selection criteria.
If any Pre-Funded Amount
remains on deposit in the
Pre-Funding Account at
the end of the Pre-Funding
Period, such amount, in the
amounts and in the manner
specified in the related
Prospectus Supplement, will
be used to prepay some or all
classes of the Securities.
In the event of such
prepayment, the
Securityholders may be
entitled to receive a
prepayment premium in the
amount and to the extent
provided in the related
Prospectus Supplement. Such a
prepayment could result in
the Securityholders receiving
principal payments at a time
when the Securityholders are
unable to reinvest such
payments in investments
having a yield and rating
comparable to the yield and
rating on the Securities. See
"Risk Factors-Yield and
Prepayment Considerations."
Revolving Account . . . . . . . . . . . . . . . . If the related Prospectus
Supplement so provides, there
may be a period commencing on
the date of issuance of a
class or classes of Notes or
Certificates of a
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<PAGE> 69
series and ending on the date
set forth in the related
Prospectus Supplement (the
"Revolving Period") during
which no principal payments
will be made to one or more
classes of Notes or
Certificates of the related
series as are identified in
such Prospectus Supplement.
All collections of principal
otherwise allocated to such
classes of Notes or
Certificates may be (i)
utilized by the Trust during
the Revolving Period to
acquire additional
Receivables that satisfy the
standards described under
"Description of the Purchase
Agreements and the Trust
Documents -- Sale and
Assignment of the
Receivables" herein and the
criteria set forth in the
related Prospectus
Supplement, (ii) held in an
account and invested in
Eligible Investments for
later distribution to
Securityholders, (iii)
applied to those Notes or
Certificates, if any,
specified in the related
Prospectus Supplement as then
are in amortization, or (iv)
otherwise applied as
specified in the related
Prospectus Supplement.
An "Amortization Period" is
the period during which an
amount of principal is
payable to holders of a
series of Securities that,
during the Revolving Period,
were not entitled to such
payments. If so specified in
the related Prospectus
Supplement, during an
Amortization Period all or a
portion of principal
collections on the
Receivables may be applied as
specified above for a
Revolving Period and, to the
extent not so applied, will
be distributed to the classes
of Notes or Certificates
specified in the related
Prospectus Supplement as then
being entitled to payments of
principal. In addition, if
so specified in the related
Prospectus Supplement,
amounts deposited in certain
accounts for the benefit of
one or more classes of Notes
or Certificates may be
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<PAGE> 70
released from time to time or
on a specified date and
applied as a payment of
principal on such classes of
Notes or Certificates. The
related Prospectus Supplement
will set forth the
circumstances which will
result in the commencement of
an Amortization Period
Each Trust that has a
Revolving Period may also
issue to the Seller a
certificate evidencing an
undivided beneficial interest
(the "Retained Interest") in
the Trust not represented by
the other Securities issued
by such Trust. As further
described in the related
Prospectus Supplement, the
value of such Retained
Interest will fluctuate as
the amount of Trust Property
fluctuates and the amount of
Notes and/or Certificates of
the related series of
Securities outstanding is
reduced.
Credit Enhancement . . . . . . . . . . . . . . . If and to the extent
specified in the related
Prospectus Supplement, credit
enhancement with respect to a
Trust or any class of
Securities may include any
one or more of the following:
a financial guaranty
insurance policy (a "Policy")
issued by an insurer
specified in the related
Prospectus Supplement (a
"Security Insurer"),
subordination of one or more
other classes of Securities,
a reserve account,
overcollateralization,
letters of credit, credit or
liquidity facilities,
repurchase obligations, third
party payments or other
support, cash deposits or
other arrangements. A form of
credit enhancement may have
certain limitations and
exclusions from coverage
thereunder, which will be
described in the related
Prospectus Supplement.
"Description of the Purchase
Agreements and the Trust
Documents - Credit
Enhancement."
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<PAGE> 71
Servicer and OFSA . . . . . . . . . . . . . . . . The Servicer will be directly
obligated to the Trustee for
the servicing and
administering of the
Receivables pursuant
to the Trust Documents.
With respect to each series
of Securities, compensation
to the Servicer will include
a monthly fee (the "Servicing
Fee") that will be payable
from the related Trust to the
Servicer on each Distribution
Date in an amount equal to
the product of one-twelfth of
the per annum rate specified
in the related Prospectus
Supplement multiplied by the
aggregate principal balance
of the Receivables (the
"Aggregate Principal
Balance") as of the first day
of the prior calendar month,
plus any late fees and other
administrative fees and
expenses or similar charges
collected with respect to the
Receivables during such
Monthly Period. The Servicer
may, to the extent provided
in the Trust Documents and
with the prior written
consent of the Security
Insurer, if any, delegate any
of its servicing duties to
one or more subservicers;
provided, however, that
notwithstanding the
delegation of its duties
pursuant to a subservicer
arrangement, the Servicer
will not be relieved of its
obligations with respect to
the servicing of the
Receivables. If specified in
the related Prospectus
Supplement, the Servicer will
enter into a Subservicing
Agreement (the "Subservicing
Agreement") with Omni
Financial Services of
America, Inc., a wholly owned
subsidiary of World Omni
Financial Corp. ("OFSA"),
pursuant to which OFSA will
subservice the Receivables
and maintain possession of
the Receivable Files in a
custodial capacity on behalf
of the Trustee. In its
capacity as subservicer, OFSA
will directly service the
Receivables and will collect
payments received on the
Receivables, engage in
collection efforts in respect
of past due
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<PAGE> 72
Receivables and, where
appropriate, repossess and
liquidate Financed Vehicles
securing defaulted
Receivables. Unless
otherwise specified in the
related Prospectus Supplement,
none of the Servicer, the
Security Insurer or OFSA will
have any obligation to make
advances of delinquent
payments of principal and
interest on the Receivables.
None of the Trustee, the
Trust, the Indenture Trustee,
the Security Insurer or the
Securityholders will be party
to the Subservicing Agreement
and none of them will have
any rights to enforce the
Subservicing Agreement other
than as such rights may be
assigned to the Trustee in
the event it acts as Back-Up
Servicer or successor
Servicer; provided, however,
the Security Insurer, if any,
will have the right to
terminate any subservicing
arrangement in connection
with a termination of the
Servicer.
Receivables . . . . . . . . . . . . . . . . . . . The Receivables forming part
of the Trust Property of each
Trust were or will have been
originated by Dealers in the
ordinary course of business.
The Receivables will
generally be prepayable at
any time without penalty to
the purchaser or
co-purchasers of the Financed
Vehicle or other person or
persons who are obligated to
make payments thereunder
(each, an "Obligor"). See "The
Receivables." Information
with respect to each
Receivables Pool, including
the weighted average annual
percentage rate and the
weighted average remaining
maturity, will be set forth
in the related Prospectus
Supplement.
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Collection Account and
Lockbox Account . . . . . . . . . . . . . . . . With respect to each
series of Securities, the
Servicer will establish and
maintain one or more
separate accounts (the
"Collection Account") in the
name of the Trustee or, in
the case of any series
including one or more classes
of Notes, in the name of the
Indenture Trustee for the
benefit of the
Certificateholders and the
Noteholders, if any. All
payments from Obligors that
are received by the Servicer
or any subservicer on behalf
of each Trust will be
deposited in the related
Collection Account not later
than two Business Days after
receipt thereof or, if
acceptable to the applicable
Rating Agencies, such other
time period as may be
specified in the related
Prospectus Supplement. Either
the Servicer or a subservicer
will establish and maintain a
lockbox account (the "Lockbox
Account") with a bank or
other depository institution
(the "Lockbox Bank") to which
payments in respect of motor
vehicle installment debt
obligations and lease
obligations serviced by the
Servicer or such subservicer
are remitted. Obligors will
be notified to remit payments
in respect of the Receivables
directly to the Lockbox
Account or, if acceptable to
the applicable Rating
Agencies, such other account
or accounts as may be
specified in the related
Prospectus Supplement.
Unless otherwise specified in
the related Prospectus
Supplement, the Lockbox
Account will not be
segregated nor assigned or
pledged to the Trustee or the
Indenture Trustee and
payments in respect of the
Receivables deposited to the
Lockbox Account may be
commingled with collections
in respect of other motor
vehicle installment debt
obligations and/or lease
obligations serviced by the
Servicer or such subservicer.
Neither the Trustee nor the
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Servicer will have any
rights to withdraw or
otherwise direct
disposition of funds on
deposit in the Lockbox
Account. The Servicer will
be permitted to use any
alternative remittance
schedule acceptable to the
Rating Agencies (as defined
below) and to the Security
Insurer, if any (unless the
Security Insurer shall be in
continuing default on its
obligations under the Policy
or certain bankruptcy events
shall have occurred with
respect to the Security
Insurer (an "Insurer
Default")). See "Description
of the Purchase Agreements
and the Trust
Documents-Collections."
Mandatory Purchases of Certain
Receivables . . . . . . . . . . . . . . . . . With respect to each
series of Securities, NAFI
will make certain
representations and
warranties to the Seller
regarding the Receivables
conveyed to the Seller in the
related Purchase Agreement.
The Seller will in turn make
representations and
warranties to the Trustee
corresponding to those made
by NAFI pursuant to the
related Purchase Agreement
and will assign to the
Trustee the right to enforce
the representations and
warranties made by NAFI for
the benefit of the related
Trust and the Security
Insurer, if any, and if such
series of Securities includes
one or more classes of Notes,
the Trustee will assign its
right to enforce such
representations and
warranties to the related
Indenture Trustee as
collateral for the Notes. The
Trustee and the Indenture
Trustee, if any, as assignees
of the obligations of NAFI to
the Seller under the Purchase
Agreement will be entitled to
require that NAFI repurchase
any Receivable if the
interests of the
Certificateholders, the
Noteholders, if any, the
Security Insurer, if any, or
the related Trust therein are
materially and adversely
affected by a breach of any
such
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representation or warranty
and such breach is not
cured within the period
specified in the
related Prospectus
Supplement, if any such
period is so specified (a
"Repurchase Event"). See
"Description of the
Purchase Agreements and the
Trust Documents-Sale and
Assignment of the
Receivables." No assurance
can be given that the Seller
or NAFI will at any time have
sufficient funds to satisfy
any such repurchase
requirement. Mandatory
repurchase by the Seller or
NAFI of the Receivables will
reduce the average life of
the Securities and could
result in the Securityholders
receiving unexpected
principal payments at a time
when such Securityholders are
unable to reinvest such
payments in investments
having a yield and rating
comparable to the yield and
rating on the Securities.
See "Risk Factors-Yield and
Prepayment Considerations."
Optional Purchase of Receivables . . . . . . . With respect to each
series of Securities, the
Seller or the Servicer may
purchase all the Receivables
held by the related Trust on
any Distribution Date
following the first Monthly
Period as of which the
Aggregate Principal Balance
has declined to 10% or less
(or such other percentage as
may be specified in the
related Prospectus
Supplement) of the Cutoff
Date Principal Balance,
subject to certain provisions
in the related Trust
Documents. Such right may be
exercised only with the prior
written consent of the
Security Insurer, if any, if
such retransfer would result
in a claim under any Policy
or would result in any amount
owing to the Security
Insurer, if any, or the
Securityholders remaining
unpaid. See "Description of
the Purchase Agreements and
the Trust Documents-
Termination."
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<PAGE> 76
Tax Status . . . . . . . . . . . . . . . . . . The anticipated federal
income tax consequences of
the purchase, ownership and
disposition of Securities
issued by a Trust will be
discussed in the related
Prospectus Suppleement. See
"Certain Federal Income Tax
Consequences" herein and in
the related Prospectus
Supplement.
ERISA Considerations . . . . . . . . . . . . . Subject to the considerations
discussed under "ERISA
Considerations" herein and
in the related Propectus
Suppleement, the Notes may
be eligible for purchase by
employee benefit plans. The
related Prospectus
Supplement will provide
further information with
respect to the eligibility of
a class of Certificates for
purchase by employee benefit
plans. See "ERISA
Considerations" herein and in
the related Prospectus
Supplement.
Rating . . . . . . . . . . . . . . . . . . . . As a condition of
issuance, the Securities of
each series will be rated in
one of the four highest
rating categories by at least
one nationally recognized
rating agency (a "Rating
Agency"). A security rating
is not a recommendation to
buy, sell or hold securities
and there is no assurance
that the ratings initially
assigned to such Securities
will not be subsequently
lowered or withdrawn by the
Rating Agencies. In the event
the rating initially assigned
to any Securities is
subsequently lowered for any
reason, no person or entity
will be obligated to provide
any credit enhancement in
addition to the credit
enhancement, if any,
specified in the related
Prospectus Supplement. Any
rating assigned to the
Securities by a Rating Agency
will reflect its assessment
solely of the likelihood that
holders of the Securities
will receive payment of the
principal thereof and
interest thereon. Such
rating will not constitute an
assessment of the likelihood
that principal
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prepayments on the Receivables
underlying the Securities
will be made by the obligors
thereon or of the degree to
which the rate of such
prepayments might differ from
that originally anticipated.
Registration of Certificates . . . . . . . . . Unless the related
Prospectus Supplement
provides for physical
delivery of the Securities,
the Certificates and the
Notes, if any, of each series
will be registered in the
name of Cede & Co., as the
nominee of DTC, and will be
available for purchase only
in book-entry form on the
records of DTC and
participating members
thereof. Certificates and
Notes will be issued in
definitive form only under
the limited circumstances
described herein. All
references herein to
"Holders" or
"Certificateholders" or
"Noteholders" shall reflect
the rights of beneficial
owners of Certificates (the
"Certificate Owners") or of
Notes ("Note Owners"), as the
case may be, as they may
indirectly exercise such
rights through DTC and
participating members
thereof, except as otherwise
specified herein or in the
related Prospectus
Supplement. See "Description
of the Purchase Agreements
and the Trust
Documents-Book-Entry
Registration."
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<PAGE> 78
RISK FACTORS
CERTAIN LEGAL ASPECTS
With respect to each series of Securities, the transfer of the
Receivables to the related Trust will be subject to the requirements of the
Uniform Commercial Code (the "UCC") as in effect in the states of Florida and
Delaware. The Seller will take or cause to be taken such action as is required
to perfect the Trust's rights in the Receivables. Each Trust Agreement will
provide that either the Trustee or a custodian specified in the related
Prospectus Supplement will hold the Receivable Files on behalf of each Trust or
that NAFI or the Servicer will retain possession of such Receivable Files. If,
however, through inadvertence or otherwise, any of the Receivables were sold to
another party (or a security interest therein were granted to another party)
that purchased (or took such security interest in) any of such Receivables in
the ordinary course of its business and took possession of such Receivables,
the purchaser (or secured party) would acquire an interest in the Receivables
superior to the interest of the related Trust if the purchaser (or secured
party) acquired (or took a security interest in) the Receivables for new value
and without actual knowledge of such Trust's interest.
Due to the administrative burden and expense, the certificates of
title for the Financed Vehicles will not be amended to reflect the assignment
of the security interests in the Financed Vehicles by NAFI to the Seller, or by
the Seller to the Trustee. In the absence of such an amendment, the Trustee may
not have a perfected security interest in the Financed Vehicles. Moreover,
statutory liens for repairs or unpaid taxes may have priority even over
perfected security interests in the Financed Vehicles. See "Description of the
Purchase Agreements and the Trust Documents - Sale and Assignment of the
Receivables" and "Certain Legal Aspects of the Receivables."
INSOLVENCY RISKS
Each NAFI Transferor intends that any transfer of Receivables to the
Seller will constitute a sale, rather than a pledge of the Receivables to
secure indebtedness of the NAFI Transferor. However, if the NAFI Transferor
were to become a debtor under the federal bankruptcy code or similar applicable
state laws (collectively, "Insolvency Laws"), a creditor or trustee in
bankruptcy of the NAFI Transferor or the NAFI Transferor as
debtor-in-possession might argue that such sale of Receivables by the NAFI
Transferor was a pledge of the Receivables rather than a sale. This position,
if presented to or accepted by a court, could cause, among other things, the
related Trust to experience a delay in or reduction of collections on the
Receivables.
In addition, if NAFI were to become a debtor under any Insolvency Law,
a creditor or trustee in bankruptcy of NAFI or NAFI as debtor-in-possession
might argue that the assets and liabilities of the Seller should be
consolidated with the assets and liabilities of NAFI. The Seller has taken and
will take steps in structuring the transactions contemplated hereby and by
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<PAGE> 79
the related Prospectus Supplement that are intended to make it unlikely that
any such attempt to consolidate the Seller and NAFI would succeed. See "The
Seller." In addition, the Seller intends that any transfer of Receivables to a
Trust will constitute a sale, rather than a pledge of the Receivables to secure
indebtedness of the Seller. No assurance can be given, however, that such a
consolidation will not occur. If a bankruptcy trustee for NAFI or a creditor
of NAFI were to take the view that NAFI and the Seller or the Trust should be
substantively consolidated or if a filing is made by or against the Seller
under any applicable bankruptcy or insolvency laws, then delays in payments on
the Securities or reductions in such payments could result.
NATURE OF OBLIGORS
The obligors under the Receivables (the "Obligors") generally have
marginal credit and fall into one of two categories: (1) customers with
moderate income, limited assets and other income characteristics which cause
difficulty in borrowing from banks, captive finance companies of auto
manufacturers or other traditional sources of auto loan financing and (2)
customers with poor credit records that may include a history of irregular
employment, previous bankruptcy filings, voluntary repossessions of property or
prior defaults in the repayment of personal debt obligations. Because of the
greater credit risk associated with non-prime motor vehicle retail installment
contracts, NAFI expects to sustain a higher level of delinquencies and credit
losses than that experienced by auto financing sources that finance motor
vehicle purchasers with lower credit-risk profiles. In addition, the payment
experience of Obligors with marginal credit is likely to be more sensitive to
changes in the economic climate in the areas in which such Obligors reside. In
the event of a default under a Receivable, the only source of payment on such
Receivable may be liquidation proceeds from the related Financed Vehicle.
The servicing of receivables of customers with such credit profiles
requires special skill and diligence. NAFI believes that its credit loss and
delinquency experience reflect in part its trained staff and collection
procedures. If NAFI is removed as Servicer, or if NAFI resigns or is terminated
as Servicer by the Security Insurer (as defined in the related Prospectus
Supplement), if any, then a backup servicer, if any, or other successor
servicer will agree to assume the obligations of successor servicer under the
related Sale and Servicing Agreement or the related Pooling and Servicing
Agreement. There can be no assurance, however, that collections with respect to
the Receivables would not be adversely affected by a change in servicer.
SUBORDINATION
To the extent specified in the related Prospectus Supplement,
distributions of interest and principal on some or all classes of Certificates
of such series may be subordinated in priority of payment to interest and
principal due on the Notes (if any) of such series and/or to distributions of
interest and principal on other classes of Certificates of such series.
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Accordingly, the yield on such subordinated classes of Securities will be more
sensitive to losses on the Receivables than classes of Securities that are
prior in right of distribution to such subordinated classes.
LIMITED ASSETS
No Trust will have any significant assets or sources of funds other
than the Receivables and, to the extent provided in the related Prospectus
Supplement, a Pre-Funding Account, a Revolving Account and any credit
enhancement specified in the related Prospectus Supplement. The Notes, if any,
of any series will represent obligations solely of, and the Certificates of
such series will represent interests solely in, the related Trust, and neither
the Notes nor the Certificates of any such series will be insured or guaranteed
by the Seller, the Servicer, the applicable Trustee, the applicable Indenture
Trustee, if any, or, except as specified in the related Prospectus Supplement,
any other person or entity. Consequently, holders of the Securities of any
series must rely for payment upon payments on the related Receivables and, if
and to the extent available, amounts on deposit in the Pre-Funding Account
and/or Revolving Account, if any, and any credit enhancement, if any, as
specified in the related Prospectus Supplement. In connection with the sale of
the Receivables by the applicable NAFI Transferor to the Seller and by the
Seller to the Trust, NAFI and the Seller will make certain representations and
warranties regarding the characteristics of the Receivables and, in certain
circumstances, NAFI and the Seller are required to repurchase Receivables with
respect to which such representations or warranties are not true as of the date
made. There is no assurance, however, that NAFI or the Seller will have the
financial ability to effect any such repurchase obligation.
YIELD AND PREPAYMENT CONSIDERATIONS
The weighted average life of the Securities will be reduced by full or
partial prepayments on the Receivables. The Receivables will generally be
prepayable at any time without penalty. Prepayments (or, for this purpose,
equivalent payments to the related Trust) may result from payments by Obligors,
liquidations due to default, the receipt of proceeds from physical damage or
credit insurance, repurchases by NAFI or the Seller as a result of certain
uncured breaches of the warranties made by it with respect to the Receivables
("Warranty Receivables"), purchases by the Servicer as a result of certain
uncured breaches of the covenants made by it with respect to the Receivables
("Administrative Receivables") in the related Agreement, or either of the
Seller or the Servicer exercising its option to purchase all of the remaining
Receivables.
The amounts paid to Securityholders in respect of principal on any
Distribution Date or Payment Date will generally include all or a portion of
the prepayments on the Receivables during the corresponding Monthly Periods.
The Certificateholders and the Noteholders will bear all reinvestment risk
resulting from the timing of payments of principal on the Securities.
LIMITED LIQUIDITY
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There is currently no market for the Securities of any series. There
can be no assurance that any such market will develop or, if it does develop,
that it will provide Securityholders with liquidity of investment or will
continue for the life of the Securities. The Securities will not be listed on
any securities exchange.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be issued in book-entry, rather than physical, form and, as a
result, in certain circumstances the liquidity of the Securities in the
secondary market and the ability of the Certificate Owners and Note Owners to
pledge them may be adversely affected. See "Plan of Distribution" and "Certain
Information Regarding the Securities - Book-Entry Registration."
LIMITED OPERATING HISTORY
NAFI commenced operations in October of 1994. Accordingly, its
historical delinquency, repossession and loss experience is limited. No
assurance can be given that the delinquency, repossession and loss experience
on the Receivables will be as favorable as the experience reflected in the
applicable Prospectus Supplement, especially in light of such limited
historical experience. In particular, there can be no assurance that the rate
of delinquencies and loan losses may not increase over time.
FEDERAL AND STATE CONSUMER PROTECTION LAWS
Various federal and state laws impose requirements and restrictions
applicable to the origination and the servicing of the Receivables. Violations
of certain of those laws may give rise to claims and defenses by an Obligor
under a Receivable against the Seller, the Servicer or the Trustee. In
addition, an Obligor may be entitled to assert against the Seller, the Servicer
or the Trustee claims and defenses which it has against the seller of the
Financed Vehicle. In either such case, the Servicer or the Trustee may be
unable to enforce the affected Receivable, thereby potentially diminishing
payments on the Certificates. See "Certain Legal Aspects of the Receivables."
THE TRUSTS
With respect to each series of Securities, the Seller will establish a
Trust pursuant to the related Trust Documents. Prior to the sale and assignment
of the related Receivables pursuant to the related Trust Documents, the Trust
will have no assets or obligations. The Trust will not engage in any business
activity other than acquiring and holding the Trust Property, issuing the
Certificates and the Notes, if any, of such series and distributing payments
thereon.
Each Certificate will represent a fractional undivided interest in,
and each Note, if any, will represent an obligation of, the related Trust. The
Trust Property of each Trust will include (i) a Receivables Pool; (ii) all
monies paid or payable thereon on or after the Cutoff
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Date (as specified in the related Prospectus Supplement); (iii) such amounts as
from time to time may be held in the Collection Account (including all
investments in the Collection Account and all income from the investment of
funds therein and all proceeds thereof) and certain other accounts (including
the proceeds thereof); (iv) an assignment of the security interest of the NAFI
Transferor in the Financed Vehicles securing the related Receivables; (v) an
assignment of the right to receive proceeds from the exercise of rights against
Dealers and Originators under agreements between NAFI and such Dealers and
Originators and the assignment of rights in respect of each related Receivable
from the applicable Dealer or Originator to NAFI; (vi) an assignment of the
right to receive proceeds from claims on certain insurance policies covering
the related Financed Vehicles or Obligors; (vii) an assignment of the rights of
the Seller under the related Purchase Agreement, and (viii) certain other
rights under the related Trust Documents. See "The Receivables" and
"Description of the Purchase Agreements and the Trust Documents - Collections."
The Trust Property will also include, if so specified in the related Prospectus
Supplement, monies on deposit in a Pre-Funding Account and/or Revolving Account
to be established with the Indenture Trustee or the Trustee, which will be used
to purchase Subsequent Receivables from the Seller from time to time (and as
frequently as daily) during the Pre-Funding Period and/or Revolving Period
specified in the related Prospectus Supplement. Any Subsequent Receivables so
purchased will be included in the related Receivables Pool forming part of the
Trust Property, subject to the prior rights of the related Indenture Trustee
and the Noteholders therein. In addition, to the extent specified in the
related Prospectus Supplement, a financial guaranty insurance policy or some
other form of credit enhancement may be issued to or held by the Trustee or the
Indenture Trustee for the benefit of holders of one or more classes of
Securities.
THE TRUSTEE
The Trustee for each Trust will be specified in the related Prospectus
Supplement. The Trustee's liability in connection with the issuance and sale of
the Securities of such series will be limited solely to the express obligations
of such Trustee set forth in the related Trust Documents. A Trustee may resign
at any time, in which event the Seller will be obligated to appoint a successor
trustee acceptable to the Security Insurer, if any. The Seller, with the
consent of the Security Insurer, if any (prior to an Insurer default), may also
remove the Trustee if the Trustee ceases to be eligible to continue as Trustee
under the related Trust Documents or if the Trustee becomes insolvent. In such
circumstances, the Seller will be obligated to appoint a successor trustee
acceptable to the Security Insurer. Any resignation or removal of an Trustee
and appointment of a successor trustee will be subject to any conditions or
approvals specified in the related Prospectus Supplement and will not become
effective until acceptance of the appointment by the successor trustee.
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THE RECEIVABLES
GENERAL
Pursuant to the Purchase Agreements, the Seller will acquire the
Initial Receivables from NAFI and/or one or more special-purpose finance
subsidiaries of NAFI to which NAFI may have previously transferred such
Receivables (each of NAFI and any such subsidiary, in its a capacity as
transferor of Receivables to the Seller, a "NAFI Transferor"). NAFI will make
certain representations and warranties with respect to each Receivable as of
the date of the transfer of such Receivable to the Seller pursuant to the
applicable Purchase Agreement and the Seller will assign such representations
and warranties to the Trustee. In the case of a series consisting of one or
more classes of Notes, the Trustee will in turn assign such representations and
warranties of NAFI to the Indenture Trustee pursuant to the Indenture. See
"Description of the Purchase Agreements and the Trust Documents."
Each Receivable will have been purchased by NAFI either from a Dealer
pursuant to a Dealer Agreement (such Receivables, "Dealer Receivables") or as
part of an bulk acquisition from an Originator pursuant to an Originator
Agreement (such Receivables, "Portfolio Receivables").
Each Dealer makes representations and warranties with respect to each
motor vehicle retail installment sale contract purchased by NAFI and with
respect to the security interests in the motor vehicles relating thereto
pursuant to a Dealer Agreement. Upon breach of any representation or warranty
made by such a Dealer with respect to a retail installment sale contract, NAFI
has the right under the applicable Dealer Agreement (which rights will be
assigned to the Seller by the NAFI Transferor and in turn by the Seller to the
Trust) to require such Dealer to repurchase such retail installment sale
contract. Except for the right to require such repurchases, no Dealer Agreement
provides for recourse to the Dealer for unpaid amounts on a retail installment
sale contract. The failure of a Dealer or a group of affiliated Dealers to
repurchase Receivables pursuant to a Dealer Agreement with NAFI upon a breach
of representations or warranties made therein with respect to such Receivables
could adversely impact NAFI's ability to honor its corresponding obligations,
if any, to repurchase such Receivables under the Purchase Agreement as well as
the Seller's ability to honor its own obligations, if any, to accept
retransfers of such Receivables under the Trust Documents. See "Description of
the Purchase Agreements and Trust Documents - Sale and Assignment of the
Receivables" herein and the related Prospectus Supplement. No representations
are made as to the financial condition of any of the Dealers from whom NAFI has
or will purchase Receivables and there can be no assurance as to the ability of
any Dealer to perform its obligations under any Dealer Agreement.
UNDERWRITING
The Obligors under the Receivables generally have marginal credit and
fall into one of two categories: (1) customers with moderate income, limited
assets and other income
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characteristics which cause difficulty in borrowing from banks, captive finance
companies of automakers or other traditional sources of auto loan financing and
(2) customers with poor credit records which may include a history of irregular
employment, previous bankruptcy filings, voluntary repossessions of property or
prior defaults in the repayment of personal debt obligations. Because of the
greater credit risk associated with non-prime motor vehicle retail installment
contracts, NAFI expects to sustain a higher level of delinquencies and credit
losses than that experienced by auto financing sources that finance motor
vehicle purchasers with lower credit risk profiles. In addition, the payment
experience on Receivables of Obligors with marginal credit is likely to be more
sensitive to changes in the economic climate in the areas in which such
Obligors reside. Although the interest rates charged to such customers is
higher than the interest rates charged to more creditworthy customers, there
can be no assurance that the incremental interest charged to such customers
will be sufficient to offset losses on the Receivables.
Dealer Receivables
Each Dealer Receivable has been or will be purchased by NAFI after a
review in accordance with underwriting procedures intended to assess the
borrower's ability to repay the loan evidenced by such Receivable and the
adequacy of the related Financed Vehicle as collateral.
NAFI requires each Dealer submitting a Receivable for purchase to
provide certain information, including a completed loan application listing the
applicant's assets, liabilities, income, credit and employment history and
other personal information. NAFI evaluates an applicant by considering the
relationship of the applicant's monthly income to monthly expenses, including
expenses relating to such motor vehicle loan and ownership of the motor
vehicle. NAFI also obtains a credit report on the applicant from an independent
credit bureau. The credit report typically contains information on matters such
as previous payment experience, credit history with merchants and lenders,
installment debt payments, defaults and bankruptcies, if any.
Each loan application and the related credit report are reviewed by a
credit officer. In addition, the credit officer obtains verification of
information in the loan application regarding residence, employment, and
income. The credit officer then calculates certain debt-to-income ratios and
payment-to-income ratios on the basis of the verified information in the loan
application and the anticipated monthly auto loan payment and associated
expenses (including the expense of insuring the vehicle) and compares the
results to the target ratios established in NAFI's general underwriting
guidelines. NAFI utilizes a proprietary credit scoring system initially
developed by Fair, Isaac and Company, Inc. to assist it in determining a
customer's creditworthiness. Among other requirements, NAFI generally requires
that each Obligor make a minimum 10% downpayment on the purchase price of the
vehicle. In addition to evaluating the loan applicant's ability to make
payments on the auto loan and to service its other consumer debt obligations,
NAFI considers the value of the car in relation to the amount of the loan
requested. Although NAFI does not adhere to any specific loan-to-value ratios,
the
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amount of a motor vehicle loan for a new motor vehicle generally will not
exceed 115% of the price paid by the Dealer for the motor vehicle, in the case
of new vehicles, or 115% of the vehicle's trade-in value indicated in the
National Automobile Dealers Association's Guide on Retail and Wholesale Values,
in the case of used vehicles. In many instances, NAFI will request additional
supporting information or discuss possible changes to the terms of a Dealer
Receivable that would allow it to be purchased in accordance with NAFI's
standards. NAFI allows some flexibility in applying the underwriting
guidelines, but a greater level of management scrutiny is involved in approving
loans which deviate from these guidelines. A substantial majority of NAFI's
portfolio of motor vehicle retail installment sale contracts meet all of its
requirements.
If NAFI decides to purchase a Dealer Receivable, it reviews the actual
Receivable submitted for purchase and the required supporting documentation. In
addition, NAFI verifies that the Obligor on the Dealer Receivable has obtained
a comprehensive and collision insurance policy naming NAFI as loss payee.
Certain Receivables also may be covered by credit accident and health and
credit life insurance policies which provide for payments on behalf of the
insured Obligor in the event of disability or death. These insurance policies
are obtained solely at the election of the Obligor but are for the benefit of
the creditor under the Receivable. No data will be compiled as to the number of
Receivables in the Trust that will be covered by such insurance. Accordingly no
assurance can be given as to the extent to which any such Receivables are
covered by any such insurance.
Portfolio Receivables
NAFI periodically acquires portfolios of motor vehicle installment
sale contracts in bulk from Originators whose underwriting guidelines and
market orientation are similar to NAFI's. NAFI has established relationships
with several Originators pursuant to which NAFI intends to make bulk purchases
of motor vehicle installment sale contracts on a monthly or quarterly basis.
In evaluating a potential bulk acquisition of motor vehicle retail
installment sale contracts NAFI reviews the prospective seller's written
underwriting guidelines and other documentation regarding its origination
program. If NAFI determines that the seller's underwriting guidelines and
origination program are sufficiently similar to NAFI's, employees of NAFI
proceed to conduct on-site reviews of each receivable file, including the sales
contract, the certificate of title or application therefor, proof of
comprehensive and collision insurance coverage and the credit application and
payment history of the related obligor, and assess, among other things, the
completeness of the receivable files, the concurrence of information within
each file, the conformity of the receivables with NAFI's portfolio acquisition
program guidelines and the seller's compliance with its own written
underwriting guidelines. However, unless fewer than four monthly payments have
been made with respect to a motor vehicle retail installment sale contract,
NAFI generally does not review the residency and employment history of the
obligors, obtain current credit reports from independent credit bureaus or
conduct certain other procedures that would constitute a
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reunderwriting of the receivables in accordance with NAFI's general
underwriting guidelines applicable to Dealer Receivables.
Portfolio Receivables acquired by NAFI may be originated by
Originators with varying underwriting guidelines that, although similar to the
underwriting guidelines observed by NAFI in connection with its acquisition of
Dealer Receivables, may be materially less stringent in certain respects.
However, based on its experience with its own portfolio of receivables and its
knowledge of the industry as a whole, NAFI believes that seasoning and payment
history are highly predictive of future obligor performance in the non-prime
motor vehicle finance sector. Accordingly, NAFI will acquire Portfolio
Receivables on the basis of seasoning and a superior payment history
notwithstanding that the underwriting guidelines of the seller are not as
stringent as NAFI's underwriting guidelines with respect to Dealer Receivables.
NAFI's portfolio acquisition program guidelines therefore place significant
emphasis on prior payment history, generally requiring that with respect to
each receivable (i) a minimum of four payments have been made by the obligor,
(ii) no payment has been 30 days or more past due, (iii) as of the date of
acquisition by NAFI the current payment is less than 15 days past due, (iv) no
payment tendered by the obligor on the receivable has been returned for
insufficiency of funds, (v) the obligor has not been involved in any bankruptcy
proceeding since entering into the retail installment sale contract, (vi) the
financed vehicle has not been repossessed and redeemed since the acquisition
financed by the retail instllment sale contract and (vii) the financed vehicle
as of the date of acquisition of the Portfolio Receivable by NAFI is not
greater than seven years old.
The Originator Agreements generally provide for the sale of such
retail installment sale contracts to NAFI without recourse to the Originator,
and accordingly, the Originator generally has no liability to NAFI if the
Obligor defaults on the Receivable. The liability of the Originator to NAFI
under the Originator Agreement is generally limited to its repurchase
obligation in respect of certain limited representations and warranties made
with respect to the Portfolio Receivables.
SERVICING PROCEDURES
The Servicer will service and administer the Receivables in each Trust
on behalf of the Trustee and will have full power and authority, acting alone
and/or through subservicers, to do any and all things which it may deem
necessary or desirable in connection with such servicing and administration and
which are consistent with the Trust Documents. In the Trust Documents the
Servicer will acknowledge that it is holding any Receivable documents in its
possession and any other property constituting a part of the Trust Property
held by it in trust, for the benefit of the Securityholders and any Security
Insurer.
Consistent with the terms of the Trust Documents, the Servicer may
waive, modify or vary any term of any Receivable or consent to the postponement
of strict compliance with any such term or in any manner grant indulgence to
any Obligor if, in the Servicer's sole determination, such waiver,
modification, postponement or indulgence is not materially
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adverse to the Securityholders or any Security Insurer (without taking into
account the coverage available under any Policy). However, except as otherwise
provided herein or in the related Prospectus Supplement, the Servicer may not
permit any modification with respect to any Receivable that would change its
APR or reduce the outstanding principal balance thereof (except for actual
payments of principal).
The Servicer will service and administer the Receivables by employing
such procedures (including collection procedures) and degree of care, in each
case consistent with prudent industry standards, as are customarily employed by
the Servicer in servicing and administering motor vehicle retail installment
sale contracts and notes owned or serviced by the Servicer comparable to the
Receivables.
Servicing activities required to be performed pursuant to the Trust
Documents will include collecting and recording payments, communicating with
Obligors, investigating payment delinquencies, providing billing and tax
records to Obligors and maintaining internal records with respect to each
Receivable.
The Servicer will be required to take all actions that are necessary
or desirable to maintain continuous perfection and first priority of security
interests granted by the Obligors in the Financed Vehicles. These actions
include, but are not limited to, using reasonable efforts to obtain the
execution by the Obligors and the recording, registering, filing, re-recording,
re-registering and refiling of all title documents, security agreements,
financing statements, continuation statements or other instruments as are
necessary to maintain the security interests granted by the respective Obligors
under the Receivables. Neither the Servicer nor any subservicer will be
required, however, to expend its own funds to remove any security interest,
lien or other encumbrance on a Financed Vehicle.
The Servicer may perform any of its duties pursuant to the Pooling
and Servicing Agreement, including those delegated to it by the Trustee
pursuant to the Trust Documents, through persons appointed by the Servicer.
Such persons may include affiliates of the Servicer. Notwithstanding any such
delegation of a duty, the Servicer will remain obligated and liable for the
performance of such duty as if the Servicer were performing such duty. The
Servicer may delegate such duties by entering into subservicing agreements
(each, a "Subservicing Agreement") with one or more subservicers for the
servicing and administration of certain Receivables with the prior written
consent of any Security Insurer. References herein to actions taken or to be
taken by the Servicer in servicing the Receivables include actions taken or to
be taken by a subservicer on behalf of the Servicer. Each Subservicing
Agreement may be upon such terms and conditions as are not inconsistent with
the Trust Documents. The Servicer has initially engaged OFSA to perform
substantially all servicing activities related to servicing of the Receivables.
The Servicer will, to the extent such procedures shall be consistent
with the Trust Documents, follow or cause to be followed such collection
procedures as it follows with respect to motor vehicle retail installment sale
contracts and notes comparable to the
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Receivables. Consistent with the foregoing, the Servicer may in its discretion
(i) waive any late payment charge and (ii) extend the then current maturity
date of a Receivable by two months during each calendar year but no more than
four months during the life of such Receivable at the request of the related
Obligor on account of the Obligor's adverse financial circumstances. No such
arrangement shall alter or modify the amortization schedule of such Receivable
for purposes of calculating required distributions on the Securities.
If a Receivable becomes and continues to be a Defaulted Receivable (as
defined below), the Servicer will be required to take all reasonable and lawful
steps necessary for repossession. However, neither the Servicer nor any
subservicer will be obligated to institute any action for repossession through
judicial proceedings unless it determines in its good faith judgment that the
liquidation proceeds that would be realized in connection therewith would be
sufficient for the reimbursement in full of its out-of-pocket expenses in
connection therewith. A Receivable will become a "Defaulted Receivable" upon
the occurrence of certain events of default or payment delinquency specified in
the related Prospectus Supplement, including (i) the determination in good
faith by the Servicer (or applicable subservicer) that all amounts that it
expects to recover under such defaulted Receivable have been received and (ii)
the repossession of the Financed Vehicle that secures the Receivable without
reinstatement of the Receivable and the expiration of any applicable redemption
period.
DELINQUENCY, LOAN LOSS AND REPOSSESSION INFORMATION
Certain information relating to NAFI's delinquency, loan loss and
repossession experience with respect to all Receivables it has serviced will be
set forth in each Prospectus Supplement. This information will include the
experience with respect to all Receivables in NAFI's portfolio of Receivables
serviced, including Receivables which do not meet the criteria for selection as
a Receivable for any particular Receivables Pool. There can be no assurance
that the delinquency, loan loss and repossession experience on any Receivables
Pool will be comparable to prior experience.
SELECTION CRITERIA AND CERTAIN OTHER CHARACTERISTICS
Information with respect to each Receivables Pool will be set forth in
the related Prospectus Supplement, including, to the extent appropriate, the
criteria used to select the related Receivables and the composition,
distribution by annual percentage rate ("APR"), Dealer and geographic
concentration of such Receivables.
TYPES OF RECEIVABLES
The Receivables will be selected from NAFI's portfolio of Receivables
by several criteria, including that each Receivable (a) is secured by a new or
used automobile, light-duty truck, van or minivan, (b) was not more than 30
days delinquent as of its Cut-off Date and (c) satisfies the other criteria set
forth herein. See "Description of the Purchase Agreements and Trust
Documents,Sale and Assignment of the Receivables."
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The Receivables in each Trust will include Receivables that provide
for payments according to one or more of the following payment allocation
methods: (i) the "sum of periodic balances" or "sum of monthly payments" method
similar to the Rule of 78's ("Rule of 78's Receivables"), (ii) the simple
interest method ("Simple Interest Receivables") and (iii) the actuarial method
("Actuarial Receivables").
Rule of 78's Receivables. Although a Rule of 78's Receivable provides
for amortization over a series of fixed level monthly installments and
allocations between interest and principal on a scheduled basis, it is a
non-level yield instrument. The yield in the initial months of a Rule of 78's
Receivable is somewhat higher than the stated APR (computed on an actuarial
basis) and the yield at the end of the loan is somewhat less than the stated
APR. Each Rule of 78's Receivable provides for the payment by the Obligor
thereon of a specified total amount of payments, payable in equal monthly
installments on each payment due date for such Rule of 78's Receivable. This
total represents the principal amount financed and add-on interest in an amount
calculated on the basis of the APR stated in a Receivable for the term of the
Rule of 78's Receivable. The rate at which such amount of add-on interest is
earned and, correspondingly, the amount of each fixed monthly payment allocated
to earned interest and to reduction of the outstanding principal are calculated
in accordance with the "Rule of 78's."
Simple Interest Receivables. Like Rule of 78's Receivables, a Simple
Interest Receivable initially provides for the payment by the Obligor of a
specified total amount of payments, payable in equal monthly installments on
each payment due date for such Simple Interest Receivable. However, the
allocation of each monthly payment to principal and interest on a Simple
Interest Receivable is made based on the actual date on which a payment is
received, using the simple interest method. Under the simple interest method,
as a payment is received under a Simple Interest Receivable, the payment is
applied first to pay accrued interest to the date of payment and the remaining
amount of the payment is applied to reduce principal. Accordingly, if an
Obligor pays the fixed monthly installment in advance of the payment due date,
the portion of the payment allocable to interest for the period since the
preceding payment will be less than it would be if the payment were made on the
payment due date, and the portion of the payment allocable to reduce the
principal balance will be correspondingly greater. Conversely, if the Obligor
pays the fixed monthly installment after its due date, the portion of the
payment allocable to interest for the period since the last payment will be
greater than it would be if the payment were made on the payment due date, and
the portion of the payment allocable to reduce the principal balance will be
correspondingly smaller. When necessary, an adjustment is made by scheduling
additional payments at the maturity of the Simple Interest Receivable in an
amount no greater than the regularly scheduled payments to reflect the smaller
allocations of payments to repay the principal balance under the Simple
Interest Receivable as a result of late payments. Alternatively, when
necessary, an adjustment is made to the scheduled final payment or to earlier
payments to reflect any larger allocation of payments to principal as a result
of early payments.
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Due to the method of allocating the portion of monthly payments on
Simple Interest Receivables between principal and interest, it is possible that
either more or less than one month's interest on a Simple Interest Receivable
at the applicable APR will be collected in a calendar month, depending on when
the monthly payments are received. In addition, in the event that more than one
month's interest at the Pass-Through Rate or the Interest Rate, as applicable
on the outstanding principal balance of a Simple Interest Receivable is
collected in a calendar month, the amount of such excess, to the extent not
otherwise distributed to Securityholders, will be distributed to NAFI on such
Distribution Date.
Actuarial Receivables. An Actuarial Receivable is a Receivable that
provides for amortization of the loan over a series of fixed level payment
monthly installments. Payments are allocated between interest and principal on
a scheduled basis, without regard to the time period that has elapsed since the
last payment was made, using the actuarial method. Under the actuarial method,
each monthly installment consists of an amount of interest equal to 1/12 of the
APR of the loan multiplied by the unpaid principal balance of the loan and an
amount of principal equal to the remainder of the monthly payment.
YIELD AND PREPAYMENT CONSIDERATIONS
The Securities will not be sold at a material discount or premium to
the initial purchasers thereof. Accordingly, except as described in the next
paragraph, prepayments, late payments, delinquencies and defaults on the
underlying Receivables and the rate of the transfer of any Subsequent
Receivables to a Trust will not materially affect the yield on the Securities
to such purchasers because each distribution of principal on such Securities
will be accompanied by all accrued interest thereon at the Pass-Through Rate or
Interest Rate, as applicable, through the Distribution Date.
The average life of the Securities may be reduced by prepayments on
the Receivables, by the early termination of certain of the Trust Documents due
to the sale, liquidation or disposal of the Receivables upon the occurrence of
certain bankruptcy or insolvency events with respect to the Seller as described
herein and by prepayments from unutilized funds in any Pre-Funding Account or
Revolving Account or as otherwise specified in the related Prospectus
Supplement. In addition, the average life of the Securities may be increased by
the transfer of any Subsequent Receivables to Trust. The Receivables may be
prepaid in full at any time. Prepayments may result from, among other things,
(i) the sale, insured loss or other disposition of the Financed Vehicle
securing any Receivable, (ii) Receivables becoming Defaulted Receivables, (iii)
the retransfer to the Seller of Receivables due to a breach by the Seller of
the warranties made by it with respect thereto in the Trust Documents, (iv) a
permitted refinancing of the related Financed Vehicle by the Obligor, or (v)
the Seller's exercise of its right to require the retransfer to it of all of
the Receivables in the Trust after the Aggregate Principal Balance has declined
to less than percentage specified in the related Prospectus Supplement of the
Cut-Off Date Outstanding Principal Balance. The rate of prepayments on the
Receivables could be influenced by a variety of economic, geographic and
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social factors. These factors may include unemployment rates, servicing
decisions, seasoning of loans, destruction of vehicles by accident, sale of
vehicles and market interest rates.
If a Receivable contains provisions requiring prepayment in full in
the event of a sale or other disposition of the Financed Vehicle securing the
Receivable, the Servicer will be required by the Trust Documents to take
reasonable steps under the circumstances to enforce such provisions.
The Securityholders could receive a principal prepayment on the
Distribution Date following the end of each of any Pre-Funding Period or
Revolving Period if and to the extent that Subsequent Receivables are not
transferred to the Trust in amounts sufficient to fully utilize the amounts on
deposit in the Pre-Funding Account or Revolving Account, respectively.
Prepayments resulting from the application of funds remaining in the
Pre-Funding Account or Revolving Account to prepay the Securities or from the
receipt of prepayments on the Receivables could result in the Securityholders
receiving unexpected principal payments at a time when the Securityholders are
unable to reinvest such payments in investments having a yield and rating
comparable to the yield and rating on the Securities.
No assurances can be given, and no prediction can be made, as to the
actual prepayment experience on the Receivables.
POOL FACTOR
The "Pool Factor" of the Securities will be a seven-digit decimal,
computed as of each Distribution Date, indicating the remaining principal
balance of the Securities as of the close of business on such Distribution
Date, as a fraction of the initial principal amount of such Securities. The
Pool Factor initially will be 1.0000000. Thereafter, the Pool Factor will
decline to reflect reductions in the outstanding principal balance of the
Securities. A Securityholder's portion of the aggregate outstanding principal
balance of the Securities will be the product of (i) the original denomination
of the Securityholder's Securities and (ii) the applicable Pool Factor.
The Holder or Holders of record of the Securities will receive reports
on or about each Distribution Date concerning payments received on the
Receivables, the Aggregate Principal Balance, the Pool Factor and various other
items of information. Securityholders of record during any calendar year also
will be furnished information for tax reporting purposes not later than the
latest date permitted by law. See "Certain Information Regarding the
Securities,Statements to Securityholders."
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement, the
net proceeds to be received by the Seller from the sale of each series of
Securities will be used to pay to the
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NAFI Transferors the purchase price for the Receivables and to make the deposit
of the Pre-Funded Amount into the Pre- Funding Account, if any, to repay
warehouse lenders and/or to provide for other forms of credit enhancement
specified in the related Prospectus Supplement. The net proceeds to be received
by the NAFI Transferors will be used to reduce indebtedness under warehouse
loans or other interim financing sources, and any additional proceeds will be
added to NAFI's general funds and used for its general corporate purposes. See
"National Auto Finance Company, Inc."
THE SELLER
National Financial Auto Funding Trust (the "Seller") is a Delaware
business trust 100% of the beneficial ownership of which is owned by NAFI or
affiliates of NAFI. The Seller is organized for the limited purposes of
purchasing motor vehicle retail installment sale contracts, transferring such
contracts to third parties, forming trusts and engaging in related activities.
The principal office of the Seller is located at One Park Place, 621 N.W. 53rd
Street, Boca Raton, Florida, 33487, and its telephone number at such office is
(800) 999-7535.
NATIONAL AUTO FINANCE COMPANY, INC.
NAFI will act as master servicer (in such capacity, the "Servicer") of
the Receivables in each Trust pursuant to the related Trust Documents.
GENERAL
NAFI is a corporation organized under the laws of the State of
Delaware. Prior to January 1997 the business of NAFI was conducted by two
affiliated limited partnerships: National Auto Finance Company L.P., organized
under the laws of the State of Delaware in September 1994, and Auto Credit
Clearinghouse L.P., organized under the laws of the State of Delaware in
September 1995. NAFI was incorporated in October 1996.
The principal business of NAFI is to acquire from automobile dealers
and service motor vehicle retail installment sale and lease contracts. NAFI's
principal office is located at One Park Place, 621 N.W. 53rd Street, Suite 200,
Boca Raton, Florida 33487, and its telephone number at such office is (407)
997-2747.
NAFI is an automotive finance company engaged primarily in the
indirect financing (by the purchase of motor vehicle retail installment sale
contracts from automotive Dealers or other companies engaged in the financing
of automotive Dealers) of automotive purchases by individuals with non-prime
credit. The non-prime market segment is comprised of individuals who are
deemed to be relatively high credit risks due to various factors, including,
among other things, the manner in which they have handled previous credit, the
limited extent of their prior credit history and/or their limited financial
resources. Because of the greater credit risk
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associated with non-prime motor vehicle retail installment sale contracts, NAFI
expects to sustain a higher level of delinquencies and credit losses than that
experienced by auto financing sources that finance motor vehicle purchasers
with lower credit risk profiles. The interest rates charged on such contracts
are generally higher than those rates charged on prime motor vehicle retail
installment sale contracts. There can be no assurance, however, that the
interest rates on the Receivables will be sufficient to cover losses on
Defaulted Receivables.
NAFI serves as an alternative source of financing to automotive
dealers by offering them the opportunity for increased sales to customers who
typically do not qualify for financing by the automotive dealers' traditional
financing sources. NAFI purchases motor vehicle retail installment sale
contracts from such dealers (the "Dealers") pursuant to non-exclusive dealer
agreements (the "Dealer Agreements"). The Dealer Agreements generally provide
for the sale of such retail installment sale contracts to NAFI without recourse
to the Dealer, and accordingly, the Dealer generally has no liability to NAFI
if the Obligor defaults on the Receivable. In addition, NAFI purchases bulk
portfolios of motor vehicle retail isntallment sales contracts from consumer
finance companies, depository institutions and other financial institutions
engaged in the financing of motor vehicle retail installment sale contracts
(each, an "Originator") pursuant to asset purchase agreements ("Originator
Agreements"). From time to time, NAFI may determine to commence business in
additional jurisdictions or cease doing business in any state in which it
presently does business. In certain cases NAFI may effect purchases of
non-prime motor vehicle retail installment sale contracts, or may hold and
effect ownership of contracts by means of a wholly-owned subsidiary.
SERVICING PROCEDURES
The Servicer conducts substantially all of its servicing activities
through OFSA pursuant to a servicing contract (the "Servicing Agreement")
between the Servicer and OFSA. OFSA will collect payments received on the
Receivables, engage in collection efforts in respect of past due Receivables
and, where appropriate, repossess and liquidate Financed Vehicles securing
Defaulted Receivables. OFSA utilizes various automated systems to support its
servicing and collections activities. Notwithstanding the delegation by the
Servicer of certain servicing duties to OFSA, the Servicer will remain
primarily liable to the Trust under the related Trust Documents for performance
of such duties.
The Servicer's standard collection practices for the collection of
past due payments include, but are not limited to, automated mailing of
delinquency notices to Obligors and oral communications with Obligors as
necessary. The Servicer also attempts to have telephone communication with each
Obligor once the related Receivable is five days delinquent. Additional
telephone communications are made in an effort to bring the Receivable current.
Once it is determined that a Receivable cannot be brought current, the
Servicer generally will initiate steps to repossess the related Financed
Vehicle. The Servicer handles repossessions through independent contractors.
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Occasionally, situations occur in the collection process where an
Obligor has become delinquent and is willing but unable to bring the related
Receivable current. In this situation, at the discretion of the Servicer's
collection department management, and subject to the guidelines described under
"The Receivables-Servicing Procedures," the term of the Receivable may be
extended by two months once during each calendar year but not more than four
months during the life of such Receivable.
If the Servicer receives a notice that an Obligor on a Receivable has
filed for relief under the United States Bankruptcy Code, the Servicer will
file a proof of claim and notify the Trustee, any Indenture Trustee and any
Security Insurer of the bankruptcy filing. In the event that activities outside
the scope of routine bankruptcy filings and follow-up are necessary, the
Servicer may hire the services of a law firm to represent the Trustee and any
Indenture Trustee in the Obligor's bankruptcy.
Each Obligor is required to obtain insurance with respect to the
financed vehicle. However, the Servicer does not monitor the maintenance of
insurance coverage and, in the event the Servicer becomes aware of a lapse in
insurance coverage, does not currently force place insurance. The Servicer
does, however, maintain supplemental vendor's single interest insurance that
protects the Servicer's interest in financed vehicles against uninsured
physical damage (including total loss) and instances where neither the vehicle
nor the borrower can be located.
The Servicer will coordinate all servicing of the Receivables at its
office in Boca Raton, Florida.
The Servicer is substantially dependent upon OFSA to perform direct
servicing functions with respect to the Seller's portfolio of motor vehicle
retail installment sale contracts. There can be no assurance that there would
not be delays in collections and other servicing interruptions associated with
transfer of servicing to the Servicer or any Back-Up Servicer in the event of
OFSA's resignation or termination or that the Servicer would have sufficient
staffing and resources to service the Receivables to the standards required in
the related Trust Documents. The Servicer is currently considering its options
with respect to developing its own servicing capability and enhancing its
management information systems.
OMNI FINANCIAL SERVICES OF AMERICA, INC. ("OFSA")
Omni Financial Services of America, Inc., a Delaware corporation
("OFSA"), will act as servicer of the Receivables pursuant to the Servicing
Agreement. OFSA is a wholly-owned subsidiary of World Omni Financial Corp., a
Florida corporation ("World Omni"). The Servicing Agreement was assigned by
World Omni to OFSA effective as of October 23, 1995.
OFSA was incorporated in July 1995 primarily to service subprime
retail motor vehicle contracts, including the Receivables. As of October 1,
1996, OFSA has over 250 employees
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operating at a new service center in Memphis, Tennessee. The Servicer and the
OFSA will maintain files relating to the Receivables at the Memphis service
center and will coordinate servicing for the Receivables at such office. The
address of the Memphis service center is 1769 Paragon Avenue, Memphis,
Tennessee 38132, and its telephone number is (901) 344- 7200.
World Omni is a wholly-owned subsidiary of JM Family Enterprises,
Inc., a Delaware corporation ("JMFE"). World Omni provides retail installment
contract and lease contract financing to retail customers of certain automotive
dealers, and wholesale floorplan financing and capital and mortgage loans
primarily to dealers and customers of Southeast Toyota Distributors, Inc.,
another wholly-owned subsidiary of JMFE. The principal executive offices of
World Omni are located at 120 NW 12th Avenue, Deerfield Beach, Florida 33442,
and its telephone number is (954) 429-2200.
World Omni originates and services retail and lease contracts
primarily through its service center located in Mobile, Alabama.
THE CERTIFICATES
GENERAL
With respect to each Trust, one or more classes of Certificates of a
given series will be issued pursuant to Trust Documents to be entered into
between the Seller, NAFI and the Trustee, forms of which have been filed as
exhibits 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 of the material provisions of
the Trust Documents. Where particular provisions of or terms used in the Trust
Documents are referred to, the actual provisions (including definitions of
terms) are incorporated by reference as part of this summary.
Unless the related Prospectus Supplement provides for physical
delivery of the Certificates, each class of Certificates will initially be
represented by a single Certificate registered in the name of the nominee of
DTC (together with any successor depository selected by the Seller, the
"Depository"). See "Certain Information Regarding the Securities - Book-Entry
Registration." Unless otherwise specified in the related Prospectus Supplement,
the Certificates evidencing interests in a Trust will be available for purchase
in minimum denominations of $20,000 initial principal amount and integral
multiples of $1,000 in excess thereof, except that one Certificate evidencing
an interest in such Trust may be issued in a denomination that is less than
$1,000 initial principal amount. Certificates may be transferred or exchanged
without the payment of any service charge other than any tax or governmental
charge payable in connection with such transfer or exchange. The Trustee or
such other party
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designated in the related Prospectus Supplement will initially be designated as
the registrar for the Certificates.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL
The timing and priority of distributions, seniority, allocations of
loss, Pass-Through Rate and amount of or method of determining distributions
with respect to principal and interest (or, where applicable, with respect to
principal only or interest only) on the Certificates of any series will be
described in the related Prospectus Supplement. Distributions of interest on
the 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. A series may include one or more
classes of Strip Certificates entitled to (i) distributions in respect of
principal with disproportionate, nominal or no interest distribution, or (ii)
interest distributions, with disproportionate, nominal or no distributions in
respect of principal. 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 Strip Certificates), or any
combination of the foregoing. The related Prospectus Supplement will specify
the Pass-Through Rate for each class of Certificate, or the initial
Pass-Through Rate and the method for determining the Pass-Through Rate.
Interest on the Certificates will be calculated on the basis of a 360-day year
consisting of twelve 30-day months or a 365-day year consisting of actual
calendar months. Distributions in respect of the Certificates will be
subordinate to payments in respect of the Notes, if any, as more fully
described in the related Prospectus Supplement. Distributions in respect of
principal of any class of Certificates will be made on a pro rata basis among
all of 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 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.
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THE NOTES
GENERAL
A series of Securities may include one or more classes of Notes 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 of the provisions of the notes
and the Indenture, and the following summary may be supplemented by the related
Prospectus Supplement. Where particular provisions of or terms used in the
Indenture are referred to, the actual provisions (including definition of
terms) are incorporated by reference as part of this summary.
Unless the related Prospectus Supplement provides for physical
delivery of the Notes, each class of Notes will initially be represented by a
single Note registered in the name of the nominee of the Depository. See
"Certain Information Regarding the Securities - Book-Entry Registration." Notes
will be available for purchase in the denominations specified in the related
Prospectus Supplement. Notes may be transferred or exchanged without the
payment of any service charge other than any tax or governmental charge payable
in connection with such transfer or exchange. The Indenture Trustee or such
other party specified in the related Prospectus Supplement will initially be
designated as the registrar for the Notes.
PRINCIPAL AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of loss,
Interest Rate and amount of or method of determining payments of principal and
interest on the Notes will be described in the related Prospectus Supplement.
The right of holders of any class of Notes to receive payments of principal and
interest may be senior or subordinate to the rights of holders of any class or
classes of Notes of such series, or any class of Certificates, as described in
the related Prospectus Supplement. Payments of interest on the Notes will be
made prior to payments of principal thereon. A series may include one or more
classes of Strip Notes entitled to (i) principal payments with
disproportionate, nominal or no interest payments, or (ii) interest payments
with disproportionate, nominal or no principal payments. Each class of Notes
may have a different Interest Rate, which may be a fixed, variable or
adjustable Interest Rate (and which may be zero for certain classes of Strip
Notes), or any combination of the foregoing. The related Prospectus Supplement
will specify the Interest Rate for each class of Notes, or the initial Interest
Rate and the method for determining the Interest Rate. One or more classes of
Notes of a series may be redeemable under the circumstances specified in the
related Prospectus Supplement.
Unless the related Prospectus Supplement provides for subordination of
payments of interest on certain classes within a series to payments of interest
on certain other classes within such series, payments in respect of interest to
Noteholders of all classes within a series will
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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 "Payment Date"), in which case each class of Noteholders will receive
their ratable share (based upon the aggregate amount of interest due to such
class of Noteholders) of the aggregate amount available to be distributed in
respect of interest on the Notes.
In the case of a series of Securities 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 of
the Notes of such class.
THE INDENTURE
A form of Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. The Seller will provide a copy
of the applicable Indenture (without exhibits) upon request to a holder of
Notes issued thereunder. Requests for such copies should be directed to Chief
Financial Officer, National Auto Finance Company, Inc., One Park Place, Suite
200, 621 N.W. 53rd Street, Boca Raton, Florida 33487 (telephone (407)
997-2747).
Modification of Indenture Without Noteholder Consent. Each Trust and
related Indenture Trustee (on behalf of such Trust) may, with the consent of
the Security Insurer, if any (prior to an Insurer Default), but without consent
of the related Noteholders, enter into one or more supplemental indentures for
any of the following purposes: (i) to correct or amplify the description of the
collateral or add additional collateral; (ii) to provide for the assumption of
the Note and the Indenture obligations by a permitted successor to the Trust;
(iii) to add additional covenants for the benefit of the related Noteholders,
or to surrender any rights or power conferred upon the Trust; (iv) to convey,
transfer, assign, mortgage or pledge any property to or with the Indenture
Trustee; (v) to cure any ambiguity or correct or supplement any provision in
the Indenture or in any supplemental indenture; (vi) to provide for the
acceptance of the appointment of a successor Indenture Trustee or to add to or
change any of the provisions of the Indenture or in any supplemental indenture
which may be inconsistent with any other provision of the Indenture as shall be
necessary and permitted to facilitate the administration by more than one
trustee; (vii) to modify, eliminate or add to the provisions of the Indenture
in order to comply with the Trust Indenture Act of 1939, as amended, and (viii)
to add any provisions to, change in any manner, or eliminate any of the
provisions of, the Indenture or modify in any manner the rights of Noteholders
under such Indenture; provided that any action specified in this clause (viii)
shall not, as evidenced by an opinion of counsel, adversely affect in any
material respect the interests of any related Noteholder unless such
Noteholder's consent is otherwise obtained as described below.
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Modifications of Indenture With Noteholder Consent. With respect to
each Trust, with the consent of the Security Insurer, if any (prior to an
Insurer Default) and the holders representing a majority of the principal
balance of the outstanding related Notes (a "Note Majority"), the Trustee and
the Indenture Trustee may execute a supplemental indenture to add provisions to
change in any manner or eliminate any provisions of, the related Indenture, or
modify in any manner the rights of the related Noteholders.
Without the consent of the Security Insurer, if any (prior to an
Insurer Default), and the holder of each outstanding related Note affected
thereby, however, no supplemental indenture may: (i) change the due date of any
installment of principal of or interest on any Note or reduce the principal
amount thereof, the interest rate specified thereon or the redemption price
with respect thereto or change the manner of calculating any such payment or
any place of payment where the coin or currency in which any Note or any
interest thereon is payable; (ii) impair the right to institute suit for the
enforcement of certain provisions of the Indenture regarding payment; (iii)
reduce the percentage of the aggregate amount of the outstanding Notes 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 Indenture or of certain defaults thereunder and
their consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the related
Trust, any other obligor on the Notes, the Seller or an affiliate of any of
them; (v) reduce the percentage of the aggregate outstanding amount of the
Notes the consent of the holders of which is required to direct the Indenture
Trustee to sell or liquidate the Receivables if the proceeds of such sale would
be insufficient to pay the principal amount and accrued but unpaid interest on
the outstanding Notes; (vi) decrease the percentage of the aggregate principal
amount of the Notes required to amend the sections of the Indenture which
specify the applicable percentage of aggregate principal amount of the Notes
necessary to amend the Indenture or certain other related agreements; or (vii)
permit the creation of any lien ranking prior to or on a parity with the lien
of the Indenture with respect to any of the collateral for the Notes or, except
as otherwise permitted or contemplated in the Indenture, terminate the lien of
the Indenture on any such collateral or deprive the holder of any Note of the
security afforded by the lien of the Indenture.
Events of Default; Rights Upon Event of Default. With respect to each
Trust, unless otherwise specified in the related Prospectus Supplement, "Events
of Default" under the Indenture will consist of: (i) a default for five days or
more in the payment of any interest on any Note; (ii) a default in the payment
of the principal of or any installment of the principal of any Note when the
same becomes due and payable; (iii) a default in the observance or performance
in any material respect of any covenant or agreement of the Trust made in the
Indenture, or any representation or warranty made by the Trust in the Indenture
or in any certificate delivered pursuant thereto or in connection therewith
having been incorrect as of the time made, and the continuation of any such
default or the failure to cure such breach of a representation or warranty for
a period of 30 days after notice thereof is given to the Trust by the Indenture
Trustee or the Trust and the Indenture Trustee by the holders of at least 25%
in principal amount of the Notes then outstanding; or (iv) certain events of
bankruptcy,
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insolvency, receivership or liquidation of the Trust. However, the amount of
principal due and payable on any class of Notes on any Payment Date (prior to
the Final Scheduled Distribution Date, if any, for such class specified in the
related Prospectus Supplement) will generally be determined by amounts
available to be deposited in the Note Distribution Account for such Payment
Date. 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 unless such class of Notes has
a Final Scheduled Distribution Date, and then not until such Final Scheduled
Distribution Date for such class of Notes. Unless otherwise specified in the
related Prospectus Supplement, if an Event of Default should occur and be
continuing with respect to the Notes of any series, the related Indenture
Trustee or a Note Majority may declare the principal of the Notes to be
immediately due and payable. Such declaration may, under certain circumstances,
be rescinded by a Note Majority.
Unless otherwise specified in the related Prospectus Supplement, if
the Notes of any series have been declared due and payable following an Event
of Default with respect thereto, the related Indenture Trustee may institute
proceedings to collect amounts due or foreclose on Trust Property, exercise
remedies as a secured party, sell the related Receivables or elect to have the
Trust maintain possession of such Receivables and continue to apply collections
on such Receivables as if there had been no declaration of acceleration. The
Indenture Trustee, however, will be prohibited from selling the related
Receivables following an Event of Default, unless (i) the holders of the
percentage of the outstanding related Notes specified in the related Prospectus
Supplement consent to such sale; (ii) the proceeds of such sale are sufficient
to pay in full the principal of and the accrued interest on such outstanding
Notes at the date of such sale; or (iii) the Indenture Trustee determines that
the proceeds of the Receivables would not be sufficient on an ongoing basis to
make all payments on the Notes as such payments would have become due if such
obligations had not been declared due and payable, and the Indenture Trustee
obtains the consent of the holders of 66 2/3% of the aggregate outstanding
amount of the Notes. Following a declaration upon an Event of Default that the
Notes are immediately due and payable, (i) Noteholders will be entitled to
ratable repayment of principal on the basis of their respective unpaid
principal balances and (ii) repayment in full of the accrued interest on and
unpaid principal balances of the Notes will be made prior to any further
payment of interest or principal on the Certificates.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, if an Event of Default occurs and is continuing with
respect to a series of Notes, the Indenture Trustee will be under no obligation
to exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of such Notes, if the Indenture Trustee
reasonably believes it will not be adequately indemnified against the costs,
expenses and liabilities which might be incurred by it in complying with such
request. Subject to the provisions for indemnification and certain limitations
contained in the Indenture, a Note Majority in a series will have the right to
direct the time, method and place of conducting any proceeding or any remedy
available to the Indenture Trustee, and a Note Majority may, in certain cases,
waive any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of the
Indenture that
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cannot be modified without the waiver or consent of all of the holders of such
outstanding Notes.
No holder of a Note of any series will have the right to institute any
proceeding with respect to the related Indenture, unless (i) such holder
previously has given to the Indenture Trustee written notice of a continuing
Event of Default, (ii) the holders of not less than 25% in principal amount of
the outstanding Notes of such series have made written request of the Indenture
Trustee to institute such proceeding in its own name as Indenture Trustee,
(iii) such holder or holders have offered the Indenture Trustee reasonable
indemnity, (iv) the Indenture Trustee has for 60 days failed to institute such
proceeding, (v) no direction inconsistent with such written request has been
given to the Indenture Trustee during such 60-day period by the holders of a
majority in principal amount of such outstanding Notes, and (vi) in the case of
a series of Securities with respect to which a Policy is issued, an Insurer
Default shall have occurred and be continuing.
If an Event of Default occurs and is continuing and if it is known to
the Indenture Trustee, the Indenture Trustee will mail to each Noteholder
notice of the Event of Default within 90 days after it occurs. Except in the
case of a failure to pay principal of or interest on any Note, the Indenture
Trustee may withhold the notice if and so long as it determines in good faith
that withholding the notice is in the interests of the Noteholders.
In addition, each Indenture Trustee and the related Noteholders, by
accepting the related Notes, will covenant that they will not at any time
institute against the Seller or the related Trust any bankruptcy,
reorganization or other proceeding under any federal or state bankruptcy or
similar law.
Neither the Indenture Trustee nor the Trustee in its individual
capacity, nor any holder of a Certificate including, without limitation, the
Seller, nor any of their respective owners, beneficiaries, agents, officers,
directors, trustees, employees, affiliates, successors or assigns will, in the
absence of an express agreement to the contrary, be personally liable for the
payment of the related Notes or for any agreement or covenant of the related
Trust contained in the Indenture.
Certain Covenants. Each Indenture will provide that the related Trust
may not consolidate with or merge into any other entity, unless (i) the entity
formed by or surviving such consolidation or merger is organized under the laws
of the United States or any state, (ii) such entity expressly assumes the
Trust's obligation to make due and punctual payments upon the Notes and the
performance or observance of every agreement and covenant of the Trust under
the Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Trustee has been
advised that the then current rating of the related Notes or Certificates then
in effect would not be reduced or withdrawn by the Rating Agencies as a result
of such merger or consolidation, (v) the Security Insurer, if any (prior to an
Insurer Default), has consented to such merger or consolidation, and (vi) the
Trustee has received an opinion of counsel to the effect that such
consolidation or
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merger would have no material adverse tax consequence to the Trust or to any
related Noteholder or Certificateholder.
Each Trust will not, among other things, (i) except as expressly
permitted by the Indenture, the Purchase Agreement, the Trust Documents or
certain related documents for such Trust (collectively, the "Related
Documents"), sell, transfer, exchange or otherwise dispose of any of the assets
of the Trust, (ii) claim any credit on or make any deduction from the principal
and interest payable in respect of the related Notes (other than amounts
withheld under the Code or applicable state law) or assert any claim against
any present or former holder of such Notes because of the payment of taxes
levied or assessed upon the Trust, (iii) dissolve or liquidate in whole or in
part, (iv) permit the validity or effectiveness of the related Indenture to be
impaired or permit any person to be released from any covenants or obligations
with respect to the related Notes under such Indenture except as may be
expressly permitted thereby, or (v) except as expressly permitted by the
related Trust Documents, permit any lien, charge, excise, claim, security
interest, mortgage or other encumbrance to be created on or extend to or
otherwise arise upon or burden the assets of the Trust or any part thereof, or
any interest therein or proceeds thereof.
No Trust may engage in any activity other than as specified under the
section of the related Prospectus Supplement entitled "The Trust." No Trust
will incur, assume or guarantee any indebtedness other than indebtedness
incurred pursuant to the related Notes and the related Indenture or otherwise
in accordance with the related Trust Documents.
Annual Compliance Statement. Each Trust will be required to file
annually with the related Indenture Trustee a written statement as to the
fulfillment of its obligations under the Indenture.
Indenture Trustee's Annual Report. The Indenture Trustee will be
required to mail each year to all related Noteholders a brief report relating
to its eligibility and qualification to continue as Indenture Trustee under the
related Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by the Trust to
the Indenture Trustee in its individual capacity, the property and funds
physically held by the Indenture Trustee as such and any action taken by it
that materially affects the Notes and that has not been previously reported.
Satisfaction and Discharge of Indenture. The Indenture will be
discharged with respect to the collateral securing the related Notes upon the
delivery to the related Indenture Trustee for cancellation of all such Notes
or, with certain limitations, upon deposit with the 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 may resign at any time, in
which event the Seller will be
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obligated to appoint a successor trustee acceptable to the Security Insurer, if
any (prior to an Insurer Default). The Seller may also remove the Indenture
Trustee, with the consent of the Security Insurer, if any (prior to an Insurer
Default), if the Indenture Trustee ceases to be eligible to continue as such
under the Indenture or if the Indenture Trustee becomes insolvent. In such
circumstances, the Seller will be obligated to appoint a successor trustee
acceptable to the Security Insurer, if any (prior to an Insurer Default). Any
resignation or removal of the Indenture Trustee and appointment of a successor
trustee will be subject to any conditions or approvals, if any, specified in
the related Prospectus Supplement and will not become effective until
acceptance of the appointment by a successor trustee.
CERTAIN INFORMATION REGARDING THE SECURITIES
BOOK-ENTRY REGISTRATION
Unless the related Prospectus Supplement provides for physical
delivery of the Securities, the Securities of each series will be registered in
the name of Cede & Co., the nominee of DTC. DTC is a limited-purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered pursuant to
the provisions of Section 17A of the Exchange Act. DTC accepts securities for
deposit from its participating organizations ("Participants") and facilitates
the clearance and settlement of securities transactions between Participants in
such securities through electronic book-entry changes in accounts of
Participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks and
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system is also available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("indirect participants").
Certificate Owners and Note Owners who are not Participants but desire
to purchase, sell or otherwise transfer ownership of Securities may do so only
through Participants (unless and until Definitive Certificates or Definitive
Notes, each as defined below, are issued). In addition, Certificate Owners and
Note Owners will receive all distributions of principal of, and interest on,
the Securities from the Trustee or the Indenture Trustee, as applicable,
through DTC and Participants. Certificate Owners and Note Owners will not
receive or be entitled to receive certificates representing their respective
interests in the Securities, except under the limited circumstances described
below and such other circumstances, if any, as may be specified in the related
Prospectus Supplement.
Unless and until Definitive Securities are issued, it is anticipated
that the only Certificateholder of the Certificates and the only Noteholder of
the Notes, if any, will be Cede & Co., as nominee of DTC. Certificate Owners
and Note Owners will not be recognized by the Trustee as Certificateholders or
by the Indenture Trustee as Noteholders as those terms are
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used in the related Trust Documents or Indenture. Certificate Owners and Note
Owners will be permitted to exercise the rights of Certificateholders or
Noteholders, as the case may be, only indirectly through Participants and DTC.
With respect to any series of Securities, while the Securities are
outstanding (except under the circumstances described below), under the rules,
regulations and procedures creating and affecting DTC and its operations (the
"Rules"), DTC is required to make book-entry transfers among 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.
Participants with whom Certificate Owners or Note Owners have accounts with
respect to Securities are similarly required to make book-entry transfers and
receive and transmit such distributions on behalf of their respective
Certificate Owners and Note Owners. Accordingly, although Certificate Owners
and Note Owners will not possess Securities, the Rules provide a mechanism by
which Certificate Owners and Note Owners will receive distributions and will be
able to transfer their interests.
With respect to any series of Securities, Certificates and Notes (if
any) will be issued in registered form to Certificate Owners and Note Owners,
or their nominees, rather than to DTC (such Certificates and Notes being
referred to herein as "Definitive Certificates" and "Definitive Notes,"
respectively), only if (i) DTC, the Seller or the Servicer advises the Trustee
or the Indenture Trustee, as the case may be, in writing that DTC is no longer
willing or able to discharge properly its responsibilities as nominee and
depository with respect to the Certificates or the Notes, and the Seller, the
Servicer, the Trustee or the Indenture Trustee, as the case may be, is unable
to locate a qualified successor, (ii) the Seller or the Administrator (if any)
at its sole option has advised the Trustee or the Indenture Trustee, as the
case may be, in writing that it elects to terminate the book-entry system
through DTC and (iii) after the occurrence of a Servicer Termination Event, the
holders representing a majority of the Certificate Balance (a "Certificate
Majority") or a Note Majority advises the Trustee or the Indenture Trustee, as
the case may be, through DTC, that continuation of a book-entry system is no
longer in their best interests. Upon issuance of Definitive Certificates or
Definitive Notes to Certificate Owners or Note Owners, such Certificates or
Notes will be transferable directly (and not exclusively on a book-entry basis)
and registered holders will deal directly with the Trustee or the Indenture
Trustee, as the case may be, with respect to transfers, notices and
distributions.
DTC has advised the Seller that, unless and until Definitive
Certificates or Definitive Notes are issued, DTC will take any action permitted
to be taken by a Certificateholder or a Noteholder under the related Trust
Documents or Indenture only at the direction of one or more Participants to
whose DTC accounts the Certificates or Notes are credited. DTC has advised the
Seller that DTC will take such action with respect to any fractional interest
of the Certificates or the Notes only at the direction of and on behalf of such
Participants beneficially owning a corresponding fractional interest of the
Certificates or the Notes. DTC may take actions, at the direction of the
related Participants, with respect to some Certificates or Notes which conflict
with actions taken with respect to other Certificates or Notes.
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Issuance of Certificates and Notes in book-entry form rather than as
physical certificates or notes may adversely affect the liquidity of
Certificates or Notes in the secondary market and the ability of the
Certificate Owners or Note Owners to pledge them. In addition, since
distributions on the Certificates and Notes will be made by the Trustee or the
Indenture Trustee to DTC and DTC will credit such distributions to the accounts
of its Participants, with the Participants further crediting such distributions
to the accounts of indirect participants or Certificate Owners or Note Owners,
Certificate Owners and Note Owners may experience delays in the receipt of such
distributions.
BOOK-ENTRY FACILITIES
Certificate Owners and Note Owners may elect to hold their interests
in the Securities through DTC in the United States or through CEDEL or
Euroclear in Europe, if they are participants of such systems, or indirectly
through organizations which are participants in such systems. The Securities
of each class will be issued in one or more certificates which equal the
aggregate principal balance of such class and will initially be registered in
the name of Cede, the nominee of DTC. CEDEL and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities
accounts in CEDEL's and Euroclear's 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. Citibank will act as
depositary for CEDEL and Morgan will act as depositary for Euroclear (in such
capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries").
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a 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 Participants or CEDEL Participants (each as defined below) on such
Business Day. Cash received in CEDEL or Euroclear as a result of sales of
securities by or through a CEDEL Participant or Euroclear Participant to a
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. For information with respect to tax
documentation procedures relating to the Securities, see Annex I hereto,
"Global Clearance, Settlement and Tax Documentation Procedures".
Transfers between Participants will occur in accordance with DTC
rules. Transfers between CEDEL Participants and Euroclear Participants will
occur in accordance with their respective 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
Participants or Euroclear Participants, on the other, will be effected by DTC
in accordance with the Rules on behalf of the relevant
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European international clearing system by the Relevant Depositary; however,
such cross market transactions 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 (European time). The relevant European international clearing system
will, if the transaction meets its settlement requirements, deliver
instructions to the Relevant 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 European
Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the
Securities, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Securities will be subject to the
rules, regulations and procedures governing DTC and its Participants as in
effect from time to time.
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 its 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. 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.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("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 32 currencies, including United
States dollars. Euroclear 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. Euroclear is operated by the Brussels, Belgium office of
Morgan Guaranty Trust Company of New York (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
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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 Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear 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 Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear 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.
Under a book-entry format, Certificate Owners and Note Owners
may experience some delay in their receipt of payments, since such payments
will be forwarded by the Trustee to Cede. Distributions with respect to Notes
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 the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Since transactions in the Book-Entry
Notes will be effected only through DTC, CEDEL, Euroclear, participating
organizations, indirect participants and certain banks, the ability of a
Beneficial Owner to pledge Notes to persons or entities that do not participate
in the DTC, CEDEL or Euroclear systems, or otherwise to take actions in respect
of such Notes, may be limited due to lack of a physical certificate
representing such Notes. In addition, issuance of the Book-Entry Notes in
book-entry form may reduce the liquidity of such Notes in the secondary market
since certain potential investors may be unwilling to purchase Notes for which
they cannot obtain physical certificates.
DTC has advised the Seller and the Trustee that, unless and until
Definitive Notes are issued, DTC will take any action permitted to be taken by
the holders of the Book-Entry Notes under the Pooling and Servicing Agreement
only at the direction of one or more Participants to whose DTC accounts the
Book-Entry Notes are credited, to the extent that such actions are taken on
behalf of Indirect Participants whose holdings include such Book-Entry Notes.
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CEDEL or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Noteholder under the Pooling and Servicing Agreement
on behalf of a CEDEL Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to the ability of the
Relevant Depositary to effect such actions on its behalf through DTC. DTC may
take actions, at the direction of the related Participants, with respect to
some Notes which conflict with actions taken with respect to other Notes.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Notes 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.
STATEMENTS TO SECURITYHOLDERS
On or prior to each Distribution Date, the Servicer will prepare and
provide to the Trustee and the Security Insurer, if any, a statement to be
delivered to the related Certificateholders on such Distribution Date. On or
prior to each Payment Date, the Servicer will prepare and provide to the
Indenture Trustee a statement to be delivered to the related Noteholders on
such Payment Date. Such statements will be based on the information in the
related Servicer's Certificate setting forth certain information required under
the Trust Documents (the "Servicer's Certificate"). Each such statement to be
delivered to Certificateholders will include, where appropriate, the following
information as to the Certificates with respect to such Distribution Date or
the period since the previous Distribution Date, as applicable, and each such
statement to be delivered to Noteholders will include the following information
as to the Notes with respect to such Payment Date or the period since the
previous Payment Date, as applicable:
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(i) the amount of the distribution allocable to
interest on or with respect to each class of Securities;
(ii) the amount of the distribution allocable to
principal on or with respect to each class of Securities;
(iii) the aggregate outstanding principal balance
and Pool Factors for each class of Securities, after giving effect to
all payments reported under (ii) above on such date;
(iv) the amount of the Servicing Fee paid to the
Servicer with respect to the related Monthly Period or Periods, as the
case may be;
(v) the Pass-Through Rate or Interest Rate for
the next period for any class of Certificates or Notes with variable
or adjustable rates;
(vi) the amount, if any, distributed to
Certificateholders and Noteholders applicable to payments under the
related Policy or other form of credit enhancement, if any; and
(vii) such other information as may be specified in
the related Prospectus Supplement.
Each amount set forth pursuant to subclauses (i), (ii), (iv) and (vi)
with respect to Certificates or Notes will be expressed as a dollar amount per
$1,000 of the initial Certificate Balance or the initial principal balance of
the Notes, as applicable.
Unless and until Definitive Certificates or Definitive Notes are
issued, such reports with respect to a series of Securities will be sent on
behalf of the related Trust to the Trustee, the Indenture Trustee and Cede &
Co., as registered holder of the Certificates and the Notes and the nominee of
DTC. Certificate Owners and Note Owners may receive copies of such reports upon
written request, together with a certification that they are Certificate Owners
or Note Owners, as the case may be, and payment of any expenses associated with
the distribution of such reports, from the Trustee or the Indenture Trustee, as
applicable. See "Book-Entry Registration" above.
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year during the term of a Trust, the Trustee and the
Indenture Trustee, as applicable, will mail to each holder of a class of
Securities who at any time during such calendar year has been a Securityholder,
and received any payment thereon, a statement containing certain information
for the purposes of such Securityholder's preparation of federal income tax
returns. See "Certain Federal Income Tax Consequences."
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LISTS OF SECURITYHOLDERS
With respect to each series of Certificates, at such time, if any, as
Definitive Certificates have been issued, the Trustee will, upon written
request by three or more Certificateholders or one or more holders of
Certificates evidencing not less than 25% of the Certificate Balance, within
five Business Days after provision to the Trustee of a statement of the
applicants' desire to communicate with other Certificateholders about their
rights under the related Trust Documents or the Certificates and a copy of the
communication that the applicants propose to transmit, afford such
Certificateholders access during business hours to the current list of
Certificateholders for purposes of communicating with other Certificateholders
with respect to their rights under the related Trust Documents. The related
Trust Documents will not provide for holding any annual or other meetings of
Certificateholders.
With respect to each series of Notes, if any, at such time as
Definitive Notes have been issued, the Indenture Trustee will, upon written
request by three or more Noteholders or one or more holders of Notes evidencing
not less than 25% of the aggregate principal balance of the related Notes,
within five Business Days after provision to the Indenture Trustee of a
statement of the applicants' desire to communicate with other Noteholders about
their rights under the related Indenture or the Notes and a copy of the
communication that the applicants propose to transmit, afford such Noteholders
access during business hours to the current list of Noteholders for purposes of
communicating with other Noteholders with respect to their rights under the
Indenture. The related Indenture will not provide for holding any annual or
other meetings of Noteholders.
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DESCRIPTION OF THE PURCHASE AGREEMENTS AND THE
TRUST DOCUMENTS
The following summary describes certain terms of the Purchase
Agreements (each a "Purchase Agreement") pursuant to which the Seller will
purchase Receivables from one or more NAFI Transferors, and certain terms of
either (i) the Pooling and Servicing Agreements or (ii) the Sale and Servicing
Agreements and the Trust Agreements (in either case collectively referred to as
the "Trust Documents") pursuant to which the Seller will sell and assign such
Receivables to a Trust and the Servicer will agree to service such Receivables
on behalf of the Trust, and pursuant to which such Trust will be created and
Certificates will be issued. Forms of the Purchase Agreement and the Trust
Documents have been filed as exhibits to the Registration Statement of which
this Prospectus forms a part. The Seller will provide a copy of such agreements
(without exhibits) upon request to a holder of Securities described therein.
Requests for such copies should be directed to Chief Financial Officer,
National Auto Finance Company, Inc., One Park Place, Suite 200, 621 N.W. 53rd
Street, Boca Raton, Florida 33487 (telephone (407) 997-2747). This summary does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, all of the provisions of the Purchase Agreement and the Trust
Documents. Where particular provisions or terms used in the Purchase Agreement
and the Trust Documents are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summary.
SALE AND ASSIGNMENT OF THE RECEIVABLES
On or prior to the Closing Date with respect to a series of Securities
specified in the related Prospectus Supplement, each applicable NAFI Transferor
(and, if such NAFI Transferor is a special-purpose finance subsidiary of NAFI,
NAFI) will enter into a Purchase Agreement with the Seller pursuant to which
such NAFI Transferor will, on or prior to such Closing Date, sell and assign to
the Seller, without recourse, its entire interest in and to the related
Receivables, including its security interest in the Financed Vehicles securing
such Receivables and its rights to receive all payments on, or proceeds with
respect to, such Receivables and the related Financed Vehicles to the extent
paid or payable on or after the applicable Cutoff Date. Pursuant to the
Purchase Agreement, NAFI will agree that, upon the occurrence of a Repurchase
Event under the related Trust Documents with respect to any Receivable of a
Trust, the Trustee on behalf of the Security Insurer (if any) and the
Certificateholders will be entitled to require NAFI to repurchase such
Receivable from the Trust. Such rights of the Trust under the Purchase
Agreement will constitute part of the property of the Trust and may be enforced
directly by the Trustee on behalf of the Security Insurer (if any) and the
Certificateholders. In addition, the Trustee will pledge such rights to the
Indenture Trustee as collateral for the Notes, if any.
On the Closing Date, the Seller will sell and assign to the Trustee,
without recourse, the Seller's entire interest in the related Receivables and
the proceeds thereof, including its security interests in the Financed
Vehicles. Each Receivable transferred by the Seller to the
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Trust will be identified in a schedule appearing as an exhibit to the related
Trust Documents (the "Schedule of Receivables"). Concurrently with such sale
and assignment, the Trustee will execute and deliver the related certificates
representing the Certificates to or upon the order of the Seller, and the
Trustee will execute and the Indenture Trustee will authenticate and deliver
the Notes, if any, to or upon the order of the Seller.
In the Purchase Agreement, NAFI will warrant to the Seller, the
Trustee and the Security Insurer, if any, and in the Trust Documents, the
Seller will warrant to the Trustee and the Security Insurer, if any, among
other things, that (except as otherwise specified in the related Prospectus
Supplement): (i) each Receivable (A) has created or will create a valid,
binding and enforceable first priority security interest in favor of NAFI in
the Financed Vehicle (and, within 180 days after the Closing Date, all title
documents to the Financed Vehicles will show NAFI as first lienholder), which
security interest has been validly assigned by NAFI to the Seller and by the
Seller to the Trustee, (B) was originated by a Dealer for the retail sale of a
Financed Vehicle in the ordinary course of such Dealer's business, was fully
and properly executed by the parties thereto, was purchased by NAFI from such
Dealer under an existing Dealer Agreement with NAFI or from an Originator
pursuant to an Originator Agreement and was validly assigned to NAFI (C)
contains customary and enforceable provisions adequate to enable realization
against the collateral security and (D) provides for level monthly payments
(other than with respect to the first and the final payments) which, if made
when due, will fully amortize the amount financed over the original term; (ii)
no selection procedures adverse to the Securityholders or the Security Insurer,
if any, were utilized in selecting the Receivables from those receivables owned
by NAFI that meet the selection criteria contained in the related Trust
Documents; (iii) all requirements of applicable Federal, state and local laws,
and regulations thereunder, in respect of all of the Receivables and each and
every sale of the Financed Vehicles have been complied with in all material
respects; (iv) each Receivable represents the genuine, legal, valid and binding
payment obligation to the Obligor thereon, enforceable in accordance with its
terms, except as may be limited by laws affecting creditors' rights generally
or as may be modified by the application of the Solders' and Sailors' Civil
Relief Act of 1940, as amended (the "Relief Act"); (v) (A) immediately before
the conveyance of each Receivable to the Trust, such Receivable will be secured
by an enforceable and validly perfected first priority security interest in the
Financed Vehicle in favor of NAFI and (B) as of the Closing Date there were no
security interests, liens, charges, pledges, preferences, equities or
encumbrances of any kind, claims or rights of others or claims for taxes, work,
labor or materials affecting a Financed Vehicle (each, a "Lien") which are or
may be Liens prior or equal to the Lien of the related Receivable; (vi) there
has been no default, breach, violation or event permitting acceleration under
the terms of any Receivable (other than payment delinquencies of not more than
30 days), and there has been no waiver of any of the foregoing; and as of the
Closing Date, no Financed Vehicle has been repossessed; (vii) immediately prior
to the conveyance of the Receivables to the Seller, the applicable NAFI
Transferor had good and indefeasible title thereto and was the sole owner
thereof, free of any Lien; immediately prior to the conveyance of the
Receivables to the Trust, the Seller had good and indefeasible title thereto
and was the sole owner thereof, free of any Lien; and upon conveyance of the
Receivables by the Seller to
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the Trust pursuant to the Trust Documents, the Trust will have good and
indefeasible title to and will be the sole owner of the Receivables, free of
any Lien; (viii) no Dealer or Originator has a participation in or other right
to receive proceeds of any Receivable, and neither the applicable NAFI
Transferor nor the Seller has taken any action to convey any right to any
person that would result in such person having a right to payments received
with respect to any Receivable; (ix) neither the applicable NAFI Transferor nor
the Seller has done anything to convey any right to any person that would
impair the rights of the Trust, the Security Insurer, if any, the
Certificateholders or the Noteholders in any Receivable or the proceeds
thereof; (x) each Receivable was sold by a Dealer or Originator to NAFI without
any fraud or misrepresentation on the part of such seller; (xi) no Obligor is
the United States of America or any State or any agency, department,
subdivision or instrumentality thereof; (xii) no Receivable is assumable by
another person in a manner that would release the Obligor thereof from such
Obligor's obligations to NAFI with respect to such Receivable; (xiii) no
Receivable was originated in, or is subject to the laws of, any jurisdiction
the laws of which would make unlawful, void or voidable the sale, transfer and
assignment of such Receivable under the Purchase Agreement or the Trust
Documents or pursuant to transfers of the Securities; (xiv) all filings and
other actions required to be made, taken or performed by any person in any
jurisdiction to give the Trust a first priority perfected lien or ownership
interest in the Receivables and the proceeds thereof will have been made, taken
or performed; (xv) there exists a Receivable File pertaining to each
Receivable, and such Receivable File contains (A) the fully executed original
of the Receivable, (B) the original lien certificate or application therefor
and (C) a credit application signed by the Obligor, or a copy thereof; each of
such documents required to be signed by the Obligor has been signed by the
Obligor in the appropriate spaces, all blanks have been properly filled in and
each form has otherwise been correctly prepared; and the complete Receivable
File for each Receivable is in the possession of a custodian; (xvi) there is
only one original executed copy of each Receivable; (xvii) the Receivables
constitute chattel paper within the meaning of the UCC as in effect in the
States of Florida and Delaware; (xviii) each Receivable was entered into by an
Obligor who at the Cutoff Date had not been identified on the records of NAFI
as being the subject of a current bankruptcy proceeding; (xix) the computer
tape containing information with respect to the Receivables that was made
available by the Seller to the Trustee on the Closing Date and was used to
select the Receivables (the "Computer Tape") was complete and accurate as of
the Cutoff Date and includes a description of the same Receivables that are
described in the Schedule of Receivables; (xx) by the Closing Date, the
portions of the electronic master record of retail installment sale contracts
of NAFI (the "Electronic Ledger") relating to the Receivables will have been
clearly and unambiguously marked to show that the Receivables have been
transferred to the Seller; (xxi) as of the Closing Date, each Financed Vehicle
was covered by a comprehensive and collision insurance policy (A) in an amount
at least equal to the lesser of (1) its maximum insurable value or (2) the
principal amount due from the Obligor under the related Receivable, (B) naming
NAFI as loss payee and (C) insuring against loss and damage due to fire, theft,
transportation, collision and other risks generally covered by comprehensive
and collision insurance coverage; and no Financed Vehicle was or had previously
been insured under a policy of force-placed insurance; (xxii) no Receivable has
been satisfied, subordinated or rescinded; the Financed Vehicle securing each
Receivable has
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not been released from the lien of the related Receivable in whole or in part;
and no provision of a Receivable has been waived, altered or modified in any
respect, except by instruments or documents contained in the Receivable File;
(xxiii) no Receivable is subject to any right of rescission, set-off,
counterclaim or defense, and the operation of the terms of any Receivable or
the exercise of any right thereunder will not render such Receivable
unenforceable in whole or in part or subject to any right of rescission,
set-off, defense or counterclaim, and no such right of rescission, set-off,
defense or counterclaim has been asserted; (xxiv) no Receivable was more than
30 days past due as of the Cutoff Date and (xxv) each Receivable had a
remaining principal balance as of the Cutoff Date equal to or greater than
$500.00.
The warranties of NAFI and the Seller will be made as of the execution
and delivery of each Purchase Agreement and the related Trust Documents and
will survive the sale, transfer and assignment of the related Receivables and
other Trust Property to the Trust but will speak only as of the date made.
In the event of a breach by NAFI of any representation or warranty
made by it in a Purchase Agreement with respect to a Receivable that materially
and adversely affects the interests of the Securityholders, the Security
Insurer (if any) or the Trust in that Receivable (any such breach by NAFI being
a "Repurchase Event"), NAFI, unless it cures the breach within the time period
specified in the related Purchase Agreement following the date on which NAFI
becomes aware of or receives written notice from the Trustee, the Indenture
Trustee, the Security Insurer, if any, or the Servicer of such breach, will be
obligated to repurchase the Receivable from the Trust. Any such repurchase
shall be made at a price equal to the Purchase Amount. The "Purchase Amount" of
any Receivable means the outstanding principal balance of such Receivable plus
accrued and unpaid interest thereon. This repurchase obligation may be enforced
by the Security Insurer (if any), or by the Trustee or the Indenture Trustee on
behalf of the Certificateholders and the Noteholders, respectively, and will
constitute the sole remedy available to the Certificateholders, the
Noteholders, the Security Insurer (if any), the Trustee or the Indenture
Trustee against NAFI or the Seller for any such uncured breach, except that
pursuant to the Trust Documents, NAFI will indemnify the Trustee, the Indenture
Trustee, the Trust, the Backup Servicer, the Collateral Agent, the Security
Insurer (if any), and the Certificateholders and Noteholders against losses,
damages, liabilities and claims which may be asserted against any of them as a
result of third-party claims arising out of the facts giving rise to such
breach.
Upon the purchase by NAFI of a Warranty Receivable, the Trustee will
convey such Receivable and the related Trust Property to NAFI.
CUSTODY OF RECEIVABLE FILES
Unless otherwise specified in the related Prospectus Supplement, OFSA
as designee of NAFI under a Custodial Agreement, on behalf of each Trust, will
hold the original installment sale contract as well as copies of documents and
instruments relating to each Receivable and evidencing the security interest in
the Financed Vehicle securing each Receivable (the
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"Receivable Files"). In order to protect the Trust's ownership interest in the
Receivables, NAFI will file UCC-1 financing statements in Florida and the
Seller will file UCC-1 financing statements in Florida and Delaware to give
notice of such Trust's ownership of the related Receivables and the related
Trust Property. If held by OFSA, the Receivables will not be segregated and
will not be stamped or otherwise marked to indicate that such Receivables have
been sold to the related Trust.
If so specified in the related Prospectus Supplement, NAFI will be
appointed to act as custodian for the Receivable Files of each Trust. The Trust
and NAFI or such other institution specified in the related Prospectus
Supplement, as the case may be, may enter into a custodial agreement pursuant
to which NAFI or such other institution will agree to hold the Receivable Files
on behalf of the related Trust. Any such custodial agreement may be terminated
by the Trust and, if NAFI is custodian, by the Security Insurer, on 30 days'
notice to NAFI or such other institution or, in the case of termination by the
Security Insurer of NAFI as custodian, immediately. If NAFI resigns or is
terminated as the Servicer, any custodial agreement with NAFI shall terminate
at the same time.
The Receivable Files, if held by NAFI as custodian, will be stamped or
otherwise marked to indicate that such Receivables have been sold to the
related Trust. The Receivable Files will also be physically segregated. Despite
these precautions, if, through inadvertence or otherwise, any of the
Receivables were sold to another party (or a security interest therein were
granted to another party) that purchased (or took such security interest in)
any of such Receivables in the ordinary course of its business and took
possession of such Receivables, the purchaser (or secured party) would acquire
an interest in the Receivables superior to the interest of the related Trust if
the purchaser (or secured party) acquired (or took a security interest in) the
Receivables for new value and without actual knowledge of such Trust's
interest. See "Certain Legal Aspects of the Receivables - Rights in the
Receivables."
COLLECTIONS
With respect to each Trust, the Servicer will establish one or more
Collection Accounts in the name of the Trustee or, in the case of any series
including one or more classes of Notes, in the name of the Indenture Trustee
for the benefit of the related Securityholders. If so specified in the related
Prospectus Supplement, the Trustee will establish and maintain for each series
an account, in the name of the Trustee on behalf of the related
Certificateholders, in which amounts released from the Collection Account, any
Pre-Funding Account or any Revolving Account and any amounts received from any
source of credit enhancement for distribution to such Certificateholders will
be deposited and from which all distributions to such Certificateholders will
be made (the "Certificate Distribution Account"). With respect to any series
including one or more classes of Notes, the Indenture Trustee will establish
and maintain for each series an account, in the name of the Indenture Trustee
on behalf of the related Noteholders, in which amounts released from the
Collection Account, any Pre-Funding Account or any Revolving Account and any
amounts received from any source of credit enhancement for payment to such
Noteholders will be deposited and from which all
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distributions to such Noteholders will be made (the "Note Distribution
Account"). The Collection Account, the Certificate Distribution Account (if
any), and the Note Distribution Account (if any), are referred to herein
collectively as the "Designated Accounts." Any other accounts to be established
with respect to a Trust will be described in the related Prospectus Supplement.
Each Designated Account will be an Eligible Account maintained with
the Trustee, the Indenture Trustee and/or other depository institutions. An
"Eligible Account" is (i) a segregated trust account that is maintained with
the corporate trust department of a depository institution (acceptable to the
Security Insurer, if any) or (ii) a segregated demand deposit account
maintained with a depository institution or trust company organized under the
laws of the United States of America, or any of the states thereof, or the
District of Columbia, that has a certificate of deposit, short-term deposit or
commercial paper rating of at least A-1+ by S&P and P-1 by Moody's (the
"Required Deposit Rating"), and that is acceptable to the Security Insurer if
any (prior to an Insurer Default). On the Closing Date specified in the related
Prospectus Supplement, the Servicer will cause to be deposited in the
Collection Account all payments on the Receivables received by the Servicer
after the Cutoff Date and on or prior to the second Business Day preceding the
Closing Date.
All payments from Obligors that are received by the Servicer or any
subservicer on behalf of each Trust will be deposited in the related Collection
Account not later than two Business Days after receipt thereof or within such
other time period as may be acceptable to the Rating Agencies and the Security
Insurer, if any. OFSA has established and maintains a lockbox account (the
"Lockbox Account") with Mellon Financial Services, a subsidiary of Mellon Bank
(the "Lockbox Bank") to which payments in respect of motor vehicle installment
debt obligations and lease obligations serviced by OFSA are remitted. Unless
otherwise specified in the related Prospectus Supplement, Obligors will be
notified to remit payments in respect of the Receivables directly to the
Lockbox Account. Unless otherwise specified in the related Prospectus
Supplement, the Lockbox Account will not be segregated, assigned or pledged to
the Trustee or the Indenture Trustee and payments in respect of the Receivables
deposited to the Lockbox Account will be commingled with collections in respect
of motor vehicle installment debt obligations and lease obligations serviced by
OFSA. Neither the Trustee nor the Servicer will have any rights to withdraw or
otherwise direct disposition of funds on deposit in the Lockbox Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will deposit all payments on the Receivables held by any Trust
received directly by the Servicer from Obligors and all proceeds of Receivables
collected directly by the Servicer during each Monthly Period into the
Collection Account not later than the Business Day after receipt.
Notwithstanding the foregoing and unless otherwise provided in the related
Prospectus Supplement, the Servicer may utilize an alternative remittance
schedule acceptable to the Servicer and the Security Insurer, if any (prior to
an Insurer Default), if the Servicer provides to the Trustee and the Indenture
Trustee written confirmation from each Rating Agency that such alternative
remittance schedule will not result in the downgrading or withdrawal by such
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Rating Agency of the rating(s) then assigned to the Securities. NAFI and the
Servicer will also deposit into the Collection Account within the time period
specified in the related Prospectus Supplement the Purchase Amount of each
Warranty Receivable or Administrative Receivable to be purchased by it.
For any series of Securities, funds in the Designated Accounts and any
other accounts identified in the related Prospectus Supplement will be
invested, as provided in the related Trust Documents, at the direction of the
Servicer in "Eligible Investments," consisting (unless otherwise specified in
the related Prospectus Supplement) of: interest-bearing obligations issued or
guaranteed as to principal and interest by the United States or any agency or
instrumentality of the United States, the obligations of which are backed by
the full faith and credit of the United States; interest-bearing obligations
issued or guaranteed by the Federal National Mortgage Association or the
Federal Home Loan Mortgage Corporation as long as such obligations are assigned
the highest credit rating by S&P and Moody's; demand or time deposits,
certificates of deposit of and certain other obligations of domestic depositary
institutions with short-term unsecured debt obligations assigned the highest
credit rating by S&P and Moody's; certain repurchase obligations with respect
to the government securities described above and entered into with a domestic
depository institution or trust company, the deposits of which are rated at
least A-1+ by S&P and P-1 by Moody's; certain corporate debt securities
assigned the highest credit rating by S&P and Moody's; certain commercial paper
rated in the highest credit rating category by S&P and Moody's; and certain
other securities meeting the criteria specified in the related Trust Documents
to the extent investment in such securities would not require registration of
the related Trust under the Investment Company Act of 1940. Eligible
Investments shall mature no later than the Business Day preceding the
applicable Distribution Date or Payment Date, as the case may be, for the
Monthly Period to which such amounts relate. Investments in Eligible
Investments will be made in the name of the Trustee or the Indenture Trustee,
as the case may be, and such investments will not be sold or disposed of prior
to their maturity.
As an administrative convenience and subject to certain conditions
specified in the Trust Documents, the Servicer will be permitted to make
deposits of amounts actually collected by it in a Monthly Period net of
distributions to be made to it with respect to such Monthly Period, which
amounts may be netted prior to any such remittance for the Monthly Period. The
Servicer will account, however, to the Trustee, the Indenture Trustee, the
Security Insurer, if any, the Certificateholders and the Noteholders as if all
such deposits and distributions were made individually. The Servicer will be
entitled to withhold, or to be reimbursed from amounts otherwise payable into,
or on deposit in, the Collection Account with respect to a Monthly Period,
amounts previously deposited in the Collection Account but later determined to
have resulted from mistaken deposits or postings or checks returned for
insufficient funds.
SERVICING PROCEDURES
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The Servicer will make reasonable efforts, consistent with the
customary servicing procedures employed by the Servicer with respect to
Receivables owned or serviced by it, to collect all payments due with respect
to the Receivables held by any Trust and, in a manner consistent with the Trust
Documents, will follow its customary collection procedures with respect to
motor vehicle loans that it services for itself and others.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will covenant in the related Trust Documents that it will not extend
the monthly payments under a Receivable more than a maximum of four months in
the aggregate and that the cumulative extensions with respect to any Receivable
will not cause the term of such Receivable to extend beyond the last day of the
Monthly Period immediately preceding the Final Scheduled Distribution Date (as
specified in the related Prospectus Supplement). The Servicer may, with the
consent of the Security Insurer, if any (prior to an Insurer Default) and
subject to certain other conditions, agree to modify a Receivable to avoid a
prepayment by the Obligor, provided that such modification may not cause the
APR on such Receivable to be below a rate equal to the highest Interest Rate or
Pass-Through Rate on the related Securities plus the applicable Servicing Rate,
nor may such modification cause the term of the modified Receivable to extend
beyond the last day of the Monthly Period immediately preceding the Final
Scheduled Distribution Date specified in the related Prospectus Supplement.
Under current Proposed Treasury Regulations, depending on the characterization
of the related Trust for federal income tax purposes, no such modification of a
Receivable may change the APR by more than .25%. The Servicer will also
covenant that it will not release a Financed Vehicle from the security interest
granted by the Receivable except when the Receivable has been paid in full or
as otherwise contemplated by the Trust Documents.
Upon the discovery by any of the Servicer, the Security Insurer, if
any, the Trustee or the Indenture Trustee, or receipt of written notice by the
Servicer of any breach by the Servicer of certain of its covenants that
materially and adversely affects the interests of a Trust, the Security Insurer
(if any) or the related Securityholders in a Receivable, unless such breach
shall have been cured within the applicable cure period provided for in the
Trust Documents and specified in the related Prospectus Supplement, the
Servicer will be required to purchase the related Receivable for the Purchase
Amount. The purchase obligation will constitute the sole remedy available to
the Security Insurer (if any), the Certificateholders, the Trustee on behalf of
Certificateholders, the Noteholders or the Indenture Trustee on behalf of
Noteholders against the Servicer for any such uncured breach, expect with
respect to certain indemnities of the Servicer under the Trust Documents.
Under the Trust Documents, the Servicer will be required to use its
best efforts to repossess or otherwise comparably convert the ownership of any
Financed Vehicle securing a Receivable with respect to which the Servicer has
determined that payments thereunder are not likely to be resumed as soon as
practicable after default on such Receivable, but in no event later than the
day on which any portion of a Scheduled Payment has become 91 days delinquent.
The Servicer is authorized to follow such of its normal collection practices
and procedures as it deems necessary or advisable to realize upon any
Receivable. The Servicer
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may repossess and sell the Financed Vehicle securing such Receivable at
judicial sale, or take any other action permitted by applicable law. See
"Certain Legal Aspects of the Receivables." The Servicer will be entitled to
recover all reasonable expenses incurred by it in connection therewith. The
proceeds of such realization (net of such expenses) will be deposited in the
Collection Account at the time and in the manner described above under
" - Collections."
Unless otherwise specified in the related Prospectus Supplement,
neither the Servicer nor any Subservicer will have any obligation to make
advances of delinquent payments of principal and interest on the Receivables.
The Trust Documents will provide that the Servicer will indemnify and
defend the Trustee, the Indenture Trustee, the Backup Servicer, the Trust, the
Security Insurer (if any) and the Securityholders against, among other things,
any and all costs, expenses, losses, damages, claims and liabilities, including
reasonable fees and expenses of counsel and expenses of litigation, arising out
of or resulting from the use, ownership or operation by the Servicer or any
affiliate thereof of any Financed Vehicle (as may occur, for instance, upon
repossession of a Financed Vehicle) or in respect of any action taken or failed
to be taken by the Servicer with respect to any portion of the Trust Property
in violation of the provisions of the Trust Documents. The Servicer's
obligations to indemnify the Trustee, the Indenture Trustee, the Backup
Servicer, the Trust, the Security Insurer (if any) and the Securityholders for
the Servicer's actions or omissions will survive the removal of the Servicer
but will not apply to any action or omission of a successor Servicer.
SERVICING COMPENSATION
With respect to each series of Securities, the Servicer will be
entitled to receive the Servicing Fee for each Monthly Period in an amount
generally equal to the product of one-twelfth of the Servicing Rate specified
in the related Prospectus Supplement and the Aggregate Principal Balance as of
the first day of such Monthly Period. The Servicer also will be entitled to
collect and retain any late fees or other administrative fees or similar
charges allowed by the terms of the Receivables or applicable law. The
Servicing Fee and any additional servicing compensation will be paid out of
collections on or with respect to the Receivables prior to distributions to
Certificateholders and Noteholders. A "Monthly Period" with respect to any
Distribution Date will generally be the calendar month immediately preceding
the month in which the Distribution Date occurs.
NAFI, as Servicer, will be required to pay all expenses incurred by it
in connection with its servicing activities (including fees, expenses and
disbursements of the Trustee, the Indenture Trustee, the Lockbox Bank, the
Custodian and independent accountants, taxes imposed on the Servicer and
expenses incurred in connection with distributions and reports to
Certificateholders and Noteholders and the Security Insurer (if any)), except
certain expenses incurred in connection with realizing upon the Receivables.
DISTRIBUTIONS
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With respect to each Trust, beginning on the Distribution Date or
Payment Date, as applicable, specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal or
interest only) on each class of Securities entitled thereto will be made by the
Trustee or the Indenture Trustee, as applicable, to the Certificateholders and
the Noteholders. The timing, calculation, allocation, order, source, priorities
of and requirements for all distributions to each class of Certificateholders
and all payments to each class of Noteholders will be set forth in the related
Prospectus Supplement.
CREDIT ENHANCEMENT
The amounts and types of credit enhancement arrangements and the
provider thereof, if applicable, with respect to each class of Securities 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 a financial guaranty insurance policy, subordination of one or more
classes of Securities, reserve accounts, overcollateralization, letters of
credit, credit or liquidity facilities, repurchase obligations, third party
payments or other support, cash deposits or such other arrangements as may be
described in the related Prospectus Supplement or any combination of two or
more of the foregoing. If specified in the applicable Prospectus Supplement,
credit enhancement for a series of Securities may cover one or more other
series of Securities.
The presence of credit enhancement is intended to enhance the
likelihood of receipt by the Certificateholders and the Noteholders of the full
amount of principal and interest due thereon and to decrease the likelihood
that the Certificateholders and the Noteholders will experience losses. The
credit enhancement for a class of Securities will not provide protection
against all risks of loss and will not guarantee repayment of the entire
principal and interest thereon unless so provided in the related Prospectus
Supplement. If losses occur which exceed the amount covered by any credit
enhancement or which are not covered by any credit enhancement, Securityholders
will bear their allocable share of deficiencies. In addition, if a form of
credit enhancement covers more than one series of Securities. Securityholders
of any such series will be subject to the risk that such credit enhancement
will be exhausted by the claims of Securityholders of other series.
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EVIDENCE AS TO COMPLIANCE
The Trust Documents will require the Servicer to cause a firm of
independent certified public accountants to furnish to the Trustee and the
Indenture Trustee, the Security Insurer, if any, and each Rating Agency, on or
before March 31 of each year (or, if the Servicer's fiscal year ends on a date
other than December 31, the date 90 days after the end of the Servicer's fiscal
year), beginning on the first March 31 after the Closing Date, with respect to
the twelve months ended the immediately preceding December 31 or other fiscal
year-end (or such other period as shall have elapsed from the Closing Date to
the date of such certificate), a statement addressed to the Board of Directors
of the Servicer, to the Trustee, the Indenture Trustee, the Backup Servicer and
the Security Insurer, if any, as to compliance by the Servicer during such
period with certain standards relating to the servicing of the Receivables set
forth in the Trust Documents. A copy of such statement may be obtained by any
Certificate Owner or Note Owner upon compliance with the requirements described
above. See "Certain Information Regarding the Securities - Statements to
Securityholders" above.
The Trust Documents will also provide for delivery to the Trustee, the
Indenture Trustee, the Security Insurer, if any, and each Rating Agency, if
any, and the Backup Servicer, on or before March 31 (or, if the Servicer's
fiscal year ends on a date other than December 31, the date 90 days after the
end of the Servicer's fiscal year) of each year, beginning on the first March
31 following the Closing Date, of an officers' certificate signed by any two of
the president, any vice-president or assistant vice president, or the
controller of the Servicer (each, a "Servicer Responsible Officer"), dated as
of December 31 of such year (or such other date on which the Servicer's fiscal
year ends), stating that (i) a review of the activities of the Servicer during
the preceding 12-month period (or such other period as shall have elapsed from
the Closing Date to the date of the first such certificate) and of its
performance under the Trust Documents has been made under such officer's
supervision, and (ii) to such officer's knowledge, based on such review, the
Servicer has fulfilled all its obligations under the Trust Documents throughout
such period, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default known to such officer and the nature
and status thereof. A copy of such certificate may be obtained by any
Certificate Owner or Note Owner upon compliance with the requirements described
above. See "Certain Information Regarding the Securities - Statements to
Securityholders" above.
CERTAIN MATTERS REGARDING THE SERVICER
If a Policy has been issued with respect to a series of Securities,
NAFI's appointment as Servicer under the related Trust Documents may be subject
to periodic renewal by the Security Insurer, if any (prior to an Insurer
Default). It is expected that the Security Insurer (if any) will renew NAFI's
appointment as Servicer until such time, if any, as a Servicer Termination
Event shall have occurred. Unless otherwise provided in the related Prospectus
Supplement, if an Insurer Default occurs or if no Policy is issued with respect
to a series, NAFI's appointment as Servicer under the related Trust Documents
will continue until such time as it resigns, is terminated as Servicer, or
until such time, if any, as a Servicer
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Termination Event shall have occurred under the related Trust Documents. The
related Trust Documents will provide that the Servicer may not resign from its
obligations and duties as Servicer thereunder, except upon a determination (as
evidenced by an opinion of independent counsel, delivered and acceptable to the
Trustee, the Indenture Trustee and the Security Insurer, if any (prior to an
Insurer Default)), that by reason of a change in legal requirements its
performance of such duties would cause it to be in violation of such legal
requirements in a manner which would result in a material adverse effect on the
Servicer. No such resignation will become effective until the Backup Servicer
or other successor Servicer has assumed the servicing obligations and duties
under the related Trust Documents.
Any corporation or other entity into which the Servicer may be merged
or consolidated, resulting from any merger or consolidation to which the
Servicer is a party, which acquires by conveyance, transfer or lease
substantially all of the assets of the Servicer or succeeding to all or
substantially all the business of the Servicer, where the Servicer is not the
surviving entity, which corporation or other entity assumes every obligation of
the Servicer under each Trust Document, will be the successor to the Servicer
under the related Trust Documents; provided, however, that (i) such entity is
an Eligible Servicer, (ii) immediately after giving effect to such transaction,
no Servicer Termination Event, no event of default under the agreement (if
any), providing for the issuance of the Policy (the "Insurance Agreement")
(prior to an Insurer Default) and no event which, after notice or lapse of
time, or both, would become a Servicer Termination Event or an event of default
under the related Insurance Agreement, if any (prior to an Insurer Default),
shall have occurred and be continuing, (iii) the Servicer shall have delivered
to the Trustee, the Indenture Trustee and the Security Insurer (if any) an
officers' certificate and an opinion of counsel each stating that such
consolidation, merger or succession and such agreement of assumption comply
with the related Trust Documents and that all conditions precedent provided for
in the Trust Documents relating to such transaction have been complied with,
and (iv) the Servicer shall have delivered an opinion of counsel either (A)
stating that, in the opinion of such counsel, all financing statements and
continuation statements and amendments thereto have been executed and filed
that are necessary fully to preserve and protect the interest of the Trustee
and the Indenture Trustee in the Receivables and the other Trust Property and
reciting the details of such filings, or (B) stating that, in the opinion of
such counsel, no such action shall be necessary to preserve and protect such
interest.
INDEMNIFICATION AND LIMITS ON LIABILITY
The Trust Documents will provide that the Servicer will be liable only
to the extent of the obligations specifically undertaken by it under the Trust
Documents and will have no other obligations or liabilities thereunder. The
Trust Documents will further provide that neither the Servicer nor any of its
directors, officers, employees and agents will have any liability to the Trust,
the Certificateholders or the Noteholders or the Security Insurer, if any,
except as provided in the Trust Documents, for any action taken or for
refraining from taking any action pursuant to the Trust Documents, other than
any liability that would otherwise be imposed by reason of the Servicer's
breach of the Trust Documents or willful misfeasance, bad faith or
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negligence (including errors in judgment) in the performance of its duties, or
by reason of reckless disregard of obligations and duties under the Trust
Documents or any violation of law.
The Servicer may, with the prior consent of the Security Insurer, if
any (prior to an Insurer Default), the Trustee, the Indenture Trustee, if any,
and the Backup Servicer, delegate duties under the related Trust Documents to
any of its affiliates. In addition, the Servicer may at any time perform the
specific duty of repossessing Financed Vehicles through subcontractors who are
in the business of servicing automotive receivables. The Servicer may also
perform other specific duties through subcontractors, with the prior consent of
the Security Insurer, if any (prior to an Insurer Default); provided, however,
that no such delegation of such duties by the Servicer shall relieve the
Servicer of its responsibility with respect thereto.
SERVICER TERMINATION EVENTS
"Servicer Termination Events" under the Trust Documents will consist
of, among other things (except as otherwise provided in the related Prospectus
Supplement), (i) any failure by the Servicer to deliver to the Trustee for
distribution to Certificateholders or the Indenture Trustee for distribution to
Noteholders any proceeds or payment required to be so delivered to be so
delivered under the terms of the Certificates, the Trust Documents, the Notes
or the Indenture (or, for so long as NAFI is the Servicer, the Purchase
Agreement) that continues unremedied for a period of two Business Days after
written notice is received by the Servicer from the Trustee, the Indenture
Trustee or the Security Insurer (if any), or after discovery of such failure by
a responsible officer of the Servicer; (ii) any failure by the Servicer to
deliver to the Trustee and the Indenture Trustee and the Security Insurer, if
any (prior to an Insurer Default), certain reports required by the Trust
Documents by the fourth Business Day prior to the related Distribution Date;
(iii) failure on the part of the Servicer duly to observe or perform in any
material respect any other covenants or agreements of the Servicer set forth in
the Certificates, the Trust Documents, the Notes or the Indenture (or, for so
long as NAFI is the Servicer, the Purchase Agreement), which failure (A)
materially and adversely affects the rights of Securityholders (determined
without regard to the availability of funds under any Policy) or of the
Security Insurer, if any (prior to an Insurer Default), and (B) continues
unremedied for a period of 30 days after the date on which written notice of
such failure, requiring the same to be remedied, shall have been given to the
Servicer by the Trustee, the Indenture Trustee or the Security Insurer, if any
(or, if an Insurer Default shall have occurred and be continuing, any
Securityholder); (iv)(A) the commencement of an involuntary case under the
federal bankruptcy laws with respect to the Servicer or the Seller, as now or
hereinafter in effect, or another present or future federal or state
bankruptcy, insolvency or similar law (the "Bankruptcy Laws"), and such case is
not dismissed within 60 days; or (B) the entry of a decree or order for relief
by a court or regulatory authority having jurisdiction in respect of the
Servicer or the Seller under the Bankruptcy Laws, or appointing a receiver,
liquidator, assignee, trustee, custodian, sequestrator or other similar
official of the Servicer or the Seller or of any substantial part of their
respective properties or ordering the winding up or
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liquidation of the affairs of the Servicer or the Seller; (v) the commencement
by the Servicer or the Seller of a voluntary case under any Bankruptcy Law, or
the consent by the Servicer or the Seller to the appointment of or taking
possession by a receiver, liquidator, assignee, trustee, custodian,
sequestrator or other similar official of the Servicer or the Seller or of any
substantial part of the Servicer's or the Seller's property or the making by
the Servicer or the Seller of an assignment for the benefit of creditors or the
failure by the Servicer or the Seller generally to pay its debts as such debts
become due or the taking of corporate action by the Servicer or the Seller in
furtherance of any of the foregoing; (vi) any representation, warranty or
statement of the Servicer made in the Trust Documents or any certificate,
report or other writing delivered pursuant thereto shall prove to be incorrect
in any material respect as of the time when the same shall have been made, and
the incorrectness of such representation, warranty or statement has a material
adverse effect (determined without regard to the availability of funds under
any Policy) on the Trust and, within 30 days after written notice thereof shall
have been given to the Servicer by the Trustee, the Indenture Trustee or the
Security Insurer, if any (or, if an Insurer Default shall have occurred and be
continuing, any Securityholder), the circumstances or condition in respect of
which such representation, warranty or statement was incorrect shall not have
been eliminated or otherwise cured; or (vii) if applicable, unless an Insurer
Default shall have occurred and be continuing, the occurrence of an event of
default under the Insurance Agreement.
If a Servicer Termination Event occurs and is continuing, the Security
Insurer, if any (or, if no Policy was issued with respect to such series or an
Insurer Default shall have occurred and be continuing, the Trustee, the
Indenture Trustee (if any), or a Certificate Majority or a Note Majority), by
notice then given in writing to the Servicer (and to the Trustee and the
Indenture Trustee if given by the Security Insurer or the Securityholders) may
terminate all of the rights and obligations of the Servicer under the Trust
Documents. Immediately upon the giving of such notice, and, in the case of a
successor Servicer other than the Backup Servicer, the acceptance by such
successor Servicer of its appointment, all authority of the Servicer will pass
to the Backup Servicer or other successor Servicer. The Trustee, the Indenture
Trustee and the successor Servicer may set off and deduct any amounts owed by
the Servicer from any amounts payable to the outgoing Servicer.
On and after the time the Servicer receives a notice of termination,
the Backup Servicer or other successor Servicer will be the successor in all
respects to the Servicer and will be subject to all the responsibilities,
restrictions, duties and liabilities of the Servicer under the related Trust
Documents; provided, however, that the successor Servicer shall have no
liability with respect to any obligation which was required to be performed by
the prior Servicer prior to the date that the successor Servicer becomes the
Servicer or any claim of a third party (including a Securityholder) based on
any alleged action or inaction of the prior Servicer. If a Policy has been
issued with respect to the series, such Policy may permit the Security Insurer
(prior to an Insurer Default) to exercise at any time its right to appoint as
Backup Servicer or as successor to the Servicer a person other than the Backup
Servicer named in the related Prospectus Supplement. Notwithstanding the above,
if the Backup Servicer shall be legally unable or shall be unwilling to act as
Servicer, and if an Insurer Default shall have occurred or
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if no Policy was issued with respect to such series, the Trustee, the Indenture
Trustee, a Certificate Majority or a Note Majority may petition a court of
competent jurisdiction to appoint any Eligible Servicer as the successor to the
Servicer. Pending any such appointment, the Backup Servicer shall act as
successor Servicer unless it is legally unable to do so, in which event the
Trustee shall act as Servicer until a successor has been appointed and accepted
such appointment. "Eligible Servicer" means a person which, at the time of its
appointment as Servicer, (A) is servicing a portfolio of motor vehicle retail
installment sale contracts and/or motor vehicle installment loans, (B) is
legally qualified and has the capacity to service the Receivables and (C) has
demonstrated the ability to service professionally and competently a portfolio
of motor vehicle retail installment sale contracts and/or motor vehicle
installment loans similar to the Receivables in accordance with high standards
of skill and care.
Any successor Servicer shall be entitled to such compensation payable
out of the Collection Account as the outgoing Servicer would have been entitled
to under the Trust Documents if the outgoing Servicer had not resigned or been
terminated.
Upon any termination of, or appointment of a successor to, the
Servicer, the Trustee and the Indenture Trustee (if any) will each give prompt
written notice thereof to Certificateholders and Noteholders, respectively, at
their respective addresses appearing in the Certificate Register or the Note
Register, to the Security Insurer, if any (prior to an Insurer Default) and to
each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, if a
Policy has been issued with respect to a series, the Security Insurer (or, if
an Insurer Default shall have occurred and be continuing, a Certificate
Majority or Note Majority) may waive any Servicer Termination Event.
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AMENDMENT
The Trust Documents will generally provide for amendment by the Seller,
the Servicer, the Trustee and the Indenture Trustee, if any, with the prior
written consent of the Security Insurer, if any (prior to an Insurer Default),
but without the consent of any of the Securityholders, to cure any ambiguity or
to correct or supplement any provision therein, provided that such action will
not, in the opinion of counsel (which may be internal counsel to the Seller,
NAFI or the Servicer) reasonably satisfactory to the Trustee, the Security
Insurer, if any, and the Indenture Trustee, materially and adversely affect the
interests of the Securityholders. The Trust Documents may also be amended by the
Seller, the Servicer and the Trustee and the Indenture Trustee (if any), with
the prior written consent of the Security Insurer, if any (prior to an Insurer
Default), and a Certificate Majority and a Note Majority (if applicable), for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Trust Documents or of modifying, in any manner, the
rights of the Certificateholders or the Noteholders. No such amendment may (i)
increase or reduce in any manner the amount of, or accelerate or delay the
timing of, collections of payments on the related Receivables or distributions
that are required to be made on any related Certificate or Note or the related
Pass-Through Rate or Interest Rate or (ii) reduce the percentage of the
Certificate Balance evidenced by Certificates or of the aggregate principal
amount of Notes then outstanding required to consent to any such amendment,
without the consent of the holders of all Certificates or all Notes, as the case
may be, then outstanding.
TERMINATION
With respect to each Trust, the Trust and the respective obligations of
the Seller, the Servicer, the Trustee and the Indenture Trustee pursuant to the
related Trust Documents will terminate upon the later of (i) the Distribution
Date or Payment Date, as the case may be, immediately following the maturity or
other liquidation of the last Receivable (including the Seller's or Servicer's
purchase of the Receivables, as described below), or (ii) payment to
Certificateholders and Noteholders of all amounts required to be paid to them
pursuant to the related Trust Documents and the related Indenture and the
payment to the Security Insurer, if any, of all amounts payable or reimbursable
to it pursuant to the related Insurance Agreement, if any, and in either case
there shall be delivered to the Trustee and the Indenture Trustee an opinion of
counsel that all applicable preference periods under federal, state and local
bankruptcy, insolvency and similar laws have expired with respect to the
payments made pursuant to clause (i) or (ii) above.
With respect to each series of Securities, in order to avoid excessive
administrative expense, the Seller and Servicer each will be permitted, at its
option (with the consent of the Security Insurer, if any (prior to an Insurer
Default), if such purchase would result in a claim on the Policy or in an amount
owing to the Security Insurer under the Insurance Agreement remaining unpaid),
to purchase from the Trust, on any Distribution Date immediately following an
Accounting Date as of which the Aggregate Principal Balance is equal to or less
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than 10% (or such other percentage as may be specified in the related Prospectus
Supplement) of the Cutoff Date Principal Balance, all remaining Receivables in
the related Trust and the other remaining Trust Property at a price equal to the
aggregate of the Purchase Amounts therefor and the appraised value of any other
remaining Trust Property. The exercise of this right will effect an early
retirement of the related Certificates and Notes.
Unless otherwise specified in the related Prospectus Supplement, the
Trust Agreement will provide that, in the event that the Seller becomes
insolvent, withdraws or is expelled as a Certificateholder or is terminated or
dissolved, the Trust will terminate in 90 days and effect redemption of the
Notes (if any) and prepayment of the Certificates following the winding-up of
the affairs of the related Trust, unless within such 90 days holders of 51% of
the Certificates of such series and the Security Insurer, if any, agree in
writing to the continuation of the business of the Trust and to the appointment
of a successor to the Seller, and the Trustee is able to obtain an opinion of
counsel satisfactory to the Security Insurer (if any) to the effect that the
Trust will not thereafter be an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. Prepayment of the
Securities resulting from the early termination of the related Trust could
result in the Securityholders receiving unexpected principal payments at a time
when the Securityholders are unable to reinvest such payments in investments
having a yield and rating comparable to the yield and rating on the Securities.
With respect to each series of Securities, the Trustee will give
written notice of the final distribution with respect to the Certificates to
each Certificateholder of record and the Indenture Trustee will give written
notice of the final payment with respect to the Notes (if any), to each
Noteholder of record. The final distribution to any Certificateholder and the
final payment to any Noteholder will be made only upon surrender and
cancellation of such holder's Certificate or Note at the office or agency of the
Trustee, with respect to Certificates, or of the Indenture Trustee, with respect
to Notes, specified in the notice of termination. Any funds remaining in the
Trust, after the Trustee or the Indenture Trustee has taken certain measures to
locate a Certificateholder or Noteholder, as the case may be, and such measures
have failed, will be distributed to the Seller, and the Certificateholders and
Noteholders, by acceptance of their Certificates and Notes, will waive any
rights with respect to such funds.
LIMITATIONS ON RIGHTS OF SECURITYHOLDERS
Until such time as an Insurer Default shall have occurred and is
continuing, the Security Insurer will have certain rights to take actions, elect
remedies and instruct the Trustee under the Trust Documents to the exclusion of
the exercise of such rights by the Securityholders, including, among other
things, the right to consent to the engagement of subservicers, the right to
terminate the Servicer in the event of a Servicer Termination Event, and the
right to waive defaults under the Trust Documents.
THE TRUSTEE
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The Trustee for each Trust will be specified in the related Prospectus
Supplement. The Trustee, in its individual capacity or otherwise, and any of its
affiliates may hold Certificates or Notes in their own names or as pledgee. In
addition, for the purpose of meeting the legal requirements of certain
jurisdictions, the Trustee, with the consent of the Servicer and the Security
Insurer, if any (so long as an Insurer Default shall not have occurred and be
continuing), shall have the power to appoint co-trustees or separate trustees of
all or any part of the related Trust. In the event of such appointment, all
rights, powers, duties and obligations conferred or imposed upon the Trustee by
the related Trust Documents will be conferred or imposed upon the Trustee and
such separate trustee or co-trustee jointly, or, in any jurisdiction where the
Trustee is 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 of any trust may resign at any time, in which event the
Seller, or if so specified in the related Prospectus Supplement, the Servicer or
its successor will be obligated to appoint a successor trustee, acceptable to
the Security Insurer, if any (prior to an Insurer Default). The Seller, or if so
specified in the related Prospectus Supplement, the Servicer may also remove the
Trustee, with the prior written consent of the Security Insurer, if any (prior
to an Insurer Default), if the Trustee ceases to be eligible to serve, becomes
legally unable to act, is adjudged insolvent or is placed in receivership or
similar proceedings. In such circumstances, the Seller, or if so specified in
the related Prospectus Supplement, the Servicer will be obligated to appoint a
successor trustee, acceptable to the Security Insurer, if any (prior to an
Insurer Default). Any resignation or removal of the Trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by the successor trustee.
DUTIES OF THE TRUSTEE
The Trustee will make no representation as to the validity or
sufficiency of any Trust Document, the Certificates or the Notes (other than its
execution of the Certificates and the Notes), the Receivables, the Policy, if
any, or any related documents, and will not be accountable for the use or
application by the Servicer of any funds paid to the Servicer in respect of the
Certificates, the Notes or the Receivables prior to deposit in the related
Collection Account.
The Trustee will be required to perform only those duties specifically
required of it under the Trust Documents. Generally, those duties will be
limited to the receipt of the various certificates, reports or other instruments
required to be furnished by the Servicer to the Trustee under the Trust
Documents, in which case it will only be required to examine such certificates,
reports or instruments to determine whether they conform substantially to the
requirements of the Trust Documents.
The Trustee will be under no obligation to exercise any of the rights
or powers vested in it by the Trust Documents 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
Certificateholders or Noteholders, unless such Certificateholders or Noteholders
have offered the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby. No
Certificateholder nor any Noteholder will have any right under the Trust
Documents to institute any proceeding with respect to such Trust Documents,
unless such holder has given the Trustee written notice of default and unless
the holders of Certificates evidencing not less than 25% of the Certificate
Balance or the holders of Notes evidencing not less than 25% of the aggregate
principal balance of the Notes then outstanding, as the case may be, 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 30 days after the receipt of such notice, request and offer to
indemnify has neglected or refused to institute any such proceedings.
Certificateholders and Noteholders will not have the right to make a claim
directly under any Policy issued with respect to such series, but in the event
that the Trustee or the Indenture Trustee fails to make such a claim,
Certificateholders and Noteholders may compel the Trustee or the Indenture
Trustee, as applicable, to do so.
THE BACKUP SERVICER
The Backup Servicer for each Trust will be specified in the related
Prospectus Supplement, although the Security Insurer, if any (prior to an
Insurer Default), may exercise its right at any time to appoint another Backup
Servicer. While NAFI is the Servicer, the Backup Servicer will not be liable or
responsible for any obligation of the Servicer, and the Certificateholders and
Noteholders may look only to NAFI to perform such obligations. The Backup
Servicer will be required to verify the monthly Servicer's Certificate each
month, to notify the Certificateholders, Noteholders and the Security Insurer
(if any) of any item that appears substantially out of the ordinary, and to seek
a written explanation thereof from the Servicer; however, neither the Trustee
nor the Backup Servicer will be required to otherwise monitor the Servicer. Upon
the Servicer's receipt of a termination notice after the occurrence of a
Servicer Termination Event, the Backup Servicer will automatically become the
Servicer, unless the Security Insurer, if any (prior to an Insurer Default),
shall have appointed a different Backup Servicer or successor Servicer. To
facilitate the transfer of servicing responsibility, the Servicer will deliver
to the Trustee and the Backup Servicer each month a computer tape containing
information with respect to the Receivables.
ADMINISTRATOR
If an Administrator (the "Administrator") is specified in the related
Prospectus Supplement, such Administrator will enter into an agreement (the
"Administration Agreement") pursuant to which such Administrator will agree, to
the extent provided in such Administration Agreement, to provide the notices and
to perform other administrative obligations require by the related Indenture and
the Trust Agreement.
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CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
The following discussion contains summaries of certain legal aspects of
consumer motor vehicle retail installment sale contracts that are general in
nature. Because such legal aspects are governed 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 Receivables is located. The summaries are
qualified in their entirety by reference to the applicable federal and state
laws governing the Receivables and the Financed Vehicles.
RIGHTS IN THE RECEIVABLES
The Receivables are "chattel paper" as defined in the UCC as in effect
in the States of Florida and Delaware. Pursuant to the UCC, an ownership
interest in chattel paper may be perfected by possession or by filing a UCC-1
financing statement in the state where the seller's principal executive office
is located. Accordingly, financing statements covering the Receivables will be
filed by the NAFI Transferors in Florida and by the Seller in Florida and
Delaware. In addition, the documents evidencing the Receivables initially will
be held by OFSA or any other Custodian specified in the related Prospectus
Supplement on behalf of the related Trust.
The Servicer will be obligated from time to time to take such actions
as are necessary to continue the perfection of each Trust's interest in the
related Receivables and the proceeds thereof. NAFI will warrant in each Purchase
Agreement with respect to the Receivables held by the related Trust, and in the
related Trust Document the Seller will assign the right to enforce such
warranties to the Trustee on behalf of such Trust and the Trustee will pledge
such right to the Indenture Trustee as collateral for the Notes, if any, that,
as of the Closing Date, such Receivables have not been sold, pledged or assigned
by NAFI or the Seller to any other person, and that it has good and indefeasible
title thereto and is the sole owner thereof free of any Liens and that,
immediately upon the transfer of the Receivables to such Trust pursuant to the
related Trust Document, the Trust will have good and indefeasible title to and
will be the sole owner of the Receivables, free of any Liens. In the event of an
uncured breach of any of such warranties in a Purchase Agreement that materially
and adversely affects the related Trust's, Security Insurer's (if any),
Certificateholders' or Noteholders' interest in any Receivable (a "Repurchase
Event"), NAFI will be obligated to repurchase such Receivable.
Unless otherwise specified in the related Prospectus Supplement, OFSA
as designee of NAFI under a Custodial Agreement, on behalf of each Trust, will
hold the original installment sale contract as well as copies of documents and
instruments relating to each Receivable and evidencing the security interest in
the Financed Vehicle securing each Receivable (the "Receivable Files"). In order
to protect the Trust's ownership interest in the Receivables, NAFI will file
UCC-1 financing statements in Florida and the Seller will file UCC-1 financing
statements in Florida and Delaware to give notice of such Trust's ownership of
the related
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Receivables and the related Trust Property. If held by OFSA, the Receivable
Files will not be segregated and will not be stamped or otherwise marked to
indicate that such Receivables have been sold to the related Trust.
The Receivable Files, if held by NAFI as custodian, will be stamped or
otherwise marked to indicate that such Receivables have been sold to the related
Trust. Despite this precaution, if, through inadvertence or otherwise, any of
the Receivables were sold to another party (or a security interest therein were
granted to another party) that purchased (or took such security interest in) any
of such Receivables in the ordinary course of its business and took possession
of such Receivables, the purchaser (or secured party) would acquire an interest
in the Receivables superior to the interest of the related Trust if the
purchaser (or secured party) acquired (or took a security interest in) the
Receivables for new value and without actual knowledge of such Trust's interest.
See "Description of the Purchase Agreements and the Trust Documents - Custody of
Receivable Files"
SECURITY INTERESTS IN THE FINANCED VEHICLES
Security interests in the Financed Vehicles must be perfected by
notation of the secured party's lien on the certificate of title or by such
notation on or actual possession of the certificate of title, depending on the
law of the state wherein the purchaser resides. The practice of NAFI is to take
such action as is required to perfect its security interest under the laws of
the state in which the Financed Vehicle is registered. In the event of clerical
errors, administrative delays or otherwise, such actions may not have been taken
with respect to a Financed Vehicle and such security interest may be subordinate
to the interests of, among others, subsequent purchasers of the Financed
Vehicles, holders of perfected security interests in the Financed Vehicle, and
the trustee in bankruptcy of the Obligor. However, such failure would give rise
to a Repurchase Event and obligate NAFI to repurchase the affected Receivable if
the interests of the related Certificateholders, Noteholders or Trust were
materially and adversely affected.
Pursuant to the related Trust Document, the Seller will assign the
security interests in the Financed Vehicles assigned to it by the NAFI
Transferor under the related Purchase Agreement to the Trustee on behalf of the
related Trust. However, because of the administrative burden and expense that
would be entailed in doing so, none of the Originators, the Seller, the Trustee
or the Servicer will be required, except to the extent provided below, to amend
the certificates of title (or other lien certificates) to identify the Trustee
(or the Seller) as the new secured party and, accordingly, the applicable
Originator will continue to be named as the secured party on the certificates of
title (or other lien certificate) relating to the Financed Vehicles. Further,
the Servicer will be required to note the interest of the related Trust on the
certificates of title for the Financed Vehicles only upon a Servicer Termination
Event, or in an event of default under the Insurance Agreement, if any (prior to
an Insurer Default), or (under certain circumstances and unless an Insurer
Default shall have occurred and be continuing) at the request of the Security
Insurer, if any. In most states, an assignment such as that under the related
Trust Documents should be an effective transfer of a security interest without
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amendment of any lien noted on the related certificate of title, and the
assignee should succeed to the assignor's status as the secured party. In the
absence of fraud or forgery by the Obligor or administrative error by state
recording officials, the notation of the lien of the Originator on the
certificate of title should be sufficient to protect the related Trust against
the rights of subsequent purchasers of a vehicle or subsequent lenders who take
a security interest in the related Financed Vehicle. However, in the absence of
such an amendment, the security interest of the related Trust in the related
Financed Vehicles might be defeated by, among others, the trustee in bankruptcy
of the Originator or the Obligor. However, such failure would give rise to a
Repurchase Event and obligate the Originator to repurchase the affected
Receivable if the interest of the related Certificateholders, the Security
Insurer, if any, Noteholders or Trust were materially and adversely affected.
In most states, a perfected security interest in a motor vehicle
continues for four months after the vehicle is moved to a different state and
thereafter until the owner re-registers the motor vehicle in the new state, but
in no event beyond the surrender of the certificate of title. A majority of
states require surrender of a certificate of title to re-register a motor
vehicle. Accordingly the secured party most surrender possession if it holds the
certificate of title to such vehicle. In the case of motor vehicles registered
in states which provide for notation of a lien but not possession of the
certificate of title by the holder of the security interest in the related motor
vehicle, the secured party should receive notice of surrender if the security
interest in the vehicle is noted on the certificate of title. Accordingly, the
secured party should have the opportunity to re-perfect its security interest in
the vehicle in the state of relocation. In states that do not require a
certificate of title for registration of a motor vehicle, re-registration could
defeat perfection.
In the ordinary course of servicing its receivables portfolio, it is
the practice of NAFI to effect such re-perfection upon receipt of notice or
information from the Obligor as to relocation. Similarly, when an Obligor sells
a Financed Vehicle, NAFI must surrender possession of the certificate of title
or receive notice as a result of its lien noted thereon and accordingly should
have an opportunity to require satisfaction of the related Receivable before
release of the lien. Under the related Trust Document, the Servicer will be
obligated to take such steps, at the Servicer's expense, as are necessary to
maintain perfection of security interest in such Financed Vehicle, and the
failure to take such steps would obligate the Servicer to purchase the related
Receivable if such failure materially and adversely affects the interests of the
related Certificateholders, the Security Insurer, if any, Noteholders and Trust
in such Receivables.
Under the laws of most states, liens for repairs performed on a motor
vehicle and liens for unpaid taxes take priority over even a perfected security
interest in a motor vehicle. The Seller in the related Trust Document (and NAFI
in the related Purchase Agreement) will represent that, immediately prior to the
sale, assignment and transfer thereof to the related Trust, each Receivable held
by such Trust was secured by a valid, subsisting and enforceable first priority
perfected security interest in favor of the Seller (or NAFI) as secured party.
However, liens for taxes, judicial liens or liens arising by operation of law
could arise at any
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time during the term of a Receivable. In addition, the laws of certain states
and federal law permit the confiscation of motor vehicles by governmental
authorities under certain circumstances if used in unlawful activities, which
may result in the loss of a secured party's perfected security interest in the
confiscated motor vehicle. No notice will be given to the Trustee, Indenture
Trustee, Certificateholders or Noteholders in the event such a lien or
confiscation arises, and if such lien arises or confiscation occurs after the
date of issuance of any series of Certificates and Notes, neither NAFI nor the
Servicer will be required to repurchase or purchase the related Receivable.
REPOSSESSION
In the event of default by an Obligor, the owner of a retail
installment sale contract or installment loan has all the remedies of a secured
party under the UCC, except where specifically limited by other state laws. The
remedies of a secured party under the UCC include the right to repossession by
self-help means, unless such means would constitute a breach of the peace.
Self-help repossession is the method employed by NAFI in most cases and is
accomplished simply by taking possession of the motor vehicle. In the event of
default by the Obligor, some jurisdictions require that the Obligor be notified
of the default and be given a time period within which he may cure the default
prior to repossession. In cases where the Obligor objects or raises a defense to
repossession, or if otherwise required by applicable state law, a court order
must be obtained from the appropriate state court, and the vehicle must then be
repossessed in accordance with that order. Other jurisdictions permit
repossession without notice, but only if the repossession can be accomplished
peacefully. If a breach of the peace cannot be avoided, judicial action is
required. A secured party may be held responsible for damages caused by a
wrongful repossession of a vehicle, including, in Florida, a wrongful
repossession conducted by an agent of the secured party. The Servicer will be
required to indemnify the related Trust for any liability imposed upon such
Trust as a result of a wrongful repossession. In Texas and many other states, a
vehicle may be repossessed without notice to the Obligor, but only if the
repossession can be accomplished without a breach of the peace.
NOTICE OF SALE; REDEMPTION RIGHTS
The UCC and various other state laws require a secured party who has
repossessed the collateral securing an obligation to provide an obligor with
reasonable notice of the date, time and place of any public sale and/or the date
after which any private sale of the collateral may be held. The obligor has the
right to redeem the collateral prior to actual sale by paying the secured party
the entire unpaid time balance of the obligation (less any unaccrued finance
charges) plus accrued default charges, reasonable expenses for repossessing,
holding and preparing the collateral for disposition and arranging for its sale,
plus, to the extent provided in the financing documents, reasonable attorneys'
fees, or in some states, by payment of delinquent installments or the unpaid
principal balance of the related obligation.
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DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
The proceeds of resale of Financed Vehicles generally will be applied
first to the expense of repossession and resale and then to the satisfaction of
the related Receivables. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale do not cover the full
amount of the indebtedness, a deficiency judgment can be sought in other states
that do not prohibit or limit such judgments, subject to satisfaction of
statutory procedural requirements by the holder of the obligation. However, any
deficiency judgment would be a personal judgment against the Obligor for the
shortfall, and a defaulting Obligor can be expected to have very little capital
or sources of income available following repossession. Therefore, in many cases,
it may not be useful to seek a deficiency judgment or, if one is obtained, it
may be settled at significant discount or not paid at all. NAFI generally seeks
to recover any deficiency existing after repossession and sale of a Financed
Vehicle.
Occasionally, after resale of a repossessed motor vehicle, and payment
of all expenses and indebtedness, there is a surplus of funds. In that case, the
law of most states requires the secured party to remit the surplus to any holder
of another lien with respect to the vehicle, if proper notification of demand
for proceeds is received prior to distribution, or, if no such lienholder
exists, to remit the surplus to the former owner of the motor vehicle.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
The Relief Act imposes certain limitations upon the actions of
creditors with respect to persons serving in the Armed Forces of the United
States and, to a more limited extent, their dependents and guarantors and
sureties of debt incurred by such persons. An obligation incurred by a person
prior to entering military service cannot bear interest at a rate in excess of
6% during the person's term of military service, unless the obligee petitions a
court which determines that the person's military service does not impair his or
her ability to pay interest at a higher rate. Further, a secured party may not
repossess during a person's military service a motor vehicle subject to an
installment sale contract entered into prior to the person's entering military
service, for a loan default which occurred prior to or during such service,
without court action. The Relief Act imposes penalties for knowingly
repossessing property in contravention of its provisions. Additionally,
dependents of military personnel are entitled to the protection of the Relief
Act, upon application to a court, if such court determines the obligation of
such dependent has been materially impaired by reason of the military service.
To the extent an obligation is unenforceable against the person in military
service or a dependent, any guarantor or surety of such obligation will not be
liable for performance.
CONSUMER PROTECTION LAWS
Numerous Federal and state consumer protection laws and related
regulations impose substantive and disclosure requirements upon lenders and
servicers involved in consumer
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finance. Some of the Federal laws and regulations include the Truth-in-Lending
Act, the Equal Credit Opportunity Act, the Federal Trade Commission Act, the
Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Motor
Vehicle Information and Cost Savings Act (the "Odometer Act"), the Magnuson-Moss
Warranty Act, and the Federal Reserve Board's Regulations B and Z.
In addition to Federal law, state consumer protection statutes
regulate, among other things, the terms and conditions of the motor vehicle
retail installment contracts pursuant to which purchasers finance the
acquisition of motor vehicles. These laws place finance charge ceilings on the
amount that a creditor may charge in connection with financing the purchase of
an automobile. These laws also impose other restrictions on consumer
transactions and require contract disclosures in addition to those required
under federal law. These requirements impose specific statutory liabilities upon
creditors who fail to comply. In some cases, this liability could affect the
ability of an assignee, such as the Trustee, to enforce consumer finance
contracts such as the Receivables. The "Credit Practices" Rule of the Federal
Trade Commission (the "FTC") imposes additional restrictions on contract
provisions and credit practices.
The FTC's so-called holder-in-due-course rule has the effect of
subjecting persons that finance consumer credit transactions (and certain
related lenders and their assignees) to all claims and defenses which the
purchaser could assert against the seller of the goods and services. An
assignee's affirmative liability to pay money to such aggrieved purchaser in the
event of a successful claim is limited to amounts paid by the purchaser under
the consumer credit contract. However, the assignee's ability to collect any
balance remaining due thereunder is subject to these claims and defenses.
Accordingly, each Trust, as assignee of the related Receivables, will be subject
to claims or defenses, if any, that the purchaser of the related Financed
Vehicle may assert against the seller of such vehicle. Under the motor vehicle
dealer licensing laws of most states, sellers of motor vehicles are required to
be licensed to sell motor vehicles at retail.
In addition, with respect to used vehicles, the FTC's Rule on Sale of
Used Vehicles requires that all sellers of used vehicles prepare, complete, and
display a "Buyer's Guide" which explains the warranty coverage for such
vehicles. Federal regulations promulgated under the Odometer Act require that
all sellers of used vehicles furnish a written statement signed by the seller
certifying the accuracy of the odometer readings. If a seller is not properly
licensed or if either a Buyer's Guide or odometer disclosure statement was not
provided to the purchaser of a Financed Vehicle, the purchaser may be able to
assert a defense as to a retail installment sale contract against the seller of
the motor vehicle.
Courts have applied general equitable principles to secured parties
pursuing repossession or litigation involving deficiency balances. These
equitable principles may have the effect of relieving an Obligor from some or
all of the legal consequences of a default.
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The Seller will warrant in the related Trust Document (and NAFI will
warrant in the related Purchase Agreement) that as of the date of origination
each Receivable held by the related Trust complied with all requirements of
applicable law in all material respects. Accordingly, if such Trust's interest
in a Receivable were materially and adversely affected by a violation of any
such law, such violation would constitute a Repurchase Event and would obligate
NAFI to repurchase the Receivable unless the breach were cured. Under each
Purchase Agreement, NAFI will be required to indemnify the related Trust for any
liability resulting from the failure of a Receivable to be in compliance with
all requirements of law. See "Description of the Purchase Agreements and the
Trust Documents - Sale and Assignment of the Receivables."
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including Federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a lender to
realize upon collateral or enforce a deficiency judgment. For example, in a
proceeding under Chapter 13 of the U.S. Bankruptcy Code of 1978, as amended, a
court may prevent a lender from repossessing a motor vehicle, and as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the market
value of the motor vehicle at the time of bankruptcy (as determined by the
court), leaving the party providing financing as a general unsecured creditor
for the remainder of the indebtedness. A bankruptcy court may also reduce the
monthly payments due under a contract, change the rate of interest and time of
repayment of the indebtedness or substitute collateral securing such
indebtedness.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of certain anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Notes and the Certificates of any series thereof. This summary is directed
solely to prospective investors that hold the Notes or Certificates as capital
assets within the meaning of Section 1221 of the Internal Revenue Code of 1986
(the "Code") and does not purport to discuss all federal income tax consequences
that may be applicable to particular categories of investors (e.g., banks,
insurance companies, foreign investors), some of whom may be subject to special
rules. Further, the authorities on which this discussion, and the opinion
referred to below, are based are subject to change or differing interpretations,
which could apply retroactively.
Taxpayers and preparers of tax returns should be aware that under
applicable Treasury regulations a provider of advice on specific issues of law
is not considered an income tax return preparer unless the advice (i) is given
with respect to events that have occurred at the time the advice is rendered and
is not given with respect to the consequences of contemplated actions, and (ii)
is directly relevant to the determination of an entry on a tax return.
Accordingly, taxpayers are urged to consult with their own tax advisors and tax
return
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preparers regarding the preparation of any item on a tax return, even
where the anticipated tax treatment has been discussed herein.
Prospective investors should note that no rulings have been or will be
sought from the Internal Revenue Service (the "IRS") with respect to any of the
federal income tax consequences discussed below, and no assurance can be given
the IRS will not take contrary positions. Moreover, there are no cases or 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 part of the discussion below. The
Placement Agent, NAFI and the Seller make no representations regarding the tax
consequences of purchase, ownership or disposition of the Notes or Certificates
under the tax laws of any state, locality or foreign jurisdiction. Investors
considering an investment in the Notes or Certificates should consult their own
tax advisors regarding such tax consequences.
The following summary is based upon current provisions of the Code, the
Treasury regulations promulgated thereunder and judicial or ruling authority,
all of which are subject to change, which change may be retroactive. Each Trust
will be provided with an opinion of special federal tax counsel to each Trust
specified in the related Prospectus Supplement ("Federal Tax Counsel"),
regarding certain federal income tax matters discussed below. An opinion of
Federal Tax Counsel, however, is not binding on the IRS or the courts. No ruling
on any of the issues discussed below will be sought from the IRS. For purposes
of the following summary, references to the Trust, the Notes, the Certificates
and related terms, parties and documents shall be deemed to refer, unless
otherwise specified herein, to each Trust and the Notes, Certificates and
related terms, parties and documents applicable to such Trust.
The federal income tax consequences to Certificateholders will vary
depending on whether (i) an election is made to treat the Trust as a partnership
under the Code, (ii) all the Certificates are retained by the Seller or an
affiliate thereof, or (iii) whether the Trust will be treated as a grantor trust
under the Code. The Prospectus Supplement for each series of Certificates will
specify which of the above situations applies.
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE
TAX CHARACTERIZATION OF OWNER TRUSTS
Federal 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 Federal Tax Counsel's
conclusions that the nature of the income of the Trust will exempt it from the
rule that certain publicly traded partnerships are taxable as corporations.
If an Owner Trust were taxable as a corporation for federal income tax
purposes, such Trust would be subject to corporate income tax on its taxable
income. The Trust's taxable
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income would include all its income on the Receivables, possibly reduced by its
interest expense on the Notes, if any. Any such corporate income tax could
materially reduce cash available to make payments on the Notes, if any, and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
General. The following discussion only applies to a Trust which elects
to be treated as a partnership and issues one or more classes of Notes.
Furthermore, the following discussion assumes that all payments on the Notes are
denominated in U.S. dollars and that any such Notes are sold to persons other
than the Seller. If these conditions are not satisfied with respect to any given
series of Notes, any additional tax considerations with respect to such Notes
will be disclosed in the applicable Prospectus Supplement.
Treatment of the Notes as Indebtebtedness. 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. Federal Tax Counsel will, except as
otherwise provided in the related Prospectus Supplement, advise the Trust that
the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, Etc. The discussion below assumes that all payments on the Notes
are denominated in U.S. dollars and that the Notes are not Strip Notes.
Moreover, the discussion assumes that the interest formula for the Notes meets
the requirements for "qualified stated interest" under the 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, and that any
prepayment premium paid as a result of a mandatory redemption will be taxable as
interest when it becomes fixed and unconditionally payable. 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 Noteholder 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
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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 Short-Term Notes
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, OID and gain
previously included by such Noteholder in income with respect to the Note (if
any) and decreased by the amount of bond premium previously amortized (if any)
and by the amount of principal payments previously received by such Noteholder
(if any) with respect to such Note. Any such gain or loss will be capital gain
or loss if the Note was held as a capital asset, except for gain representing
accrued interest and accrued market discount not previously included in income.
Capital losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder
who is a nonresident alien, foreign corporation or other non-United States
person (a "foreign person") generally will be considered "portfolio interest",
and generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent shareholder"
of the Trust or the Seller (including a holder of 10% of the outstanding
Certificates) 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.
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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 Federal 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 treated as a publicly traded partnership taxable as a corporation with
the adverse consequences described above and, as a publicly traded partnership
taxable as a 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 Federal 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 CERTIFICATEHOLDERS ISSUED BY AN OWNER TRUST
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 a Trust, the partners of the
partnership being the Certificateholders (including the Seller), and the Notes,
if any, being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust, the Certificates, the Notes, if any, the
Seller and the Servicer is not clear because there is no authority on
transactions closely comparable to that contemplated herein.
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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
Certificate Owners 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, that all payments on the Certificates are denominated in U.S.
dollars, none of the Certificates are Strip Certificates, 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 allocable share of income, gains,
losses, deductions and credits of the Trust. In certain instances, however, the
Trust could have an obligation to make payments of withholding tax on behalf of
a Certificateholder. See "Tax Consequences to Foreign Certificateholders" and
"Backup Withholding" below. The Trust's income will consist primarily of
interest and finance charges earned on the Receivables (including appropriate
adjustments for market discount, OID, and bond premium) and any gain upon
collection or disposition of Receivables. The Trust's deductions will consist
primarily of interest accruing with respect to the Notes, servicing and other
fees, and losses or deductions upon collection or disposition of Receivables.
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
generally provide 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 Receivables that corresponds to the
economic accrual of any discount on the Certificates, if the initial principal
amount of the Certificate exceed their initial 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 Receivables 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
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will in effect be required to report income from the Certificates on the accrual
basis, and Certificateholders may be liable for taxes on Trust income even if
they have not received cash from the Trust to pay such taxes. In addition,
because tax allocations and tax reporting will be done on a uniform basis for
all Certificateholders but Certificateholders may be purchasing Certificates at
different times and at different prices, Certificateholders may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust (including fees
to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such miscellaneous itemized deductions are allowed only to the
extent they exceed, in the aggregate, 2% of an individual's adjusted gross
income. Furthermore, Section 68 of the Code provides that itemized deductions
otherwise allowable for a taxable year of an individual taxpayer whose adjusted
gross income exceeds a specified amount will be reduced by the lesser of (i) 3%
of the excess, if any, of adjusted gross income over such amount, or (ii) 80% of
the amount of itemized deductions otherwise allowable for such year.
Accordingly, such deductions might be disallowed to such 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 Receivables will not be
issued with OID, and, therefore, the Trust should not have OID income. However,
the purchase price paid by the Trust for the Receivables may be greater or less
than the remaining principal balance of the Receivables at the time of purchase.
If so, the Receivables 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 a
Receivable-by-Receivable basis.)
If the Trust acquires the Receivables 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 Receivables or to offset any such premium against
interest income on the Receivables. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
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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
have contributed all of its assets to a new partnership (the "new partnership")
in exchange for interests in the new partnership. Such interests would be deemed
distributed to the partners of the Trust in liquidation thereof, which would not
constitute a sale or exchange.
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 Receivables would generally
be treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust does not expect to have any other assets that
would give rise to such special reporting requirements. Thus, to avoid those
special reporting requirements, the Trust will elect to include market discount
in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the
Trust's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. The Seller is
authorized to revise the Trust's method of allocation between transferors and
transferees to conform to a method permitted by future regulations.
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Section 731 Distributions. In the case of any distribution to a
Certificateholder, no gain will be recognized to that Certificateholder to the
extent that the amount of any money distributed with respect to such Certificate
does not exceed the Certificateholder's adjusted basis in the Certificate. To
the extent that the amount of money distributed exceeds such adjusted basis,
gain will be currently recognized. In the case of any distribution to a
Certificateholder, no loss will be recognized except upon a distribution in
liquidation of a Certificateholder's interest. Any gain or loss recognized by a
Certificateholder will generally be capital gain or loss.
Section 754 Election. In the event that a Certificateholder sells its
Certificate at a profit (or loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificate 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 the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust and will report each Certificateholder's allocable share of items of Trust
income and expense to holders and the IRS on Schedule K-1. The Trust will
provide the Schedule K-1 information to nominees that fail to provide the Trust
with the information statement described below and such nominees will be
required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust or be subject to penalties unless the
holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish 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
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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. As discussed below, an
investment in a Certificate may not be suitable for any foreign person.
Accordingly, no interest in a Certificate should be acquired by or on behalf of
any foreign persons without first considering the United States tax consequences
of holding a Certificate. No regulations, published rulings or judicial
decisions exist that would discuss the characterization for federal withholding
tax purposes with respect to foreign persons who are partners of a partnership
with activities substantially the same as the Trust. 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 foreign 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 approximately 35% for foreign holders that are taxable as corporations and
39.6% for all other foreign holders. Amounts withheld will be deemed distributed
to the foreign Certificateholders. Subsequent adoption of Treasury regulations
or the issuance of other administrative pronouncements may require the Trust to
change its withholding procedures. In determining a Certificateholder'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
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payment made (or accrued) to a Certificateholder who is a foreign person
generally will be considered guaranteed payments to the extent such payments are
determined without regard to the income of the Trust. If these interest payments
are properly characterized as guaranteed payments, then the interest will not be
considered "portfolio interest." As a result, Certificateholders will be subject
to United States federal income tax and withholding tax at a rate of 30 percent,
unless reduced or eliminated pursuant to an applicable treaty. In such case, a
foreign holder would only be entitled to claim a refund for that portion of the
taxes in excess of the taxes that should be withheld with respect to the
guaranteed payments.
Backup Withholding. Distributions made on the Certificates and
proceeds from the sale of the Certificates will be subject to a "backup"
withholding tax of 31 percent 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
CLASSIFICATION OF THE TRUST AS A GRANTOR TRUST
If a partnership election is not made, Federal 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 the Code. In this case, beneficial 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
Receivables and any other assets in the Trust. Any amounts received by a Grantor
Trust Certificateholder in lieu of amounts due with respect to any Receivable or
other asset in the Trust 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.
TAXATION OF OWNERS OF GRANTOR TRUST CERTIFICATES
GENERAL. Grantor Trust Certificateholders generally will be required to
report on their federal income tax returns their shares of the entire income
from the Receivables (including amounts used to pay reasonable servicing fees
and other expenses) and will be entitled to deduct their shares of any such
reasonable servicing fees and other expenses. Because of stripped interests,
market or OID, or premium, the amount includible in income on account of a
Grantor Trust Certificate may differ significantly from the amount distributable
thereon representing interest on the Receivables. Under Section 67 of the Code,
an individual, estate or trust holding a Grantor Trust Certificate directly or
through certain pass-through entities
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will be allowed a deduction for such reasonable servicing fees and expenses only
to the extent that the aggregate of such holder's miscellaneous itemized
deductions exceeds two percent of such holder's adjusted gross income. In
addition, Section 68 of the Code provides that the amount of itemized deductions
otherwise allowable for an individual whose adjusted gross income exceeds a
specified amount will be reduced by the lesser of (i) 3% of the excess of the
individual's adjusted gross income over such amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for the taxable year. The amount of
additional taxable income reportable by Grantor Trust Certificateholders who are
subject to the limitations of either Section 67 or Section 68 of the Code may be
substantial. Further, individual Certificateholders subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining such
holder's alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple classes of Grantor Trust
Certificates (including Grantor Trust Certificates constituting stripped
coupons) are issued, such fees and expenses should be allocated among the
classes of Grantor Trust Certificates using a method that recognizes that each
such class benefits from the related services. In the absence of statutory or
administrative clarification as to the method to be used, it currently is
intended to base information returns or reports to the IRS and
Certificateholders on a method that allocates such expenses among classes of
Grantor Trust Certificates with respect to each period based on the
distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Certificates of any
series will depend on whether they are subject to the "stripped bond" rules of
Section 1286 of the Code. Grantor Trust Certificates may be subject to those
rules if (i) a class of Grantor Trust Certificates constituting stripped coupons
is issued as part of the same series of Certificates or (ii) the Seller or any
of its affiliates retains (for its own account or for purposes of resale) a
right to receive a specified portion of the interest payable on a Receivable.
Further, an unreasonably high servicing fee retained by a seller or servicer may
be treated as a retained ownership interest that constitutes a stripped coupon.
If Stripped Bond Rules Apply. If the stripped bond rules apply, each
Grantor Trust Certificate will be treated as having been issued with OID within
the meaning of Section 1273(a) of the Code, subject, however, to the discussion
below regarding the treatment of certain stripped bonds as market discount
bonds and the discussion regarding de minimis market discount. See " -
TAXATION OF GRANTOR TRUST CERTIFICATES - Market Discount." Under the stripped
bond rules, a Grantor Trust Certificateholder (whether a cash or accrual method
taxpayer) will be required to report interest income from its Grantor Trust
Certificate for each month in an amount equal to the income that accrues on
such Certificate in that month calculated under a constant yield method, in
accordance with the rules of the Code relating to OID.
The OID on a Grantor Trust Certificate will be the excess of such
Certificate's stated redemption price over its issue price. The issue price of a
Grantor Trust Certificate as to any original purchaser will be equal to the
price paid by such purchaser for the Grantor Trust Certificate. The stated
redemption price of a Grantor Trust Certificate will be the sum of all
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payments to be made on such Certificate, other than "qualified stated interest,"
if any, as well as such Certificate's share of reasonable servicing fees and
other expenses. See " - TAXATION OF GRANTOR TRUST CERTIFICATES - If Stripped
Bond Rules Do Not Apply" for a definition of "qualified stated interest." In
general, the amount of such income that accrues in any month would equal the
product of such holder's adjusted basis in such Grantor Trust Certificate at
the beginning of such month (see " - Sales of Grantor Trust Certificates") and
the yield of such Grantor Trust Certificate to such holder. Such yield would
be computed at the rate (compounded based on the regular interval between
payment dates) that, if used to discount the holder's share of future payments
on the Receivables, would cause the present value of those future payments to
equal the price at which the holder purchased such Certificate. In computing
the yield under the stripped bond rules, a Certificateholder's share of future
payments on the Receivables will not include any payments made in respect of
any spread or any other ownership interest in the Receivables retained by the
Seller, a Servicer, or its respective affiliates, but will include such
Certificateholder's share of any reasonable servicing fees and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing OID and (ii) adjustments in the accrual of OID
when prepayments do not conform to the prepayment assumption, with respect to
certain categories of debt instruments, and regulations could be adopted
applying those provisions to the Grantor Trust Certificates. It is unclear
whether those provisions would be applicable to the Grantor Trust Certificates
or whether use of a reasonable prepayment assumption may be required or
permitted without reliance on these rules. It is also uncertain, if a prepayment
assumption is used, whether the assumed prepayment rate would be determined
based on conditions at the time of the first sale of the Grantor Trust
Certificate or, with respect to any holder, at the time of purchase of the
Grantor Trust Certificate by that holder. Certificateholders are advised to
consult their own tax advisors concerning reporting OID in general and, in
particular, whether a prepayment assumption should be used in reporting OID with
respect to Grantor Trust Certificates.
In the case of a Grantor Trust Certificate acquired at a price equal to
the principal amount of the Receivables allocable to such Certificate, the use
of a prepayment assumption generally would not have any significant effect on
the yield used in calculating accruals of interest income. In the case, however,
of a Grantor Trust Certificate acquired at a discount or premium (that is, at a
price less than or greater than such principal amount, respectively), the use of
a reasonable prepayment assumption would increase or decrease such yield, and
thus accelerate or decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Receivable prepays
in full, the holder of a Grantor Trust Certificate acquired at a discount or a
premium generally will recognize ordinary income or loss equal to the difference
between the portion of the prepaid principal amount of the Receivable that is
allocable to such Certificate and the portion of the adjusted basis of such
Certificate that is allocable to such Certificateholder's interest in the
Receivable. If a prepayment assumption is used, it appears that no separate item
of income or loss should be recognized upon a prepayment. Instead, a prepayment
should be treated as a
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partial payment of the stated redemption price of the Grantor Trust Certificate
and accounted for under a method consistent with Section 1272(a)(6) of the Code.
It is unclear whether any other adjustments would be required to reflect
differences between an assumed prepayment rate and the actual rate of
prepayments.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Seller nor any other person will make any representation that the
Receivables will in fact prepay at a rate conforming to such Prepayment
Assumption or any other rate and Certificateholders should bear in mind that the
use of a representative initial offering price will mean that such information
returns or reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial Certificateholders of each series
who bought at that price.
If Stripped Bond Rules Do Not Apply. Subject to the discussion below
on OID, if the stripped bond rules do not apply to a Grantor Trust Certificate,
the Certificateholder will be required to report its share of the interest
income on the Receivables in accordance with such Certificateholder's normal
method of accounting. The OID rules will apply to a Grantor Trust Certificate
to the extent it evidences an interest in Receivables issued with OID.
The OID, if any, on the Receivables will equal the difference between
the stated redemption price of such Receivables and their issue price. Under the
OID regulations, the stated redemption price is equal to the total of all
payments to be made on such Receivable other than "qualified stated interest."
"Qualified stated interest" includes interest that is unconditionally payable at
least annually at a single fixed rate, and--in the case of Receivables bearing
adjustable or variable interest rates--at a "qualified floating rate", or at an
"objective rate", a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate", or a
combination of "qualified floating rates" that does not operate in a manner that
accelerates or defers interest payments on such Receivable. In general, the
issue price of a Receivable will be the amount received by the borrower from the
lender and the stated redemption price of a Receivable will equal its principal
amount.
Notwithstanding the general definition of OID, OID will be considered
to be de minimis if such OID is less than 0.25% of the stated redemption price
multiplied by the weighted average maturity of the Receivable. For this purpose,
the weighted average maturity of the Receivable will be computed as the sum of
the amounts determined, as to each payment included in the stated redemption
price of such Receivable, by multiplying (i) the number of complete years
(rounding down for partial years) from the issue date until such payment is
expected to be made by (ii) a fraction, the numerator of which is the amount of
the payment and the denominator of which is the stated redemption price of the
Receivable. Under the OID regulations, OID of only a de minimis amount (other
than de minimis OID attributable to a so-called "teaser" rate or initial
interest holiday) will be included in income as each payment of
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stated principal price is made, based on the product of the total amount of such
de minimis OID and a fraction, the numerator of which is the amount of each such
payment and the denominator of which is the outstanding stated principal amount
of the Receivable. The OID regulations also permit a Certificateholder to elect
to accrue de minimis OID into income currently based on a constant yield method.
See " - TAXATION OF OWNERS OF GRANTOR TRUST CERTIFICATES - Market Discount"
below.
If OID is in excess of a de minimis amount, all OID with respect to a
Receivable will be required to be accrued and reported in income each month,
based on a constant yield. The OID Regulations suggest that no prepayment
assumption is appropriate in computing the yield on prepayable obligations
issued with OID. In the absence of statutory or administrative clarification, it
currently is not intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code may
require that a prepayment assumption be made in computing yield with respect to
all asset-backed securities. Certificateholders are advised to consult their own
tax advisors concerning whether a prepayment assumption should be used in
reporting OID with respect to Grantor Trust Certificates. Certificateholders
should refer to the related Prospectus Supplement with respect to each series to
determine whether and in what manner the OID rules will apply to Receivables in
such series.
A purchaser of a Grantor Trust Certificate (other than a Certificate
subject to the stripped bond rules) that purchases such Grantor Trust
Certificate at a cost less than such Certificate's allocable portion of the
aggregate remaining stated redemption price of the Receivables held in the
related Trust Fund will also be required to include in gross income such
Certificate's daily portions of any OID with respect to such Receivables.
However, each such daily portion will be reduced, if the cost of such Grantor
Trust Certificate to such purchaser is in excess of such Certificate's allocable
portion of the aggregate "adjusted issue prices" of the Receivables held in the
related Trust Fund, approximately in proportion to the ratio such excess bears
to such Certificate's allocable portion of the aggregate OID remaining to be
accrued on such Receivables. The adjusted issue price of a Receivable on any
given day equals the sum of (i) the adjusted issue price (or, in the case of the
first accrual period, the issue price) of such Receivable at the beginning of
the accrual period that includes such day and (ii) the daily portions of OID for
all days during such accrual period prior to such day. The adjusted issue price
of a Receivable at the beginning of any accrual period will equal the issue
price of such Receivable, increased by the aggregate amount of OID with respect
to such Receivable that accrued in prior accrual periods, and reduced by the
amount of any payments made on such Receivable in prior accrual periods of
amounts included in its stated redemption price.
Unless otherwise provided in the related Prospectus Supplement, the
Trustee or the Servicer as applicable, in addition to its regular reports will
provide to any holder of a Grantor Trust Certificate such information as such
holder may reasonably request from time to time
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with respect to OID accruing on Grantor Trust Certificates. See " - Grantor
Trust Reporting" below.
Market Discount. If the stripped bond rules do not apply to a
Grantor Trust Certificate, a Certificateholder may be subject to the market
discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a Receivable is considered to have been purchased at a "market
discount," that is, in the case of a Receivable issued without OID, at a
purchase price less than its remaining stated redemption price or in the case of
a Receivable issued with OID, at a purchase price less than its adjusted issue
price (as defined above). If market discount is in excess of a de minimis amount
(as described below), the holder generally will be required to include in income
in each month the amount of such discount that has accrued (under the rules
described in the next paragraph) through such month that has not previously been
included in income, but limited, in the case of the portion of such discount
that is allocable to any Receivable, to the payment of stated redemption price
on such Receivable that is received by (or, in the case of accrual basis
Certificateholders, due to) the Trust Fund in that month. A Certificateholder
may elect to include market discount in income currently as it accrues (under a
constant yield method based on the yield of the Certificate to such holder)
rather than including it on a deferred basis in accordance with the foregoing.
If made, such election will apply to all market discount bonds acquired by such
Certificateholder during or after the first taxable year to which such election
applies. In addition, the OID regulations would permit a Certificateholder to
elect to accrue all interest, discount (including de minimis market or OID) and
premium in income as interest, based on a constant yield method. If such an
election were made with respect to a Receivable with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election and thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. Each of these elections to accrue
interest, discount and premium with respect to a Certificate on a constant yield
method or as interest is irrevocable.
Section 1276(b)(3) of the Code authorized the Treasury Department to
issue regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the legislative history to Section 1276 of the Code apply.
Under those rules, in each accrual period market discount on the Receivables
should accrue, at the Certificateholder's option: (i) on the basis of a constant
yield method, (ii) in the case of a Receivable issued without OID, in an amount
that bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the Receivable as of the beginning of the accrual period, or (iii)
in the case of a Receivable issued with OID, in an amount that bears the same
ratio to the total remaining market discount as the OID accrued in the accrual
period bears to the total OID remaining at the beginning of the accrual period.
The prepayment assumption, if
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any, used in calculating the accrual of OID is to be used in calculating the
accrual of market discount. The effect of using a prepayment assumption could be
to accelerate the reporting of such discount income. Because the regulations
referred to in this paragraph have not been issued, it is not possible to
predict what effect such regulations might have on the tax treatment of a
Receivable purchased at a discount in the secondary market.
Because the Receivables will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were OID.
Market discount with respect to Receivables generally will be
considered to be de minimis if it is less than 0.25% of the stated redemption
price of the Receivables multiplied by the number of complete years to maturity
remaining after the date of its purchase. In interpreting a similar rule with
respect to OID on obligations payable in installments, the OID Regulations refer
to the weighted average maturity of obligations, and it is likely that the same
rule will be applied with respect to market discount, presumably taking into
account the prepayment assumption used, if any. The effect of using a prepayment
assumption could be to accelerate the reporting of such discount income. If
market discount is treated as de minimis under the foregoing rule, it appears
that actual discount would be treated in a manner similar to OID of a de minimis
amount. See " - TAXATION OF OWNERS OF GRANTOR TRUST CERTIFICATES - If Stripped
Bond Rules Do Not Apply."
Further, under the rules described above any discount that is not OID
and exceeds a de minimis amount may require the deferral of interest expense
deductions attributable to accrued market discount not yet includible in income,
unless an election has been made to report market discount currently as it
accrues. This rule applies without regard to the origination dates of the
Receivables.
Premium. If a Certificateholder is treated as acquiring the underlying
Receivables at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Receivables originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to Receivables originated before September 28, 1985 or to Receivables
for which an amortization election is not made, should be allocated among the
payments of stated redemption price on the Receivable and be allowed as a
deduction as such payments are made (or, for a Certificateholder using the
accrual method of accounting, when such payments of stated redemption price are
due).
It is unclear whether a prepayment assumption should be used in
computing amortization of premium allowable under Section 171 of the Code. If
premium is not subject to amortization using a prepayment assumption and a
Receivable prepays in full, the holder of a Grantor Trust Certificate acquired
at a premium should recognize a loss, equal to the difference between the
portion of the prepaid principal amount of the Receivable that is
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allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Receivable. If a prepayment assumption is
used to amortize such premium, it appears that such a loss would be unavailable.
Instead, if a prepayment assumption is used, a prepayment should be treated as a
partial payment of the stated redemption price of the Grantor Trust Certificate
and accounted for under a method similar to that described for taking account of
OID on the Notes. It is unclear whether any other adjustments would be required
to reflect differences between the prepayment assumption used, if any, and the
actual rate of prepayments.
Possible Application of Contingent Payment Rules. The coupon
stripping rules' general treatment of stripped coupons is to regard them as
newly issued debt instruments in the hands of each purchaser. To the extent that
payments on the Certificates subject to the stripped bond rules would cease if
the Receivables were prepaid in full, the Certificates subject to the stripped
bond rules could be considered to be debt instruments providing for contingent
payments. Under the OID regulations, debt instruments providing for contingent
payments are not subject to the same rules as debt instruments providing for
noncontingent payments. Regulations were finalized on June 11, 1996 regarding
contingent payment debt instruments, but it appears that Certificates subject to
the stripped bond rules, due to their similarity to other mortgage-backed
securities (such as REMIC regular interests) that are expressly excepted from
the application of such regulations, may be excepted from such regulations. Like
the OID regulations, the contingent payment debt instruments regulations do not
specifically address securities, such as the Certificates subject to the
stripped bond rules, that are subject to the stripped bond rules of Section 1286
of the Code.
If the contingent payment debt instrument regulations were to apply,
the holder of a Grantor Trust Strip Certificate would be required to apply the
"noncontingent bond method". Under the "noncontingent bond method," the issuer
of a Grantor Trust Strip Certificate determines a projected payment schedule on
which interest will accrue. Certificateholders subject to the stripped bond
rules are bound by the issuer's projected payment schedule. The projected
payment schedule consists of all noncontingent payments and a projected amount
for each contingent payment based on the projected yield (as described below) of
the Grantor Trust Strip Certificate.
The projected amount of each payment is determined so that the
projected payment schedule reflects the comparable yield. The projected amount
of each payment must reasonably reflect the relative expected values of the
payments to be received by the holders of a Grantor Trust Strip Certificate. The
comparable yield referred to above is a reasonable yield, which, in some
circumstances is presumed to be the "applicable federal rate" that, as of the
issue date, reflects general market conditions, the credit quality of the
issuer, and the terms and conditions of the Receivables. The holder of a Grantor
Trust Strip Certificate would be required to include as interest income in each
month the adjusted issue price of the Grantor Trust Strip Certificate at the
beginning of the period multiplied by the comparable yield.
Assuming that a prepayment assumption were used, if the proposed
regulations or their principles were applied to Certificates subject to the
stripped bond rules, the amount of income
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reported with respect thereto would be substantially similar to that described
under "TAXATION OF OWNERS OF GRANTOR TRUST CERTIFICATES--IF STRIPPED BOND RULES
APPLY". Certificateholders should consult their tax advisors concerning the
possible application of the contingent payment rules to the Certificates subject
to the stripped bond rules.
Sales of Grantor Trust Certificates. Any gain or loss, equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis, recognized on such sale or exchange
of a Grantor Trust Certificate by an investor who holds such Grantor Trust
Certificate as a capital asset, will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial institutions)
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Certificate generally will equal its cost, increased by any
income reported by the seller (including OID and market discount income) and
reduced (but not below zero) by any previously reported losses, any amortized
premium and by any distributions with respect to such Grantor Trust
Certificate. The Code as of the date of this Prospectus provides a top marginal
tax rate of 39.6% for individuals and a maximum marginal rate for long-term
capital gains of individuals of 28%. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be
partially or wholly ordinary and not capital in certain circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income, as will gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Code. Furthermore, a portion of
any gain that might otherwise be capital gain may be treated as ordinary income
to the extent that the Grantor Trust Certificate is held as part of a
"conversion transaction" within the meaning of Section 1258 of the Code. A
conversion transaction generally is one in which the taxpayer has taken two or
more positions in the same or similar property that reduce or eliminate market
risk, if substantially all of the taxpayer's return is attributable to the time
value of the taxpayer's net investment in such transaction. The amount of gain
realized in a conversion transaction that is recharacterized as ordinary income
generally will not exceed the amount of interest that would have accrued on the
taxpayer's net investment at 120% of the appropriate "applicable federal rate"
(which rate is computed and published monthly by the IRS) at the time the
taxpayer enters into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income items from
the transaction. Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include such
net capital gain in total net investment income for that taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
Grantor Trust Reporting. Unless otherwise provided in the related
Prospectus Supplement, as applicable, the Trustee or the Servicer will furnish
to each Grantor Trust Certificateholder with each distribution a statement
setting forth the amount of such distribution allocable to principal on the
underlying Receivables and to interest thereon at the
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related Pass-Through Rate. In addition, within a reasonable time after the end
of each calendar year, the Trustee or Servicer, as applicable, will furnish to
each Certificateholder during such year such customary factual information as
the Depositor or the reporting party deems necessary or desirable to enable
holders of Grantor Trust Certificates to prepare their tax returns and will
furnish comparable information to the IRS as and when required by law to do so.
Because the rules for accruing discount and amortizing premium with respect to
the Grantor Trust Certificates are uncertain in various respects, there is no
assurance the IRS will agree with the Trustee's or Servicer's, as the case may
be, information reports of such items of income and expense. Moreover, such
information reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial Certificateholders that bought
their Certificates at the representative initial offering price used in
preparing such reports.
Backup Withholding. In general, the rules described in
" - Notes - Backup Withholding with Respect to Notes" will also apply to Grantor
Trust Certificates.
Foreign Investors. In general, the discussion with respect to
Notes applies to Grantor Trust Certificates except that Grantor Trust
Certificates will, unless otherwise disclosed in the related Prospectus
Supplement, be eligible for exemption from United States withholding tax,
subject to the conditions described in such discussion, only to the extent the
related Receivables were originated after July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be
exempt under Sections 871(h)(1) and 881(c) of the Code from United States
withholding tax, and the Grantor Trust Certificate is not held in connection
with a Certificateholder's trade or business in the United States, such Grantor
Trust Certificate will not be subject to United States estate taxes in the
estate of a non-resident alien individual.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A CERTIFICATEHOLDERS
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF CERTIFICATES, DEBT CERTIFICATES AND NOTES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES", potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of the Certificates offered hereunder. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax
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laws of any state or other jurisdiction. Therefore, prospective investors should
consult their own tax advisors with respect to the various tax consequences of
investments in the certificates offered hereunder.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain 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 (and as applicable, insurance company general accounts) in
which such plans, accounts or arrangements are invested that are subject to the
fiduciary responsibility provisions of ERISA and Section 4975 of the Code
("Plans"), and on persons who are fiduciaries with respect to such Plans, in
connection with the investment of Plan assets. Certain employee benefit plans,
such as governmental plans (as defined in ERISA Section 3(32)), and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Securities without regard
to the ERISA considerations described below, subject to the provisions of other
applicable federal, state and local law. Any such plan which is qualified and
exempt from taxation under Sections 401(a) and 501(a) of the Code, however, is
subject to the prohibited transaction rules set forth in Section 503 of the
Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of a Plan and
persons ("parties in interest" within the meaning of ERISA and "disqualified
persons" within the meaning of the Code; collectively, "Parties in Interest")
who have certain specified relationships to the Plan, unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code or a penalty imposed pursuant to Section
502(i) of ERISA, unless a statutory or administrative exemption is available.
These prohibited transactions generally are set forth in Section 406 of ERISA
and Section 4975 of the Code.
PLAN ASSET REGULATIONS
A Plan's investment in Securities may cause the underlying Receivables
and other assets included in a related Trust to be deemed assets of such Plan.
Section 2510.3-101 of the regulations (the "Plan Asset Regulations") of the
United States Department of Labor (the "DOL") provides that when a Plan acquires
an equity interest in an entity, the Plan's assets
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include both such equity interest and an undivided interest in each of the
underlying assets of the entity, unless certain exceptions not applicable here
apply, or unless the equity participation in the entity by "benefit plan
investors" (i.e., Plans and certain employee benefit plans not subject to ERISA)
is not "significant," both as defined therein. For this purpose, in general,
equity participation by benefit plan investors will be "significant" on any date
if 25% or more of the value of any class of equity interests in the entity is
held by benefit plan investors. Equity participation in a Trust will be
significant on any date if immediately after the most recent acquisition of any
Certificate, 25% or more of any class of Securities is held by benefit plan
investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Receivables and other assets included in a Trust constitute Plan
assets, then any party exercising management or discretionary control regarding
those assets, such as the Servicer, any Backup Servicer, any subservicer, the
Trustee, the obligor under any credit enhancement mechanism, or certain
affiliates thereof, may be deemed to be a Plan "fiduciary" and thus subject to
the fiduciary responsibility provisions and prohibited transaction provisions of
ERISA and the Code with respect to the investing Plan. In addition, if the
Receivables and other assets included in a Trust constitute Plan assets, the
purchase of Securities by a Plan, as well as the operation of the Trust, may
constitute or involve a prohibited transaction under ERISA or the Code.
The Plan Asset Regulations provide that the term "equity interest"
means any interest in an entity other than an instrument that is treated as
indebtedness under applicable local law and which has no substantial equity
features. Accordingly, if the Notes issued by a Trust are treated as debt under
applicable law and do not have substantial equity features, the Receivables
included in such Trust would not be treated as assets of Plan investors.
PROHIBITED TRANSACTION EXEMPTIONS
In considering an investment in the Securities, a Plan fiduciary should
consider the availability of prohibited transaction exemptions promulgated by
the DOL including, among others, Prohibited Transaction Class Exemption ("PTCE")
75-1, which exempts certain transactions involving Plans and certain
broker-dealers, reporting dealers and banks; PTCE 90-1, which exempts certain
transactions between insurance company separate accounts and Parties in
Interest; PTCE 91-38, which exempts certain transactions between bank collective
investment funds and Parties in Interest; PTCE 84-14, which exempts certain
transactions effected on behalf of a Plan by a "qualified professional asset
manager"; PTCE 95-60, which exempts certain transactions between insurance
company general accounts and Parties in Interest; and PTCE 96-23, regarding
transactions effected by an "in-house asset manager".
In addition to any exemption that may be available under PTCE 95-60 for
the purchase and holding of the Securities by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain
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exemptive relief from the provisions of Part 4 of Title I of ERISA and Section
4975 of the Code, including the prohibited transaction restrictions imposed by
ERISA and the related excise taxes imposed by the Code, for transactions
involving an insurance company general account. Pursuant to Section 401(c) of
ERISA, the DOL is required to issue final regulations ("401(c) Regulations") no
later than December 31, 1997 which are to provide guidance for the purpose of
determining, in cases where insurance policies supported by an insurer's general
account are issued to or for the benefit of a Plan on or before December 31,
1998, which general account assets constitute Plan assets. Section 401(c) of
ERISA generally provides that, until the date which is 18 months after the
401(c) Regulations become final, no person shall be subject to liability under
Part 4 of Title I of ERISA and Section 4975 of the Code on the basis of a claim
that the assets of an insurance company general account constitute Plan assets,
unless (i) as otherwise provided by the Secretary of Labor in the 401(c)
Regulations to prevent avoidance of the regulations or (ii) an action is brought
by the Secretary of Labor for certain breaches of fiduciary duty which would
also constitute a violation of federal or state criminal law. Any assets of an
insurance company general account which support insurance policies issued to a
Plan after December 31, 1998 or issued to Plans on or before December 31, 1998
for which the insurance company does not comply with the 401(c) Regulations may
be treated as Plan assets. In addition, because Section 401(c) does not relate
to insurance company separate accounts, separate account assets are still
treated as Plan assets of any Plan invested in such separate account. Insurance
companies contemplating the investment of general account assets in the
Securities should consult with their legal counsel with respect to the
applicability of Section 401(c) of ERISA, including the general account's
ability to continue to hold the Securities after the date which is 18 months
after the date the 401(c) Regulations become final.
Plan fiduciaries should consider whether an individual prohibited
transaction exemption has been issued with respect to the Securities being
offered to such Plan. There can be no assurance that any of these exemptions
will apply with respect to any particular Plan investment in the Securities or,
even if it were deemed to apply, that any exemption would apply to all
prohibited transactions that may occur in connection with such investment. The
Prospectus Supplement with respect to a series of Securities may contain
additional information regarding the availability of these or other exemptions
with respect to the Securities offered thereby and the eligibility of a class of
securities for purchase by Plans.
CONSULTATION WITH COUNSEL
Any Plan fiduciary which proposes to purchase Securities on behalf of
or with assets of a Plan should consider its general fiduciary obligations under
ERISA and should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment and the availability of
any prohibited transaction exemption in connection therewith.
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PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement (the
"Underwriting Agreement") with respect to each Trust, the Seller will agree to
sell to each of the underwriters named therein and in the related Prospectus
Supplement, and each of such underwriters will severally agree to purchase from
the Seller, the principal amount of each class of Securities of the related
series set forth therein and in the related Prospectus Supplement.
In each Underwriting Agreement, the several underwriters will agree,
subject to the terms and conditions set forth therein, to purchase all the
Securities described therein which are offered hereby and by the related
Prospectus Supplement if any of such Securities are purchased. In the event of a
default by any such underwriter, each Underwriting Agreement will provide that,
in certain circumstances, purchase commitments of the nondefaulting underwriters
may be increased, or the Underwriting Agreement may be terminated.
First Union Capital Markets Corp. may be designated as an underwriter
in the related Prospectus Supplement. IronBrand Capital, LLC, an affiliate of
the First Union Capital Markets Corp. (the "First Union Partner"), is a 15%
limited partner of NAFI. As part of a referral program, First Union National
Bank of North Carolina, an affiliate of First Union Capital Markets Corp., is
entitled to receive fees for referrals of credit applications to the extent the
related motor vehicle retail installment contracts are acquired by the Company.
Based upon several factors, including the overall performance of the referral
program and the total market value of NAFI over a specified time period, the
First Union Partner may increase its limited partnership interest in NAFI to
approximately 49%.
In the ordinary course of their respective businesses, First Union
Capital Markets Corp. and its affiliates have engaged and may engage in
investment banking and/or commercial banking transactions with NAFI and its
affiliates.
The Prospectus and the related Prospectus Supplements may be used by
First Union Capital Markets Corp. in connection with offers and sales related to
market making transactions in any series of the Securities. First Union Capital
Markets Corp. may act as principal or agent in such transactions. Such sales
will be made at prices related to prevailing market prices at the time of the
sale or otherwise.
Each Prospectus Supplement will either (i) set forth the price at which
each class of Securities being offered thereby will be offered to the public and
any concessions that may be offered to certain dealers participating in the
offering of such Securities or (ii) specify that the related Securities are to
be resold by the underwriters in negotiated transactions at varying prices to be
determined at the time of such sale. After the initial public offering of any
Securities, the public offering price and such concessions may be changed.
-105-
<PAGE> 160
Each Underwriting Agreement will provide that NAFI and the Seller will
indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act.
The Indenture Trustee, if any, may, from time to time, invest the funds
in the Designated Accounts in Eligible Investments acquired from the
underwriters.
Under each Underwriting Agreement, the closing of the sale of any class
of Securities subject thereto will be conditioned on the closing of the sale of
all other such classes.
The place and time of delivery for the Securities in respect of which
this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
LEGAL MATTERS
Certain matters with respect to the validity of the Certificates and
the Notes will be passed upon for the Seller by Morrison & Foerster, New York,
New York.
-106-
<PAGE> 161
INDEX OF DEFINED TERMS
401(c) Regulations.............................................. 108
Actuarial Receivables........................................... 33
Administration Agreement........................................ 76
Administrative Receivables...................................... 26
Administrator................................................... 76
Aggregate Principal Balance..................................... 17
Amortization Period............................................. 15
APR............................................................. 33
Backup Servicer................................................. 6
Bankruptcy Laws................................................. 70
CEDEL Participants.............................................. 51
Certificate Balance............................................. 7
Certificate Distribution Account................................ 60
Certificate Majority............................................ 49
Certificate Owners.............................................. 23
Certificateholders.............................................. 7
Certificates.................................................... 1
Code............................................................ 83
Collection Account.............................................. 18
Commission...................................................... 4
Computer Tape................................................... 58
Cooperative..................................................... 51
Cutoff Date..................................................... 1
Dealer Agreements............................................... 28, 38
Dealer Assignments.............................................. 28
Dealers......................................................... 11, 38
Debt Certificates............................................... 84
Defaulted Receivable............................................ 33
Definitive Certificates......................................... 49
Definitive Notes................................................ 49
Depositor....................................................... 115
Depository...................................................... 40
Designated Accounts............................................. 61
Distribution Date............................................... 41, 63
DOL............................................................. 107
DTC............................................................. 3
Electronic Ledger............................................... 58
Eligible Account................................................ 61
Eligible Investments............................................ 62
Eligible Servicer............................................... 71
ERISA........................................................... 107
-107-
<PAGE> 162
Euroclear Operator.............................................. 51
Euroclear Participants.......................................... 51
European Depositaries........................................... 50
Events of Defaul................................................ 44
Exchange Act.................................................... 4
Federal Tax Counsel............................................. 83
Financed Vehicles............................................... 11
First Union Partner............................................. 110
Foreign person.................................................. 88
FTC............................................................. 82
Funding Trust................................................... 115
Indenture....................................................... 1
Indenture Trustee............................................... 1, 7
Indirect participants........................................... 48
Insolvency Laws................................................. 24
Insurance Agreement............................................. 67
Insurer Default................................................. 20
Interest Rate................................................... 9
IRS............................................................. 83
JMFE............................................................ 39
Lien............................................................ 57
Lockbox Account................................................. 19, 61
Lockbox Bank.................................................... 19, 61
Monthly Period.................................................. 64
NAFCO........................................................... 1, 6
NAFCO Transferor................................................ 12, 29
Note Distribution Account....................................... 61
Note Majority................................................... 43
Note Owners..................................................... 23
Noteholders..................................................... 9
Notes........................................................... 1
Obligor......................................................... 18
Obligors........................................................ 25
Odometer Act.................................................... 81
OFSA............................................................ 17, 39
OID Regulations................................................. 85
Originator Agreements........................................... 38
Originators..................................................... 1, 38
Participants.................................................... 48
Parties in Interest............................................. 107
Pass-Through Rate............................................... 7
Payment Date.................................................... 42
-108-
<PAGE> 163
Plan Asset Regulations.......................................... 107
Plans........................................................... 107
Policy.......................................................... 16
Pool Factor..................................................... 36
Pooling and Servicing Agreement................................. 1
Pre-Funded Amount............................................... 12
Pre-Funding Account............................................. 13
Pre-Funding Period.............................................. 13
Prepayment Assumption........................................... 99
Prospectus Supplement........................................... 1
PTCE............................................................ 108
Purchase Agreement.............................................. 12, 5
Purchase Amount................................................. 59
Qualified stated interest....................................... 99
Rating Agency................................................... 22
Receivable Files................................................ 60, 77
Receivables..................................................... 1, 11
Receivables Pool................................................ 11
Registration Statement.......................................... 4
Related Documents............................................... 46
Relevant Depositary............................................. 50
Relief Act...................................................... 57
Repurchase Event................................................12, 20, 59, 77
Required Deposit Rating......................................... 61
Retained Interest............................................... 16
Revolving Period................................................ 15
Rule of 78's Receivables........................................ 33
Rules........................................................... 49
Sale and Servicing Agreement.................................... 1
Schedule of Receivables......................................... 57
Securities...................................................... 1
Security Insurer................................................ 16
Securityholders................................................. 4
Seller.......................................................... 1, 6, 37
Servicer........................................................ 6, 37
Servicer Responsible Officer.................................... 66
Servicer Termination Events..................................... 70
Servicer's Certificate.......................................... 53
Servicing Agreement............................................. 38
Servicing Fee................................................... 17
Short-Term Note................................................. 87
-109-
<PAGE> 164
Simple Interest Receivables..................................... 33
Strip Certificates.............................................. 8
Strip Notes..................................................... 9
Subsequent Receivables.......................................... 1, 12
Subservicing Agreement.......................................... 17, 32
Terms and Conditions............................................ 52
Trust........................................................... 1, 6
Trust Agreement................................................. 1, 115
Trust Documents................................................. 1, 56
Trust Property.................................................. 1, 10
Trustee......................................................... 1, 6
UCC............................................................. 24
Underwriting Agreement.......................................... 110
Warranty Receivables............................................ 26
World Omni...................................................... 39
-110-
<PAGE> 165
======================================================
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, AND ANY
INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY NAFI, THE SELLER OR THE UNDERWRITER. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH THE PROSPECTUS
SUPPLEMENT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS NOR ANY SALES MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN OR THEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS SUPPLEMENT OR
PROSPECTUS
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Reports to Noteholders........................ S-2
Incorporation Of Certain Documents By
Reference................................... S-3
Summary Of The Terms Of The Notes............. S-4
Risk Factors.................................. S-14
The Trust..................................... S-16
Use Of Proceeds............................... S-17
The Receivables Pool.......................... S-17
The Seller.................................... S-26
National Auto Finance Company, Inc. .......... S-26
Omni Financial Services of America, Inc.
("OFSA").................................... S-27
The Insurer................................... S-27
The Notes..................................... S-29
The Sale And Servicing Agreement.............. S-40
The Purchase Agreements....................... S-45
The Policy.................................... S-46
Certain Federal Income Tax Consequences....... S-48
ERISA Considerations.......................... S-50
Underwriting.................................. S-51
Legal Matters................................. S-52
Ratings....................................... S-52
Experts....................................... S-53
PROSPECTUS
Available Information......................... 3
Reports to Securityholders.................... 3
Incorporation of Certain Documents by
Reference................................... 3
Prospectus Summary............................ 5
Risk Factors.................................. 23
The Trusts.................................... 26
The Receivables............................... 28
Yield and Prepayment Considerations........... 35
Pool Factor................................... 36
Use of Proceeds............................... 37
The Seller.................................... 37
National Auto Finance Company, Inc. .......... 37
Omni Financial Services of America, Inc. ..... 40
The Certificates.............................. 40
The Notes..................................... 42
Certain Information Regarding the
Securities.................................. 48
Description of the Purchase Agreements and the
Trust Documents............................. 55
Certain Legal Aspects of the Receivables...... 74
Certain Federal Income Tax Consequences....... 81
ERISA Considerations.......................... 101
Plan of Distribution.......................... 104
Legal Maters.................................. 105
Index of Defined Terms........................ 106
</TABLE>
---------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
NATIONAL AUTO FINANCE
1997-1 TRUST
$66,891,200
% AUTOMOBILE RECEIVABLES-
BACKED NOTES
NATIONAL FINANCIAL
AUTO FUNDING TRUST
(SELLER)
NATIONAL AUTO
FINANCE COMPANY, INC.
(SERVICER)
-----------------------------------------
PROSPECTUS SUPPLEMENT
-----------------------------------------
FIRST UNION
CAPITAL MARKETS CORP.
JULY , 1997
======================================================
