<PAGE>
FILED PURSUANT TO RULE 424(B)(2)
REGISTRATION NO. 333-00282
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 10, 1997)
$168,003,000
TRANSAMERICA MORTGAGE COMPANY
MASTER SERVICER
TFC HOME EQUITY LOAN TRUST 1997-1
TFC HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 1997-1
The TFC Home Equity Loan Asset-Backed Certificates, Series 1997-1 (the "Certif-
icates"), will consist of the Class A-1, Class A-2, Class A-3, Class A-4 and
Class A-5 Certificates (collectively, the "Class A Certificates") and the Class
R Certificate. Only the Class A Certificates are offered hereby. The Certifi-
cates represent interests in a trust fund to be designated as the TFC Home Eq-
uity Loan Trust 1997-1 (the "Trust"). The assets of the Trust consist of (i) a
pool (the "Mortgage Pool") of fixed and adjustable rate mortgage loans (each, a
"Home Equity Loan") secured by mortgages, deeds of trust or other instruments
(each, a "Mortgage") creating a first, second or more junior lien primarily on
one- to four-family dwellings, condominiums, units in planned unit developments
and manufactured homes (each, a "Mortgaged Property"), (ii) all monies received
on the Home Equity Loans after the Cut-off Date (as defined herein) and (iii)
the Certificate Insurance Policy described herein. The Home Equity Loans will
be serviced by Transamerica Mortgage Company (in its capacity as servicer, the
"Master Servicer"). The Certificates will be issued pursuant to a Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement") to be entered into
among the Master Servicer, Transamerica Consumer Mortgage Receivables Corpora-
tion, a Delaware corporation (the "Seller") and a wholly owned indirect subsid-
iary of Transamerica Finance Corporation, and The First National Bank of Chica-
go, as trustee (the "Trustee").
(continued on next page)
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE CERTIFI-
CATES, SEE "RISK FACTORS" BEGINNING ON PAGE S-14 HEREIN AND "RISK FACTORS" IN
THE PROSPECTUS, WHICH BEGINS ON PAGE 12 THEREIN.
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 AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROCEEDS OF THE ASSETS IN THE TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE CER-
TIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE SELLER, THE MASTER SERVICER OR ANY OF THEIR AFFILIATES. NEITHER THE CERTIF-
ICATES NOR THE UNDERLYING HOME EQUITY LOANS WILL BE GUARANTEED OR INSURED BY
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SELLER, THE MASTER
SERVICER OR ANY OF THEIR AFFILIATES. NONE OF SUCH ENTITIES WILL HAVE ANY OBLI-
GATIONS IN RESPECT OF THE CERTIFICATES, EXCEPT AS EXPRESSLY SET FORTH HEREIN.
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
INITIAL
CERTIFICATE PASS-THROUGH PRICE TO UNDERWRITING PROCEEDS TO
CLASS BALANCE RATE PUBLIC(2) DISCOUNT SELLER (3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A-1..... $ 24,564,000 (1) 100% 0.20% 99.80%
- -------------------------------------------------------------------------------
A-2..... $ 10,989,000 6.61% 99.896247% 0.23% 99.666247%
- -------------------------------------------------------------------------------
A-3..... $ 9,686,000 6.76% 99.914751% 0.28% 99.634751%
- -------------------------------------------------------------------------------
A-4..... $ 11,181,000 7.03% 99.925869% 0.35% 99.575869%
- -------------------------------------------------------------------------------
A-5..... $111,583,000 (1) 100% 0.25% 99.75%
- -------------------------------------------------------------------------------
Total... $168,003,000 $167,975,052.78 $419,614.50 $167,555,438.28
- -------------------------------------------------------------------------------
</TABLE>
(1) The Pass-Through Rate on this Class will be subject to adjustment based
upon the level of One-Month LIBOR (as defined herein), subject to the limi-
tations set forth herein.
(2) Plus accrued interest at the applicable rate from November 1, 1997, or in
the case of the Class A-1 and Class A-5 Certificates, from the Closing
Date.
(3) Before deducting expenses payable by the Seller, estimated to be $400,000.
The Class A Certificates are offered subject to prior sale, when, as and if is-
sued by the Trust and accepted by the Underwriters and subject to their right
to reject orders in whole or in part. It is expected that delivery of the Class
A certificates will be made in book-entry form only through the facilities of
The Depository Trust Company and Cedel Bank, societe anonyme, or the Euroclear
System on or about December 5, 1997.
J.P. MORGAN & CO. BANCAMERICA ROBERTSON STEPHENS, INC.
December 4, 1997
<PAGE>
(continued from previous page)
Distributions on the Certificates will be made, to the extent funds are avail-
able therefor, on the 25th day of each month, or, if such day is not a Busi-
ness Day, then on the next Business Day, commencing in December, 1997 (each, a
"Payment Date").
On or before the issuance of the Certificates, there will be obtained a secu-
rities guaranty surety bond in favor of the Trustee for the benefit of the
holders of Class A Certificates (the "Certificate Insurance Policy"). Certain
distributions on the Class A Certificates will be unconditionally and irrevo-
cably guaranteed as to the payment on each Payment Date pursuant to the terms
of the Certificate Insurance Policy to be issued by
[LOGO OF AMBAC ASSURANCE CORPORATION APPEARS HERE]
There is currently no secondary market for the Class A Certificates. The Un-
derwriters intend to make a secondary market in the Class A Certificates, but
are not obligated to do so. There can be no assurance that a secondary market
for the Class A Certificates will develop or, if one does develop, that it
will continue or will provide sufficient liquidity of investment. None of the
Class A Certificates will be listed on any securities exchange.
It is a condition to the issuance of the Certificates that the Class A Certif-
icates be rated "Aaa" by Moody's Investors Service, Inc. ("Moody's") and "AAA"
by Standard & Poor's Ratings Services ("S&P"). Such ratings do not address the
likelihood that any LIBOR Carryover Amount will be paid.
As described herein, an election will be made to treat the Trust as a "real
estate mortgage investment conduit" ( a "REMIC") for federal income tax pur-
poses. The Class A Certificates will constitute "regular interests" in a
REMIC. For a description of certain tax consequences of owning the Class A
Certificates, including, without limitation, original issue discount, see
"Certain Federal Income Tax Consequences" herein.
This Prospectus Supplement does not contain complete information about the of-
fering of the Class A Certificates. Additional information is contained in the
Prospectus dated October 10, 1997 of which this Prospectus Supplement is a
part and which accompanies this Prospectus Supplement. Purchasers are urged to
read both this Prospectus Supplement and the Prospectus in full. Sales of the
Class A Certificates 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 Class A Certificates
offered hereby. Such transactions may include stabilizing and the purchase of
the Class A Certificates to cover syndicate short positions. For a description
of these activities, see "Underwriting" herein.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, 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
ACTING AS UNDERWRITERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
In addition to the documents under "Incorporation of Certain Documents by Ref-
erence" in the Prospectus, the financial statements included in, or as exhib-
its to the following documents which have been filed with the Securities and
Exchange Commission by the Insurer or by Ambac Financial Group, Inc., are
hereby incorporated by reference in this Prospectus Supplement:
(a) The consolidated financial statements of the Insurer and its subsidiar-
ies as of December 31, 1996 and December 31, 1995 and for each of the three
years in the period ended December 31, 1996 included in the Annual Report
on Form 10-K of the Certificate Insurer for the year ended December 31,
1996; and
(b) The consolidated financial statements of the Insurer and its subsidiar-
ies as of September 30, 1997 and for each of the nine month periods ending
September 30, 1997 and September 30, 1996 included in the Quarterly Report
on Form 10-Q of the Insurer for the period ended September 30, 1997.
All financial statements included in documents filed by the Insurer and its
subsidiaries pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, subsequent to the date of this Prospectus
Supplement and prior to the termination of the offering of the Class A Certif-
icates shall be deemed to be incorporated by reference into this Prospectus
Supplement and to be a part hereof from the respective dates of filing such
documents.
The Master Servicer on behalf of the Trust will provide without charge to each
person to whom this Prospectus Supplement is delivered, on the written or oral
request of such person, a copy of any or all of the documents referred to in
the Prospectus under "Incorporation of Certain Documents by Reference" that
have been or may be incorporated by reference in the Prospectus (not including
exhibits to the information that is incorporated by reference unless such ex-
hibits are specifically incorporated by reference into the information that
the Prospectus incorporates). Such request should be directed to the Corporate
Trust Office of the Trustee on behalf of the Master Servicer at The First Na-
tional Bank of Chicago, One First National Plaza, Suite 0126, Chicago, Illi-
nois 60670, telephone: (312) 407-1902, facsimile number: (312) 407-1708, at-
tention: Corporate Trust Services Division.
S-2
<PAGE>
No dealer, salesperson or other individual has been authorized to give any in-
formation or to make any representations not contained in this Prospectus Sup-
plement and the Prospectus and, if given or made, such information or repre-
sentations must not be relied upon as having been authorized by the Seller or
the Underwriters. This Prospectus Supplement and the Prospectus does not con-
stitute an offer to sell, or a solicitation of an offer to buy, the securities
offered hereby by anyone in any jurisdiction in which the person making such
offer or solicitation is not qualified to do so or to anyone to whom it is un-
lawful to make any such offer or solicitation. Neither the delivery of this
Prospectus Supplement and the Prospectus, nor any sale made hereunder shall,
under any circumstances, create an implication that information herein is cor-
rect as of any time since the date of this Prospectus Supplement and the Pro-
spectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PROSPECTUS SUPPLEMENT
<S> <C>
SUMMARY OF TERMS......................................................... S-4
RISK FACTORS............................................................. S-14
Risks of the Home Equity Loans.......................................... S-14
Creditors' Rights and Bankruptcy Considerations......................... S-16
Yield and Prepayment Considerations..................................... S-16
DESCRIPTION OF THE MORTGAGE POOL......................................... S-17
General................................................................. S-17
Fixed Rate Group........................................................ S-18
Floating Rate Group..................................................... S-23
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS.............................. S-30
Class A-1 Certificates.................................................. S-35
Class A-2 Certificates.................................................. S-36
Class A-3 Certificates.................................................. S-37
Class A-4 Certificates.................................................. S-38
Class A-5 Certificates.................................................. S-39
THE MASTER SERVICER AND THE SUBSERVICER--ORIGINATION AND SERVICING
EXPERIENCE.............................................................. S-40
General................................................................. S-40
Transamerica Mortgage Company........................................... S-40
Metropolitan Mortgage Company........................................... S-42
LOSS AND DELINQUENCY EXPERIENCE.......................................... S-45
DESCRIPTION OF THE CERTIFICATES.......................................... S-46
General................................................................. S-46
Final Scheduled Payment Dates........................................... S-47
Representations and Warranties of the Seller, the Subservicer and the
Master Servicer........................................................ S-47
Distributions........................................................... S-48
Advances; Servicing Advances............................................ S-53
Servicing Compensation.................................................. S-54
Master Servicer Termination Event....................................... S-55
Rights Upon the Occurrence of a Master Servicer Termination Event....... S-55
Termination; Purchase of Home Equity Loans.............................. S-55
Amendment of Pooling and Servicing Agreement............................ S-56
Assignment of Home Equity loans......................................... S-56
THE CERTIFICATE INSURANCE POLICY AND THE INSURER......................... S-57
The Insurer............................................................. S-57
The Certificate Insurance Policy........................................ S-58
THE TRUSTEE.............................................................. S-59
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................. S-60
ERISA CONSIDERATIONS..................................................... S-61
LEGAL INVESTMENT......................................................... S-61
USE OF PROCEEDS.......................................................... S-61
UNDERWRITING............................................................. S-62
EXPERTS.................................................................. S-62
RATINGS.................................................................. S-63
LEGAL MATTERS............................................................ S-63
APPENDIX A--Global Clearance, Settlement and Tax Documentation
Procedures.............................................................. A-1
APPENDIX B--The Master Servicer Underwriting Criteria.................... B-1
APPENDIX C--The Subservicer Underwriting Criteria........................ C-1
PROSPECTUS
Available Information.................................................... 2
Reports to Holders....................................................... 2
Incorporation of Certain Documents By Reference.......................... 3
Summary of Prospectus.................................................... 4
Risk Factors............................................................. 12
Description of the Mortgage Pools........................................ 17
Certain Yield and Prepayment Considerations.............................. 19
The Trusts............................................................... 20
Transamerica Finance Corporation......................................... 21
The Master Servicer and its Affiliates................................... 21
The Seller............................................................... 21
The Consumer Mortgage Loan Program....................................... 22
Description of the Certificates.......................................... 25
Certain Legal Aspects of the Home Equity Loans........................... 43
Certain Federal Income Tax Consequences.................................. 49
State and Other Tax Consequences......................................... 65
ERISA Considerations..................................................... 65
Legal Investment......................................................... 70
Use of Proceeds.......................................................... 70
Plan of Distribution..................................................... 70
Ratings.................................................................. 71
Legal Matters............................................................ 71
</TABLE>
S-3
<PAGE>
SUMMARY OF TERMS
The following Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the Prospectus. Capitalized terms used but not otherwise defined shall have the
meanings ascribed to such terms in the Prospectus.
ISSUER........................... TFC Home Equity Loan Trust 1997-1.
SECURITIES OFFERED............... TFC Home Equity Loan Asset-Backed Certifi-
cates, Series 1997-1, in the classes listed
on the cover page hereof. Each Class of the
Class A Certificates will have the Initial
Certificate Balances listed on the cover
page hereof and will accrue interest at the
rates (each, a "Pass-Through Rate") set
forth on the cover page hereof or described
herein.
The Class A-1, Class A-2, Class A-3, Class
A-4 and Class A-5 Certificates are referred
to herein collectively as the "Class A Cer-
tificates" and individually as a "Class" of
Certificates. The Class A-1 and Class A-5
Certificates are referred to herein as the
"Adjustable Rate Certificates".
FINAL SCHEDULED PAYMENT DATES.... The Final Scheduled Payment Date for each
Class of Class A Certificates is as follows:
-------------------------
<TABLE>
<CAPTION>
FINAL SCHEDULED
CLASS: PAYMENT DATE:
------ ----------------
<S> <C>
A-1 April 25, 2007
A-2 January 25, 2011
A-3 January 25, 2017
A-4 January 25, 2028
A-5 October 25, 2028
</TABLE>
The Final Scheduled Payment Dates with re-
spect to each Class of Class A Certificates
have been calculated as described under "De-
scription of the Certificates -- Final
Scheduled Payment Dates" herein.
SELLER........................... Transamerica Consumer Mortgage Receivables
Corporation, a Delaware corporation (the
"Seller") and a wholly owned indirect sub-
sidiary of Transamerica Finance Corporation.
MASTER SERVICER.................. Transamerica Mortgage Company (the "Master
Servicer"). See "The Master Servicer and its
Affiliates" in the Prospectus and "The Mas-
ter Servicer and the Subservicer -- Origina-
tion and Servicing Experience" herein.
SUBSERVICER...................... Metropolitan Mortgage Company (the
"Subservicer"), a wholly-owned indirect sub-
sidiary of Transamerica Finance Corporation.
See "The Master Servicer and the
Subservicer--Origination and Servicing Expe-
rience" herein.
TRUSTEE.......................... The First National Bank of Chicago, a na-
tional banking association organized under
the laws of the United States of America and
having its principal place of business in
the State of Illinois (the "Trustee"). See
"The Trustee" herein.
S-4
<PAGE>
CUT-OFF DATE..................... The close of business on October 31, 1997
(the "Cut-off Date").
CLOSING DATE..................... On or about December 5, 1997 (the "Closing
Date").
PAYMENT DATE..................... The 25th calendar day of each month or, if
such day is not a Business Day, the first
Business Day following such 25th calendar
day, commencing in December, 1997 (each, a
"Payment Date").
DETERMINATION DATE............... The fifteenth day of the month in which the
related Payment Date occurs, or if such fif-
teenth day is not a Business Day, then the
following Business Day (each, a "Determina-
tion Date").
RECORD DATE...................... With respect to the Class A-1 Certificates
and the Class A-5 Certificates, the Business
Day immediately preceding each Payment Date
(or, if definitive Certificates are issued,
the last Business Day of the immediately
preceding calendar month) and with respect
to the Class A-2, Class A-3 and Class A-4
Certificates, the last Business Day of the
preceding calendar month or, in the case of
the first Payment Date, the Closing Date
(each, a "Record Date").
DESCRIPTION OF THE
CERTIFICATES..................... The TFC Home Equity Loan Asset-Backed Cer-
tificates, Series 1997-1 (the "Certifi-
cates"), will consist of the Class A Certif-
icates and the Class R Certificate. Only the
Class A Certificates are offered hereby. The
Certificates represent interests in a trust
fund to be designated as the TFC Home Equity
Loan Trust 1997-1 (the "Trust"), consisting
of (i) a pool (the "Mortgage Pool") of fixed
and adjustable rate mortgage loans acquired
by the Seller and evidenced by promissory
notes or other evidence of indebtedness (the
"Home Equity Loans") secured by mortgages,
deeds of trust or other instruments (each, a
"Mortgage") creating a first, second, or
more junior lien primarily on one- to four-
family dwellings, condominiums, units in
planned unit developments and manufactured
homes (each, a "Mortgaged Property"), with
an aggregate principal balance of approxi-
mately $169,131,344 as of the Cut-off Date
(the "Original Pool Principal Balance"),
(ii) all monies received with respect to the
Home Equity Loans after the Cut-off Date and
(iii) the Certificate Insurance Policy. The
Certificates will be issued pursuant to a
Pooling and Servicing Agreement to be dated
as of the Cut-off Date among the Master
Servicer, the Seller and the Trustee (the
"Pooling and Servicing Agreement"). See "De-
scription of the Certificates - General"
herein.
THE MORTGAGE POOL................ The Mortgage Pool will consist of closed-end
home equity loans bearing fixed or adjust-
able interest rates ("Fixed Rate Loans" and
"ARM Loans," respectively) with original
terms to scheduled maturity of 24 to 360
months. Each Home Equity Loan will fully am-
ortize the principal balance thereof. All of
the Home Equity Loans in the Mortgage Pool
were originated or acquired by Transamerica
Mortgage Company and Metropolitan Mortgage
Company in accordance with the underwriting
standards described under "The Consumer
Mortgage Loan Program -- Credit Policy and
Procedures Relating to Consumer Mortgage
Loans" in the Prospectus and "The Master
Servicer and the Subservicer--Origination
and Servicing Experience" herein. The Home
Equity Loans will be selected from home eq-
uity loans in the portfolio of such loans
owned by Transamerica
S-5
<PAGE>
Mortgage Company and Metropolitan Mortgage
Company (the "Portfolio") based on the cri-
teria specified in the Pooling and Servicing
Agreement and described herein. See "De-
scription of the Mortgage Pool" herein.
The Mortgage Pool will be divided into two
groups of Home Equity Loans, one group con-
sisting of all of the Fixed Rate Loans in
the Mortgage Pool (the "Fixed Rate Group")
and the other group consisting of all of the
ARM Loans in the Mortgage Pool (the "Float-
ing Rate Group"). Each of the Fixed Rate
Group and the Floating Rate Group is re-
ferred to herein as a "Home Equity Loan
Group". Distributions on the Class A-1,
Class A-2, Class A-3 and Class A-4 Certifi-
cates (the "Fixed Rate Group Certificates")
will be calculated by reference to amounts
available for distribution in respect of
Home Equity Loans in the Fixed Rate Group.
Distributions on the Class A-5 Certificates
will be calculated by reference to amounts
available for distribution in respect of
Home Equity Loans in the Floating Rate
Group. As of the Cut-off Date, the aggregate
principal balance of the Fixed Rate Loans in
the Fixed Rate Group is approximately
$56,420,537 (the "Original Fixed Rate Group
Principal Balance") and the aggregate prin-
cipal balance of the ARM Loans in the Float-
ing Rate Group is approximately $112,710,807
(the "Original Floating Rate Group Principal
Balance"). See "Description of the Mortgage
Pool" herein.
SUMMARY YIELD AND PREPAYMENT
CONSIDERATIONS................... The yield to maturity on each Class of the
Class A Certificates will depend on the rate
and timing of payments of principal on the
Home Equity Loans in the related Home Equity
Loan Group and, in certain circumstances,
the Home Equity Loans in the other Home Eq-
uity Loan Group, including prepayments, liq-
uidations due to defaults and repurchases
due to defective documentation or breaches
of representations and warranties. Such
yields may be adversely affected by a higher
or lower than anticipated rate of prepay-
ments on the related Home Equity Loans. Pre-
payments are influenced by a number of fac-
tors, as described more fully under "Certain
Yield and Prepayment Considerations" herein
and in the Prospectus.
Greater than anticipated prepayments of
principal will increase the yield on Class A
Certificates purchased at a price less than
par. Greater than anticipated prepayments of
principal will decrease the yield on Class A
Certificates purchased at a price greater
than par. The effect on an investor's yield
due to principal prepayments on the related
Home Equity Loans occurring at a rate that
is faster (or slower) than the rate antici-
pated by the investor in the period immedi-
ately following the issuance of the Class A
Certificates may not be entirely offset by a
subsequent like reduction (or increase) in
the rate of principal payments. The weighted
average life of each Class of Class A Cer-
tificates will also be affected by the
amount and timing of delinquencies and de-
faults on the related Home Equity Loans and
the recoveries, if any, on defaulted Home
Equity Loans and foreclosed properties.
In addition, because principal distributions
are paid to certain Classes of Class A Cer-
tificates before other Classes, if the In-
surer fails
S-6
<PAGE>
to perform its obligations under the Certif-
icate Insurance Policy, holders of Classes
having a later priority of payment bear
greater risk of loss than holders of Classes
having earlier priorities for distributions
of principal.
DENOMINATIONS.................... The Class A Certificates of each Class will
be issued in minimum denominations of
$100,000 and integral multiples of $1,000 in
excess thereof. Each Class A Certificate
will represent a percentage interest (a
"Percentage Interest") in the respective
Class of Class A Certificates determined by
dividing the original dollar amount repre-
sented by such Class A Certificate by the
original aggregate principal balance of all
Class A Certificates of the same Class as
such Certificate.
REGISTRATION OF THE CLASS A
CERTIFICATES..................... The Class A Certificates will initially be
issued in a book-entry form. Persons acquir-
ing beneficial ownership interests in the
Class A Certificates ("Certificate Owners")
may elect to hold their Certificate inter-
ests through The Depository Trust Company
("DTC"), in the United States or the
Euroclear System ("Euroclear") or Cedel Bank
societe anonyme ("Cedel"), in Europe. Trans-
fers within DTC, Cedel or Euroclear, as the
case may be, will be in accordance with the
usual rules and operating procedures of the
relevant system. So long as the Class A Cer-
tificates are Book-Entry Certificates (as
defined herein), such Certificates will be
evidenced by one or more Certificates regis-
tered in the name of Cede & Co. ("Cede"), as
nominee of DTC or one of the relevant depos-
itaries (collectively, the "European Deposi-
taries"). Cross-market transfers between
persons holding directly or indirectly
through DTC, on the one hand, and
counterparties holding directly or indi-
rectly through Euroclear or Cedel, on the
other, will be effected in DTC through The
Chase Manhattan Bank ("Chase") or Citibank,
N.A. ("Citibank"), the relevant depositaries
of Euroclear and Cedel, respectively, and
each a participating member of DTC. The in-
terests of the Certificate Owners will be
represented by book entries on the records
of DTC and participating members thereof. No
Certificate Owner will be entitled to re-
ceive a definitive certificate representing
such person's interest, except in the event
that definitive Certificates are issued un-
der the limited circumstances described in
the Pooling and Servicing Agreement. All
references in this Prospectus Supplement to
any of the Class A Certificates reflect the
rights of Certificate Owners only as such
rights may be exercised through DTC and its
participating organizations for so long as
such Class A Certificates are held by DTC.
See "Risk Factors" and "Appendix A" hereto.
DISTRIBUTIONS.................... As more fully described herein, distribu-
tions will be made on the Certificates on
each Payment Date to the extent monies are
available therefor, if and to the extent
such Certificates are then entitled to such
distributions, as described herein. Any dis-
tributions on the Class A Certificates will
be made on each Payment Date to
Certificateholders of record on the related
Record Date in an amount equal to the prod-
uct of such Class A Certificateholder's Per-
centage Interest and the amount available
for distribution on such Payment Date to the
holders of the same Class of Class A Certif-
icates in
S-7
<PAGE>
accordance with the priorities described in
"Description of the Certificates -- Distri-
butions" herein.
On any Payment Date, the amount available
for distribution to holders of the Fixed
Rate Group Certificates generally will equal
the Available Payment Amount with respect to
the Fixed Rate Group and the amount avail-
able for distribution to holders of the
Class A-5 Certificates generally will equal
the Available Payment Amount with respect to
the Floating Rate Group.
The term "Available Payment Amount" gener-
ally means, with respect to any Payment Date
and each Home Equity Loan Group, (a) collec-
tions on or with respect to the Home Equity
Loans in such Home Equity Loan Group re-
ceived by the Master Servicer or the
Subservicer during the preceding calendar
month other than scheduled payments due in
months subsequent to such calendar month,
net of the related Servicing Fee (defined
below) paid to the Master Servicer and
Subservicer and reimbursements for accrued
and unpaid Servicing Fees, previous Advances
and Servicing Advances and certain expenses
paid by the Master Servicer and the
Subservicer and the amount of the premium
payable to the Insurer with respect to the
preceding calendar month, (b) the amount of
any Advances, as described further under
"Advances" in this summary, (c) Compensating
Interest and (d) any Insured Payments.
For purposes of determining the Available
Payment Amount with respect to each Home Eq-
uity Loan Group, the Servicing Fee, certain
expenses paid by the Master Servicer and the
Subservicer and the amount of the premium
payable to the Insurer will be allocated to
each Home Equity Loan Group based upon the
principal balances of the Home Equity Loans
in such Home Equity Loan Group.
INTEREST DISTRIBUTIONS........... Interest on each Class of the Class A Cer-
tificates will accrue during the related Ac-
crual Period on the related Class Certifi-
cate Balance (as defined below) immediately
prior to the related Payment Date.
Interest will accrue on each of the Class A-
2, Class A-3 and Class A-4 Certificates at
the respective Pass-Through Rates specified
on the cover page hereof and will be dis-
tributed, to the extent monies are available
therefor, on each Payment Date, commencing
in December, 1997. Interest with respect to
the Class A-2, Class A-3 and Class A-4 Cer-
tificates will accrue on the basis of a 360-
day year consisting of twelve 30-day months.
The Class A-1 Certificates will accrue in-
terest during each Accrual Period at a per
annum rate equal to the lesser of (i) One-
Month LIBOR plus 0.16% and (ii) the Fixed
Rate Group Net WAC Cap (the "Class A-1 Pass-
Through Rate"). The Class A-5 Certificates
will accrue interest during each Accrual Pe-
riod at a rate equal to the lesser of (i)
One-Month LIBOR plus 0.23% and (ii) the
Floating Rate Group Net WAC Cap (the "Class
A-5 Pass-Through Rate"). Interest with re-
spect to the Class A-1 and Class A-5 Certif-
icates will accrue
S-8
<PAGE>
on the basis of a 360-day year and the ac-
tual days elapsed in the related Accrual Pe-
riod.
The Fixed Rate Group Net WAC Cap for any
Payment Date will equal the average of the
Net Mortgage Rates for the Fixed Rate Loans
as of the first day of the preceding calen-
dar month less 0.5% and less the premium
payable to the Insurer with respect to the
related Home Equity Loan Group (calculated
as a per annum rate), with such average
weighted by the respective principal bal-
ances of each such Fixed Rate Loan as of
such first day.
The Floating Rate Group Net WAC Cap for any
Payment Date will equal the average of the
Net Mortgage Rates for the ARM Loans as of
the first day of the preceding calendar
month less, if such Payment Date occurs af-
ter the date that is six months after the
Closing Date, 0.75% and less the premium
payable to the Insurer with respect to the
related Home Equity Loan Group (calculated
as a per annum rate), with such average
weighted by the respective principal bal-
ances of each such ARM Loan as of such first
day.
The "Net Mortgage Rate" for each Home Equity
Loan is equal to the Mortgage Interest Rate
less the per annum rate used to determine
the Servicing Fee.
The "Accrual Period" for each Payment Date
and with respect to (i) the Adjustable Rate
Certificates is defined to be the period
from the preceding Payment Date, or the
Closing Date in the case of the first Ac-
crual Period, to and including the day pre-
ceding the current Payment Date and (ii) the
Class A-2, Class A-3 and Class A-4 Certifi-
cates is defined to be the calendar month
immediately prior to such Payment Date.
LIBOR CARRYOVER AMOUNT........... If on any Payment Date, the Class A-1 Pass-
Through Rate or the Class A-5 Pass-Through
Rate is limited by the Fixed Rate Group Net
WAC Cap or the Floating Rate Group Net WAC
Cap, respectively, the holders of such Class
A Certificates will be entitled to receive,
from and to the limited extent of funds
available therefor as described herein, the
related LIBOR Carryover Amount. The "LIBOR
Carryover Amount" for any Payment Date and
either Class of Adjustable Rate Certificates
will equal the excess, if any, of (i) the
sum of (a) the excess of interest accrued
during the applicable Accrual Period on the
applicable Class Certificate Balance at the
rate determined by reference to One-Month
LIBOR and the applicable margin (as to ei-
ther Class of Adjustable Rate Certificates,
the "LIBOR Rate") over interest accrued at
the Class A-1 Pass-Through Rate or Class A-5
Pass-Through Rate, as applicable, and (b) 30
days' interest on such excess at the appli-
cable LIBOR Rate over (ii) the amount, if
any, distributed in respect of such excess
on prior Payment Dates. The Certificate In-
surance Policy does not cover, and the rat-
ings of the Class A Certificates do not ad-
dress the likelihood of, the payment of any
LIBOR Carryover Amount.
PRINCIPAL DISTRIBUTIONS.......... Holders of the Class A Certificates will be
entitled to receive on each Payment Date, to
the extent of the portion of the Available
Payment
S-9
<PAGE>
Amount attributable to the Home Equity Loans
in the related Home Equity Loan Group (but
not more than the Class Certificate Balance
of the Class then outstanding), a distribu-
tion allocable to principal in an amount
calculated and described under "Description
of the Certificates - Distributions; Payment
Priority" herein.
CREDIT ENHANCEMENT............... The credit enhancement provided for the ben-
efit of the Class A Certificateholders con-
sists of (i) the overcollateralization and
crosscollateralization mechanics which uti-
lize the internal cash flows of the Trust
and (ii) the Certificate Insurance Policy.
For a description of the Certificate Insur-
ance Policy, see "The Certificate Insurance
Policy and the Insurer" herein.
Overcollateralization. The credit enhance-
ment provisions of the Trust result in a
limited acceleration of the amortization of
the Class A Certificates then entitled to
distributions of principal related to a Home
Equity Loan Group relative to the amortiza-
tion of the Home Equity Loans in such Home
Equity Loan Group in the early months of the
transaction. The accelerated amortization is
achieved by the application of excess inter-
est collections to payments in reduction of
the related Class A Certificate Balance. The
"excess interest" collections that are used
to achieve this limited acceleration are es-
sentially the excess of the interest collec-
tions with respect to the Home Equity Loans
in each Home Equity Loan Group (net of the
Servicing Fee, the premium paid to the In-
surer and reimbursement of Advances and Ser-
vicing Advances) over the amount of interest
that is accruing with respect to the related
Class A Certificates.
This acceleration feature creates, with re-
spect to each Home Equity Loan Group,
overcollateralization (i.e., the excess of
the aggregate outstanding principal balance
of the Home Equity Loans in the related Home
Equity Loan Group over the aggregate Class
Certificate Balance of the Class A Certifi-
cates related to such Home Equity Loan
Group). Once the required level of
overcollateralization is reached, i.e. the
Overcollateralization Requirement (as de-
fined herein), the acceleration feature will
cease unless necessary to maintain the re-
quired level of overcollateralization. Once
the acceleration provisions cease because
the Overcollateralization Requirement has
been achieved, then such "excess interest"
collections described above and initially
used to accelerate the Class A Certificates
will, subject to the discussion below of
cross-collateralization, be passed through
to the Class R Certificateholder to the ex-
tent that such amounts are not needed to re-
imburse the Insurer for the payment of any
Insured Payments pursuant to the Certificate
Insurance Policy.
Cross Collateralization. The Pooling and
Servicing Agreement provides for cross-
collateralization through the application of
certain excess amounts generated by one Home
Equity Loan Group to fund shortfalls with
respect to the other Home Equity Loan Group
and to meet the Overcollateralization Re-
quirement for the other Home Equity Loan
Group. See "Description of the Certifi-
cates -- Distributions" herein.
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<PAGE>
THE CERTIFICATE INSURANCE
POLICY........................... On or before the Closing Date, there will be
obtained a Certificate Insurance Policy,
which is non-cancelable, in favor of the
Trustee on behalf of the Class A
Certificateholders. The Certificate Insur-
ance Policy will, subject to its terms, pro-
vide for the timely payment of interest on
the Class A Certificates on each Payment
Date and the ultimate payment of principal
for the Class A Certificates. The Certifi-
cate Insurance Policy does not guarantee to
the Class A Certificateholders any specified
rate of prepayments and does not guarantee
payment of any LIBOR Carryover Amount. The
Insurer is Ambac Assurance Corporation, a
Wisconsin domiciled stock insurance corpora-
tion whose claims paying ability is rated
"AAA" by S&P and "Aaa" by Moody's. See "The
Certificate Insurance Policy and the Insur-
er" herein.
ADVANCES......................... On each Payment Date the Master Servicer
will make an advance (each, an "Advance") in
an amount equal to all monthly payments of
interest that were due on the Home Equity
Loans during the preceding calendar month
and delinquent at the close of business on
the last day of such month, to the extent
the Master Servicer believes that the amount
so advanced will be recoverable from subse-
quent payments and collections in respect of
the related Home Equity Loan. On each Pay-
ment Date, the Master Servicer will be enti-
tled to a first priority reimbursement for
previous Advances from funds received with
respect to such delinquent Home Equity
Loans. When the Master Servicer has deter-
mined that any Advances are nonrecoverable,
the Master Servicer will be entitled to a
first priority reimbursement for such Ad-
vances from any funds received with respect
to the Home Equity Loans.
In addition, the Master Servicer will ad-
vance funds to satisfy or to keep current
any Home Equity Loans secured by senior
liens, in order to preserve the Trust's in-
terest in such Home Equity Loans, or to pay
taxes, legal expenses and attorney fees, in-
surance premiums and similar expenses relat-
ing to a Home Equity Loan (each, a "Servic-
ing Advance"), to the extent that the Master
Servicer believes that the amount so ad-
vanced will be recoverable from subsequent
payments and collections on the related Home
Equity Loan. The Master Servicer will be en-
titled to a first priority reimbursement for
previous Servicing Advances from funds re-
ceived with respect to the Home Equity
Loans. See "Description of the Certifi-
cates--Advances" herein and in the Prospec-
tus.
SERVICING........................ The Master Servicer will be responsible for
servicing the Home Equity Loans in accor-
dance with the Pooling and Servicing Agree-
ment and generally in accordance with the
first and second mortgage loan servicing
standards and procedures accepted by prudent
mortgage lending institutions. On the Clos-
ing Date the Master Servicer will enter into
a subservicing agreement (the "Subservicing
Agreement") with Metropolitan Mortgage Com-
pany (the "Subservicer") whereby the
Subservicer will agree to service the MMC
Loans (as defined herein) in accordance with
the Pooling and Servicing Agreement and gen-
erally in accordance with the first and sec-
ond mortgage loan servicing standards and
procedures accepted by prudent mortgage
S-11
<PAGE>
lending institutions. See "Description of
the Certificates--Servicing Standards" and
"--Use of Subservicers" in the Prospectus
for a further description of the provisions
of the Pooling and Servicing Agreement re-
lating to servicing standards and the use of
subservicers.
SERVICING FEE.................... The Master Servicer (with respect to the TMC
Loans) and the Subservicer (with respect to
the MMC Loans) will be entitled to a fee of
0.50% per annum of the outstanding principal
balance of each such Home Equity Loan (the
"Servicing Fee") payable out of collections
with respect to the Home Equity Loans as
provided in the Pooling and Servicing Agree-
ment.
RATINGS.......................... It is a condition to the issuance of the
Certificates that the Class A Certificates
be rated "Aaa" by Moody's and "AAA" by S&P
(each of Moody's and S&P, a "Rating Agen-
cy"). A security rating is not a recommenda-
tion to buy, sell or hold securities and may
be subject to revision or withdrawal at any
time. No person is obligated to maintain any
rating on any Class A Certificates, and, ac-
cordingly, there can be no assurance that
the ratings assigned to the Class A Certifi-
cates upon initial issuance thereof will not
be lowered or withdrawn by a Rating Agency
at any time thereafter. In the event any
rating is revised or withdrawn, the liquid-
ity of the Class A Certificates may be ad-
versely affected. In general, the ratings
address credit risk and do not represent any
assessment of the likelihood or rate of
principal prepayments. The ratings do not
address the likelihood of the payment of any
LIBOR Carryover Amount. See "Ratings" here-
in.
OPTIONAL TERMINATION AND
TERMINATION AUCTION.............. The Master Servicer may, at its option, ter-
minate the Pooling and Servicing Agreement
on any date on which the Pool Principal Bal-
ance is less than 10% of the Original Pool
Principal Balance (the "Clean-up Call Date")
by purchasing from the Trust, on the next
succeeding Payment Date, all of the Home Eq-
uity Loans and all Mortgaged Properties ac-
quired by foreclosure or deed in lieu of
foreclosure ("REO Properties") then remain-
ing in the Trust at a price described herein
under "Description of the Certificates-- Op-
tional Termination and Termination Auction."
If the Master Servicer does not exercise
such option within 90 days of the Clean-up
Call Date, the Trustee is required to con-
duct a Termination Auction. If satisfactory
bids are received as described under "De-
scription of the Certificates--Optional Ter-
mination and Termination Auction" herein,
such remaining Home Equity Loans and REO
Properties will be sold and the proceeds
distributed to the Certificateholders in the
same priority as distributions are made on
any Payment Date. Any early termination and
early retirement of the Class A Certificates
that results from the Master Servicer's ex-
ercise of its option or a successful Termi-
nation Auction may have an effect on an in-
vestor's yield. See "Prepayment and Yield
Considerations" herein and in the Prospec-
tus.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES..................... An election will be made to treat the assets
of the Trust as a "real estate mortgage in-
vestment conduit" (a "REMIC") for federal
income tax purposes.
S-12
<PAGE>
Upon the issuance of the Certificates,
Orrick, Herrington & Sutcliffe LLP, counsel
to the Seller, will deliver its opinion gen-
erally to the effect that, assuming compli-
ance with all provisions of the Pooling and
Servicing Agreement, for federal income tax
purposes the Trust will qualify as a REMIC
under Sections 860A through 860G of the In-
ternal Revenue Code of 1986.
For federal income tax purposes, the Class R
Certificate will be the sole class of "re-
sidual interests" in the Trust and the Class
A Certificates will represent ownership of
"regular interests" in the Trust and gener-
ally will be treated as representing owner-
ship of debt instruments in the Trust.
For further information regarding the fed-
eral income tax consequences of investing in
the Class A Certificates, see "Certain Fed-
eral Income Tax Consequences" herein and in
the Prospectus.
ERISA CONSIDERATIONS............. The U.S. Department of Labor has issued an
exemption, as described under "ERISA Consid-
erations--Prohibited Transaction Exemptions"
in the Prospectus, to J.P. Morgan Securities
Inc. The purchase or holding of the Class A
Certificates by, on behalf of, or with "plan
assets" of a pension or other employee bene-
fit plan (a "Plan") may qualify for
exemptive relief under such exemption. How-
ever, such exemption contains a number of
conditions, as described under "ERISA Con-
siderations--Prohibited Transaction Exemp-
tions" in the Prospectus. Any Plan fiduciary
considering whether to purchase any of the
Class A Certificates on behalf of a Plan
should consult with its counsel regarding
the applicability of the provisions of
ERISA. See "ERISA Considerations" herein and
in the Prospectus.
LEGAL INVESTMENT................. The Class A Certificates will not constitute
"mortgage related securities" under the Sec-
ondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because the Mortgage Pool in-
cludes Home Equity Loans that are secured by
second Mortgages. Investors should consult
their own legal advisers in determining
whether and to what extent any Class of Cer-
tificates constitute legal investments for
such investors. See "Legal Investment" here-
in.
USE OF PROCEEDS.................. The Seller will use the net proceeds re-
ceived from the sale of the Class A Certifi-
cates to purchase the Home Equity Loans.
S-13
<PAGE>
RISK FACTORS
Investors should consider, among other things, the matters discussed under
"Risk Factors" in the Prospectus and the following factors in connection with
the purchase of the Class A Certificates:
RISKS OF THE HOME EQUITY LOANS
Geographic Concentration. Certain geographic regions of the United States from
time to time will experience weaker regional economic conditions and housing
markets, and, consequently, will experience higher rates of loss and delin-
quency on mortgage loans generally. Any concentration of the Home Equity Loans
in such a region may present risk considerations in addition to those gener-
ally present for similar mortgage-backed securities without such concentra-
tion. In addition, any geographic concentration of the Mortgaged Properties
may increase the risk of loss due to natural disasters such as hurricanes,
tornadoes and floods. In particular, as of the Cut-off Date approximately
63.7% by principal balance of the Fixed Rate Loans in the Fixed Rate Group are
secured by Mortgaged Properties located in the state of Florida. In addition,
as of the Cut-off Date approximately 23.6% and 11.8% by principal balance of
the ARM Loans in the Floating Rate Group are secured by Mortgaged Properties
located in the states of Michigan and Texas, respectively. See "Description of
the Mortgage Pool" herein for further information regarding the geographic
concentration of the Home Equity Loans in the Mortgage Pool.
Junior Liens. As of the Cut-off Date, approximately 21.96% by principal bal-
ance of the Fixed Rate Loans in the Fixed Rate Group are secured by second or
more junior Mortgages. Although little data is available, the rate of default
of junior mortgage loans may be greater than that of mortgage loans secured by
first liens on comparable properties. See "Risk Factors--Risks of the Home Eq-
uity Loans--Junior Liens" in the Prospectus.
Risk of Early Defaults of Recently Originated Home Equity Loans. Many of the
Home Equity Loans were originated within 12 months of the Cut-off Date. In
particular, as of the Cut-off Date, the weighted average number of months
elapsed since origination (with such average weighted by the respective prin-
cipal balances of such loans) of the Fixed Rate Loans is 10.365 months and of
the ARM Loans is 8.161 months. Although little data is available, defaults on
mortgage loans are generally expected to occur with greater frequency in their
early years. Liquidation proceeds received upon liquidation of a Mortgaged
Property following a default on the related Home Equity Loan will have the
same effect as a principal prepayment on the yield to maturity of the Class of
Class A Certificates receiving such proceeds. In general, the earlier a pre-
payment is received, the greater will be the effect on the yield to maturity.
In addition, Certificateholders may not be able to reinvest such prepayments
at yields equal to the yields on the related Certificates.
Prepayments May Vary. All of the Home Equity Loans may be prepaid in whole or
in part at any time. Certain of the Fixed Rate Loans include provisions that
may subject the Mortgagor to a charge in connection with certain prepayments.
Neither the Seller, the Master Servicer, the Subservicer nor any of their Af-
filiates is aware of any publicly available studies or statistics on the rate
of prepayment of loans such as the Home Equity Loans. Generally, home equity
loans are not viewed by borrowers as permanent financing. Accordingly, the
Home Equity Loans may experience a higher rate of prepayment than traditional
mortgage loans. The Trust's prepayment experience may be affected by a wide
variety of factors, including general economic conditions, interest rates, the
availability of alternative financing and homeowner mobility. In addition, the
Master Servicer and Subservicer are required to enforce any due-on-sale provi-
sions contained in the Home Equity Loans unless prohibited by law. See "Cer-
tain Legal Aspects of the Loans--Enforceability of Certain Provisions" in the
Prospectus.
Underwriting Standards Affect Performance. As described under "The Master
Servicer and the Subservicer--Origination and Servicing Experience" herein,
the underwriting standards of the Master Servicer and the Subservicer gener-
ally are less stringent than those of FNMA or FHLMC with respect to a borrow-
er's credit history and in certain other respects. As a result of this ap-
proach to underwriting, the Home Equity Loans may experience higher rates of
delinquencies, defaults and foreclosures than mortgage loans underwritten in a
more traditional manner.
Delinquent Home Equity Loans. As of the Cut-off Date, approximately 1.67%, and
0.52% of the Fixed Rate Loans (by principal balance) were 31 to 60 days delin-
quent, and in bankruptcy, respectively. As of the Cut-off Date, 2.29%, and
0.47% of the ARM Loans (by principal balance) were 31 to 60 days delinquent
and in bankruptcy, respectively. The Master Servicer expects that as of the
Closing Date, up to approximately 0.137% (by principal balance) and 1.452% (by
principal balance) of the Fixed Rate Loans and the ARM Loans, respectively,
will be in acceleration or otherwise in the preliminary stages leading to
foreclosure.
The Master Servicer (with respect to the TMC Loans) and the Subservicer
(with respect to the MMC Loans) will covenant that if any such Home Equity
Loan is not brought current within 60 days of the Closing Date, the Master
Servicer or Subservicer, as
S-14
<PAGE>
applicable, will prior to the 90th day after the Closing Date substitute other
Home Equity Loans therefore or repurchase such Home Equity Loans. To the ex-
tent the Master Servicer or Subservicer is unable to substitute for such Home
Equity Loans, holders of the Class A-1 and/or Class A-5 Certificates, as ap-
plicable, will receive a prepayment of principal that would be significant.
Other Legal Considerations. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures and require licensing of
a person originating or acquiring home equity loans like the Home Equity
Loans. In addition, other state laws, public policy and general principles of
equity relating to the protection of consumers, unfair and deceptive practices
and debt collection practices may apply to the origination, servicing and col-
lection of the Home Equity Loans. The Seller will be required to repurchase
any Home Equity Loans that, at the time of origination, did not comply with
applicable federal and state laws and regulations. Depending on the provisions
of the applicable law and the specific facts and circumstances involved, vio-
lations of these laws, policies and principles may limit the ability of the
Master Servicer to collect all or part of the principal of or interest on the
Home Equity Loans, may entitle the borrower to a refund of amounts previously
paid and, in addition, could subject the Seller to damages and administrative
enforcement.
The Home Equity Loans are also subject to federal laws, including:
(i) the Federal Truth-in-Lending Act and Regulation Z promulgated thereun-
der, which require certain disclosures to the borrowers regarding the terms
of the Home Equity Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated thereun-
der, which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or
the exercise of any right under the Consumer Credit Protection Act in the
extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the ability
of the Master Servicer to collect all or part of the principal of or interest
on the Home Equity Loans and, in addition, could subject the Seller to damages
and administrative enforcement. The Seller will be required to repurchase any
Home Equity Loans that, at the time of origination, did not comply with such
federal laws or regulations.
Some of the Home Equity Loans will be subject to the Riegle Community Develop-
ment and Regulatory Improvement Act of 1994 (the "Riegle Act"), which incorpo-
rates the Home Ownership and Equity Protection Act of 1994. The Riegle Act
adds certain additional provisions to Regulation Z, which is the implementing
regulation of the Truth-in-Lending Act. These provisions impose additional
disclosure and other requirements on creditors with respect to non-purchase
money home equity loans with high interest rates or high upfront fees and
charges. In general, home equity loans within the purview of the Riegle Act
have annual percentage rates over 10% greater than the yield on Treasury Secu-
rities of comparable maturity and/or fees and points which exceed the greater
of 8% of the total loan amount or $400. The provisions of the Riegle Act apply
on a mandatory basis to all home equity loans originated on or after October
1, 1995. These provisions can impose specific statutory liabilities upon cred-
itors who fail to comply with their provisions and may affect the enforceabil-
ity of the related loans. In addition, any assignee of the creditor would gen-
erally be subject to all claims and defenses that the consumer could assert
against the creditor, including, without limitation, the right to rescind the
home equity loan. The Seller will represent and warrant in the Pooling and
Servicing Agreement that each Home Equity Loan was originated in compliance
with all applicable laws including the Truth-in-Lending Act, as amended.
Book-entry Registration May Affect Liquidity. Issuance of the Class A Certifi-
cates in book-entry form may reduce the liquidity of such Certificates in the
secondary trading market since investors may be unwilling to purchase Class A
Certificates for which they cannot obtain physical certificates.
Since transactions in the Class A Certificates can be effected only through
DTC, Cedel, Euroclear, participating organizations, indirect participants and
certain banks, the ability of a Certificate Owner to pledge a Class A Certifi-
cate to persons or entities that do not participate in the DTC, Cedel or
Euroclear system or otherwise to take actions in respect of such Certificates,
may be limited due to lack of a physical certificate representing such Certif-
icates.
Reduction of Rating May Affect Price. The rating of the Class A Certificates
will depend primarily on an assessment by the Rating Agencies of the Home Eq-
uity Loans and upon the claims-paying ability of the Insurer. Any reduction in
a rating assigned to the claims-paying ability of the Insurer below the rating
initially given to the Class A Certificates would likely result in a with-
drawal or reduction in the rating of the Class A Certificates. Any such with-
drawal or downgrading of the ratings of the Class A Certificates may adversely
affect the liquidity and the prices purchasers may be willing to pay for such
Certificates. The rating by the Rating Agencies of the Class A Certificates is
not a recommendation to purchase, hold or sell the Class A Certificates. There
is no assurance
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<PAGE>
that the ratings will remain in place for any given period of time or that the
ratings will not be lowered or withdrawn by the Rating Agencies. In general,
the ratings address credit risk and do not address the likelihood of prepay-
ments. See "Ratings" herein.
Limited Operating History of Master Servicer. The Master Servicer commenced
originating and servicing mortgage loans in June 1996 as part of Transamerica
Finance Corporation's strategy to build a centralized real estate secured
lending operation. Accordingly, the Master Servicer has a limited operating
history, and the available delinquency or loss experience data is unlikely to
be indicative of future performance. Currently, the Master Servicer services a
loan portfolio with an aggregate principal amount of approximately $160 mil-
lion, which consists primarily of first mortgage loans.
CREDITORS' RIGHTS AND BANKRUPTCY CONSIDERATIONS
Creditors' Rights Considerations. During the period that the Class A Certifi-
cates are outstanding and so long as certain conditions specified by the In-
surer are met, assignments of the related Mortgages to the Trustee will not be
required to be recorded. The failure to record assignments of the Mortgages to
the Seller and to the Trustee in some states in which the Mortgaged Properties
are located, may have the result of making the sale thereof ineffective
against (i) creditors of a prior owner or the Seller, (ii) a purchaser to whom
a prior owner or the Seller fraudulently, negligently, or inadvertently sells
a Home Equity Loan, or (iii) any bankruptcy trustee or similar official ap-
pointed for a prior owner or the Seller.
If the conditions specified by the Insurer are not met, assignments of the
Mortgages in favor of the Trustee will be required to be recorded (or opinions
of counsel acceptable to the Insurer and the Rating Agencies will be obtained
to the effect that recording is not required to protect the Trust's interest
in and to the related Home Equity Loan). See "Description of the Certifi-
cates--Assignment of the Home Equity Loans" in the Prospectus.
Bankruptcy Related Matters. The transactions described herein will be struc-
tured such that the Seller is unlikely to become the debtor in a case under
the United States Bankruptcy Code and so that, even if such a filing should
occur, it should not result in consolidation of the assets and liabilities of
the Seller with those of any person selling the Home Equity Loans to the Sell-
er. These steps include the creation of the Seller as a separate, limited pur-
pose corporation, the certificate of incorporation of which contains limita-
tions on the nature of its business and restrictions on the ability of the
Seller to commence voluntary or involuntary cases or proceedings under the
Bankruptcy Code without the prior unanimous affirmative vote of all its direc-
tors. The Seller does not and will not engage in any activities other than the
transactions described herein and other similar transactions and activities
incidental to, or necessary or convenient to accomplish the foregoing. The
Seller has no current intention of filing a voluntary petition under the Bank-
ruptcy Code. No assurance can be given, however, that the Seller or a prior
owner of the Home Equity Loans will not become a debtor in a case under the
Bankruptcy Code, or that the activities of the Seller would not result in a
court concluding that the assets and liabilities of the Seller should be con-
solidated with those of such prior owners.
The Master Servicer and the Subservicer will each represent and warrant with
respect to the TMC Loans and the MMC Loans, respectively, that the transfer of
the Home Equity Loans to the Seller will constitute a sale to the Seller, and
that all actions that are required to perfect the Seller's ownership interests
in the Home Equity Loans have been taken. Accordingly, it is intended that
such Home Equity Loans will not be part of the bankruptcy estate of any prior
owner and will not be available to the creditors of any prior owner. However,
in the event of the bankruptcy of any prior owner, it is possible that such
prior owner, a bankruptcy trustee for such prior owner or a creditor of such
prior owner may attempt to recharacterize the transaction between the prior
owner and the Seller as a pledge of the Home Equity Loans in connection with a
borrowing by such prior owner rather than a true sale. This position, if as-
serted, could prevent timely payments of amounts due on the related Certifi-
cates. If such an attempt were successful, reductions in distributions of
principal and interest on such Certificates could result, or such a trustee in
bankruptcy could elect to accelerate payment of the obligation to the Seller
and liquidate the Home Equity Loans.
YIELD AND PREPAYMENT CONSIDERATIONS
General. The yield to maturity on each Class of the Class A Certificates will
depend on the rate and timing of payment of principal on the Home Equity Loans
in the related Home Equity Loan Group, and in certain circumstances, the Home
Equity Loans in the other Home Equity Loan Group, including prepayments, liq-
uidations due to defaults and repurchases due to defective documentation or
breaches of representations and warranties. Such yield may be adversely af-
fected by a higher or lower than anticipated rate of prepayments on the Home
Equity Loans in the related Home Equity Loan Group. Because the actual prepay-
ment experience of a pool of loans is dependent on a wide variety of economic
and market factors which change from time to time, such as relative interest
rates, general economic conditions, homeowner mobility and the availability of
alternative financing, the Seller does not believe that disclosure of the his-
torical prepayment experience of the Master Servicer or the Subservicer would
be informative or
S-16
<PAGE>
relevant for investors. No representation is made by the Seller, the Master
Servicer, the Subservicer or any of their affiliates as to the prepayment ex-
perience with respect to the Home Equity Loans.
The Class A Certificates have been structured so that principal distributions
thereon will be made, to the extent funds are available, in an amount neces-
sary to cause the principal balances of the related Home Equity Loans to ex-
ceed the aggregate Class Certificate Balance of the related Class A Certifi-
cates by the applicable Overcollateralization Requirement. In the case of the
Fixed Rate Certificates, all such payments of principal will be applied to the
Class A-1 Certificate Balance, the Class A-2 Certificate Balance, the Class A-
3 Certificate Balance and the Class A-4 Certificate Balance sequentially until
each such Class Certificate Balance has been reduced to zero. As a result,
such Certificates will be sensitive in varying degrees to the rate of princi-
pal payments and prepayments on the Home Equity Loans in the Fixed Rate Group.
See "Certain Yield and Prepayment Considerations" herein and in the Prospec-
tus.
The Accrual Period for each Payment Date with respect to the Class A-2, Class
A-3 and Class A-4 Certificates will be the calendar month immediately prior to
the such Payment Date. Collections on Home Equity Loans will not be distrib-
uted until at least the 25th of the following month. As a result, the yield to
such Certificateholders will be slightly lower than would be the case if the
Accrual Period were to be from Payment Date to Payment Date.
Basis Risk. Although all of the ARM Loans provide for periodic adjustments to
the Mortgage Interest Rates, some of such ARM Loans will not have their first
adjustment dates for a period of time that is longer than would otherwise be
indicated by the applicable index ("Delayed First Adjustment Loans"). Until
their respective first adjustment dates, each Delayed First Adjustment Loan
will bear interest at a fixed rate set at the origination of such loan. Even
after such first adjustment dates, the Mortgage Interest Rates on a substan-
tial majority of the ARM Loans will adjust at 12- or 24-month intervals. The
Class A-5 Pass-Through Rate is subject to adjustment monthly based on an index
(One-Month LIBOR) that is different from the indices for the ARM Loans and
that may move differently than such indices. Since the Floating Rate Group Net
WAC Cap is largely a function of the weighted average of the Mortgage Interest
Rates on the ARM Loans, any delay in the adjustment of such Mortgage Interest
Rates may make it more likely that the Class A-5 Pass-Through Rate will be
limited by the Floating Rate Group Net WAC Cap. Although holders of the Class
A-5 Certificates will be entitled to any related LIBOR Carryover Amount from
and to the limited extent of funds available therefor as provided herein,
there can be no assurance that such funds will be available or sufficient for
such purposes. In addition, the Certificate Insurance Policy does not cover,
and the ratings of the Class A Certificates do not address the likelihood of,
payment of any LIBOR Carryover Amount.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The description herein of the Home Equity Loans comprising part of the Trust
(the "Mortgage Pool") and of the Mortgaged Properties describes the pool of
Home Equity Loans as it was constituted on the Cut-off Date. The Mortgage Pool
consists of 3,153 Home Equity Loans and had an aggregate principal balance
outstanding as of the Cut-off Date of $169,131,344 (the "Original Pool Princi-
pal Balance"). The promissory notes (the "Mortgage Notes") evidencing the Home
Equity Loans are secured by mortgages primarily on one- to four-family dwell-
ings, condominiums, units in planned unit developments and manufactured homes.
None of the Home Equity Loans is insured or guaranteed by any governmental
agency. As of the Cut-off Date, no Home Equity Loan had a scheduled maturity
later than October 1, 2027. The Home Equity Loans were acquired by the Seller
as described under "The Consumer Mortgage Loan Program" in the Prospectus and
"The Master Servicer and the Subservicer--Origination and Servicing Experi-
ence" herein.
Each Home Equity Loan in the Trust will be assigned to one of two mortgage
loan groups (the "Fixed Rate Group" and the "Floating Rate Group", respec-
tively and each a "Home Equity Loan Group") comprised of Home Equity Loans
which bear fixed interest rates only, in the case of the Fixed Rate Group, and
Home Equity Loans which bear adjustable interest rates only ("ARM Loans"), in
the case of the Floating Rate Group. Distributions on the Class A-5 Certifi-
cates will be calculated by reference to amounts available for distribution in
respect of Home Equity Loans in the Floating Rate Group. Distributions on the
Fixed Rate Group Certificates will be calculated by reference to amounts
available for distribution in respect of the Home Equity Loans in the Fixed
Rate Group. 39.04% of the Fixed Rate Loans in the Fixed Rate Group are TMC
Loans and 60.96% are MMC Loans. 96.85% of the ARM Loans in the Floating Rate
Group are TMC Loans and 3.15% are MMC Loans.
Each Home Equity Loan was selected for inclusion in the Mortgage Pool from
among those home equity loans in the Portfolio that satisfied, among other
things, the following criteria as of the Cut-off Date: were not 61 or more
days past due, had a remaining
S-17
<PAGE>
principal balance of not less than $100, had Mortgage Interest Rates greater
than or equal to 6%, had a Combined Loan-to-Value Ratio of less than or equal
to 100% and were not in foreclosure.
FIXED RATE GROUP
The Fixed Rate Group consists of 2,008 Home Equity Loans representing 33.4% of
the Original Pool Principal Balance. The Fixed Rate Loans provide for level
monthly installments consisting of interest equal to one-twelfth of the appli-
cable Mortgage Interest Rate times the unpaid principal balance, with the re-
mainder of such payment applied to principal. No adjustment is made if a pay-
ment is made earlier or later than the due date, although the Mortgagor may be
subject to a late payment penalty. If such Home Equity Loan is prepaid, the
borrower is required to pay interest only to the date of prepayment.
As of the Cut-off Date, the unpaid principal balance of the Fixed Rate Loans
averaged $28,098 and the highest and lowest remaining principal balance of the
Fixed Rate Loans was $585,495 and $524, respectively. The Mortgage Interest
Rates on the Fixed Rate Loans ranged from 8.625% to 15.95% per annum, the
weighted average Mortgage Interest Rate of the Fixed Rate Loans was 11.68% per
annum, the weighted average original term to scheduled maturity of the Fixed
Rate Loans was 225.4 months and the weighted average remaining term to sched-
uled maturity of the Fixed Rate Loans was 215.1 months. The original term to
scheduled maturity of the Fixed Rate Loans ranged from 24 months to 360
months. As of the dates of origination of the Fixed Rate Loans, the Combined
Loan-to-Value Ratios ranged from 3% to 100% and the weighted average Combined
Loan-to-Value Ratio of the Fixed Rate Loans was approximately 61.6%. See also
"Description of the Mortgage Pools -- General" in the Prospectus
Set forth below is a description of certain additional characteristics of the
Fixed Rate Group as of the Cut-off Date.
MORTGAGE POOL STATISTICS
FIXED RATE GROUP
DISTRIBUTION OF REMAINING MONTHS TO STATED MATURITY -- FIXED RATE GROUP
The following table sets forth the range of remaining months to stated matu-
rity with respect to the Fixed Rate Loans in the Fixed Rate Group as of the
Cut-off Date.
<TABLE>
<CAPTION>
--------------------------------------------
RANGE OF REMAINING PERCENT OF
MONTHS TO STATED NUMBER OF FIXED PRINCIPAL
MATURITY RATE LOANS PRINCIPAL BALANCE BALANCE
------------------ --------------- ----------------- ----------
<S> <C> <C> <C>
1 - 60.................. 347 $ 2,554,751.04 4.53%
61 - 120.................. 509 7,374,401.53 13.07
121 - 180.................. 673 20,058,072.89 35.55
181 - 240.................. 214 9,768,175.26 17.31
241 -0300.................. 17 1,185,903.53 2.10
301 - 360.................. 248 15,479,232.76 27.44
----- -------------- ------
Total.................... 2,008 $56,420,537.01 100.00%
===== ============== ======
</TABLE>
S-18
<PAGE>
DISTRIBUTION OF MORTGAGE INTEREST RATES -- FIXED RATE GROUP
The following table sets forth the range of Mortgage Interest Rates with re-
spect to the Fixed Rate Loans in the Fixed Rate Group as of the Cut-off Date.
<TABLE>
<CAPTION>
--------------------------------------------
PERCENT OF
MORTGAGE INTEREST NUMBER OF FIXED PRINCIPAL
RATE RANGE RATE LOANS PRINCIPAL BALANCE BALANCE
----------------- --------------- ----------------- ----------
<S> <C> <C> <C>
8.01% - 9.00%............. 61 $ 1,028,132.56 1.82%
9.01% - 10.00%............ 287 4,814,531.28 8.53
10.01% - 11.00%............ 506 13,612,186.28 24.13
11.01% - 12.00%............ 554 17,046,185.02 30.21
12.01% - 13.00%............ 480 16,232,518.59 28.77
13.01% - 14.00%............ 99 3,074,391.04 5.45
14.01% - 15.00%............ 18 494,886.29 0.88
15.01% - 16.00%............ 3 117,705.95 0.21
----- -------------- ------
Total.................... 2,008 $56,420,537.01 100.00%
===== ============== ======
</TABLE>
DISTRIBUTION OF PRINCIPAL BALANCES -- FIXED RATE GROUP
The following table sets forth the range of principal balances with respect to
the Fixed Rate Loans in the Fixed Rate Group as of the Cut-off Date.
<TABLE>
<CAPTION>
--------------------------------------------
PERCENT OF
RANGE OF PRINCIPAL NUMBER OF FIXED PRINCIPAL
BALANCES RATE LOANS PRINCIPAL BALANCE BALANCE
------------------ --------------- ----------------- ----------
<S> <C> <C> <C>
1 - 25,000.......... 1,178 $14,374,915.27 25.48%
25,001 - 50,000.......... 549 19,581,334.42 34.71
50,001 - 75,000.......... 181 10,851,951.93 19.23
75,001 - 100,000.......... 53 4,596,394.87 8.15
100,001 - 125,000.......... 19 2,163,350.67 3.83
125,001 - 150,000.......... 16 2,116,431.96 3.75
150,001 - 175,000.......... 4 630,636.47 1.12
175,001 - 200,000.......... 2 385,292.67 0.68
200,001 - 225,000.......... 4 826,269.46 1.46
300,001 - 325,000.......... 1 308,464.48 0.55
575,001 - 600,000.......... 1 585,494.81 1.04
----- -------------- ------
Total.................... 2,008 $56,420,537.01 100.00%
===== ============== ======
</TABLE>
S-19
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES BY STATE -- FIXED RATE GROUP
The following table sets forth the geographic distribution by state of the
Mortgaged Properties relating to the Fixed Rate Loans in the Fixed Rate Group
as of the Cut-off Date.
<TABLE>
<CAPTION>
--------------------------------------------
PERCENT OF
MORTGAGED PROPERTY NUMBER OF FIXED PRINCIPAL
STATE RATE LOANS PRINCIPAL BALANCE BALANCE
------------------ --------------- ----------------- ----------
<S> <C> <C> <C>
Alabama.................... 7 $ 317,628.94 0.56%
Arizona.................... 28 1,474,250.37 2.61
Arkansas................... 5 187,155.72 0.33
California................. 13 1,078,857.05 1.91
Colorado................... 2 92,629.88 0.16
Florida.................... 1,635 35,909,302.24 63.65
Georgia.................... 1 84,764.70 0.15
Idaho...................... 1 78,017.54 0.14
Illinois................... 5 845,918.25 1.50
Indiana.................... 12 486,642.86 0.86
Iowa....................... 2 109,328.35 0.19
Kentucky................... 10 437,252.89 0.77
Louisiana.................. 24 1,217,945.56 2.16
Maryland................... 4 359,919.42 0.64
Massachusetts.............. 1 198,253.62 0.35
Michigan................... 23 1,158,314.73 2.05
Minnesota.................. 11 558,979.44 0.99
Mississippi................ 7 236,448.36 0.42
Missouri................... 12 443,141.70 0.79
Montana.................... 1 79,666.31 0.14
Nevada..................... 1 38,943.52 0.07
New Hampshire.............. 2 55,745.47 0.10
New Jersey................. 6 301,273.87 0.53
New Mexico................. 1 49,980.66 0.09
New York................... 7 290,808.58 0.52
North Carolina............. 34 1,242,164.57 2.20
North Dakota............... 1 18,620.20 0.03
Ohio....................... 53 2,904,201.99 5.15
Oklahoma................... 15 841,350.21 1.49
Oregon..................... 1 132,575.46 0.23
Pennsylvania............... 7 429,698.30 0.76
South Carolina............. 9 486,565.94 0.86
South Dakota............... 1 46,827.06 0.08
Tennessee.................. 15 604,417.31 1.07
Texas...................... 41 2,597,567.82 4.60
Utah....................... 1 36,141.18 0.06
Virginia................... 5 575,888.34 1.02
Washington................. 3 367,338.49 0.65
West Virginia.............. 1 46,010.11 0.08
----- -------------- ------
Total.................... 2,008 $56,420,537.01 100.00%
===== ============== ======
</TABLE>
S-20
<PAGE>
OCCUPANCY TYPE -- FIXED RATE GROUP
The following table sets forth the occupancy types (as represented by the
Mortgagor) with respect to the Fixed Rate Loans in the Fixed Rate Group as of
the Cut-off Date.
<TABLE>
<CAPTION>
-------------------------------------------------
PERCENT OF
NUMBER OF FIXED PRINCIPAL
OCCUPANCY TYPE RATE LOANS PRINCIPAL BALANCE BALANCE
-------------- --------------- ----------------- ----------
<S> <C> <C> <C> <C>
Mortgager.................. 1,884 $52,351,409.63 92.79%
Tenant..................... 116 3,706,173.51 6.57
Unknown.................... 8 362,953.87 0.64
----- -------------- ------
Total.................... 2,008 $56,420,537.01 100.00%
===== ============== ======
</TABLE>
SENIOR MORTGAGE LOAN-TO-VALUE RATIOS -- FIXED RATE GROUP
The following table sets forth the range of original senior mortgage Loan-to-
Value Ratios with respect to the Fixed Rate Loans in the Fixed Rate Group.
<TABLE>
<CAPTION>
-------------------------------------------------
PERCENT OF
RANGE OF SENIOR NUMBER OF FIXED PRINCIPAL
MORTGAGE LTV RATE LOANS PRINCIPAL BALANCE BALANCE
--------------- --------------- ----------------- ----------
<S> <C> <C> <C> <C>
0.01% - 10.00%........... 265 $ 2,019,322.64 3.58%
10.01% - 20.00%........... 428 5,249,744.98 9.30
20.01% - 30.00%........... 297 5,534,009.48 9.81
30.01% - 40.00%........... 219 5,349,415.22 9.48
40.01% - 50.00%........... 179 5,534,364.31 9.81
50.01% - 60.00%........... 171 6,808,217.57 12.07
60.01% - 70.00%........... 164 8,997,670.86 15.95
70.01% - 80.00%........... 183 10,374,409.23 18.39
80.01% - 90.00%........... 96 6,336,052.89 11.23
90.01% - 100.00%........... 6 217,329.83 0.39
----- -------------- ------
Total.................... 2,008 $56,420,537.01 100.00%
===== ============== ======
</TABLE>
COMBINED LOAN-TO-VALUE RATIOS -- FIXED RATE GROUP
The following table sets forth the range of original Combined Loan-to-Value
Ratios with respect to the Fixed Rate Loans in the Fixed Rate Group.
<TABLE>
<CAPTION>
-------------------------------------------------
PERCENT OF
RANGE OF COMBINED NUMBER OF FIXED PRINCIPAL
LTV RATIOS RATE LOANS PRINCIPAL BALANCE BALANCE
----------------- --------------- ----------------- ----------
<S> <C> <C> <C> <C>
0.01% - 10.00%........... 23 $ 164,952.71 0.29%
10.01% - 20.00%........... 95 1,014,939.05 1.80
20.01% - 30.00%........... 215 2,868,843.45 5.08
30.01% - 40.00%........... 234 4,256,000.46 7.54
40.01% - 50.00%........... 272 6,371,844.73 11.29
50.01% - 60.00%........... 375 9,731,382.58 17.25
60.01% - 70.00%........... 363 12,374,573.14 21.93
70.01% - 80.00%........... 267 11,755,194.45 20.83
80.01% - 90.00%........... 142 7,376,214.90 13.07
90.01% - 100.00%........... 22 506,591.54 0.90
----- -------------- ------
Total.................... 2,008 $56,420,537.01 100.00%
===== ============== ======
</TABLE>
S-21
<PAGE>
PROPERTY TYPES -- FIXED RATE GROUP
The following table sets forth the property types with respect to the Fixed
Rate Loans in the Fixed Rate Group as of the Cut-off Date.
<TABLE>
<CAPTION>
-------------------------------------------------
PERCENT OF
NUMBER OF FIXED PRINCIPAL
PROPERTY TYPE RATE LOANS PRINCIPAL BALANCE BALANCE
------------- --------------- ----------------- ----------
<S> <C> <C> <C> <C>
Single Family............. 1,966 $53,975,763.29 95.67%
Manufactured Home......... 12 556,330.43 0.99
2-4 Family................ 12 697,869.41 1.24
Planned Unit Development.. 7 786,792.62 1.39
Condominium............... 5 188,626.17 0.33
Triplex................... 1 30,782.45 0.05
Townhouse................. 2 36,462.98 0.06
Duplex.................... 2 133,726.41 0.24
Not Specified............. 1 14,183.25 0.03
----- -------------- ------
Total................... 2,008 $56,420,537.01 100.00%
===== ============== ======
</TABLE>
DISTRIBUTION BY LIEN POSITION -- FIXED RATE GROUP
The following table sets forth the lien position with respect to the Fixed
Rate Loans in the Fixed Rate Group as of the Cut-off Date.
<TABLE>
<CAPTION>
-------------------------------------------------
PERCENT OF
NUMBER OF FIXED PRINCIPAL
LIEN POSITION RATE LOANS PRINCIPAL BALANCE BALANCE
------------- --------------- ----------------- ----------
<S> <C> <C> <C> <C>
First...................... 1,170 $44,026,743.29 78.03%
Second..................... 798 12,127,189.11 21.49
Third...................... 40 266,604.61 0.47
----- -------------- ------
Total.................... 2,008 $56,420,537.01 100.00%
===== ============== ======
</TABLE>
DISTRIBUTION OF ORIGINAL MONTHS TO STATED MATURITY -- FIXED RATE GROUP
The following table sets forth the range of original months to stated maturity
with respect to the Fixed Rate Loans in the Fixed Rate Group.
<TABLE>
<CAPTION>
-------------------------------------------------
RANGE OF ORIGINAL PERCENT OF
MONTHS TO STATED NUMBER OF FIXED PRINCIPAL
MATURITY RATE LOANS PRINCIPAL BALANCE BALANCE
----------------- --------------- ----------------- ----------
<S> <C> <C> <C> <C>
1 - 60.................. 298 $ 2,260,719.40 4.01%
61 - 120.................. 543 7,365,342.10 13.05
121 - 180.................. 683 19,971,026.26 35.40
181 - 240.................. 208 9,484,038.32 16.81
241 - 300.................. 21 1,237,833.57 2.19
301 - 360.................. 255 16,101,577.36 28.54
----- -------------- ------
Total.................... 2,008 $56,420,537.01 100.00%
===== ============== ======
</TABLE>
S-22
<PAGE>
FLOATING RATE GROUP
The Floating Rate Group consists of 1,145 Home Equity Loans representing 66.6%
of the Original Pool Principal Balance, all of which are ARM Loans.
As of the Cut-off Date, the unpaid principal balance of the ARM Loans averaged
$98,437, the current Mortgage Interest Rates on the ARM Loans ranged from
6.75% to 13.95% per annum, the current weighted average Mortgage Interest Rate
of the ARM Loans was 9.95% per annum, the weighted average original term to
scheduled maturity of the ARM Loans was 359.9 months and the weighted average
remaining term to scheduled maturity of the ARM Loans was 351.8 months. As of
the Cut-off Date, the maximum principal balance of any of the ARM Loans was
$614,462 and the minimum principal balance was $5,756. The original term to
scheduled maturity of the ARM Loans ranged from 180 months to 360 months. The
remaining term to scheduled maturity as of the Cut-off Date of the ARM Loans
ranged from 62 months to 360 months. No ARM Loan had a scheduled maturity
later than October 1, 2027. As of the dates of origination of the ARM Loans,
the Combined Loan-to-Value Ratios ranged from 22% to 100% and the weighted av-
erage Combined Loan-to-Value Ratio of the ARM Loans was approximately 77.9%.
The weighted average months to the next Adjustment Date is 10.53. As of the
Cut-off Date, the Margins ranged from 0% to 9.95%, the weighted average Margin
was 4.96%, the Maximum Mortgage Rates ranged from 11.75% per annum to 19.95%
per annum, the weighted average Maximum Mortgage Rate was 15.82% per annum,
the Minimum Mortgage Rates ranged from 4.25% per annum to 13.95% per annum and
the weighted average Minimum Mortgage Rate was 9.671% per annum.
The Indices with respect to the ARM Loans consist of per annum rates equal to
(i) the weekly average rate on U.S. Treasury Bills with a maturity of six
months ("6 Month T-Bill") or adjusted to a constant maturity of one year ("1
Year CMT"), two years ("2 Year CMT") or five years ("5 Year CMT") or (ii) the
average of interbank offered rates for six-month U.S. dollar-denominated de-
posits in the London market ("6 Month LIBOR"). As of the Cut-off Date, approx-
imately 68.1% by principal balance of the ARM Loans had an Index determined
with reference to 1 Year CMT, approximately 19.6% by principal balance had an
Index determined with reference to 2 Year CMT, approximately 12.0% by princi-
pal balance had an Index determined with reference to 6 Month LIBOR and the
remainder had an Index determined with reference to 5 Year CMT or 6 Month T-
Bill.
On each Adjustment Date for an ARM Loan, the Mortgage Interest Rate thereon
will be subject to adjustment to equal the sum, rounded, if applicable, as set
forth in the related Mortgage Note of the applicable Index and the number of
basis points, if any (the "Margin"), set forth in the related Mortgage Note,
subject to the limitation set forth in such Mortgage Note with respect to in-
creases and decreases on any Adjustment Date (the "Periodic Cap") and the max-
imum and minimum rates, if any, set forth therein (the "Maximum Mortgage Rate"
and the "Minimum Mortgage Rate", respectively).
The initial Mortgage Interest Rate in effect on an ARM Loan generally will be
lower, and may be significantly lower, than the Mortgage Interest Rate that
would have been in effect based on the related Index and Margin. Therefore,
unless the related Index declines after origination of an ARM Loan, the re-
lated Mortgage Interest Rate will generally increase on the first Adjustment
Date following origination of such ARM Loan subject to the Periodic Cap and
the Maximum Mortgage Rate. In addition, some of the ARM Loans are Delayed
First Adjustment Loans. The repayment of the ARM Loans will be dependent on
the ability of the Mortgagors to make larger monthly payments following ad-
justments of the Mortgage Interest Rate. ARM Loans that have the same initial
Mortgage Interest Rate may not always bear interest at the same Mortgage In-
terest Rate thereafter because such Home Equity Loans may have different Ad-
justment Dates (and the Mortgage Rates therefore may reflect different related
Index values), Margins, Maximum Mortgage Rates and Minimum Mortgage Rates.
Each of the ARM Loans includes a due-on-sale provision.
Set forth below is a description of certain additional characteristics of the
Floating Rate Group as of the Cut-off Date.
S-23
<PAGE>
MORTGAGE POOL STATISTICS
FLOATING RATE GROUP
DISTRIBUTION OF REMAINING MONTHS TO STATED MATURITY -- FLOATING RATE GROUP
The following table sets forth the range of remaining months to stated matu-
rity with respect to the ARM Loans in the Floating Rate Group as of the Cut-
off Date.
<TABLE>
<CAPTION>
-----------------------------------------------
RANGE OF REMAINING PERCENT OF
MONTHS TO STATED NUMBER OF ARM PRINCIPAL
MATURITY LOANS PRINCIPAL BALANCE BALANCE
- ------------------ ------------- ----------------- ----------
<S> <C> <C> <C> <C>
61 - 120....................... 1 $ 5,756.43 0.01%
121 - 180....................... 1 42,000.00 0.04
181 - 240....................... 9 463,080.71 0.41
241 - 300....................... 4 726,340.92 0.64
301 - 360....................... 1,130 111,473,629.02 98.90
----- --------------- ------
Total......................... 1,145 $112,710,807.08 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION BY LIEN POSITION -- FLOATING RATE GROUP
The following table sets forth the lien position of the Mortgages related to
the ARM Loans in the Floating Rate Group as of the Cut-off Date.
<TABLE>
<CAPTION>
-----------------------------------------------
PERCENT OF
NUMBER OF ARM PRINCIPAL
LIEN POSITION LOANS PRINCIPAL BALANCE BALANCE
------------- ------------- ----------------- ----------
<S> <C> <C> <C> <C>
First........................ 1,144 $112,668,807.08 99.96%
Second....................... 1 42,000.00 0.04
----- --------------- ------
Total...................... 1,145 $112,710,807.08 100.00%
===== =============== ======
</TABLE>
OCCUPANCY TYPE -- FLOATING RATE GROUP
The following table sets forth the occupancy type (as represented by the Mort-
gagor) with respect to the ARM Loans in the Floating Rate Group as of the Cut-
off Date.
<TABLE>
<CAPTION>
-----------------------------------------------
PERCENT OF
NUMBER OF ARM PRINCIPAL
OCCUPANCY LOANS PRINCIPAL BALANCE BALANCE
--------- ------------- ----------------- ----------
<S> <C> <C> <C> <C>
Mortgagor.................. 1,103 $107,837,261.30 95.68%
Tenant..................... 34 3,830,290.03 3.40
Unknown.................... 8 1,043,255.75 0.93
----- --------------- ------
Total.................... 1,145 $112,710,807.08 100.00%
===== =============== ======
</TABLE>
S-24
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES BY STATE -- FLOATING RATE
GROUP
The following table sets forth the geographic distribution by state of the
Mortgage Properties related to the ARM Loans in the Floating Rate Group as of
the Cut-off Date.
<TABLE>
<CAPTION>
-----------------------------------------------
PERCENT OF
MORTGAGED PROPERTY NUMBER OF ARM PRINCIPAL
STATE LOANS PRINCIPAL BALANCE BALANCE
------------------ ------------- ----------------- ----------
<S> <C> <C> <C> <C>
Arizona...................... 26 $ 2,354,331.87 2.09%
Arkansas..................... 4 457,064.70 0.41
California................... 45 6,741,851.60 5.98
Colorado..................... 5 576,961.16 0.51
Connecticut.................. 7 949,148.40 0.84
Delaware..................... 1 35,986.45 0.03
District of Columbia......... 9 947,998.52 0.84
Florida...................... 73 7,957,415.18 7.06
Georgia...................... 5 519,450.24 0.46
Hawaii....................... 1 403,342.36 0.36
Idaho........................ 6 517,563.87 0.46
Illinois..................... 42 4,994,226.16 4.43
Indiana...................... 15 1,135,864.06 1.01
Iowa......................... 3 201,486.71 0.18
Kansas....................... 9 503,933.46 0.45
Kentucky..................... 9 716,120.11 0.64
Louisiana.................... 16 1,105,724.02 0.98
Maine........................ 4 257,646.45 0.23
Maryland..................... 55 8,395,161.21 7.45
Massachusetts................ 45 5,576,697.04 4.95
Michigan..................... 302 26,576,270.23 23.58
Minnesota.................... 12 779,984.47 0.69
Mississippi.................. 3 302,103.64 0.27
Missouri..................... 34 2,388,019.85 2.12
Nebraska..................... 1 139,768.40 0.12
Nevada....................... 5 500,511.93 0.44
New Hampshire................ 2 200,590.23 0.18
New Jersey................... 4 752,674.67 0.67
New Mexico................... 1 99,906.32 0.09
New York..................... 2 310,026.34 0.28
North Carolina............... 11 1,330,812.50 1.18
North Dakota................. 4 333,845.16 0.30
Ohio......................... 128 9,486,465.42 8.42
Oklahoma..................... 27 1,622,304.07 1.44
Oregon....................... 7 666,857.30 0.59
Pennsylvania................. 6 330,853.20 0.29
South Carolina............... 2 220,174.10 0.20
South Dakota................. 9 893,639.85 0.79
Tennessee.................... 10 914,180.90 0.81
Texas........................ 135 13,310,571.22 11.81
Utah......................... 21 1,867,883.64 1.66
Virginia..................... 21 3,514,530.68 3.12
Washington................... 11 1,291,682.90 1.15
West Virginia................ 3 185,034.65 0.16
Wisconsin.................... 4 344,141.84 0.31
----- --------------- ------
Total...................... 1,145 $112,710,807.08 100.00%
===== =============== ======
</TABLE>
S-25
<PAGE>
SENIOR MORTGAGE LOAN-TO-VALUE RATIOS -- FLOATING RATE GROUP
The following table sets forth the range of original senior mortgage Loan-to-
Value Ratios with respect to the ARM Loans in the Floating Rate Group.
<TABLE>
<CAPTION>
-----------------------------------------------
PERCENT OF
NUMBER OF ARM PRINCIPAL
SENIOR MORTGAGE LTV LOANS PRINCIPAL BALANCE BALANCE
------------------- ------------- ----------------- ----------
<S> <C> <C> <C> <C>
10.01% - 20.00%............. 1 $ 42,000.00 0.04%
20.01% - 30.00%............. 4 401,732.53 0.36
30.01% - 40.00%............. 8 341,759.63 0.30
40.01% - 50.00%............. 14 736,144.08 0.65
50.01% - 60.00%............. 49 5,013,341.80 4.45
60.01% - 70.00%............. 118 10,368,286.58 9.20
70.01% - 80.00%............. 535 51,160,215.27 45.39
80.01% - 90.00%............. 413 43,973,721.70 39.01
90.01% - 100.00%............. 3 673,605.49 0.60
----- --------------- ------
Total...................... 1,145 $112,710,807.08 100.00%
===== =============== ======
</TABLE>
COMBINED LOAN-TO-VALUE RATIOS -- FLOATING RATE GROUP
The following table sets forth the range of original Combined Loan-to-Value
Ratios with respect to the ARM Loans in the Floating Rate Group.
<TABLE>
<CAPTION>
-----------------------------------------------
PERCENT OF
RANGE OF COMBINED NUMBER OF ARM PRINCIPAL
LTV RATIOS LOANS PRINCIPAL BALANCE BALANCE
----------------- ------------- ----------------- ----------
<S> <C> <C> <C> <C>
20.01% - 30.00%............. 4 $ 401,732.53 0.36%
30.01% - 40.00%............. 8 341,759.63 0.30
40.01% - 50.00%............. 14 736,144.08 0.65
50.01% - 60.00%............. 49 5,013,341.80 4.45
60.01% - 70.00%............. 118 10,368,286.58 9.20
70.01% - 80.00%............. 535 51,202,215.27 45.39
80.01% - 90.00%............. 413 43,973,721.70 39.01
90.01% - 100.00%............. 3 673,605.49 0.60
----- --------------- ------
Total...................... 1,145 $112,710,807.08 100.00%
===== =============== ======
</TABLE>
PROPERTY TYPES -- FLOATING RATE GROUP
The following table sets forth the property type of the Mortgage Properties
related to the ARM Loans in the Floating Rate Group as of the Cut-off Date.
<TABLE>
<CAPTION>
-----------------------------------------------
PERCENT OF
NUMBER OF ARM PRINCIPAL
PROPERTY TYPE LOANS PRINCIPAL BALANCE BALANCE
------------- ------------- ----------------- ----------
<S> <C> <C> <C> <C>
Single Family............... 1,025 $ 99,927,280.76 88.66%
Condominium................. 31 3,895,964.35 3.46
Manufactured Homes.......... 34 2,479,296.45 2.20
2-4 Family.................. 10 1,374,869.10 1.22
Planned Unit Development.... 33 4,211,225.12 3.74
Row house................... 2 102,554.07 0.09
Townhouse................... 8 620,456.89 0.55
Mobile Home................. 2 99,160.34 0.09
----- --------------- ------
Total..................... 1,145 $112,710,807.08 100.00%
===== =============== ======
</TABLE>
S-26
<PAGE>
DISTRIBUTION OF MORTGAGE INTEREST RATES -- FLOATING RATE GROUP
The following table sets forth the range of Mortgage Interest Rates with re-
spect to the ARM Loans in the Floating Rate Group as of the Cut-off Date.
<TABLE>
<CAPTION>
-----------------------------------------------
PERCENT OF
MORTGAGE INTEREST RATE NUMBER OF ARM PRINCIPAL
RANGE LOANS PRINCIPAL BALANCE BALANCE
---------------------- ------------- ----------------- ----------
<S> <C> <C> <C> <C>
6.01% - 7.00%.............. 1 $ 85,115.97 0.08%
7.01% - 8.00%.............. 13 1,402,667.25 1.24
8.01% - 9.00%.............. 205 22,269,492.11 19.76
9.01% - 10.00%.............. 453 46,241,643.64 41.03
10.01% - 11.00%.............. 280 25,232,361.58 22.39
11.01% - 12.00%.............. 161 13,672,216.08 12.13
12.01% - 13.00%.............. 20 1,353,146.81 1.20
13.01% - 14.00%.............. 12 2,454,163.64 2.18
----- --------------- ------
Total...................... 1,145 $112,710,807.08 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION OF PRINCIPAL BALANCES -- FLOATING RATE GROUP
The following table sets forth the range of principal balances with respect to
the ARM Loans in the Floating Rate Group as of the Cut-off Date.
<TABLE>
<CAPTION>
-----------------------------------------------
PERCENT OF
RANGE OF PRINCIPAL NUMBER OF ARM PRINCIPAL
BALANCES LOANS PRINCIPAL BALANCE BALANCE
------------------ ------------- ----------------- ----------
<S> <C> <C> <C> <C>
1 - 25,000............ 11 $ 197,046.28 0.17%
25,001 - 50,000............ 180 7,130,696.30 6.33
50,001 - 75,000............ 293 18,259,068.60 16.20
75,001 - 100,000............ 239 20,914,931.16 18.56
100,001 - 125,000............ 163 18,140,332.33 16.09
125,001 - 150,000............ 95 12,987,992.67 11.52
150,001 - 175,000............ 62 10,046,375.41 8.91
175,001 - 200,000............ 33 6,181,749.64 5.48
200,001 - 225,000............ 19 4,074,166.50 3.61
225,001 - 250,000............ 16 3,835,318.44 3.40
250,001 - 275,000............ 10 2,607,282.43 2.31
275,001 - 300,000............ 8 2,270,523.96 2.01
300,001 - 325,000............ 5 1,537,426.21 1.36
325,001 - 350,000............ 5 1,713,982.24 1.52
375,001 - 400,000............ 2 767,079.94 0.68
400,001 - 425,000............ 1 403,342.36 0.36
425,001 - 450,000............ 1 433,834.49 0.38
575,001 - 600,000............ 1 595,195.65 0.53
600,001 - 625,000............ 1 614,462.47 0.55
----- --------------- ------
Total...................... 1,145 $112,710,807.08 100.00%
===== =============== ======
</TABLE>
S-27
<PAGE>
DISTRIBUTION BY INDICES -- FLOATING RATE GROUP
The following table sets forth the types of Indices with respect to the ARM
Loans in the Floating Rate Group as of the Cut-off Date.
<TABLE>
<CAPTION>
-----------------------------------------------
PERCENT OF
PRINCIPAL
INDEX NUMBER OF LOANS CURRENT BALANCE BALANCE
----- --------------- --------------- ----------
<S> <C> <C> <C> <C>
1 Year CMT................... 764 $ 76,756,409.92 68.10%
2 Year CMT................... 252 22,116,545.67 19.62
5 Year CMT................... 1 98,134.11 0.09
6 Month LIBOR................ 125 13,575,290.84 12.04
6 Month T-Bill............... 3 164,426.54 0.15
----- --------------- ------
Total...................... 1,145 $112,710,807.08 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION OF MAXIMUM MORTGAGE RATES -- FLOATING RATE GROUP
The following table sets forth the range of Maximum Mortgage Rates with re-
spect to the ARM Loans in the Floating Rate Group as of the Cut-off Date.
<TABLE>
<CAPTION>
-----------------------------------------------
PERCENT OF
RANGE OF MAXIMUM NUMBER OF ARM PRINCIPAL
MORTGAGE RATES LOANS PRINCIPAL BALANCE BALANCE
---------------- ------------- ----------------- ----------
<S> <C> <C> <C> <C>
11.01% - 12.00%.............. 2 $ 782,895.01 0.69%
12.01% - 13.00%.............. 4 558,109.74 0.50
13.01% - 14.00%.............. 13 1,363,668.26 1.21
14.01% - 15.00%.............. 212 22,606,102.82 20.06
15.01% - 16.00%.............. 502 50,956,125.93 45.21
16.01% - 17.00%.............. 261 23,195,138.97 20.58
17.01% - 18.00%.............. 117 9,549,995.43 8.47
18.01% - 19.00%.............. 21 1,194,699.09 1.06
19.01% - 20.00%.............. 13 2,504,071.83 2.22
----- --------------- ------
Total...................... 1,145 $112,710,807.08 100.00%
===== =============== ======
</TABLE>
S-28
<PAGE>
DISTRIBUTION OF MINIMUM MORTGAGE RATES -- FLOATING RATE GROUP
The following table sets forth the range of Minimum Mortgage Rates with re-
spect to the ARM Loans in the Floating Rate Group as of the Cut-off Date.
<TABLE>
<CAPTION>
-----------------------------------------------
PERCENT OF
RANGE OF MAXIMUM NUMBER OF ARM PRINCIPAL
MORTGAGE RATES LOANS PRINCIPAL BALANCE BALANCE
---------------- ------------- ----------------- ----------
<S> <C> <C> <C> <C>
4.01% - 5.00%.............. 1 $ 85,094.28 0.08%
5.01% - 6.00%.............. 6 1,272,177.31 1.13
6.01% - 7.00%.............. 11 1,046,887.39 0.93
7.01% - 8.00%.............. 30 2,968,075.98 2.63
8.01% - 9.00%.............. 234 24,994,440.86 22.18
9.01% - 10.00%.............. 498 50,872,751.34 45.14
10.01% - 11.00%.............. 235 20,096,269.35 17.83
11.01% - 12.00%.............. 104 8,154,385.77 7.23
12.01% - 13.00%.............. 14 766,561.16 0.68
13.01% - 14.00%.............. 12 2,454,163.64 2.18
----- --------------- ------
Total...................... 1,145 $112,710,807.08 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION OF MARGINS -- FLOATING RATE GROUP
The following table sets forth the range of Margins with respect to the ARM
Loans in the Floating Rate Group as of the Cut-off Date.
<TABLE>
<CAPTION>
-----------------------------------------------
PERCENT OF
NUMBER OF ARM PRINCIPAL
RANGE OF MARGINS LOANS PRINCIPAL BALANCE BALANCE
---------------- ------------- ----------------- ----------
<S> <C> <C> <C> <C>
0% ............... 3 $ 164,426.54 0.15%
2.01% - 3.00%............... 11 1,558,023.71 1.38
3.01% - 4.00%............... 151 15,109,985.77 13.41
4.01% - 5.00%............... 456 45,503,063.36 40.37
5.01% - 6.00%............... 497 47,206,977.98 41.88
6.01% - 7.00%............... 15 1,187,785.53 1.05
7.01% - 8.00%............... 9 1,593,420.61 1.41
8.01% - 9.00%............... 2 347,167.92 0.31
9.01% - 10.00%............... 1 39,955.66 0.04
----- --------------- ------
Total...................... 1,145 $112,710,807.08 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION OF ORIGINAL MONTHS TO STATED MATURITY -- FLOATING RATE GROUP
The following table sets forth the range of original months to stated maturity
with respect to the ARM Loans in the Floating Rate Group as of the Cut-off
Date.
<TABLE>
<CAPTION>
-----------------------------------------------
RANGE OF ORIGINAL PERCENT OF
MONTHS NUMBER OF ARM PRINCIPAL
TO STATED MATURITY LOANS PRINCIPAL BALANCE BALANCE
------------------ ------------- ----------------- ----------
<S> <C> <C> <C> <C>
121 - 180.................... 2 $ 47,756.43 0.04%
301 - 360.................... 1,143 112,663,050.65 99.96
----- --------------- ------
Total...................... 1,145 $112,710,807.08 100.00%
===== =============== ======
</TABLE>
S-29
<PAGE>
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Class A Certificates, the aggregate
amount of each interest payment on the Class A Certificates and the yield to
maturity of the Class A Certificates are related to the rate and timing of
payments of principal on the Home Equity Loans in the related Home Equity Loan
Group, which may be in the form of scheduled and unscheduled payments. In gen-
eral, when the level of prevailing interest rates for similar loans signifi-
cantly declines, the rate of prepayment is likely to increase, although the
prepayment rate is influenced by a number of other factors, including general
economic conditions and homeowner mobility. Defaults on mortgage loans are ex-
pected to occur with greater frequency in their early years and the rate of
default on second or more junior mortgage loans may be greater than that of
mortgage loans secured by first liens on comparable properties. Prepayments,
liquidations and purchases of the Home Equity Loans will result in distribu-
tions to the related Class of Class A Certificates of amounts of principal
which would otherwise be distributed over the remaining terms of the Home Eq-
uity Loans in the related Home Equity Loan Group. See "Risk Factors--Delin-
quent Home Equity Loans" herein.
In addition, the Master Servicer may, at its option, purchase from the Trust
all of the outstanding Home Equity Loans and REO Properties, and thus effect
the early retirement of the Certificates, on any Payment Date following the
first date on which the Pool Principal Balance (as defined herein) is less
than 10% of the Original Pool Principal Balance. If the Master Servicer does
not exercise such option within 90 days of the first Payment Date upon which
the Pool Principal Balance is less than 10% of the Original Pool Principal
Balance, the Trustee is required to conduct a Termination Auction. If satis-
factory bids are received as described under "Description of the Certifi-
cates--Termination and Purchase of Home Equity Loans" herein, such remaining
Home Equity Loans and REO Properties will be sold and the proceeds distributed
to the Certificateholders in the same priority as distributions are made on
any Payment Date.
As with fixed rate obligations generally, the rate of prepayment on a pool of
mortgage loans with fixed rates such as the Fixed Rate Loans in the Fixed Rate
Group is affected by prevailing market rates for mortgage loans of a compara-
ble term and risk level. When the market interest rate is below the mortgage
coupon, mortgagors may have an increased incentive to refinance their mortgage
loans. Depending on prevailing market rates, the future outlook for market
rates and economic conditions generally, some mortgagors may sell or refinance
mortgaged properties in order to realize their equity in the mortgaged proper-
ties, to meet cash flow needs or to make other investments. No assurance can
be given as to the overall rate of prepayment on the Fixed Rate Loans.
All of the Home Equity Loans in the Floating Rate Group are ARM Loans. As is
the case with conventional fixed rate mortgage loans, adjustable rate mortgage
loans may be subject to a greater rate of principal prepayments in a declining
interest rate environment. For example, if prevailing interest rates fall sig-
nificantly, adjustable rate mortgage loans such as the ARM Loans in the Float-
ing Rate Group could be subject to higher prepayment rates than if prevailing
interest rates remain constant because the availability of fixed rate mortgage
loans at competitive interest rates may encourage mortgagors to refinance
their adjustable rate mortgage loans to "lock in" a low fixed interest rate.
The prepayment behavior of the Delayed First Adjustment Loans may differ from
that of the Fixed Rate Loans and the other ARM Loans. As a Delayed First Ad-
justment Loan approaches its initial Adjustment Date, the borrower may become
more likely to refinance such loan to avoid an increase in the Mortgage Inter-
est Rate, even if fixed rate loans are only available at rates that are
slightly lower or higher than the Mortgage Interest Rate before adjustment.
The existence of the applicable Periodic Cap, Maximum Mortgage Rate and Mini-
mum Mortgage Rate also may affect the likelihood of prepayments resulting from
refinancings. However, no assurance can be given as to the overall rate of
prepayment on the ARM Loans.
The prepayment experience on non-conventional home equity loans such as the
Home Equity Loans may differ from that on conventional first mortgage loans
primarily due to the credit quality of the typical borrower. Because the
credit histories of many home equity borrowers may preclude them from other
traditional sources of financing, such borrowers may be less likely to refi-
nance due to a decline in market interest rates. Non-conventional home equity
loans may also experience more prepayments in a rising interest rate environ-
ment as the borrowers' finances are stressed to the point of default. However,
the increased level of competition among home equity lenders has increased the
awareness among credit-impaired borrowers of the availability of credit and
the attraction of refinancing.
Greater than anticipated prepayments of principal will increase the yield on
Class A Certificates purchased at a price less than par. Greater than antici-
pated prepayments of principal will decrease the yield on Class A Certificates
purchased at a price greater than par. The effect on an investor's yield due
to principal prepayments on the related Home Equity Loans occurring at a rate
that is faster (or slower) than the rate anticipated by the investor in the
period immediately following the issuance of the Class A Certificates will not
be entirely offset by a subsequent like reduction (or increase) in the rate of
principal payments. The weighted
S-30
<PAGE>
average life of the Class A Certificates will also be affected by the amount
and timing of delinquencies and defaults on the Home Equity Loans in the re-
lated Home Equity Loan Group and the recoveries, if any, on defaulted Home Eq-
uity Loans and foreclosed properties in such Home Equity Loan Group.
The Class A Certificates have been structured so that principal distributions
thereon will be made, to the extent funds are available, in an amount neces-
sary to cause the principal balances of the related Home Equity Loans to ex-
ceed the aggregate Class Certificate Balance of the related Class A Certifi-
cates by the applicable Overcollateralization Requirement. In the case of the
Fixed Rate Certificates, all such payments of principal will be applied to the
Class A-1 Certificate Balance, the Class A-2 Certificate Balance, the Class A-
3 Certificate Balance and the Class A-4 Certificate Balance sequentially until
each such Class Certificate Balance has been reduced to zero. As a result,
such Certificates will be sensitive in varying degrees to the rate of princi-
pal payments, including principal prepayments, on the Home Equity Loans in the
Fixed Rate Group.
No representation is made as to the particular factors that will affect the
prepayment of the Home Equity Loans, as to the relative importance of such
factors, as to the percentage of the principal balance of the Home Equity
Loans that will be paid as of any date or as to the overall rate of prepayment
on the Home Equity Loans. See "Certain Yield and Prepayment Considerations" in
the Prospectus.
ADJUSTABLE RATE CERTIFICATES
Each Accrual Period for the Adjustable Rate Certificates will consist of the
actual number of days elapsed from the Payment Date in the month preceding the
month of the applicable Payment Date (or, in the case of the first Accrual Pe-
riod, from the Closing Date) through the day preceding such Payment Date. The
Pass-Through Rate for each Class of Adjustable Rate Certificates will be ad-
justed by reference to changes in the level of One-Month LIBOR, subject to the
effects of the applicable limitations described herein.
The Pass-Through Rate for the Adjustable Rate Certificates may be calculated
by reference to the Fixed Rate Group Net WAC Cap and the Floating Rate Group
Net WAC Cap. If Home Equity Loans bearing higher fixed Mortgage Interest Rates
were to prepay, the weighted average Mortgage Interest Rate of such Home Eq-
uity Loans would be lower than otherwise would be the case. Changes in One-
Month LIBOR may not correlate with changes in prevailing rates of interest. It
is possible that a lower level of prevailing interest rates, which would be
expected to result in faster prepayments, could occur simultaneously with an
increased level of One-Month LIBOR. If the LIBOR Rate were to be higher than
the Fixed Rate Group Net WAC Cap or the Floating Rate Group Net WAC Cap, the
Pass-Through Rate for the Class A-1 Certificates or the Class A-5 Certificates
would be lower than otherwise would be the case. Although holders of the Ad-
justable Rate Certificates will be entitled to any related LIBOR Carryover
Amount from and to the limited extent of funds available therefor as provided
herein, there can be no assurance that such funds will be available or suffi-
cient for such purposes. In addition, the Certificate Insurance Policy does
not cover, and the ratings of the Class A Certificates do not address the
likelihood of, payment of any LIBOR Carryover Amount.
The Pass-Through Rate for the Class A-5 Certificates may be calculated with
reference to One-Month LIBOR. Although the Mortgage Interest Rates on the ARM
Loans are subject to adjustment, the Mortgage Interest Rates adjust less fre-
quently than the Pass-Through Rate with respect to the Class A-5 Certificates
and adjust by reference to the applicable Index. Changes in One-Month LIBOR
may not correlate with changes in the applicable Index and either may not cor-
relate with prevailing interest rates. It is possible that an increased level
of One-Month LIBOR could occur simultaneously with a lower level of prevailing
interest rates, which would be expected to result in faster prepayments,
thereby reducing the weighted average life of the Class A-5 Certificates.
Certain of the ARM Loans were originated with initial Mortgage Interest Rates
that were based on competitive conditions and did not equal the sum of the In-
dex and the related Margin. As a result, the Mortgage Interest Rates on such
ARM Loans are more likely to adjust on their first, and possibly subsequent
Adjustment Dates, subject to the effects of the applicable Periodic Cap and
the Maximum Mortgage Rate. Because the Pass-Through Rate for the Class A-5
Certificates is limited by the Floating Rate Group Net WAC Cap on each Payment
Date, limits on changes in the Mortgage Interest Rates of the ARM Loans may
limit changes in the Pass-Through Rate for the Class A-5 Certificates.
The Floating Rate Group Net WAC Cap on a Payment Date will depend, in part, on
the weighted average of the then-current Mortgage Interest Rates of the out-
standing ARM Loans. If the ARM Loans bearing higher Mortgage Interest Rates
were to prepay, the weighted average Mortgage Interest Rate of the ARM Loans,
and consequently the Floating Rate Group Net WAC Cap, would be lower than oth-
erwise would be the case.
S-31
<PAGE>
PREPAYMENT MODEL
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement with respect
to the Fixed Rate Group Certificates is the prepayment assumption (the "Pre-
payment Assumption") that represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of the pool of mortgage
loans for the life of such mortgage loans. For each Class of Fixed Rate Group
Certificates, a 100% Prepayment Assumption assumes a constant prepayment rate
("CPR") of 1.8% per annum of the outstanding principal balance of the Fixed
Rate Loans in the Fixed Rate Group in the first month of the life of such
Fixed Rate Loans and an additional 1.8% per annum in each month thereafter un-
til the tenth month; beginning in the eleventh month and in each month there-
after during the life of such Fixed Rate Loans, a CPR of 18% per annum each
month is assumed. As used in the table below, 0% Prepayment Assumption assumes
a CPR equal to 0% of the Prepayment Assumption, i.e. no prepayments. Corre-
spondingly, 125% Prepayment Assumption assumes prepayment rates equal to 125%
of the Prepayment Assumption, and so forth. The Prepayment Assumption does not
purport to be a historical description of prepayment experience or a predic-
tion of the anticipated rate of prepayment of any pool of mortgage loans, in-
cluding the Home Equity Loans. For the Class A-5 Certificates, a CPR of 26%
per annum of the outstanding principal balance of the ARM Loans in the Float-
ing Rate Group for each month in the life of such ARM Loans is assumed.
For the purpose of the tables below, it is assumed that: (i) the Home Equity
Loans of each Home Equity Loan Group consist of loans with the characteristics
set forth below, (ii) the Closing Date is December 5, 1997, (iii) distribu-
tions on the Class A Certificates are made on the 25th day of each month re-
gardless of the day on which the Payment Date actually occurs, commencing in
December 1997 in accordance with the priorities described herein, (iv) the
scheduled monthly payments of principal and interest on the Home Equity Loans
will be timely delivered to the Master Servicer or Subservicer each month
(with no defaults), commencing with November 1997, (v) the Mortgage Interest
Rate for each ARM Loan in the Floating Rate Group is adjusted on its next rate
adjustment date (and on subsequent rate adjustment dates, if necessary) to
equal the sum of (a) an assumed level of the applicable Index (which remains
constant at 5.42%, 5.8625%, 5.70% and 5.79% with respect to 1 Year CMT, 6
Month LIBOR, 2 Year CMT and 5 Year CMT, respectively) and (b) the respective
gross margin (such sum being subject to the applicable Periodic Cap, Maximum
Mortgage Rate and Minimum Mortgage Rate), (vi) all prepayments are prepayments
in full received on the last day of each month (commencing November 1997) and
include 30 days' interest thereon, (vii) the Class A Certificates of each
Class have the respective Pass-Through Rates and Class Certificate Balances as
set forth herein and One-Month LIBOR is equal to 5.6875%, and (viii) the num-
bers under the "Months to Next Rate Adjustment Date" heading for the Floating
Rate Group table below indicate the number of months from the Cut-off Date to
the first interest rate change date for the applicable pools of loans.
FIXED RATE GROUP
<TABLE>
<CAPTION>
------------------------------------------------------------
ORIGINAL REMAINING TERM
TERM TO TO MORTGAGE
AMORTIZATION MATURITY MATURITY PRINCIPAL INTEREST
METHODOLOGY (MONTHS) (MONTHS) BALANCE RATE
------------ -------- -------------- -------------- --------
<S> <C> <C> <C> <C>
Level Pay(1) 50 45 $ 2,260,719.40 10.268%
Level Pay 98 92 7,365,342.10 11.234
Level Pay 175 164 19,971,026.26 11.831
Level Pay 239 230 9,484,038.32 12.346
Level Pay 292 284 1,237,833.57 12.729
Level Pay 359 345 15,447,295.93 11.440
Level Pay 360 350 654,281.43 11.030
</TABLE>
- -------
(1) A "Level Pay" amortization methodology provides for amortization of the
principal balance thereof in equal monthly installments by the stated ma-
turity.
S-32
<PAGE>
FLOATING RATE GROUP
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
MONTHS TO ORIGINAL REMAINING
NEXT MORTGAGE MAXIMUM MINIMUM TERM TO TERM TO
PRINCIPAL ADJUST- INTEREST MORTGAGE MORTGAGE PERIODIC MATURITY MATURITY
INDEX BALANCE MENT DATE RATE MARGIN RATE RATE CAP (MONTHS) (MONTHS)
----- ------------- --------- -------- ------ -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year CMT $ 953,466.83 3 13.950% 5.950% 19.950% 13.875% 1.000% 360 358
1 Year CMT 263,558.61 7 8.500 2.750 13.875 6.000 1.000 360 253
1 Year CMT 85,094.28 1 8.750 3.250 13.000 4.250 2.000 360 348
1 Year CMT 3,510,950.61 2 9.189 4.972 15.139 9.182 2.000 360 345
1 Year CMT 7,778,886.71 3 9.315 5.015 15.315 9.318 2.000 360 351
1 Year CMT 5,982,754.27 4 9.333 4.951 15.379 9.290 2.031 360 351
1 Year CMT 5,058,776.53 5 9.442 4.885 15.436 9.443 2.000 360 352
1 Year CMT 7,158,880.81 6 9.604 4.922 15.625 9.584 2.000 360 353
1 Year CMT 6,231,625.24 7 9.708 4.716 15.711 9.702 1.998 360 354
1 Year CMT 5,602,696.13 8 9.786 4.785 15.798 9.588 2.047 360 350
1 Year CMT 3,485,053.28 9 9.841 4.886 15.851 9.848 2.000 360 356
1 Year CMT 4,565,581.12 10 10.320 5.045 15.565 9.472 2.000 360 351
1 Year CMT 7,952,379.18 11 10.229 5.107 15.299 9.276 2.000 360 350
1 Year CMT 8,351,058.02 12 10.117 5.125 15.552 9.515 2.000 359 353
1 Year CMT 4,533,273.51 13 9.464 4.816 15.000 8.870 1.996 360 341
1 Year CMT 106,954.23 15 8.990 4.000 14.990 6.990 2.000 360 351
1 Year CMT 46,608.25 22 11.125 6.000 17.125 11.130 2.000 360 346
1 Year CMT 258,465.11 24 10.674 4.258 16.674 10.674 2.000 360 348
1 Year CMT 492,111.87 25 10.420 5.108 16.420 10.423 2.083 360 349
1 Year CMT 257,059.28 26 11.351 5.598 17.351 11.351 2.000 360 350
1 Year CMT 709,623.57 27 10.579 5.278 16.579 10.579 2.000 360 351
1 Year CMT 561,724.90 28 10.080 4.717 16.080 10.377 2.000 360 352
1 Year CMT 249,315.46 29 10.788 5.272 16.788 10.793 2.000 360 353
1 Year CMT 98,621.47 30 11.621 5.439 17.621 11.621 2.000 360 354
1 Year CMT 347,445.69 31 11.608 5.586 17.608 11.609 2.000 360 355
1 Year CMT 497,277.04 32 10.521 4.579 16.521 10.521 2.000 360 356
1 Year CMT 265,231.01 33 11.009 5.207 17.009 11.011 2.000 360 357
1 Year CMT 229,729.69 34 7.750 2.750 12.750 5.750 2.000 360 353
1 Year CMT 367,721.61 35 11.074 5.413 17.074 11.077 2.000 360 359
1 Year CMT 341,932.60 37 9.990 4.000 15.990 7.990 2.000 360 337
1 Year CMT 66,116.27 42 9.490 4.000 15.490 7.490 2.000 360 342
1 Year CMT 149,016.38 46 9.990 4.000 15.990 7.990 2.000 360 346
1 Year CMT 123,838.84 48 9.545 4.000 15.545 7.547 2.000 360 348
1 Year CMT 73,581.52 49 9.490 4.000 15.490 7.490 2.000 360 349
6 Month LIBOR 1,439,058.20 1 13.170 7.293 19.072 13.007 1.000 360 358
6 Month LIBOR 1,384,750.84 2 10.116 5.614 16.282 9.570 1.284 360 354
6 Month LIBOR 1,613,639.07 3 10.554 5.739 16.900 10.039 1.411 360 356
6 Month LIBOR 1,623,435.78 4 10.565 5.195 16.518 9.524 1.500 360 353
6 Month LIBOR 2,657,885.05 5 10.203 5.193 16.511 9.579 1.467 360 356
6 Month LIBOR 3,247,065.13 6 9.741 4.829 16.207 9.209 1.500 360 357
6 Month LIBOR 912,670.19 7 10.291 5.024 16.489 9.489 1.500 360 353
6 Month LIBOR 129,009.33 10 8.875 5.375 14.875 8.880 1.500 360 347
6 Month LIBOR 348,958.93 13 10.081 6.297 16.331 10.084 1.250 360 349
6 Month LIBOR 125,506.82 14 10.240 5.950 16.740 10.240 1.000 360 351
6 Month LIBOR 93,311.50 15 9.400 6.000 15.900 9.400 1.000 360 351
6 Month T-bill 32,186.93 6 7.250 0.000 15.750 5.750 10.000 360 192
6 Month T-bill 132,239.61 7 6.884 0.000 15.750 5.750 10.000 360 193
2 Year CMT 90,892.50 9 9.750 4.250 15.750 9.750 2.000 360 341
2 Year CMT 211,677.81 11 10.765 5.182 16.765 10.767 2.000 360 347
2 Year CMT 482,016.72 12 10.564 5.043 16.564 10.567 2.000 360 348
2 Year CMT 324,245.82 13 10.162 4.940 16.162 10.166 2.000 360 349
2 Year CMT 740,813.01 14 10.244 5.354 16.244 10.246 2.000 360 350
2 Year CMT 1,537,550.30 15 9.593 4.594 15.593 9.596 2.000 360 351
2 Year CMT 1,939,932.89 16 9.935 4.666 15.935 9.938 2.000 360 352
2 Year CMT 3,075,001.46 17 9.709 4.526 15.490 9.711 2.000 360 353
2 Year CMT 1,735,451.81 18 10.009 4.623 16.009 10.012 2.000 360 354
2 Year CMT 2,103,289.50 19 10.568 4.784 16.568 10.534 2.000 360 355
2 Year CMT 1,955,391.87 20 10.648 4.947 16.648 10.651 2.000 360 356
2 Year CMT 2,283,884.32 21 10.434 4.878 16.434 10.437 2.000 360 357
2 Year CMT 2,184,220.61 22 10.330 4.882 16.330 10.332 2.000 360 358
2 Year CMT 3,157,113.28 23 9.935 4.642 15.935 9.938 2.000 360 359
2 Year CMT 295,063.77 24 9.881 4.505 15.880 9.883 2.000 360 359
5 Year CMT 98,134.11 59 8.875 2.750 14.125 8.125 2.000 360 299
</TABLE>
S-33
<PAGE>
Any discrepancy between the characteristics of the Home Equity Loans actually
included in the Trust and the characteristics of the Home Equity Loans ex-
pected to be so included may affect the percentages of the original outstand-
ing principal balance set forth in the tables and the weighted average lives
of the Certificates. In addition, to the extent that the Home Equity Loans in-
cluded in the Trust have characteristics that differ from those assumed in
preparing the following tables, the outstanding principal balance of any Cer-
tificate will be reduced to zero earlier or later than that indicated by the
table.
Variations in actual prepayment experience and the principal balances of the
Home Equity Loans that prepay may increase or decrease the percentages of the
Initial Certificate Balance outstanding and each of the Class A Certificates'
respective Weighted Average Life to Maturity and Weighted Average Life to Call
shown in the following tables. Such variations may occur even if the average
prepayment experience of all such Home Equity Loans equals the indicated lev-
els of the Prepayment Assumption. There is no assurance that prepayments of
the Home Equity Loans will conform to any level of the Prepayment Assumption.
Based on the foregoing assumptions, the following tables set forth the per-
centages of the Initial Certificate Balance of each Class of Class A Certifi-
cates that would be outstanding after each of the dates shown at various per-
centages of the Prepayment Assumption and the corresponding weighted average
lives.
S-34
<PAGE>
CLASS A-1 CERTIFICATES
Percent of Initial Class A-1 Certificate Balance Outstanding at the Following
Percentages of the Prepayment Assumption
<TABLE>
<CAPTION>
----------------------------------------------
PAYMENT DATE: 0% 50% 75% 100% 125% 150% 200%
- ------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100
11/25/98 86 66 56 47 37 27 7
11/25/99 77 41 24 8 0 0 0
11/25/00 67 17 0 0 0 0 0
11/25/01 56 0 0 0 0 0 0
11/25/02 47 0 0 0 0 0 0
11/25/03 36 0 0 0 0 0 0
11/25/04 24 0 0 0 0 0 0
11/25/05 12 0 0 0 0 0 0
11/25/06 3 0 0 0 0 0 0
11/25/07 0 0 0 0 0 0 0
11/25/08 0 0 0 0 0 0 0
11/25/09 0 0 0 0 0 0 0
11/25/10 0 0 0 0 0 0 0
11/25/11 0 0 0 0 0 0 0
11/25/12 0 0 0 0 0 0 0
11/25/13 0 0 0 0 0 0 0
11/25/14 0 0 0 0 0 0 0
11/25/15 0 0 0 0 0 0 0
11/25/16 0 0 0 0 0 0 0
11/25/17 0 0 0 0 0 0 0
11/25/18 0 0 0 0 0 0 0
11/25/19 0 0 0 0 0 0 0
11/25/20 0 0 0 0 0 0 0
11/25/21 0 0 0 0 0 0 0
11/25/22 0 0 0 0 0 0 0
11/25/23 0 0 0 0 0 0 0
11/25/24 0 0 0 0 0 0 0
11/25/25 0 0 0 0 0 0 0
Weighted Average
Life to Maturity (years) (1): 4.57 1.72 1.27 1.00 0.82 0.69 0.51
Weighted Average
Life to Call (years)(2): 4.57 1.72 1.27 1.00 0.82 0.69 0.51
</TABLE>
- -------
(1) The "Weighted Average Life to Maturity" of the Class A-1 Certificates as
shown above is determined by (i) multiplying the amount of the principal
payments with respect to the Class A-1 Certificates by the number of years
from the date of issuance of the Class A-1 Certificates to the related
Payment Date upon which such Certificates mature, (ii) summing the results
and (iii) dividing the sum by the sum of the amounts in clause (i) above.
(2) The "Weighted Average Life to Call" of the Class A-1 Certificates as shown
above is determined by (i) multiplying the amount of the principal pay-
ments with respect to the Class A-1 Certificates by the number of years
from the date of issuance of the Class A-1 Certificates to the earliest
Payment Date upon which the Class A-1 Certificates would be subject to op-
tional termination by the Master Servicer, (ii) summing the results and
(iii) dividing the sum by the sum of the amounts in clause (i) above.
S-35
<PAGE>
CLASS A-2 CERTIFICATES
Percent of Initial Class A-2 Certificate Balance Outstanding at the Following
Percentages of the Prepayment Assumption
<TABLE>
<CAPTION>
-----------------------------------------------------------
PAYMENT DATE: 0% 50% 75% 100% 125% 150% 200%
- ------------- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100
11/25/98 100 100 100 100 100 100 100
11/25/99 100 100 100 100 83 51 0
11/25/00 100 100 90 47 10 0 0
11/25/01 100 91 38 0 0 0 0
11/25/02 100 51 0 0 0 0 0
11/25/03 100 17 0 0 0 0 0
11/25/04 100 0 0 0 0 0 0
11/25/05 100 0 0 0 0 0 0
11/25/06 100 0 0 0 0 0 0
11/25/07 85 0 0 0 0 0 0
11/25/08 60 0 0 0 0 0 0
11/25/09 33 0 0 0 0 0 0
11/25/10 3 0 0 0 0 0 0
11/25/11 0 0 0 0 0 0 0
11/25/12 0 0 0 0 0 0 0
11/25/13 0 0 0 0 0 0 0
11/25/14 0 0 0 0 0 0 0
11/25/15 0 0 0 0 0 0 0
11/25/16 0 0 0 0 0 0 0
11/25/17 0 0 0 0 0 0 0
11/25/18 0 0 0 0 0 0 0
11/25/19 0 0 0 0 0 0 0
11/25/20 0 0 0 0 0 0 0
11/25/21 0 0 0 0 0 0 0
11/25/22 0 0 0 0 0 0 0
11/25/23 0 0 0 0 0 0 0
11/25/24 0 0 0 0 0 0 0
11/25/25 0 0 0 0 0 0 0
Weighted Average Life to
Maturity (years)(1): 11.36 5.09 3.81 3.00 2.45 2.04 1.50
Weighted Average Life to
Call (years)(2): 11.36 5.09 3.81 3.00 2.45 2.04 1.50
</TABLE>
- -------
(1) The "Weighted Average Life to Maturity" of the Class A-2 Certificates as
shown above is determined by (i) multiplying the amount of the principal
payments with respect to the Class A-2 Certificates by the number of years
from the date of issuance of the Class A-2 Certificates to the related
Payment Date upon which such Certificates mature, (ii) summing the results
and (iii) dividing the sum by the sum of the amounts in clause (i) above.
(2) The "Weighted Average Life to Call" of the Class A-2 Certificates as shown
above is determined by (i) multiplying the amount of the principal pay-
ments with respect to the Class A-2 Certificates by the number of years
from the date of issuance of the Class A-2 Certificates to the earliest
Payment Date upon which such Class A-2 Certificates would be subject to
optional termination by the Master Servicer, (ii) summing the results and
(iii) dividing the sum by the sum of the amounts in clause (i) above.
S-36
<PAGE>
CLASS A-3 CERTIFICATES
Percent of Initial Class A-3 Certificate Balance Outstanding at the Following
Percentages of the Prepayment Assumption
<TABLE>
<CAPTION>
-----------------------------------
PAYMENT DATE: 0% 50% 75% 100% 125% 150% 200%
- ------------- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100
11/25/98 100 100 100 100 100 100 100
11/25/99 100 100 100 100 100 100 92
11/25/00 100 100 100 100 100 75 13
11/25/01 100 100 100 93 51 16 0
11/25/02 100 100 97 47 7 0 0
11/25/03 100 100 57 10 0 0 0
11/25/04 100 83 24 0 0 0 0
11/25/05 100 52 0 0 0 0 0
11/25/06 100 28 0 0 0 0 0
11/25/07 100 5 0 0 0 0 0
11/25/08 100 0 0 0 0 0 0
11/25/09 100 0 0 0 0 0 0
11/25/10 100 0 0 0 0 0 0
11/25/11 75 0 0 0 0 0 0
11/25/12 64 0 0 0 0 0 0
11/25/13 51 0 0 0 0 0 0
11/25/14 37 0 0 0 0 0 0
11/25/15 21 0 0 0 0 0 0
11/25/16 2 0 0 0 0 0 0
11/25/17 0 0 0 0 0 0 0
11/25/18 0 0 0 0 0 0 0
11/25/19 0 0 0 0 0 0 0
11/25/20 0 0 0 0 0 0 0
11/25/21 0 0 0 0 0 0 0
11/25/22 0 0 0 0 0 0 0
11/25/23 0 0 0 0 0 0 0
11/25/24 0 0 0 0 0 0 0
11/25/25 0 0 0 0 0 0 0
Weighted Average Life to Maturity
(years)(1): 16.01 8.20 6.27 5.00 4.09 3.43 2.50
Weighted Average Life to Call (years)(2): 16.01 8.20 6.27 5.00 4.09 3.43 2.50
</TABLE>
- -------
(1) The "Weighted Average Life to Maturity" of the Class A-3 Certificates as
shown above is determined by (i) multiplying the amount of the principal
payments with respect to the Class A-3 Certificates by the number of years
from the date of issuance of the Class A-3 Certificates to the related
Payment Date upon which such Certificates mature, (ii) summing the results
and (iii) dividing the sum by the sum of the amounts in clause (i) above.
(2) The "Weighted Average Life to Call" of the Class A-3 Certificates as shown
above is determined by (i) multiplying the amount of the principal pay-
ments with respect to the Class A-3 Certificates by the number of years
from the date of issuance of the Class A-3 Certificates to the earliest
Payment Date upon which such Class A-3 Certificates would be subject to
optional termination by the Master Servicer, (ii) summing the results and
(iii) dividing the sum by the sum of the amounts in clause (i) above.
S-37
<PAGE>
CLASS A-4 CERTIFICATES
Percent of Initial Class A-4 Certificate Balance Outstanding at the Following
Percentages of the Prepayment Assumption
<TABLE>
<CAPTION>
-------------------------------------
PAYMENT DATE: 0% 50% 75% 100% 125% 150% 200%
- ------------- ----- ----- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100
11/25/98 100 100 100 100 100 100 100
11/25/99 100 100 100 100 100 100 100
11/25/00 100 100 100 100 100 100 100
11/25/01 100 100 100 100 100 100 67
11/25/02 100 100 100 100 100 79 40
11/25/03 100 100 100 100 77 54 23
11/25/04 100 100 100 83 56 36 13
11/25/05 100 100 97 63 40 24 7
11/25/06 100 100 79 49 28 15 3
11/25/07 100 100 63 36 20 10 1
11/25/08 100 87 50 27 13 6 0
11/25/09 100 71 38 19 8 3 0
11/25/10 100 56 28 13 5 1 0
11/25/11 100 44 20 8 2 0 0
11/25/12 100 37 16 6 1 0 0
11/25/13 100 31 12 4 0 0 0
11/25/14 100 25 9 2 0 0 0
11/25/15 100 20 7 1 0 0 0
11/25/16 100 15 4 0 0 0 0
11/25/17 94 12 3 0 0 0 0
11/25/18 87 10 2 0 0 0 0
11/25/19 78 8 1 0 0 0 0
11/25/20 69 6 0 0 0 0 0
11/25/21 59 4 0 0 0 0 0
11/25/22 50 2 0 0 0 0 0
11/25/23 38 1 0 0 0 0 0
11/25/24 25 0 0 0 0 0 0
11/25/25 10 0 0 0 0 0 0
Weighted Average Life to Maturity
(years)(1): 24.60 14.82 11.80 9.62 8.02 6.79 5.05
Weighted Average Life to Call (years)(2): 24.57 13.96 9.82 7.65 6.41 5.04 3.73
</TABLE>
- -------
(1) The "Weighted Average Life to Maturity" of the Class A-4 Certificates as
shown above is determined by (i) multiplying the amount of the principal
payments with respect to the Class A-5 Certificates by the number of years
from the date of issuance of the Class A-4 Certificates to the related
Payment Date upon which such Certificates mature, (ii) summing the results
and (iii) dividing the sum by the sum of the amounts in clause (i) above.
(2) The "Weighted Average Life to Call" of the Class A-4 Certificates as shown
above is determined by (i) multiplying the amount of the principal pay-
ments with respect to the Class A-5 Certificates by the number of years
from the date of issuance of the Class A-4 Certificates to the earliest
Payment Date upon which such Class A-4 Certificates would be subject to
optional termination by the Master Servicer, (ii) summing the results and
(iii) dividing the sum by the sum of the amounts in clause (i) above.
S-38
<PAGE>
CLASS A-5 CERTIFICATES
Percent of Initial Class A-5 Certificate Balance Outstanding at the Following
CPR's
<TABLE>
<CAPTION>
-----------------------------------------------------------
PAYMENT DATE: 0% 10% 20% 26% 30% 40% 50%
- ------------- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100
11/25/98 95 85 75 69 65 55 46
11/25/99 95 76 59 50 44 31 20
11/25/00 94 67 46 36 31 19 11
11/25/01 93 60 36 27 21 11 5
11/25/02 93 53 29 19 15 7 2
11/25/03 92 46 23 14 10 4 1
11/25/04 91 41 18 10 7 2 0
11/25/05 89 37 14 8 5 1 0
11/25/06 88 33 11 5 3 0 0
11/25/07 87 29 9 4 2 0 0
11/25/08 85 25 7 3 1 0 0
11/25/09 83 23 5 2 0 0 0
11/25/10 82 20 4 1 0 0 0
11/25/11 79 17 3 0 0 0 0
11/25/12 77 15 2 0 0 0 0
11/25/13 74 13 1 0 0 0 0
11/25/14 72 12 1 0 0 0 0
11/25/15 68 10 1 0 0 0 0
11/25/16 65 8 0 0 0 0 0
11/25/17 61 7 0 0 0 0 0
11/25/18 56 6 0 0 0 0 0
11/25/19 52 5 0 0 0 0 0
11/25/20 46 4 0 0 0 0 0
11/25/21 41 3 0 0 0 0 0
11/25/22 35 2 0 0 0 0 0
11/25/23 28 1 0 0 0 0 0
11/25/24 21 1 0 0 0 0 0
11/25/25 13 0 0 0 0 0 0
11/25/26 3 0 0 0 0 0
Weighted Average Life to
Maturity (years)(1): 20.09 7.48 3.94 2.97 2.52 1.77 1.30
Weighted Average Life to
Call (years)(2): 20.01 6.98 3.69 2.78 2.36 1.68 1.23
</TABLE>
- -------
(1) The "Weighted Average Life to Maturity" of the Class A-5 Certificates as
shown above is determined by (i) multiplying the amount of the principal
payments with respect to the Class A-5 Certificates by the number of years
from the date of issuance of the Class A-5 Certificates to the related
Payment Date upon which such Certificates mature, (ii) summing the results
and (iii) dividing the sum by the sum of the amounts in clause (i) above.
(2) The "Weighted Average Life to Call" of the Class A-5 Certificates as shown
above is determined by (i) multiplying the amount of the principal pay-
ments with respect to the Class A-5 Certificates by the number of years
from the date of issuance of the Class A-5 Certificates to the earliest
Payment Date upon which such Class A-5 Certificates would be subject to
optional termination by the Master Servicer, (ii) summing the results and
(iii) dividing the sum by the sum of the amounts in clause (i) above.
S-39
<PAGE>
THE MASTER SERVICER AND THE SUBSERVICER--ORIGINATION AND SERVICING EXPERIENCE
GENERAL
For a general discussion of the Seller and the Master Servicer, see "The Sell-
er" and "The Master Servicer and Its Affiliates" in the Prospectus.
As of the Cut-off Date, 77.6% (by principal amount) of the Home Equity Loans
included in the Mortgage Pool (the "TMC Loans") were originated or acquired by
Transamerica Mortgage Company and 22.4% (by principal amount) of the Home Eq-
uity Loans included in the Mortgage Pool (the "MMC Loans") were originated or
acquired by Metropolitan Mortgage Company ("MMC"). Certain representations and
warranties will be made by TMC with respect to the TMC Loans and certain rep-
resentations and warranties will be made by MMC with respect to the MMC Loans.
Such representations and warranties will include, among others, the represen-
tations and warranties set forth in the Prospectus under "Representations and
Warranties of the Seller" and "Description of the Class A Certificates--Repre-
sentations and Warranties of the Seller, the Master Servicer and the
Subservicer" herein.
TMC will be the Master Servicer. The Master Servicer will be responsible for
servicing the Home Equity Loans in accordance with the Pooling and Servicing
Agreement and generally in accordance with the first and second mortgage loan
servicing standards and procedures accepted by prudent mortgage lending insti-
tutions. On the Closing Date the Master Servicer will enter into a
subservicing agreement (the "Subservicing Agreement") with Metropolitan Mort-
gage Company (the "Subservicer") whereby the Subservicer will agree to service
the MMC Loans in accordance with the Pooling and Servicing Agreement and gen-
erally in accordance with the first and second mortgage loan servicing stan-
dards and procedures accepted by prudent mortgage lending institutions. See
"Description of the Certificates--Servicing Standards" and "--Use of
Subservicers" in the Prospectus for a further description of the provisions of
the Pooling and Servicing Agreement relating to servicing standards and the
use of subservicers.
TRANSAMERICA MORTGAGE COMPANY
All of the TMC Loans are secured by first priority mortgage liens. Transamer-
ica Mortgage Company ("TMC") is a nationwide wholesaler specializing in resi-
dential mortgage lending to sub-prime credit borrowers. TMC was incorporated
in May 1996, and its underwriting and servicing operations are centralized in
Dallas, Texas.
TMC acquires loans through independent mortgage brokers located throughout the
United States, who originate loans in conformance with underwriting and docu-
mentation standards developed by TMC (the "Flow Program"). Flow Program loans
are re-underwritten by TMC prior to their funding. TMC solicits and contacts
mortgage brokers through advertising in mortgage industry publications, direct
mail campaigns, telemarketing and more recently, through account executives
located in several metropolitan areas. In addition, TMC acquires seasoned
loans or small packages of loans on an ongoing basis from a variety of sourc-
es, including commercial banks, mortgage banks and brokers and thrifts (the
"Bulk Acquisition Program"). As of the Cut-off Date, 69.5% (by principal bal-
ance) of the Home Equity Loans in the Mortgage Pool were originated by TMC
through its Flow Program and 8.1% (by principal balance) of the Home Equity
Loans in the Mortgage Pool were acquired by TMC through its Bulk Acquisition
Program.
Flow Program Underwriting
In order to arrive at a lending decision under the Flow Program, TMC generally
evaluates the adequacy of the property to serve as collateral, the sufficiency
of the borrower's projected income to total fixed obligations and the credit
history of the borrower. The underwriting standards described herein include
such criteria and characteristics as guidelines only. If compensating factors
exist, underwriting personnel may use their judgement in assessing such com-
pensating factors and the overall feasibility of the loan. See "Underwriting
Guidelines" below.
Broker Selection. Each broker is required to submit to TMC's screening proc-
ess. TMC prefers that brokers have at least two years of experience as brokers
or prior experience in the mortgage brokerage industry.
Brokers are compensated based upon the size of the loan. Such compensation
typically includes a yield spread premium. In addition, such compensation may
include incentives tied to the volume of mortgage loans such brokers originate
on behalf of TMC and the level of prepayments with respect to such loans. TMC
currently does business with approximately 650 brokers located throughout the
United States. Since inception no broker has accounted for more than 7% (by
principal balance) of the TMC Loans in the Mortgage Pool.
S-40
<PAGE>
Combined Loan-to-Value Ratio. Subject to the discussion under "Underwriting
Guidelines" below, the Combined Loan-to-Value Ratio for each loan is dependent
upon the credit grade established for such loan. See "Credit Grading" below.
For loans graded B-1, a maximum Combined Loan-to-Value Ratio guideline is es-
tablished at 85% for owner occupied residences and 75% for non-owner occupied
residences (provided that for owner occupied residences under the limited in-
come verification program and the no income qualification program, the maximum
Combined Loan-to-Value Ratio is set at 75% and 70%, respectively). For loans
graded B-2, a maximum Combined Loan-to-Value Ratio guideline is established at
80% for owner occupied residences and 70% for non-owner occupied residences
(provided that for owner occupied residences under the limited income verifi-
cation plan, the maximum Combined Loan-to-Value Ratio is set at 70%). For
loans graded B-3, a maximum Combined Loan-to-Value Ratio guideline is estab-
lished at 75% for owner occupied residences and 65% for non-owner occupied
residences. Properties other than single family residences, such as condomini-
ums, manufactured homes and rural properties, may have lower Combined Loan-to-
Value Ratio guidelines. The maximum loan amount varies from $350,000 to
$500,000 depending upon the credit grade and the Combined Loan-to-Value Ratio
of the loan.
An appraisal of the property is required in connection with all TMC Loans
originated under the Flow Program. All appraisals are performed by independent
appraisers licensed in the state in which the property is located selected by
the broker. For loan applications with a Combined Loan-to-Value Ratio in ex-
cess of 80%, TMC requires a desktop review appraisal by an appraiser selected
by TMC. For all loans in excess of $350,000, a second full appraisal by an ap-
praiser selected by TMC is required.
Debt to Income Ratio. TMC's underwriting guidelines specify that, subject to
the discussion under "Underwriting Guidelines" below, TMC's maximum debt to
income ratio guideline for each borrower is 50%, provided that for loans with
a Combined Loan-to-Value Ratio of 85% and for loans originated under TMC's no
income qualification and limited income verification programs discussed below,
the maximum debt to income ratio guideline is 45%. In determining the borrow-
er's income level, certain sources of income are usually not considered, in-
cluding educational benefits, one time capital gains, tax refunds, contribu-
tions and support from family members and cash income which cannot be verified
or documented. In determining the borrower's debt level, TMC does not include
any installment debts with fewer than ten payments remaining.
Certain of the TMC Loans have been originated under the limited income verifi-
cation and no income qualification programs which require less documentation
and verification than the traditional full documentation program. Such pro-
grams are generally available only to borrowers, other than real estate pro-
fessionals, who are self-employed. In addition such programs are generally
available only for owner occupied properties. As of the Cut-off Date, approxi-
mately 2.5% (by principal balance) of the Home Equity Loans in the Mortgage
Pool were originated under TMC's limited income verification and no income
qualification programs.
Credit Grading. TMC has established grades based upon the applicant's credit
by which it can aggregate acceptable loans into groupings considered to have
progressively greater risk. The grades applicable to the TMC Loans are B-1, B-
2 and B-3. As discussed under "Underwriting Guidelines" below, each TMC Loan
may not completely satisfy the specified criteria for each category.
In evaluating the credit of each applicant, TMC will obtain credit reports
from two repositories. In addition TMC will require a twelve month payment
history on rent or mortgages of the borrower. TMC will consider borrowers who
are in bankruptcy proceedings under Chapter 13 provided that the new loan from
TMC will pay in full the outstanding balance to the bankruptcy trustee, the
bankruptcy trustee provides written approval to TMC and the prospective bor-
rower has paid any existing mortgage satisfactorily during the Chapter 13 pro-
ceedings. TMC will also consider borrowers who have been previously discharged
from bankruptcy proceedings in the prior two years on a case by case basis
provided their mortgage or rental payment history has been acceptable. Many of
the borrowers on the TMC Loans originated through the Flow Program may have
had a prior bankruptcy at some point in time. Approximately 0.6% of the prin-
cipal balance of all TMC Loans (including TMC Loans acquired through the Bulk
Acquisition Program) representing 0.5% of the principal balance of the Home
Equity Loans included in the Mortgage Pool were in bankruptcy proceedings as
of the Cut-off Date.
TMC's credit underwriting criteria is set forth in Appendix B.
As of the Cut-off Date, approximately 36.5%, 22.4% and 10.6% (by principal
balance) of the Home Equity Loans in the Mortgage Pool were graded at origina-
tion B-1, B-2 and B-3, respectively, by TMC pursuant to its Flow Program.
Underwriting Guidelines. As discussed above, TMC's underwriting process em-
ploys criteria that are guidelines only. A substantial portion of the TMC
Loans underwritten under TMC's Flow Program may not completely satisfy all of
the criteria for the defined credit grade because TMC's underwriting personnel
may employ a certain amount of discretion based upon the existence of
S-41
<PAGE>
compensating factors. This underwriting process extensively utilizes and re-
lies upon the judgement and experience of TMC's underwriting personnel. Vari-
ances from the guidelines may, for example, result in debt to income ratios or
Combined Loan-to-Value Ratios varying from the above standards. Compensating
factors often include a long length of employment or residence in the proper-
ty, a high quality property or the superior payment history of the borrower.
Quality Control. TMC manages its quality control process in-house while
outsourcing data sampling and report generation to an independent contractor.
Approximately 10% of all loans acquired through the Flow Program are sampled
on a random basis. In addition, certain loans with high risk characteristics
are selected by TMC for review. The quality control group reviews the loan
documentation, re-underwrites the loans to TMC's standards and provides TMC
with a report on a monthly basis detailing discrepancies from TMC's documenta-
tion and underwriting standards. Such discrepancies are graded as to the level
of seriousness.
Title Insurance and Escrow Impound Accounts. A title insurance policy is re-
quired for each TMC Loan. TMC requires a valid one year policy of hazard in-
surance and, if applicable, flood insurance. Except in states where escrow ac-
counts are not allowed, TMC requires the establishment of an escrow account
for insurance premiums and taxes. As a general rule, TMC does not require pri-
mary mortgage insurance.
Bulk Acquisition Program
Under the Bulk Acquisition Program, TMC acquires residential performing and/or
sub-performing loans in bulk from a variety of sources, including commercial
banks, mortgage banks and brokers and thrifts. Typically these loans are sea-
soned from one to five years. TMC conducts a due diligence file review on each
loan borrower and generally obtains a broker's price opinion regarding the
mortgaged property, borrower payment history and a credit score on the bor-
rower prior to acquiring the loan.
In addition, separate from the Bulk Acquisition Program, as of the Cut-off
Date, approximately 3.5% (by principal balance) of the Home Equity Loans in
the Mortgage Pool consist of mortgage loans purchased in bulk by TMC from
Transamerica Financial Services ("TFS"), a former affiliate of TMC. Generally,
these loans acquired from TFS do not have escrow accounts and do not have cur-
rent hazard insurance information.
Servicing
TMC follows specific servicing and collection procedures. Servicing includes,
but is not limited to, post-origination loan processing, customer service,
payment handling, collections and liquidations. Currently TMC employs the
equivalent of approximately eight full-time employees in its servicing depart-
ment. TMC also outsources some servicing activities. TMC is a HUD-approved
mortgagee.
It is TMC's policy to begin the collection process after a payment due under a
loan is between two and twenty days past due. TMC collection representatives
handling delinquent accounts attempt to initiate contact with the delinquent
borrower by telephone and/or through letters targeted to the particular his-
tory of an account. After a loan is delinquent more than 30 days, TMC gener-
ally informs the borrower of its intent to begin accelerating the loan because
TMC believes that the potential for acceleration compels borrowers to make
timely payments. TMC generally does not modify delinquent loans, but may cre-
ate a payment plan whereby the borrower can make up delinquent payments over a
specified period of time. TMC typically does not accept partial payments from
delinquent borrowers.
Foreclosure procedures usually begin by the time an account is 90 or more days
delinquent. If TMC obtains title to the property upon foreclosure, the account
is placed in a "Real Estate Owned" status until the property is liquidated.
TMC utilizes a real estate asset management company to maximize the disposi-
tion of its "Real Estate Owned" property.
Upon sale of a "Real Estate Owned" property, the proceeds are applied to the
loan balance and any collectible expenses due to TMC. If the sale proceeds do
not cover the existing balance due TMC, the remainder of the balance is
charged off.
METROPOLITAN MORTGAGE COMPANY
The MMC Loans are secured by first priority or junior mortgage liens. Metro-
politan Mortgage Company ("MMC") was incorporated in Florida in 1953. It was
acquired by an affiliate of Transamerica Finance Corporation in March 1997 and
is now a wholly-owned indirect subsidiary of Transamerica Finance Corporation.
MMC's underwriting and servicing operations are centralized in Miami, Florida.
All of the MMC Loans have been originated exclusively to borrowers owning res-
idential properties located in the state of Florida under the three lending
programs described below.
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<PAGE>
As of the Cut-off Date 17.6% (by principal amount) of the Home Equity Loans in
the Mortgage Pool were originated by MMC under its retail program (the "Retail
Program"). MMC markets loans in the states of Florida and Georgia under the
Retail Program through its twenty-eight retail branch offices located in the
states of Florida and Georgia. Direct mail solicitation, telemarketing and ex-
tensive television and radio advertising are utilized. Such marketing efforts
are targeted at MMC's primary market of credit-impaired borrowers who have
significant equity in their homes but whose borrowing needs are not being met
by traditional financial institutions.
As of the Cut-off Date 2.1% (by principal amount) of the Home Equity Loans in-
cluded in the Mortgage Pool were originated by MMC under its wholesale lending
program (the "Wholesale Program"). This program was implemented by MMC in
March of 1997. Under this program, participating banks, thrifts and mortgage
companies identify borrowers who do not meet such lender's underwriting crite-
ria but may qualify for a loan from MMC. When such a borrower is identified,
the originator may complete the underwriting and documentation of a loan in
conformance with the underwriting standards of MMC. MMC will purchase such a
loan after MMC has re-underwritten the loan and reviewed the documentation.
As of the Cut-off Date 2.7% (by principal amount) of the Home Equity Loans in-
cluded in the Mortgage Pool were originated by MMC under its institutional
lending program (the "Institutional Program"). Such loans are underwritten in
accordance with more traditional guidelines and are targeted at a more tradi-
tional market of borrowers whose profiles do not fit MMC's Retail Program. MMC
directs borrowers who desire a higher Combined Loan-to-Value Ratio to its In-
stitutional Program.
Underwriting -- Retail Program
Underwriting guidelines and procedures under the Retail Program generally rely
more heavily upon the value of the Mortgaged Property and typically do not
rely as heavily upon the borrower's credit grade or income. The underwriting
standards described herein include such criteria and characteristics as guide-
lines only. If compensating factors exist, underwriting personnel may use
their judgement in assessing such compensating factors and the overall feasi-
bility of the loan. See "Underwriting Guidelines" below.
MMC's underwriting guidelines are based upon the maximum Combined Loan-to-
Value Ratio, which can vary up to 60% or higher under certain circumstances.
See "Underwriting Guidelines" below. Certain credit related criteria are con-
sidered at each Combined Loan-to-Value Ratio, including the following: (i) the
maximum mortgage debt service to monthly gross income ratio; (ii) the maximum
total debt service to monthly gross income ratio; (iii) the minimum monthly
dollars remaining after satisfaction of current obligations; (iv) the status
of superior mortgages; (v) the collateral type; and (vi) the occupancy type.
Appraisals are an integral part of the underwriting process for the Retail
Program. Appraisals are required for all loans and are heavily relied upon in
assessing a loan application. MMC performs its own appraisals through its
staff of licensed appraisers employed by First Florida Appraisal Services,
Inc. ("FFAS") and First Georgia Appraisal Services, Inc., each wholly owned
subsidiaries of MMC. All of the appraisers are certified as residential ap-
praisers and are full-time employees compensated by salary and a bonus that is
not dependent on the completion of loan transactions.
Verification of income is not generally required under MMC's underwriting
guidelines. Furthermore, the underwriting guidelines established by MMC do not
rely heavily upon the borrower's credit history (other than the borrower's
mortgage credit history over the prior twelve months). As a result many of the
borrowers have delinquencies and other derogatory information on their credit
report. A "dial up" credit bureau report is obtained in connection with each
application. A "dial up" credit report is a short form credit report produced
by credit bureaus which lists only a summary of the applicant's credit histo-
ry. Of all the factors considered, MMC views the borrower's performance on
first mortgage loans as highly indicative. If the borrower has performed sat-
isfactorily on such first mortgage, substantial consideration will be given to
that performance in the underwriting process. Borrowers on the MMC Loans orig-
inated through the Retail Program may have had a prior bankruptcy at some
point in time. Approximately 0.12% of the principal balance of the MMC Loans
(including MMC Loans originated through the Institutional Program and acquired
through the Wholesale Program) representing 0.03% of the principal balance of
the Home Equity Loans included in the Mortgage Pool were in bankruptcy pro-
ceedings as of the Cut-off Date.
Subject to the discussion under "Underwriting Guidelines" below, for all MMC
Loans under the Retail Program, borrowers are allowed a maximum mortgage debt
to income ratio of 50% and a maximum total debt to income ratio of 55%.
Loans are underwritten at each Combined Loan-to-Value Ratio based upon the
criteria set forth in Appendix C.
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<PAGE>
Underwriting Guidelines. As discussed above, MMC's underwriting process em-
ploys criteria that are guidelines only. The indicated underwriting standards
applicable at a certain Combined Loan-to-Value Ratio vary with respect to a
substantial portion of the MMC Loans originated through the Retail Program and
a certain amount of discretion is utilized by MMC's underwriting personnel
based upon compensating factors. Variances from the guidelines may, for exam-
ple, result in Combined Loan-to-Value Ratios varying from the standards set
forth in Appendix C, sometimes as a result of high credit scores as reported
on the "dial-up" credit bureau report, and sometimes as a result of good job
stability, an excellent payment history on an existing first mortgage or rapid
marketability of the subject property. This underwriting process extensively
utilizes and relies upon the judgement and experience of MMC's underwriting
personnel.
Quality Control. MMC usually conducts both a pre-closing and a post-closing
review of the loan documents and the underwriting guidelines for a sample of
loans originated under the Retail Program. Such review is conducted periodi-
cally by senior management and includes, among other things, a review of the
loan and appraisal documentation and reverification of the Combined Loan-to-
Value Ratio and various other closing statement amounts.
Insurance. Title insurance is generally required for all properties. Hazard
insurance is generally required for all properties unless the value of the
land is greater than the loan amount or the loan balance is under $5,000. MMC
will monitor such insurance during the life of the loan and force place such
insurance if necessary. MMC does not require the establishment of escrow ac-
counts for the payment of insurance premiums or taxes. Some of the MMC Loans
include private mortgage guarantee insurance.
Underwriting -- Institutional Program
The MMC Loans originated under MMC's Institutional Program have been under-
written in accordance with the underwriting guidelines developed by a large
U.S. mortgage loan wholesaler/retailer. Such guidelines classify loans as "A",
"B", "C" or "D" in accordance with the progressively greater risk characteris-
tics each such loan possesses.
Underwriting -- Wholesale Program
As discussed above, MMC acquires loans under its Wholesale Program from banks,
thrifts and mortgage companies located in the state of Florida. MMC requires a
standard FNMA application from all borrowers. All submissions from originators
include a credit report and an appraisal. Under the full documentation loan
program, MMC may also determine and verify the borrower's income and debt lev-
els. Loans are assigned a grade of A, B, C, D, or E based upon the borrower's
most recent 12 month mortgage or rental payment history using the borrower's
overall credit history as a compensating factor.
Servicing
MMC is a FNMA-approved servicer. MMC's mortgage servicing activities include
processing and administering mortgage loan payments, monitoring the status of
homeowner's insurance and property taxes, collection monitoring and manage-
ment, foreclosure and other administration of mortgage loans. MMC currently
has approximately fourteen employees on its collection staff and eight employ-
ees on its servicing staff.
Collection efforts on loans generally begin when the account is 6-10 days de-
linquent with phone calls and thereafter late notices. MMC may reach a verbal
or written payment agreement with the borrower, depending upon a number of
factors, including the borrower's payment history and the reason for the in-
ability to make current payments. MMC prefers to reach a payment agreement
with a delinquent borrower rather than accepting partial payments. A payment
agreement may provide that a borrower who is delinquent may make up such de-
linquent payments over a specified period of time.
When a loan is more than 30 days past due in accordance with its original
terms, the facts surrounding the delinquency are generally reviewed. MMC will
generally recommend that legal action be commenced to force foreclosure of the
underlying collateral only if it deems a delinquency cannot otherwise be
cured. After a mortgage is from 76 to 120 days delinquent, its status is re-
viewed and a foreclosure determination is made. The underlying property may be
appraised or a field inspection performed and the results evaluated to help
MMC determine the proper course of action. If the delinquency cannot be cured,
MMC may then commence foreclosure proceedings. In appropriate circumstances
MMC may pursue various loss mitigation alternatives to foreclosure, including
pre-foreclosure sales and deeds in lieu of foreclosure.
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<PAGE>
LOSS AND DELINQUENCY EXPERIENCE
TMC serviced loans under the Flow Program and the Bulk Acquisition Program ag-
gregating approximately $49,022,000 as of December 31, 1996 and $163,775,000
as of September 30, 1997. MMC serviced loans under the Retail, Institutional
and Wholesale Programs aggregating approximately $160,425,000, $169,136,000,
$175,197,000 and $176,227,000 as of December 31, 1996, 1995, 1994 and 1993,
respectively. Set forth below is certain loss and delinquency information re-
lating to such loans. With respect to the information regarding the TMC port-
folio, since TMC was only recently formed and has a short operating history,
such loss and delinquency information is unlikely to be indicative of the fu-
ture performance of TMC's portfolio.
METROPOLITAN MORTGAGE COMPANY
<TABLE>
<CAPTION>
--------------------------------------
YEAR ENDING DECEMBER 31,
--------------------------------------
1993 1994 1995 1996
(Dollars in 000s) -------- -------- -------- --------
<S> <C> <C> <C> <C>
Servicing Portfolio (at period
end)(number of loans)................ 12,165 11,804 11,042 9,935
Servicing Portfolio (at period
end)($).............................. $176,227 $175,197 $169,136 $160,425
Delinquency of Home Equity Loans Serv-
iced (at period end)(as a percentage
of number of loans:)
30 Days:
Number of loans................... 427 347 464 382
Percent of Delinquency............ 3.51% 2.94% 4.20% 3.84%
60 Days:
Number of loans................... 51 69 99 92
Percent of Delinquency............ 0.42% 0.58% 0.90% 0.93%
90 Days or more:
Number of loans................... 14 12 9 22
Percent of Delinquency............ 0.12% 0.10% 0.08% 0.22%
Total Delinquencies
Number of loans................... 492 428 572 496
Percent of Delinquency............ 4.04% 3.63% 5.18% 4.99%
In foreclosure and bankruptcy
Number of loans................... 211 180 180 205
Percent of Delinquency............ 1.73% 1.52% 1.63% 2.06%
REO Property at Period End (1)........ $ 2,445 $ 2,324 $ 2,390 $ 2,165
REO as a percentage of Serviced Port-
folio (2)............................ 1.39% 1.33% 1.41% 1.35%
Net Loss on REO Portfolio (3)......... $ 579 $ 415 $ 475 $ 330
Net Loss as a percentage of Serviced
Portfolio (4)........................ 0.33% 0.24% 0.28% 0.21%
</TABLE>
- -------
(1) Outstanding principal balance of loans where the servicer has acquired ti-
tle to the property ("real estate owned properties" or "REO Property").
(2) Outstanding principal balance of loans related to REO Property as a per-
cent of outstanding principal of all loans in serviced portfolio.
(3) REO and Net Loss data include property acquired by a related mortgage in-
surance company.
(4) Net Loss on REO Portfolio as a percentage of outstanding principal balance
of all loans in serviced portfolio.
The delinquency percentages set forth in the preceding table are calculated on
the basis of the number of mortgage loans included in the portfolio as of the
end of the periods indicated. The net loss percentages set forth above are
calculated on the basis of the outstanding principal balance of mortgage loans
included in the portfolio as of the end of the periods indicated. The actual
delinquency percentages and loss experience with respect to the Home Equity
Loans in the Mortgage Pool may be expected to be substantially higher than the
delinquency percentages indicated above because the composition of the Mort-
gage Pool will not change.
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<PAGE>
TRANSAMERICA MORTGAGE COMPANY
<TABLE>
<CAPTION>
---------------------------
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
1996 1997
(Dollars in 000s) ------------ -------------
<S> <C> <C> <C> <C>
Servicing Portfolio (at period end).............. $49,022 $163,775
Average Serviced Portfolio....................... $19,980 $110,611
Delinquency of mortgage loans serviced (at period
end)
31 days........................................ $ 494 1.01% $ 2,331 1.42%
61 days........................................ $ 119 0.24% $ 59 0.04%
91 days or more................................ $ 23 0.05% $ 259 0.16%
Total delinquencies (at period end).............. $ 636 1.30% $ 2,649 1.62%
REO Portfolio (at period end).................... -- 0.00% $ 152 0.09%
Total.......................................... $ 636 1.30% $ 2,801 1.71%
In foreclosure and bankruptcy (at period end).... -- 0.00% $ 13,508 8.25%
Net Loss on REO Portfolio........................ -- $ 71
Net Loss As A Percentage of Serviced Portfolio--
Annualized...................................... 0.00% 0.06%
</TABLE>
The delinquency percentages set forth in the preceding table are calculated on
the basis of the unpaid principal balances of mortgage loans included in the
Portfolio as of the end of the periods indicated. The annualized net loss per-
centages set forth above are calculated on the basis of the ending outstanding
unpaid principal balance of mortgage loans included in the Portfolio with re-
spect to the periods indicated. However, because the amount of loans included
in TMC's portfolio has increased rapidly over these periods as a result of new
originations, the portfolio as of the end of any indicated period includes
many loans that will not have been outstanding long enough to give rise to
some or all of the indicated periods of delinquency or to have resulted in
losses. In the absence of such substantial and continual additions of newly
originated loans to the portfolio, the delinquency and charge-offs percentages
indicated above would be higher and could be substantially higher. The actual
delinquency percentages and loss experience with respect to the Home Equity
Loans in TMC's portfolio may be expected to be substantially higher than the
delinquency percentages indicated above because the composition of the Mort-
gage Pool will not change. Until such time as TMC develops a meaningful ser-
vicing portfolio, the reported delinquency and loss experience is unlikely to
have any predictive value with respect to the delinquency and loss experience
on the Home Equity Loans. As a result, it is unlikely that the delinquency and
loss experience with respect to the TMC Loans will be comparable to that re-
ported above.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The following summary describes certain terms of the Certificates and the
Pooling and Servicing Agreement. Reference is made to the accompanying Pro-
spectus for important additional information regarding the terms of the Class
A Certificates and the underlying documents. A form of the Pooling and Servic-
ing Agreement has been filed as an exhibit to the Registration Statement of
which the Prospectus forms a part. The summary does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the pro-
visions of the Class A Certificates and the Pooling and Servicing Agreement.
Where particular provisions or terms used in any of such documents are re-
ferred to, the actual provisions (including definitions of terms) are incorpo-
rated by reference as part of such summaries.
The TFC Home Equity Loan Asset-Backed Certificates, Series 1997-1, will con-
sist of the Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Certifi-
cates (collectively, the "Class A Certificates"), and the Class R Certificate
(together with the Class A Certificates, the "Certificates"). Only the Class A
Certificates are offered hereby.
The Certificates represent interests in the Trust created pursuant to the
Pooling and Servicing Agreement. The Trust consists of (i) a pool (the "Mort-
gage Pool") of fixed and adjustable rate mortgage loans (each, a "Home Equity
Loan") secured by mortgages, deeds of trust or other instruments (each, a
"Mortgage") creating a first, second or more junior lien primarily on one- to
four-family dwellings, condominiums, units in planned unit developments and
manufactured homes (each, a "Mortgaged Property") to be deposited into the
Trust by the Seller for the benefit of the holders of the Certificates (the
"Certificateholders"), (ii) all monies received on the Home Equity Loans after
the Cut-off Date and (iii) the Certificate Insurance Policy.
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<PAGE>
Each Class A Certificate will be issued in minimum denominations of $100,000
and integral multiples of $1,000 in excess thereof. Each Class A Certificate
will represent a percentage interest (a "Percentage Interest") in the Certifi-
cates of the applicable Class determined by dividing the original dollar
amount represented by such Certificate by the Class Certificate Balance for
such Class.
Each Class of Class A Certificates (the "Book-Entry Certificates") will ini-
tially be represented by one or more certificates registered in the name of
Cede & Co. ("Cede"), the nominee of The Depository Trust Company ("DTC"). Per-
sons acquiring beneficial ownership in the Class A Certificates ("Certificate
Owners") will hold their Certificates through DTC in the United States, or
Cedel or Euroclear in Europe, if they are participants in such systems, or in-
directly through organizations which are participants in such systems. Trans-
fers within DTC, Cedel or Euroclear, as the case may be, will be in accordance
with the usual rules and operating procedures of the relevant system. Cross-
market transfers between persons holding directly or indirectly through DTC,
on the one hand, and counterparties holding directly or indirectly through
Euroclear or Cedel, on the other, will be effected in DTC through The Chase
Manhattan Bank ("Chase") or Citibank, N.A. ("Citibank"), the relevant deposi-
taries of Euroclear and Cedel, respectively, and each a participating member
of DTC. The interests of the Certificate Owners will be represented by book
entries on the records of DTC and participating members thereof. No Certifi-
cate Owner will be entitled to receive a definitive certificate representing
such person's interest, except in the event that definitive Certificates are
issued in the limited circumstances described in the Pooling and Servicing
Agreement. All references in this Prospectus Supplement to any of the Class A
Certificates reflect the rights of Certificate Owners only as such rights may
be exercised through DTC and its participating organizations for so long as
such Class A Certificates are held by DTC. See "Risk Factors" and "Appendix A"
hereto.
On each Payment Date, the Trustee will pay to each person in whose name a Cer-
tificate is registered on the related Record Date (which in the case of Book-
Entry Certificates initially will be only Cede, as nominee of DTC), the por-
tion of the aggregate payment to be made to Certificateholders of the applica-
ble Class of Certificates, to which such holder is entitled based on the Per-
centage Interest of the Certificates of such Class held by such holder. Dis-
tributions will be made by wire transfer of immediately available funds to the
account of such holder at a bank or other entity having appropriate facilities
therefor if such holder owns of record Certificates in denominations aggregat-
ing in excess of $1,000,000 and shall have provided complete wiring instruc-
tions to the Trustee at least five Business Days prior to the Record Date, and
otherwise by check mailed to the address of the person entitled thereto as it
appears on the Certificate Register. A "Business Day" is defined to be any day
other than (i) a Saturday or Sunday or (ii) a day on which banking institu-
tions in New York, New York, Dallas, Texas, or the city in which the corporate
trust office of the Trustee or the executive office of the Insurer is located
shall be authorized or obligated by law, executive order, or governmental de-
cree to be closed.
FINAL SCHEDULED PAYMENT DATES
The Final Scheduled Payment Dates of the Class A Certificates will be as fol-
lows:
Class A-1: April 25, 2007
Class A-2: January 25, 2001
Class A-3: January 25, 2017
Class A-4: January 25, 2028
Class A-5: October 25, 2028
The Final Scheduled Payment Date with respect to the Class A-1, Class A-2 and
Class A-3 Certificates is the Payment Date on which the Class Certificate Bal-
ance of such Classes are expected to be reduced to zero assuming that, among
other things, that there are no principal prepayments on the related Home Eq-
uity Loans. The Final Scheduled Payment Date with respect to the Class A-4 and
Class A-5 Certificates is the Payment Date that is one year after the maturity
of the last maturing Home Equity Loan in the Fixed Rate Group and Floating
Rate Group, respectively. The rate of payment of principal of the Class A Cer-
tificates will depend on the rate of payments of principal (including prepay-
ments) and any repurchases of the related Home Equity Loans. Since the Final
Scheduled Payment Dates have been determined based upon the assumptions set
forth above, the actual final Payment Date of each Class is likely to occur
prior to its Final Scheduled Payment Date although, in the event of defaults
in payment of the Home Equity Loans, it could occur later or earlier.
REPRESENTATIONS AND WARRANTIES OF THE SELLER, THE SUBSERVICER AND THE MASTER
SERVICER
The Seller will make the representations, among others, as to each Home Equity
Loan conveyed by the Seller as of the Closing Date described under "Descrip-
tion of the Certificates -- Representations and Warranties of the Seller" in
the Prospectus and will also represent that:
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(i) As of the Cut-off Date, no Home Equity Loans in the Mortgage Pool are
more than 60 days contractually delinquent.
(ii) No Home Equity Loan is subject to foreclosure proceedings as of the
Cut-off Date.
(iii) No Home Equity Loan has a Combined Loan-to-Value Ratio in excess of
100%.
(iv) All Home Equity Loans have Mortgage Interest Rates equal to or in ex-
cess of 6% per annum.
With respect to the TMC Loans, the Master Servicer will make the same repre-
sentations and warranties that the Seller makes. Likewise, with respect to the
MMC Loans, the Subservicer will make the same representations and warranties
that the Seller makes. Upon the breach of such representations and warranties,
the Master Servicer or the Subservicer, as the case may be, will be required
to cure such breach or repurchase or substitute for such affected Home Equity
Loans upon the terms and conditions sets forth in the Pooling and Servicing
Agreement. See "Description of the Certificates--Representations and Warran-
ties of the Seller" in the Prospectus.
DISTRIBUTIONS
General. Distributions will be made on the Certificates on each Payment Date
to the extent monies are available therefor, if and to the extent such Certif-
icates are then entitled to such distributions, as described herein.
On any Payment Date, the amount available for distribution to Fixed Rate Group
Certificateholders generally will equal the Available Payment Amount with re-
spect to the Fixed Rate Group and the amount available for distribution to
Class A-5 Certificateholders generally will equal the Available Payment Amount
with respect to the Floating Rate Group. The "Fixed Rate Group Certificates"
are the Class A-1, Class A-2, Class A-3 and Class A-4 Certificates.
The term "Available Payment Amount" generally means, with respect to any Pay-
ment Date and each Home Equity Loan Group, (a) collections on or with respect
to the Home Equity Loans in the related Home Equity Loan Group received by the
Master Servicer or the Subservicer during the immediately preceding calendar
month other than scheduled payments due in months subsequent to such calendar
month, net of the related Servicing Fee paid to each of the Master Servicer
and Subservicer and reimbursements for accrued and unpaid Servicing Fees, pre-
vious Advances and Servicing Advances and certain expenses paid by the Master
Servicer and Subservicer, and the amount of the monthly premium payable to the
Insurer with respect to the preceding calendar month, (b) the amount of any
Advances with respect to the related Home Equity Loans, (c) Compensating In-
terest and (d) any Insured Payments.
For purposes of determining the Available Payment Amount with respect to each
Home Equity Loan Group, the Servicing Fee and certain expenses paid by the
Master Servicer or the Subservicer, and the amount of the monthly premium pay-
able to the Insurer will be all allocated to each Home Equity Loan Group based
upon the principal balances of the Home Equity Loans in such Home Equity Loan
Group.
Interest. Interest on the Class A Certificates will accrue for each Accrual
Period on the Class A Certificate Balance immediately prior to such Payment
Date.
Interest will accrue on each of the Class A-2, Class A-3 and Class A-4 Certif-
icates at the respective Pass-Through Rates specified on the cover page hereof
and will be distributed, to the extent monies are available therefor, on each
Payment Date, commencing in December, 1997. Interest with respect to the Class
A-2, Class A-3 and Class A-4 Certificates will accrue on the basis of a 360-
day year consisting of twelve 30-day months.
The Class A-1 Certificates will accrue interest at a per annum rate equal to
the lesser of (i) One- Month LIBOR plus 0.16% and (ii) the Fixed Rate Group
Net WAC Cap (the "Class A-1 Pass-Through Rate"). The Class A-5 Certificates
will accrue interest during each Accrual Period at a rate equal to the lesser
of (i) One-Month LIBOR plus 0.23% and (ii) the Floating Rate Group Net WAC Cap
(the "Class A-5 Pass-Through Rate"). Interest with respect to the Class A-1
and Class A-5 Certificates will accrue on the basis of a 360-day year and ac-
tual days elapsed.
The "Accrual Period" for each Payment Date and with respect to (i) the Adjust-
able Rate Certificates is defined to be the period from the preceding Payment
Date, or the Closing Date in the case of the first Accrual Period, to and in-
cluding the day preceding the current Payment Date and (ii) the Class A-2,
Class A-3 and Class A-4 Certificates is defined to be the calendar month imme-
diately prior to such Payment Date.
"One-Month LIBOR" means, as of any LIBOR Determination Date, the rate for de-
posits in United States dollars for a period of one month which appears in the
Telerate Page 3750 as of 11:00 a.m., London time, on such date. If such rate
does not appear on
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Telerate Page 3750, the rate for that day will be determined on the basis of
the rates at which deposits in United States dollars are offered by the Refer-
ence Banks at approximately 11:00 a.m., London time, on that day to prime
banks in the London interbank market for a period of one month. The Trustee
will request the principal London office of each of the Reference Banks to
provide a quotation of its rate. If at least two such quotations are provided,
the rate for that day will be the arithmetic mean of the quotations. If fewer
than two quotations are provided as requested, the rate for that day will be
the arithmetic mean of the rates quoted by major banks in New York City, se-
lected by the Master Servicer, at approximately 11:00 a.m., New York City
time, on that day for loans in United States dollars to leading European banks
for a period of one month.
"Telerate Page 3750" means the display page currently so designated on the Dow
Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices).
"LIBOR Determination Date" means with respect to any Accrual Period, the sec-
ond LIBOR Business Day prior to such Accrual Period.
"Reference Banks" means two major banks in the London interbank market se-
lected by the Master Servicer and not controlled by or under common control
with the Master Servicer.
The "Current Interest" for any Class of Class A Certificates and any Payment
Date will equal the sum of (i) interest accrued during the applicable Accrual
Period at the related Pass-Through Rate on the related Class Certificate Bal-
ance immediately prior to such Payment Date and (ii) the Carryforward Amount.
The "Carryforward Amount" with respect to any Class of Class A Certificates is
the amount, as of any Payment Date, equal to the sum of (i) the amount, if
any, by which (x) the Current Interest for such Class exceeds (y) the amount
of the actual distribution in respect of interest on such Class of Class A
Certificates, made to the holders of such Class of Class A Certificates on the
immediately preceding Payment Date and (ii) 30 days' interest on such excess
at the related Pass-Through Rate for such Class of Class A Certificates.
The "Fixed Rate Group Net WAC Cap" for any Payment Date will equal the average
of the Net Mortgage Rates for the Fixed Rate Loans as of the first day of the
preceding calendar month less 0.50% and less the premium payable to the In-
surer with respect to the related Home Equity Loan Group (calculated as a per
annum rate), with such average weighted by the respective principal balances
of each such Fixed Rate Loan as of such first day.
The "Floating Rate Group Net WAC Cap" for any Payment Date will equal the av-
erage of the Net Mortgage Rates for the ARM Loans as of the first day of the
preceding calendar month less, if such Payment Date occurs after the date that
is six months after the Closing Date, 0.75% and less the premium payable to
the Insurer with respect to the related Home Equity Loan Group (calculated as
a per annum rate), with such average weighted by the respective principal bal-
ances of each such ARM Loan as of such first day.
The "Net Mortgage Rate" for each Home Equity Loan is equal to the Mortgage In-
terest Rate less the per annum rate used to determine the Servicing Fee.
Principal. Holders of the Class A Certificates will be entitled to receive on
each Payment Date, to the extent of the portion of the Available Payment
Amount attributable to the Home Equity Loans in the related Home Equity Loan
Group (but not more than the Class Certificate Balance of the Class then out-
standing), a distribution allocable to principal in an amount equal to the
amounts available pursuant to the Payment Priority described below.
Payment Priority. The Available Payment Amount on deposit in the Collection
Account will be distributed on each Payment Date in the following amounts and
order of priority:
(i) first to the Insurer, the premium payable with respect to the Certificate
Insurance Policy;
(ii) second, on each Payment Date, the Trustee shall allocate an amount equal
to the sum of (x) the Total Monthly Excess Spread with respect to the related
Home Equity Loan Group plus (y) any Overcollateralization Reduction Amount
with respect to such Home Equity Loan Group and Payment Date (such sum being
the "Total Monthly Excess Cashflow") in the following order of priority:
(A) first, such Total Monthly Excess Cashflow shall be allocated to the
payment of the related Principal Payment (excluding any
Overcollateralization Increase Amount) pursuant to clause (iv)(C) below in
an amount equal to the amount if any, by which (x) such Principal Payment
exceeds (y) Available Funds with respect to such Home Equity Loan Group for
such Payment Date, net of the related Current Interest and the premium pay-
able to the Insurer (the amount of such difference with respect to a Home
Equity Loan Group being an "Available Funds Shortfall" for such Home Equity
Loan Group);
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(B) second, any portion of Total Monthly Excess Cashflow with respect to
such Home Equity Loan Group remaining after the application described in
clause (A) above shall be allocated pursuant to clause (iv)(D) below
against any Available Funds Shortfall with respect to the other Home Equity
Loan Group;
(C) third, any portion of Total Monthly Excess Cashflow with respect to
such Home Equity Loan Group remaining after the allocations described in
clauses (A) and (B) above shall be paid to the Insurer in respect of any
Reimbursement Amount (as defined in the Pooling and Servicing Agreement)
owed to the Insurer with respect to the related Home Equity Loan Group;
(D) fourth, any portion of Total Monthly Excess Cashflow remaining after
the allocations described in clauses (A), (B) and (C) above shall be paid
to the Insurer in respect of any Reimbursement Amount owed to the Insurer
with respect to the other Home Equity Loan Group;
(iii) third, the amount, if any, of the Total Monthly Excess Cashflow with re-
spect to such Home Equity Loan Group on a Payment Date remaining after the al-
locations and payments described in clause (ii) above is the "Net Monthly Ex-
cess Cashflow" with respect to such Home Equity Loan Group and Payment Date
and is required to be applied in the following order of priority:
(A) first, such Net Monthly Excess Cashflow shall be used to reduce to ze-
ro, through the payment of an Overcollateralization Increase Amount, any
Overcollateralization Deficiency with respect to the related Home Equity
Loan Group as of such Payment Date;
(B) second, any Net Monthly Excess Cashflow remaining after the application
described in clause (A) above shall be used to reduce to zero, through the
payment of an Overcollateralization Increase Amount, the
Overcollateralization Deficiency, if any, with respect to the other Home
Equity Loan Group; and
(iv) fourth, following the making of all of the allocations and disbursements
described above, the following disbursements shall be made from the remaining
Available Payment Amount with respect to the related Home Equity Loan Group:
(A) to the Insurer, the amounts described in (ii)(C) and (D) above;
(B) to the applicable Class A Certificateholders from the related Available
Payment Amount, the related Current Interest;
(C) to the applicable Class A Certificateholders, an amount equal to the
related Principal Payment;
(D) to the holders of the Class or Classes of Class A Certificates related
to the other Home Equity Loan Group, any amounts specified in clauses
(ii)(B) and (iii)(B) above (such amounts with respect to the Fixed Rate
Group Certificateholders shall be distributed sequentially as provided for
in the definition of Principal Payment);
(E) to the holders of the related Class of Adjustable Rate Certificates,
the related LIBOR Carryover Amount;
(F) to the holders of the other Class of Adjustable Rate Certificates, the
related LIBOR Carryover Amount; and
(v) fifth, to the Class R Certificateholder, any remaining distributable
amounts as described in the Pooling and Servicing Agreement.
The "Principal Payment" for each Home Equity Loan Group and Payment Date shall
be the lesser of:
(a) the Total Available Funds (as defined herein) for the related Home Equity
Loan Group minus the related Current Interest, and the premium payable to the
Insurer for such Payment Date with respect to the related Class A Certifi-
cates; and
(b) the excess, if any, of
(i) the sum of (without duplication):
(A) the principal portion of all scheduled monthly payments on the Home
Equity Loans in the related Home Equity Loan Group due on or prior to
the related due date thereof, to the extent actually received by the
Master Servicer during the related Remittance Period and any prepayments
made by the Mortgagors and actually received by the Master Servicer dur-
ing the related Remittance Period;
(B) the balance of each Home Equity Loan (the "Principal Balance") in
the related Home Equity Loan Group that was repurchased by the Seller
during the related Remittance Period, to the extent such Principal Bal-
ance is actually received by the Trustee;
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(C) any substitution amounts (i.e. the excess, if any, of the Principal
Balance of a Home Equity Loan being replaced over the outstanding prin-
cipal balance of a replacement Home Equity Loan plus accrued and unpaid
interest) delivered by the Seller in connection with a substitution of a
Home Equity Loan in the related Home Equity Loan Group (to the extent
such substitution amounts relate to principal), to the extent such sub-
stitution amounts are actually received by the Trustee;
(D) all net liquidation proceeds actually collected by the Master
Servicer with respect to the Home Equity Loans in the related Home Eq-
uity Loan Group during the related Remittance Period (to the extent such
Net Liquidation Proceeds relate to principal);
(E) the amount of any Overcollateralization Deficit with respect to the
related Home Equity Loan Group for such Payment Date;
(F) the principal portion of the proceeds received with respect to the
related Home Equity Loan Group by the Trustee upon termination of the
Trust (to the extent such proceeds relate to principal); and
(G) the amount of any Overcollateralization Increase Amount with respect
to the related Home Equity Loan Group for such Payment Date to the ex-
tent of any Net Monthly Excess Cashflow available for such purpose;
over
(ii) the amount of any Overcollateralization Reduction Amount with respect
to the related Home Equity Loan Group for such Payment Date.
The Principal Payment for the Fixed Rate Group will be applied as follows:
first, to the Class A-1 Certificates until the Class A-1 Certificate Balance
has been reduced to zero; second, to the Class A-2 Certificates until the
Class A-2 Certificate Balance has been reduced to zero; third, to the Class A-
3 Certificates until the Class A-3 Certificate Balance has been reduced to ze-
ro; and fourth, to the Class A-4 Certificates until the Class A-4 Certificate
Balance has been reduced to zero.
The "Remittance Period" with respect to any Payment Date is the calendar month
immediately preceding such Payment Date.
The "Group Principal Balance" with respect to either Home Equity Loan Group at
any time equals the aggregate outstanding principal balance of the Home Equity
Loans in such Home Equity Loan Group.
The "Overcollateralization Requirement" with respect to each of the Fixed Rate
Group Certificates and the Class A-5 Certificates with respect to each Payment
Date is an amount provided for in the Pooling and Servicing Agreement. The
Overcollateralization Requirement provides for a certain level of
overcollateralization with respect to the each of the Fixed Rate Group Certif-
icates and the Class A-5 Certificates, i.e. the excess of the outstanding
principal balance of the Home Equity Loans in the related Home Equity Loan
Group over the aggregate Class Certificate Balance of the related Class A Cer-
tificates. Such level may increase or decrease over time as a result of the
performance of the Home Equity Loans in the related Home Equity Loan Group
with respect to certain tests specified in the Pooling and Servicing Agree-
ment. In addition, the Overcollateralization Requirement is subject to certain
floors specified in the Pooling and Servicing Agreement.
"Available Funds" as to each Home Equity Loan Group and each Payment Date is
defined to be the Available Payment Amount with respect to such Home Equity
Loan Group (net of Total Monthly Excess Cashflow and disregarding any Insured
Payments to be made on such Payment Date).
The "Class Certificate Balance" as of any Payment Date with respect to any
Class of Class A Certificates equals the principal amount set forth next to
such Class of Class A Certificates on the cover page hereof less all amounts
distributed to the Certificateholders of such Class as principal.
As of any Payment Date, the "Class A Certificate Balance" will equal the sum
of the Class Certificate Balances of all Class A Certificates.
As of any Payment Date, the "Fixed Rate Group Certificate Balance" will equal
the sum of the Class A-1 Certificate Balance, the Class A-2 Certificate Bal-
ance, the Class A-3 Certificate Balance and Class A-4 Certificate Balance.
"LIBOR Carryover Amount" for any Payment Date and either Class of Adjustable
Rate Certificates will equal the excess, if any, of (i) the sum of (a) the ex-
cess of interest accrued during the applicable Accrual Period on the applica-
ble Class Certificate Balance at the rate determined by reference to One-Month
LIBOR and the applicable margin (as to either Class of Adjustable Rate Certif-
icates, the "LIBOR Rate") over interest accrued at the Class A-1 Pass-Through
Rate or Class A-5 Pass-Through Rate, as applicable, and (b) 30 days' interest
on such excess at the applicable LIBOR Rate over (ii) the amount, if any, dis-
tributed in respect of
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such excess on prior Payment Dates. The Certificate Insurance Policy does not
cover, and the ratings of the Class A Certificates do not address the likeli-
hood of, the payment of any LIBOR Carryover Amount.
"Total Available Funds" as to each Home Equity Loan Group and Payment Date is
the sum of (i) the Available Payment Amount on deposit in the Collection Ac-
count with respect to such Home Equity Loan Group (net of Total Monthly Excess
Cashflow with respect to the related Home Equity Loan Group) on such Payment
Date and (ii) any amounts of Total Monthly Excess Cashflow with respect to
such Home Equity Loan Group to be applied on such Payment Date (disregarding
the amount of any Insured Payment to be made on such Payment Date).
CREDIT ENHANCEMENT
General. The credit enhancement provided for the benefit of the Class A
Certificateholders consists of (x) the overcollateralization and
crosscollateralization mechanics which utilize the internal cash flows of the
Trust and (y) the Certificate Insurance Policy. For a description of the Cer-
tificates Insurance Policy, see "The Certificate Insurance Policy and the In-
surer" herein.
Overcollateralization Resulting from Cash Flow Structure. The Pooling and Ser-
vicing Agreement requires that, on each Payment Date, Net Monthly Excess
Cashflow with respect to a Home Equity Loan Group be applied on such Payment
Date as an accelerated payment of principal on the related Class(es) of Class
A Certificates then entitled to distributions of principal, but only to the
limited extent hereafter described. Net Monthly Excess Cashflow equals the ex-
cess of (I) the excess, if any, of (x) the interest which is collected on the
Home Equity Loans in such Home Equity Loan Group during a calendar month (net
of the Servicing Fee, the premium paid to the Insurer and certain miscellane-
ous administrative amounts with respect to such Home Equity Loan Group includ-
ing reimbursement of Advances and Servicing Advances) over (y) the related
Current Interest (the difference between (x) and (y) is the "Total Monthly Ex-
cess Spread" with respect to such Home Equity Loan Group), over (II) the por-
tion of the Total Monthly Excess Cashflow that is used to cover shortfalls in
Available Funds on such Payment Date in the related Home Equity Loan Group or
in the other Home Equity Loan Group, or used to reimburse the Insurer.
The application of Net Monthly Excess Cashflow has the effect of accelerating
the amortization of the Class A Certificates relative to the amortization of
the Home Equity Loans in the related Home Equity Loan Group. To the extent
that any Net Monthly Excess Cashflow is not so used (and is not required to
satisfy requirements with respect to the other Home Equity Loan Group or to
pay Reimbursement Amounts (as defined in the Pooling and Servicing Agreement)
to the Insurer), the Pooling and Servicing Agreement provides that it will be
paid to the Class R Certificateholder.
Pursuant to the Pooling and Servicing Agreement, each Home Equity Loan Group's
Net Monthly Excess Cashflow will be applied as an accelerated payment of prin-
cipal on the Class A Certificates until the Overcollateralization Amount has
increased to the level required. "Overcollateralization Amount" means, with
respect to each Home Equity Loan Group and Payment Date, the excess, if any,
of the aggregate principal balances of the Home Equity Loans in such Home Eq-
uity Loan Group as of the close of business on the last day of the preceding
calendar month over the aggregate Class Certificate Balance of the related
Class A Certificates as of such Payment Date (after taking into account the
payment of the Principal Payment to such Home Equity Loan Group (except for
any Overcollateralization Reduction Amount or Overcollateralization Increase
Amount) on such Payment Date). With respect to each Home Equity Loan Group,
any amount of Net Monthly Excess Cashflow actually applied as an accelerated
payment of principal is a "Overcollateralization Increase Amount." The re-
quired level of the Overcollateralization Amount for each Home Equity Loan
Group with respect to a Payment Date is the "Overcollateralization Require-
ment." The Pooling and Servicing Agreement generally provides that the related
Overcollateralization Requirement may, over time, decrease, or increase, based
on the performance on the Home Equity Loans in the related Home Equity Loan
Group with respect to certain tests specified in the Pooling and Servicing
Agreement based on delinquency rates and cumulative losses.
In the event that the Overcollateralization Requirement with respect to a Home
Equity Loan Group is permitted to decrease on a Payment Date in the future,
the Pooling and Servicing Agreement provides that a portion of the amounts
which would otherwise be distributed to the related Class A Certificateholders
on such Payment Date shall be distributed to the holder of the Class R Certif-
icate. This has the effect of decelerating the amortization of Class A Certif-
icates relative to the amortization of the Home Equity Loans and of reducing
the related Overcollateralization Amount. With respect to any Home Equity Loan
Group and Payment Date, the excess, if any, of (x) the related
Overcollateralization Amount on such Payment Date after taking into account
all distributions to be made on such Payment Date (except for any distribu-
tions of related Overcollateralization Reduction Amounts as described in this
sentence) over (y) the related Overcollateralization Requirement is the "Ex-
cess Overcollateralization Amount" for such Home Equity Loan Group and Payment
Date. If, on any Payment Date, the Excess Overcollateralization Amount is, or,
after taking into account all other distributions to be made on such Payment
Date would be, greater than zero (i.e., the Overcollateralization Amount is or
would be greater than the related Overcollateralization Requirement), then
such amounts which
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would otherwise be distributed to the related Class A Certificateholders on
such Payment Date shall instead be distributed to the holder of the Class R
Certificate: such amount being the "Overcollateralization Reduction Amount"
with respect to the related Home Equity Loan Group and Payment Date.
The Pooling and Servicing Agreement provides generally that, on any Payment
Date all amounts collected (other than any such amount applied to the payment
of an Overcollateralization Reduction Amount) with respect to a Home Equity
Loan Group during the prior calendar month will be distributed to the related
Class A Certificateholders on such Payment Date. If any Home Equity Loan be-
came a Liquidated Home Equity Loan during such prior calendar month, the Net
Liquidation Proceeds related thereto and allocated to principal may be less
than the principal balance of the related Home Equity Loan; the amount of any
such insufficiency is a "Net Loss." In addition, the Pooling and Servicing
Agreement provides that the principal balance of any Home Equity Loan which
becomes a Liquidated Home Equity Loan shall thenceforth equal zero. The Pool-
ing and Servicing Agreement does not contain any requirement that the amount
of any Net Loss be distributed to the related Class A Certificateholders on
the Payment Date which immediately follows the event of loss; i.e., the Pool-
ing and Servicing Agreement does not require the current recovery of losses.
However, the realization of a Net Loss will reduce the Overcollateralization
Amount with respect to the related Home Equity Loan Group, which to the extent
that such reduction causes the Overcollateralization Amount to be less than
the related Overcollateralization Requirement applicable to the related Pay-
ment Date, will require the payment of an Overcollateralization Increase
Amount on such Payment Date (or, if insufficient funds are available on such
Payment Date, on subsequent Payment Dates, until the Overcollateralization
Amount equals the related Overcollateralization Requirement). The effect of
the foregoing is to allocate losses to the Class R Certificateholder by reduc-
ing, or eliminating entirely, payments of Total Monthly Excess Spread and
Overcollateralization Reduction Amounts which such Certificateholder would
otherwise receive.
Overcollateralization and the Certificate Insurance Policy. The Pooling and
Servicing Agreement defines an "Overcollateralization Deficit" with respect to
a Home Equity Loan Group and Payment Date to be the amount, if any, by which
the aggregate Class Certificate Balance of the related Class A Certificates
with respect to such Payment Date, after taking into account all distributions
to be made on such Payment Date (without regard to any Insured Payment to be
made on such Payment Date), exceeds the aggregate principal balances of the
Home Equity Loans in such Home Equity Loan Group as of the close of business
on the last day of the prior calendar month. The Pooling and Servicing Agree-
ment requires the Trustee to make a claim for an Insured Payment under the
Certificate Insurance Policy not later than the second Business Day prior to
any Payment Date as to which the Trustee has determined that an
Overcollateralization Deficit will occur for the purpose of applying the pro-
ceeds of such Insured Payment as a payment of principal to the related Class A
Certificateholders on such Payment Date. The Certificate Insurance Policy is
thus similar to the subordination provisions described above insofar as such
Certificate Insurance Policy guarantees ultimate, rather than current, payment
of the amounts of any Net Losses to the Class A Certificateholders. Investors
in the Class A Certificates should realize that, under extreme loss or delin-
quency scenarios applicable to the related Home Equity Loan Group, they may
temporarily receive no distributions of principal when they would otherwise be
entitled thereto under the principal allocation provisions described herein.
Nevertheless, the exposure to risk of loss of principal of the Class A Certif-
icates depends in part on the ability of the Insurer to satisfy its obliga-
tions under the Certificate Insurance Policy. In that respect and to the ex-
tent that the Insurer satisfies such obligations, the Class A
Certificateholders are insulated from shortfalls in Available Funds that may
arise.
The Pooling and Servicing Agreement will provide that to the extent that the
Insurer makes Insured Payments, either directly or indirectly to the holders
of such Class A Certificates, the Insurer will be subrogated to the rights of
such holders of Class A Certificates with respect to such Insured Payments,
and shall receive reimbursement for such Insured Payment as provided in the
Pooling and Servicing Agreement, but only from the sources and in the manner
provided in the Pooling and Servicing Agreement, such subrogation and reim-
bursement to have no effect on the Insurer's obligations under the Certificate
Insurance Policy.
Cross-collateralization. In addition to the foregoing, the Total Monthly Ex-
cess Spread and Net Monthly Excess Cashflow will be available to cover the
Overcollateralization Increase Amounts, Available Funds Shortfalls and
Overcollateralization Deficits with respect to the other Home Equity Loan
Group as described above under "Description of the Certificates -- Distribu-
tions; Payment Priority."
ADVANCES; COMPENSATING INTEREST
Not later than two Business Days prior to each Payment Date, the Master
Servicer will make an advance (each, an "Advance") in an amount equal to all
monthly payments of interest that were due on the Home Equity Loans during the
preceding calendar month and delinquent at the close of business on the last
day of such calendar month, to the extent the Master Servicer believes that
the amount so advanced will be recoverable from subsequent payments and col-
lections in respect of the related Home Equity Loan. On each Payment Date, the
Master Servicer will be entitled to a first priority reimbursement for previ-
ous Advances from
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funds received with respect to such delinquent Home Equity Loans. When the
Master Servicer has determined that any Advances are nonrecoverable, the Mas-
ter Servicer will be entitled to a first priority reimbursement for such Ad-
vances from any funds received with respect to the Home Equity Loans.
Not later than two Business Days prior to each Payment Date, the Master
Servicer is required to remit to the Trustee, without any right of reimburse-
ment, an amount equal to, with respect to each Home Equity Loan as to which a
principal prepayment in full was received during the preceding calendar month,
the lesser of (a) the excess, if any, of the sum of 30 days' interest on the
principal balance of each such Home Equity Loan (or at such lower rate as may
be in effect because of application of the Civil Relief Act) minus the Servic-
ing Fees for such Home Equity Loan, over the amount of interest actually paid
by the related Mortgagor in connection with each such principal prepayment
(with respect to all such Home Equity Loans, the "Prepayment Interest
Shortfall") and (b) the sum of the Servicing Fees for the most recently ended
calendar month. Such payments are referred to herein as "Compensating Inter-
est."
In addition, the Master Servicer is obligated to advance funds to satisfy or
to keep current any Home Equity Loans secured by senior liens, in order to
preserve the Trust's interest in such Home Equity Loans, or to pay taxes, le-
gal expenses and attorney fees, insurance premiums and similar expenses relat-
ing to a Home Equity Loan (each, a "Servicing Advance"), to the extent that
the Master Servicer believes that the amount so advanced will be recoverable
from subsequent payments and collections on the related Home Equity Loan. The
Master Servicer will be entitled to a first priority reimbursement for such
Servicing Advances from amounts received with respect to the Home Equity
Loans. The Subservicer will have similar obligations under the Subservicing
Agreement.
SERVICING COMPENSATION
The Master Servicer (with respect to the TMC Loans) and the Subservicer (with
respect to the MMC Loans) will be entitled to a fee of 0.50% per annum of the
outstanding principal balance of each such Home Equity Loan (the "Servicing
Fee") payable out of collections with respect to the Home Equity Loans as pro-
vided in the Pooling and Servicing Agreement. In addition to the Servicing
Fee, the Master Servicer and Subservicer are entitled under the Pooling and
Servicing Agreement to retain as additional servicing compensation any prepay-
ment charges and assumption and other administrative fees (including bad check
charges, late payment fees and similar fees), the excess of any net liquida-
tion proceeds over the outstanding principal balance of a Liquidated Home Eq-
uity Loan, to the extent not otherwise required to be remitted to the Trustee
for deposit into the Collection Account, and earnings paid on Permitted In-
vestments and similar items.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Agreement provides that the Master Servicer may not resign from its obli-
gations and duties thereunder, unless such duties and obligations are no
longer permissible under applicable laws as evidenced by an opinion of counsel
delivered to the Trustee. No such resignation will become effective until the
Trustee or a successor servicer has assumed the Master Servicer's obligations
and duties under the Agreement.
The Master Servicer may perform any of its duties and obligations under the
Pooling and Servicing Agreement through one or more subservicers or delegates,
which may be affiliates of the Master Servicer. On the Closing Date, the Mas-
ter Servicer will engage Metropolitan Mortgage Company to service the MMC
Loans. Notwithstanding any such arrangement, the Master Servicer will remain
liable and obligated to the Trustee, the Insurer and the Certificateholders
for the Master Servicer's duties and obligations under the Pooling and Servic-
ing Agreement, without any diminution of such duties and obligations and as if
the Master Servicer itself were performing such duties and obligations.
Any corporation into which the Master Servicer may be merged or consolidated,
or any corporation resulting from any merger, conversion or consolidation to
which the Master Servicer shall be a party, or any corporation succeeding to
the business of the Master Servicer shall be the successor of the Master
Servicer under the Agreement, provided, however, that, so long as Certificates
are outstanding under the Pooling and Servicing Agreement, the Master Servicer
will covenant that any such consolidation, merger, sale or transfer shall be
upon the condition that the due and punctual performance and observance of all
the terms, covenants and conditions of the Pooling and Servicing Agreement to
be kept or performed by the Master Servicer shall, by an agreement supplemen-
tal thereto, executed and delivered to the Trustee, be assumed by the corpora-
tion (if other than the Master Servicer) formed by or resulting from any such
consolidation or merger, or which shall have received the transfer of all or
substantially all of the property and assets of the Master Servicer, just as
fully and effectually as if such successor corporation had been an original
party thereto, and the representations and warranties set forth by the Master
Servicer therein shall be true and correct with respect to such successor cor-
poration in all material respects. No consent or approval of the
Certificateholders shall be required as to any such transaction.
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<PAGE>
MASTER SERVICER TERMINATION EVENTS
Any one of the following events constitutes a "Master Servicer Termination
Event:" (i) failure by the Master Servicer to make any payment, transfer or
deposit, or to give instructions to the Trustee to make any payment, transfer
or deposit, on the date the Master Servicer is required to do so under the
Pooling and Servicing Agreement, which is not cured within a five Business Day
grace period; (ii) the Master Servicer assigns its duties under the Pooling
and Servicing Agreement, except as specifically permitted thereunder, or fail-
ure on the part of the Master Servicer duly to observe or perform in any mate-
rial respect any other covenants or agreements of the Master Servicer in the
Pooling and Servicing Agreement which has a material adverse effect on the In-
surer or the Certificateholders and which continues unremedied for a period of
60 days after the date on which the Master Servicer shall have received writ-
ten notice (or had actual knowledge) of such failure from the Trustee, the In-
surer or the Holders of Certificates evidencing not less than 33-1/3% of the
Class A Certificate Balance; (iii) any representation, warranty or certifica-
tion made by the Master Servicer in the Pooling and Servicing Agreement or in
any certificate delivered pursuant to the Pooling and Servicing Agreement
proves to have been incorrect in any material respect when made, which has a
material adverse effect on the rights of the Certificateholders or the Insur-
er, and which material adverse effect continues for a period of 60 days after
written notice; (iv) certain bankruptcy or insolvency events occur with re-
spect to the Master Servicer; and (v) certain tests with respect to the per-
formance of the Home Equity Loans in the Mortgage Pool are not met.
RIGHTS UPON THE OCCURRENCE OF A MASTER SERVICER TERMINATION EVENT
Subject to the cure periods specified above and so long as a Master Servicer
Termination Event has not been remedied, the Insurer may terminate all of the
rights and obligations of the Master Servicer as servicer of the Home Equity
Loans under the Pooling and Servicing Agreement. On or after the receipt by
the Master Servicer of such written notice, all authority and power of the
Master Servicer under the Pooling and Servicing Agreement, whether with re-
spect to the Certificates or the Home Equity Loans or otherwise, will pass to
and be vested in the Trustee.
TERMINATION; PURCHASE OF HOME EQUITY LOANS
The Pooling and Servicing Agreement will terminate upon the taking of the last
action required to be taken by the Trustee on the final Payment Date following
the earlier of (i) the purchase or (ii) the final payment or other liquida-
tion, of the principal balance of the last Home Equity Loan remaining in the
Trust and the disposition of all property acquired upon foreclosure or deed in
lieu of foreclosure of any Home Equity Loan.
Subject to provisions in the Pooling and Servicing Agreement concerning adopt-
ing a plan of complete liquidation, the Master Servicer may, at its option,
terminate the Pooling and Servicing Agreement on any date on which the Pool
Principal Balance is less than 10% of the Original Pool Principal Balance by
purchasing, on the next succeeding Payment Date, all of the outstanding Home
Equity Loans and REO Properties then remaining in the Trust at a price (the
"Termination Price") equal to the sum of (w) 100% of the principal balance of
each Home Equity Loan (other than any Liquidated Home Equity Loans and any
Home Equity Loan which is in "REO Property" status and whose fair market value
is included pursuant to clause (x) below) as of the Payment Date upon which
the proceeds of any such purchase are to be distributed, (x) the fair market
value of REO Property (but in no event less than the principal balance and ac-
crued and unpaid interest of the related Home Equity Loan), (y) accrued and
unpaid interest at the applicable Mortgage Interest Rate on the principal bal-
ance of each Home Equity Loan and (z) all Reimbursement Amounts owing the the
Insurer.
If the Master Servicer does not exercise such option within 90 days of the
first Payment Date upon which Pool Principal Balance is less than 10% of the
Original Pool Principal Balance, the Trustee is required to conduct a termina-
tion auction (the "Termination Auction"). The Trustee will solicit one or more
active participants in the asset-backed securities or mortgage loan markets
that are not affiliated with the Master Servicer to make a bid to purchase the
Home Equity Loans at the Termination Auction. The Trustee will sell all the
Home Equity Loans to the highest bidder, subject, among other things, to: (i)
the requirement that the highest bid equal or exceed the Minimum Termination
Amount; and (ii) the requirement that at least one bid be tendered by an ac-
tive participant in the asset-backed securities or mortgage loan market that
is not affiliated with the Master Servicer. If the foregoing requirements are
satisfied, the successful bidder or bidders shall remit the aggregate purchase
price for the Home Equity Loans to the Trustee. If the foregoing requirements
are not satisfied, the purchase shall not occur and distributions will con-
tinue to be made on the Certificates. Any sale and consequent termination of
the Trust as a result of a Termination Auction must constitute a "qualified
liquidation" of the Trust under Section 860F of the Code. If satisfactory bids
are received as described above, such remaining Home Equity Loans will be sold
and the proceeds distributed to the Certificateholders in the same priority as
distributions are made on any Payment Date.
S-55
<PAGE>
The "Minimum Termination Amount" is defined to be the sum of (i) the Class A
Certificate Balance, (ii) the interest on the respective Class Certificate
Balance for each Class of Class A Certificates at the respective Pass-Through
Rates for the next succeeding Payment Date and (iii) all Reimbursement Amounts
owing to the Insurer.
The "Pool Principal Balance" as of any date is the sum of the Group Principal
Balances for each of the Fixed Rate Group and the Floating Rate Group.
AMENDMENT OF POOLING AND SERVICING AGREEMENT
The Pooling and Servicing Agreement may be amended from time to time by the
Seller, Master Servicer and the Trustee by written agreement, without prior
notice to, or consent of, the Certificateholders, but with the consent of the
Insurer, to cure any ambiguity, to correct or supplement any provisions there-
in, or to make any other provisions with respect to matters or questions aris-
ing under the Pooling and Servicing Agreement which shall not be inconsistent
with the provisions of the Pooling and Servicing Agreement, provided that such
action does not, as evidenced by an opinion of counsel delivered to the Trust-
ee, adversely affect in any material respect the interests of any
Certificateholder.
The Pooling and Servicing Agreement may also be amended from time to time by
the Seller, the Master Servicer and the Trustee by written agreement, without
prior notice to, or consent of, the Certificateholders, but with the consent
of the Insurer, to modify, eliminate or add to the provisions thereof as may
be necessary to maintain the qualification of the Trust as a REMIC under the
Code or avoid, or minimize the risk of, the imposition of any tax on the Trust
under the Code, or to prevent the Trust from entering into any "prohibited
transaction" as defined in the Code; provided that (a) there shall have been
delivered an opinion of counsel addressed to the Trustee to the effect that
such action is necessary or appropriate to prevent the Trust from entering
into such prohibited transaction and (b) such amendment shall not adversely
affect in any material respect the interests of any Certificateholder.
The Pooling and Servicing Agreement may also be amended from time to time by
the Seller, the Master Servicer and the Trustee with the consent of the In-
surer and Holders of Certificates evidencing Percentage Interests aggregating
not less than 51% of the Class A Certificate Balance, such classes voting to-
gether as a class for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Agreement, or of modi-
fying in any manner the rights of the Holders of Certificates; provided, how-
ever, that no such amendment shall (i) increase or reduce in any manner the
amount of, or accelerate or delay the timing of, collections of payments on
Home Equity Loans or distributions that shall be required to be made on any
Certificate without the consent of the Holder of such Certificate, or (ii) re-
duce the aforesaid percentage required to consent to any such amendment, with-
out the consent of the Holders of all Certificates then outstanding. Further-
more, no such amendment shall be effective unless the Trustee has received an
opinion of counsel with respect to certain tax matters.
ASSIGNMENT OF HOME EQUITY LOANS
On the Closing Date, the Seller will transfer to the Trust all of its right,
title and interest in and to each Home Equity Loan, the related mortgage note,
mortgages and other related documents (collectively, the "Related Documents"),
including all payments received after the Cut-off Date. The Trustee, concur-
rently with such initial transfer, will deliver the Certificates to the Sell-
er. Each Home Equity Loan transferred to the Trust will be identified on a
schedule (the "Mortgage Loan Schedule") delivered to the Trustee pursuant to
the Pooling and Servicing Agreement. Such schedule will include information as
to the principal balance of each Home Equity Loan as of the Cut-off Date, as
well as other information.
The Pooling and Servicing Agreement will require that, within the time period
specified therein, the Seller will deliver to the Trustee (or a custodian, as
the Trustee's agent for such purpose) the Home Equity Loans endorsed to the
Trustee and the Related Documents. Under the terms of the Pooling and Servic-
ing Agreement, the Seller will prepare assignments of the Mortgages related to
each Home Equity Loan in favor of the Trustee.
During the period that the Class A Certificates are outstanding and so long as
certain conditions specified by the Insurer are met, assignments of the re-
lated Mortgages from the entities that will sell Home Equity Loans to the
Seller and from the Seller to the Trustee will not be required to be recorded.
See "Risk Factors--Creditors' Rights and Bankruptcy Considerations" herein.
If the conditions specified by the Insurer are not met, assignments of the
Mortgages in favor of the Trustee will be required to be recorded (or opinions
of counsel acceptable to the Insurer and the Rating Agencies will be obtained
to the effect that recording is not required to protect the Trust's interest
in and to the related Home Equity Loan). See "Description of the Certifi-
cates -- Assignment of the Home Equity Loans" in the Prospectus.
S-56
<PAGE>
Within 60 days of the Closing Date the Trustee will review the Home Equity
Loans and the Related Documents pursuant to the Pooling and Servicing Agree-
ment and if any Home Equity Loan or the Related Documents are found to be de-
fective in any material respect (a "Defective Home Equity Loan") and such de-
fect is not cured within 90 days (with respect to defects relating to the
Mortgage Note) or within 120 Days (with respect to defects relating to the Re-
lated Documents) following notification thereof to the Seller by the Trustee
or the Insurer, the Seller will be obligated to either (i) substitute for such
Home Equity Loan an Eligible Substitute Home Equity Loan; however, such sub-
stitution is permitted only within two years of the Closing Date or (ii) pur-
chase such Home Equity Loan at a price (the "Purchase Price") equal to the
outstanding principal balance of such Home Equity Loan as of the date of pur-
chase, plus unpaid and unpaid interest thereon through the calendar month in
which such purchase occurs. The obligation of the Seller to repurchase or sub-
stitute for a Defective Home Equity Loan is the sole remedy regarding any de-
fects in the Home Equity Loans and Related Documents available to the Trustee
or the Certificateholders.
In connection with the substitution of an Eligible Substitute Home Equity
Loan, the Seller will be required to deposit in the Collection Account the
amount of any accrued and unpaid interest on the Defective Home Equity Loan
plus the excess, if any, of the Principal Balance of the Defective Home Equity
Loan over the aggregate Principal Balances of the Eligible Substitute Home Eq-
uity Loan or Loans for deposit into the Collection Account as a payment with
respect to the Eligible Substitute Home Equity Loan.
An "Eligible Substitute Home Equity Loan" is a Home Equity Loan to be substi-
tuted by the Seller for a Defective Home Equity Loan which must have an aggre-
gate Principal Balance equal to or less than the Principal Balance of such De-
fective Home Equity Loan, a Mortgage Interest Rate of not less than the Mort-
gage Interest Rate of such Defective Home Equity Loan and not more than 1% in
excess thereof, a final maturity of no more than six months earlier or later
than the final maturity of such Defective Home Equity Loan (and in no event
later than the latest maturing Home Equity Loan in the related Home Equity
Loan Group) and a Combined Loan-to-Value Ratio no higher than that of the De-
fective Home Equity Loan and shall not be a Balloon Loan. In addition, if the
Defective Home Equity Loan is an ARM Loan, the Eligible Substitute Home Equity
Loan must be an ARM Loan and likewise for Fixed Rate Loans. Each Eligible Sub-
stitute Home Equity Loan shall itself be subject to repurchase or substitu-
tion. The Insurer may vary the above criteria.
The Seller will make certain representations and warranties as to the accuracy
in all material respects of certain information furnished to the Trustee with
respect to each Home Equity Loan. In addition, the Seller will represent and
warrant, on the Closing Date, that, among other things: (i) at the time of
transfer to the Trust, the Seller has transferred or assigned all of its
right, title and interest in each Home Equity Loan and the Related Documents,
free of any lien; and (ii) each Home Equity Loan complied, at the time of
origination, in all material respects with applicable state and federal laws.
Upon discovery of a breach of any such representation and warranty which mate-
rially and adversely affects the interests of the Certificateholders or the
Insurer in the related Home Equity Loan and Related Documents, the Seller will
have a period of 90 days after discovery or notice of the breach to effect a
cure. If the breach cannot be cured with the 90-day period, the Seller will be
obligated to (i) substitute for such Home Equity Loan an Eligible Substitute
Home Equity Loan or (ii) purchase such Home Equity Loan from the Trust. The
same procedure and limitations that are set forth above for the substitution
or purchase of Defective Home Equity Loan as a result of deficient documenta-
tion relating thereto will apply to the substitution or purchase of a Home Eq-
uity Loan as a result of a breach of a representation or warranty in the Pool-
ing and Servicing Agreement that materially and adversely affects the inter-
ests of the Certificateholders or the Insurer.
THE CERTIFICATE INSURANCE POLICY AND THE INSURER
The information set forth in this section has been provided by Ambac Assurance
Corporation. No representation is made by the Seller, the Master Servicer, the
Subservicer, the Underwriters or any of their affiliates as to the accuracy or
completeness of any such information.
THE INSURER
Ambac Assurance Corporation (the "Insurer") is a Wisconsin-domiciled stock in-
surance corporation regulated by the Office of the Commissioner of Insurance
of the State of Wisconsin and licensed to do business in 50 states, the Dis-
trict of Columbia, the Commonwealth of Puerto Rico and Guam. The Insurer pri-
marily insures newly issued municipal and structured finance obligations. The
Insurer is a wholly-owned subsidiary of Ambac Financial Group, Inc. (formerly,
AMBAC Inc.), a 100% publicly-held company. Moody's, S&P and Fitch Investors
Service, L.P. have each assigned a triple-A claims-paying ability rating to
the Insurer.
S-57
<PAGE>
The consolidated financial statements of the Insurer and its subsidiaries as
of December 31, 1996 and December 31, 1995 and for the three years ended De-
cember 31, 1996, prepared in accordance with generally accepted accounting
principles, included in the Current Report on Form 8-K of Ambac Financial
Group, Inc. (formerly AMBAC Inc.) (which was filed with the Commission on
March 12, 1997; Commission File No. 1-10777) and the consolidated financial
statements of the Insurer and its subsidiaries as of September 30, 1997 and
for the periods ending September 30, 1997 and September 30, 1996 included in
the Quarterly Report on Form 10-Q of Ambac Financial Group, Inc. for the pe-
riod ended September 30, 1997 (which was filed with the Commission on November
14, 1997) are hereby incorporated by reference into this Prospectus Supplement
and shall be deemed to be a part hereof. Any statement contained in a document
incorporated herein by reference shall be modified or superseded for the pur-
poses of this Prospectus Supplement to the extent that a statement contained
herein by reference herein also modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus Supplement.
All financial statements of the Insurer and its subsidiaries included in docu-
ments filed by Ambac Financial Group, Inc. with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Class A Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The following table sets forth the capitalization of the Insurer as of Decem-
ber 31, 1994, December 31, 1995, December 31, 1996 and September 30, 1997, re-
spectively, in conformity with generally accepted accounting principles.
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
<TABLE>
<CAPTION>
-----------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1997
(Dollars in Millions) ------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Unearned premiums........ $ 840 $ 906 $ 995 $1,047
Other liabilities........ 136 295 259 311
------- ------- ------- ------
Total liabilities........ 976 1,201 1,254 1,358
------- ------- ------- ------
Stockholder's equity
Common stock........... 82 82 82 82
Additional paid in cap-
ital.................. 444 481 515 521
Unrealized gains (loss-
es) on investments,
net of tax............ (46) 87 66 89
Retained earnings...... 782 907 992 1,130
------- ------- ------- ------
Total stockholder's equi-
ty...................... 1,262 1,557 1,655 1,822
------- ------- ------- ------
Total liabilities and
stockholders equity..... $ 2,238 $ 2,758 $ 2,909 $3,180
======= ======= ======= ======
</TABLE>
For additional financial information concerning the Insurer, see the audited
and unaudited financial statements of the Insurer incorporated by reference
herein. Copies of the financial statements of the Insurer incorporated herein
by reference and copies of the Insurer's annual statement for the year ended
December 31, 1996 prepared in accordance with statutory accounting standards
are available, without charge from the Insurer. The address of the Insurer's
administrative offices and its telephone number are One State Street Plaza,
17th Floor, New York, New York 10004 and (212) 668-0340.
The Insurer makes no representation regarding the Certificates or the advis-
ability of investing in the Certificates and makes no representation regard-
ing, nor has it participated in the preparation of, this Prospectus Supplement
other than the information supplied by the Insurer and presented under this
heading "The Certificate Insurance Policy and the Insurer" and in the finan-
cial statements incorporated herein by reference.
THE CERTIFICATE INSURANCE POLICY
The Insurer will issue its Securities Guaranty Surety Bond for the Class A
Certificates (the "Certificate Insurance Policy"). The Certificate Insurance
Policy unconditionally guarantees the payment of Insured Payments on the Class
A Certificates. The Insurer
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<PAGE>
will make each required Insured Payment to the Trustee on the later of (i) the
Payment Date on which such Insured Payment is distributable to the Class A
Certificateholders pursuant to the Pooling and Servicing Agreement and (ii)
the Business Day next following the day on which the Insurer shall have re-
ceived telephonic or telegraphic notice, subsequently confirmed in writing, or
written notice by registered or certified mail, from the Trustee, specifying
that an Insured Payment is due in accordance with the terms of the Certificate
Insurance Policy.
The Insurer's obligation under the Certificate Insurance Policy will be dis-
charged to the extent that funds are received by the Trustee for distribution
to the Class A Certificateholders, whether or not such funds are properly dis-
tributed by the Trustee.
For purposes of the Certificate Insurance Policy, "Class A Certificateholder"
as to a particular Certificate, does not and may not include the Trust, the
Master Servicer, any Subservicer or the Seller.
The Certificate Insurance Policy does not guarantee to the Class A
Certificateholders any rate of principal payments on the Class A Certificates.
Furthermore, the Certificate Insurance Policy does not guarantee any payments
of the LIBOR Carryover Amount. The Certificate Insurance Policy expires and
terminates without any action on the part of the Insurer or any other person
on the date that is one year and one day following the date on which the Class
A Certificates have been paid in full.
"Insured Payment" means (x) with respect to any Home Equity Loan Group and for
any Payment Date the excess, if any, of (i) the sum of (a) the related Current
Interest, (b) the related Overcollateralization Deficit and (c) the related
Preference Amount (without duplication) over (ii) the related Total Available
Funds (after applying the cross-collateralization provisions of the Pooling
and Servicing Agreement, after any deduction of the related premium and after
taking into account the portion of the related Principal Payment to be actu-
ally distributed on such Payment Date without regard to any related Insured
Payments to be made with respect to such Payment Date) and (y) (without dupli-
cation) on the Payment Date in October, 2028, the Class Certificate Balance of
any Class A Certificates then outstanding, to the extent not otherwise paid on
such Payment Date.
"Preference Amount" means any amount previously distributed to a holder of a
Class A Certificate that is recoverable and sought to be recovered as a void-
able preference by a trustee in bankruptcy pursuant to the United States Bank-
ruptcy Code (11 U.S.C.) as amended from time to time, in accordance with a fi-
nal non-appealable order of a court having competent jurisdiction.
In the absence of payments under the Certificate Insurance Policy,
Certificateholders will directly bear the credit and other risks associated
with their undivided interest in the Trust.
The Certificate Insurance Policy is non-cancelable.
The Certificate Insurance Policy is issued under and pursuant to and shall be
construed under, the laws of the State of Illinois, without giving effect to
the conflict of laws principles thereof.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/CAUSALITY IN-
SURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
The information set forth above concerning the Insurer has been provided by
the Insurer.
THE TRUSTEE
The First National Bank of Chicago, a national banking association organized
under the laws of the United States of America (the "Trustee"), has its corpo-
rate trust offices at One First National Plaza, Chicago, Illinois 60670-0126.
Pursuant to the Pooling and Servicing Agreement, the Trustee is required at
all times to be a banking association organized and doing business under the
laws of the United States of America or of any State, authorized under such
laws to exercise corporate trust powers, having a combined capital and surplus
of at least $50,000,000 and subject to supervision or examination by federal
or state authorities. If at any time the Trustee shall cease to be eligible in
accordance with the provisions described in this paragraph, the Trustee shall
give notice of such ineligibility to the Master Servicer and shall resign,
upon the request of the Insurer or of the Master Servicer (with the consent of
the Insurer), in the manner and with the effect specified in the Pooling and
Servicing Agreement.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall become effective upon the acceptance of appointment by such suc-
cessor trustee.
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<PAGE>
The Trustee, or any successor trustee or trustees, may resign at any time by
giving written notice to the Master Servicer in the manner set forth in the
Pooling and Servicing Agreement. Upon receiving notice of resignation, the
Master Servicer is required to promptly appoint a successor trustee or trust-
ees acceptable to the Insurer meeting the eligibility requirements set forth
above in the manner set forth in the Pooling and Servicing Agreement. The Mas-
ter Servicer will deliver a copy of the instrument used to appoint a successor
trustee to the Certificateholders. If no successor trustee shall have been ap-
pointed and have accepted appointment within 60 days after the giving of such
notice of resignation, the resigning trustee may petition any court of compe-
tent jurisdiction for the appointment of a successor trustee. Such court may
thereupon, after such notice, if any, as it may deem proper and prescribe, ap-
point a successor trustee.
At any time, for the purpose of meeting any legal requirements of any juris-
diction in which any part of the Trust or property securing the same may at
the time be located, the Master Servicer and the Trustee acting jointly shall
have the power and shall execute and deliver all instruments to appoint one or
more persons approved by the Trustee to act as co-trustee or co-trustees,
jointly with the Trustee, or separate trustee or separate trustees, of all or
any part of the Trust, and to vest in such person or persons, in such capaci-
ty, such title to the Trust, or any part thereof, and, subject to the provi-
sions of the Pooling and Servicing Agreement, such powers, duties, obliga-
tions, rights and trusts as the Master Servicer and the Trustee may consider
necessary or desirable.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class A Certificates, Orrick, Herrington & Sutcliffe
LLP, counsel to the Seller, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the Pooling and Servicing
Agreement, for federal income tax purposes, the Trust (as defined in the Pool-
ing and Servicing Agreement) will qualify as a REMIC under the Code.
For federal income tax purposes, (a) the Class R Certificate will constitute
the sole class of "residual interests" in the Trust and (b) each class of
Class A Certificates will represent ownership of "regular interests" in the
Trust and will generally be treated as representing ownership of debt instru-
ments of the Trust. See "Certain Federal Income Tax Consequences -- REMICs" in
the Prospectus.
For federal income tax reporting purposes, the Class A Certificates will not
be treated as having been issued with original issue discount. The prepayment
assumption that will be used in determining the rate of accrual of original
issue discount, market discount and premium, if any, for federal income tax
purposes will be based on the assumption that subsequent to the date of any
determination the Home Equity Loans in the Fixed Rate Group will prepay at a
rate equal to 100% of the Prepayment Assumption and the Home Equity Loans in
the Floating Rate Group will prepay at a CPR of 26%. No representation is made
that the Home Equity Loans will prepay at that rate or at any other rate. See
"Certain Federal Income Tax Consequences -- REMICs -- Taxation of Owners of
REMIC Regular Certificates -- Original Issue Discount" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID Reg-
ulations") under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers
of the Adjustable Rate Certificates should be aware that the OID Regulations
and Section 1272(a)(6) of the Code do not adequately address certain issues
relevant to, or are not applicable to, securities such as the Adjustable Rate
Certificates. In addition, because of the uncertainties concerning the appli-
cation of Section 1272(a)(6) of the Code to debt instruments having an adjust-
able rate of interest and because the rules of the OID Regulations relating to
such debt instruments are limited in their application in ways that could pre-
clude their application to the Adjustable Rate Certificates even in the ab-
sence of Section 1272(a)(6) of the Code, the IRS could assert that the Adjust-
able Rate Certificates should be treated as having been issued with original
issue discount, or that the Adjustable Rate Certificates should be governed by
the rules applicable to debt instruments having contingent payments or by some
other method not yet set forth in regulations. Prospective purchasers of the
Adjustable Rate Certificates are advised to consult their tax advisors con-
cerning the tax treatment of such Certificates.
In the absence of other authority, the Master Servicer believes that if the
Adjustable Rate Certificates were determined to have been issued with original
issue discount in excess of a de minimis amount that it would be proper to re-
port all income with respect to such Certificates as original issue discount
for each period, computing such original issue discount (i) by assuming that
the value of the applicable index will remain constant for purposes of deter-
mining the original yield to maturity of, and projecting future distributions
on, each class of such Certificates, thereby treating such Certificates as
fixed rate instruments to which the original issue discount rules described in
the Prospectus can be applied, and (ii) by accounting for any positive or neg-
ative variation in the applicable index in any period from its assumed value
as a current adjustment to original issue discount with respect to such peri-
od.
S-60
<PAGE>
If the method for computing original issue discount described in the Prospec-
tus results in a negative amount for any period with respect to a
Certificateholder, the amount of original issue discount allocable to such pe-
riod would be zero and such Certificateholder will be permitted to offset such
negative amount only against future original issue discount (if any) attribut-
able to such Certificates.
The OID Regulations permit the holder of a debt instrument to recognize origi-
nal issue discount under a method that differs in certain respects from that
used by the issuer. Accordingly, it is possible for the holder of a Certifi-
cate to recognize original issue discount in amounts different from those to
be reported by the Master Servicer to Certificateholders and the IRS.
Certain classes of the Class A Certificates may be treated for federal income
tax purposes as having been issued at a premium. Whether any holder of such
Certificates will be treated as holding a certificate with amortizable bond
premium will depend on such Certificateholder's purchase price and the distri-
butions remaining to be made on such Certificate at the time of its acquisi-
tion by such Certificateholder. Holders of such classes of Certificates should
consult their own tax advisors regarding the possibility of making an election
to amortize such premium. See "Certain Federal Income Tax Consequences --
REMICs -- Taxation of Owners of REMIC Regular Certificates" and "-- Premium"
in the Prospectus.
The Class A Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Class A Certificates will be
treated as "interest on obligations secured by mortgages on real property" un-
der Section 856(c)(3)(B) of the Code generally to the extent that such Class A
Certificates are treated as "real estate assets" under Section 856(c)(4)(A) of
the Code. Moreover, the Class A Certificates will be "qualified mortgages"
within the meaning of Section 860G(a)(3) of the Code if transferred to another
REMIC on its startup day in exchange for a regular or residual interest there-
in. See "Certain Federal Income Tax Consequences -- REMICs -- Characterization
of Investments in REMIC Certificates" in the Prospectus.
For further information regarding federal income tax consequences of investing
in the Class A Certificates, see "Certain Federal Income Tax Consequences" in
the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement subject
to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
or Section 4975 of the Code (a "Plan"), or any insurance company (whether in-
vesting through its general or separate accounts) or other person investing
"plan assets" of any Plan, should carefully review with its legal advisors
whether the purchase or holding of Class A Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section
4975 of the Code. The U.S. Department of Labor has issued an Exemption, as de-
scribed under "ERISA Considerations--Prohibited Transaction Exemptions" in the
Prospectus, to J.P. Morgan Securities Inc. The purchase or holding of the
Class A Certificates by, on behalf of or with "plan assets" of a Plan may
qualify for exemptive relief under the Exemption. However, the Exemption con-
tains a number of conditions, as described under "ERISA Considerations--Pro-
hibited Transaction Exemptions" in the Prospectus, including the requirement
that any such Plan must be an "accredited investor" as defined in Rule
501(a)(i) of Regulation D of the Securities and Exchange Commission under the
Securities Act of 1933, amended. See "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT
Although upon their initial issuance the Class A Certificates will be rated
"Aaa" by Moody's and "AAA" by S&P, the Class A Certificates will not consti-
tute "mortgage related securities" under the Secondary Mortgage Market En-
hancement Act of 1984 ("SMMEA") because the Mortgage Pool includes Home Equity
Loans that are secured by second Mortgages. Investors should consult their own
legal advisers in determining whether and to what extent any Class of Certifi-
cates constitute legal investments for such investors.
USE OF PROCEEDS
The Seller will use the net proceeds received from the sale of the Class A
Certificates to purchase the Home Equity Loans.
S-61
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") among the Seller and the Underwriters named be-
low, the Seller has agreed to sell to the Underwriters, and the Underwriters
have severally agreed to purchase from the Seller, the respective principal
amounts of Certificates set forth opposite their names below.
<TABLE>
<CAPTION>
----------------------------------------------------------------
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5
CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
UNDERWRITERS ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
J.P. Morgan Securities
Inc.................... $14,738,400 $ 6,593,400 $5,811,600 $ 6,708,600 $ 66,949,800
BancAmerica Robertson
Stephens, Inc.......... $ 9,825,600 $ 4,395,600 $3,874,400 $ 4,472,400 $ 44,633,200
----------- ----------- ---------- ----------- ------------
Totals................ $24,564,000 $10,989,000 $9,686,000 $11,181,000 $111,583,000
=========== =========== ========== =========== ============
</TABLE>
Under the terms of the Underwriting Agreement, the Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
Class A Certificates offered hereby if any of such Certificates are purchased.
The Seller has been advised that the Underwriters propose initially to offer
the Class A Certificates to certain dealers at such price less a selling con-
cession not to exceed the percentage of the Certificate denomination set forth
below, and that the Underwriters may allow and such dealers may reallow a re-
allowance discount not to exceed the percentage of the Certificate denomina-
tion set forth below:
<TABLE>
<CAPTION>
----------------------
SELLING REALLOWANCE
CLASS CONCESSION DISCOUNT
----- ---------- -----------
<S> <C> <C>
A-1............................................. 0.130% 0.091%
A-2............................................. 0.150% 0.105%
A-3............................................. 0.185% 0.130%
A-4............................................. 0.230% 0.161%
A-5............................................. 0.165% 0.116%
</TABLE>
Until the distribution of the Class A Certificates is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Class A Certificates. As an exception to
these rules, the Underwriters are permitted to engage in certain transactions
that stabilize the price of the Class A Certificates. Such transactions con-
sist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Class A Certificates.
In general, purchases of a security for the purpose of stabilization or to re-
duce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Seller nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transac-
tions described above may have on the prices of the Class A Certificates. In
addition, neither the Seller nor any of the Underwriters makes any representa-
tion that the Underwriters will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
The Underwriting Agreement provides that the Seller and the Master Servicer
will indemnify the Underwriters against certain liabilities, including liabil-
ities under the Securities Act of 1933, as amended.
In the ordinary course of their respective businesses, the Underwriters and/or
their respective affiliates have engaged, and may in the future engage, in in-
vestment banking and/or commercial banking transactions with the Seller and
their affiliates. An affiliate of J.P. Morgan Securities Inc. previously pur-
chased substantially all of the Home Equity Loans to be included in the Mort-
gage Pool. The proceeds from the sale of the Class A Certificates will be used
to acquire such Home Equity Loans from such affiliate.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation, as of
December 31, 1996 and 1995 and for each of the years in the three year period
ending December 31, 1996 are incorporated by reference herein and in the reg-
istration statement in
S-62
<PAGE>
reliance upon the report of KPMG Peat Marwick LLP, independent certified pub-
lic accountants, incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing.
RATINGS
It is a condition to the issuance of the Class A Certificates that they be
rated "Aaa" by Moody's and "AAA" by S&P. Such ratings do not address the like-
lihood that any LIBOR Carryover Amount will be paid.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning Rating
Agency. No person is obligated to maintain the rating on any Certificate, and,
accordingly, there can be no assurance that the ratings assigned to the Class
A Certificates upon initial issuance will not be lowered or withdrawn by a
Rating Agency at any time thereafter. In general, ratings address credit risk
and do not represent any assessment of the likelihood or rate of principal
prepayments.
LEGAL MATTERS
In addition to the legal opinions referred to in the Prospectus, certain legal
matters relating to the Certificates will be passed upon for the Seller by
Orrick, Herrington & Sutcliffe LLP and for the Underwriters by Stroock &
Stroock & Lavan LLP. Certain federal income tax matters will be passed upon
for the Seller by Orrick, Herrington & Sutcliffe LLP.
S-63
<PAGE>
APPENDIX A
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered TFC Home Equity
Loan Trust 1997-1 Class A-1 Certificates, Class A-2 Certificates, Class A-3
Certificates, Class A-4 Certificates and Class A-5 Certificates (collectively,
the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of The
Depository Trust Company ("DTC"), CEDEL or Euroclear. The Global Securities
will be tradable as home market instruments in both the European and U.S. do-
mestic markets. Initial settlement and all secondary trades will settle in
same-day funds.
Secondary market trading between investors holding Global Securities through
CEDEL and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with conven-
tional Eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities through
DTC will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC Participants
holding Certificates will be effected on a delivery against payment basis
through the respective Depositaries of CEDEL and Euroclear (in such capacity)
and as DTC Participants.
Non U.S. holders (as described below) of Global Securities will be subject to
U.S. withholding taxes unless such holders meet certain requirements and de-
liver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their respective Depos-
itaries, which in turn will hold such positions in accounts as DTC Partici-
pants.
Investor securities custody accounts will be credited with their holdings yet
payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or Euroclear
accounts will follow the settlement procedures applicable to conventional
eurobonds, except that there will be no temporary global security and no
"lockup" or restricted period. Global Securities will be credited to the secu-
rities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to es-
tablish at the time of the trade where both the purchaser's and seller's ac-
counts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC Partic-
ipants will be settled in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market trading
between CEDEL Participants or Euroclear Participants will be settled using the
procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global Secu-
rities are to be transferred from the account of a DTC Participant to the ac-
count of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one Business Day prior to settlement. CEDEL or
Euroclear will instruct the respective Depositary, as the case may be, to re-
ceive the Global Securities against payment. Payment will include interest ac-
crued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date, calculated on the basis of either a 360
day year composed of twelve 30-day months or a year of 360 days, as applica-
ble, and the actual number of days occurring in the period for which such in-
terest is payable, as applicable. Payment will then be made by the respective
Depositary to the DTC Participant's account against delivery of the Global
A-1
<PAGE>
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in ac-
cordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (Euro-
pean time) and the cash debit will be back-valued to, and the interest on the
Global Securities will accrue from, the value date (which would be the preced-
ing day when settlement occurred in New York). If settlement is not completed
on the intended value date (i.e., the trade fails), the CEDEL or Euroclear
cash debit will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within CEDEL or Euroclear. Under this ap-
proach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants can elect not to preposition funds and allow that
credit line to be drawn upon to finance settlement. Under this procedure,
CEDEL Participants or Euroclear Participants purchasing Global Securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the Global Securities were credited to their accounts. However, interest
on the Global Securities would accrue from the value date. Therefore, in many
cases the investment income on the Global Securities earned during that one-
day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular Cost of funds.
Since the settlement is taking place during New York business hours, DTC Par-
ticipants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time zone
differences in their favor, CEDEL Participants and Euroclear Participants may
employ their customary procedures for transactions in which Global Securities
are to be transferred by the respective clearing system, through the respec-
tive Depositary, to a DTC Participant. The seller will send instructions to
CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one Business Day prior to settlement. In these cases, CEDEL or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the bonds
to the DTC Participant's account against payment. Payment will include inter-
est accrued on the Global Securities from and including the last coupon pay-
ment date to and excluding the settlement date, calculated on the basis of a
either a 360 day year composed of twelve 30-day months year of 360 days and
the actual number of days occurring in the period for which such interest is
payable, as applicable. The payment will then be reflected in the account of
the CEDEL Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the CEDEL Participant's or Euroclear Participant's ac-
count would be back-valued to the value date (which would be the proceeding
day, when settlement occurred in New York). Should the CEDEL Participant or
Euroclear Participant have a line of credit with its respective clearing sys-
tem and elect to be in debit in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft charges in-
curred over the one-day period. If settlement is not completed on the intended
value date (i.e., the trade fails), receipt of the cash proceeds in the CEDEL
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global Se-
curities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the
sale side unless affirmative action was taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures.
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securi-
ties sufficient time to be reflected in their CEDEL or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
A-2
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments
of interest (including original issue discount) on registered debt issued by
U.S. Persons, unless under currently applicable laws (i) each clearing system,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business in the chain of intermediaries be-
tween such beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (ii) such beneficial
owner takes one of the following steps to obtain an exemption or reduced tax
rate.
Exemption for non-US. Persons (Form W8). Beneficial owners of Class A Certifi-
cates that are non-U.S. Persons can obtain a complete exemption from the with-
holding tax by filing a signed Form W8 (Certificate of Foreign Status). If the
information shown on Form W8 changes, a new Form W8 must be filed within 30
days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form 4224).
A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its con-
duct of a trade or business in the United States, can obtain an exemption from
the withholding tax by filing Form 4224 (Exemption from Withholding of Tax on
Income Effectively Connected with the Conduct of a Trade or Business in the
United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificateholders residing in a coun-
try that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form 1001 (Owner-
ship, Exemption or Reduced Rate Certificate). If the treaty provides only for
a reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W8. Form 1001 may be filed by the Certificateholder
or his agent.
Exemption for U.S. Persons (Form W9). U.S. Persons can obtain a complete ex-
emption from the withholding tax by filing Form W9 (Payer's Request for Tax-
payer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The holder of a Global Security
or, in the case of a Form 1001 or a Form 4224 filer, his agent, files by sub-
mitting the appropriate form to the person through whom it holds (the clearing
agency, in the case of persons holding directly on the books of the clearing
agency). Form W8 and Form 1001 are effective for three calendar years and Form
4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States, any state thereof or the District of Columbia, (iii) an estate or
trust the income of which is includible in gross income for United States tax
purposes, regardless of its source. This summary does not deal with all as-
pects of U.S. federal income tax withholding that may be relevant to foreign
holders of the Global Securities. Investors are advised to consult their own
tax advisors for specific tax advice concerning their holding and disposing of
the Global Securities.
Further, the U.S. Treasury Department has recently finalized new regulations
that will revise some aspects of the current system for withholding on amounts
paid to foreign persons. Under these regulations, interest or OID paid to a
nonresident alien would continue to be exempt from U.S. witholding taxes (in-
cluding backup withholding) provided that the holder complies with the new
certification procedures.
A-3
<PAGE>
APPENDIX B
TRANSAMERICA MORTGAGE COMPANY UNDERWRITING CRITERIA
The credit underwriting criteria established for each of the B-1, B-2 and B-3
grades are as set forth below. The application of such criteria is subject to
the discussion under "Flow Program Underwriting; Underwriting Guidelines".
B-1: Under category B-1, a maximum of two 30 day late payments on each of the
borrower's mortgage, installment and revolving debt payments are allowed over
the prior 12 months and no other late payments are allowed over the prior 12
months. Judgements, liens, collections and charge-offs against the borrower
should not aggregate more than $500 over the past 12 months. The borrower
should have been discharged from any bankruptcy proceedings for at least 2
years from the date of application.
B-2: Under category B-2, a maximum of three 30 day late payments on the bor-
rower's mortgage are allowed over the prior 12 months. A maximum of three 30
day late payments or one 60 day late payment are allowed on each of the bor-
rower's installment and revolving debt over the prior 12 months. Judgements,
liens, collections and charge-offs are allowed in an amount up to $1,000. The
borrower should have been discharged from any bankruptcy proceedings for at
least one year.
B-3: Under category B-3, a maximum of four 30 day late payments, two 60 day
late payments or one 90 day late payment are allowed on the borrower's mort-
gage over the prior 12 months. A maximum of five 30 day late payments, two 60
day late payments or one 90 day late payment are allowed on the borrower's in-
stallment debt over the prior 12 months and a maximum of four 30 day late pay-
ments, two 60 day late payments or one 90 day late payment are allowed on the
borrower's revolving debt over the prior 12 months. Judgements, liens, collec-
tions and charge-offs are allowed in an amount up to $2,500. The borrower may
currently be in Chapter 13 bankruptcy proceedings.
B-1
<PAGE>
APPENDIX C
METROPOLITAN MORTGAGE COMPANY UNDERWRITING CRITERIA
Loans are underwritten at each Combined Loan-to-Value Ratio based upon the
criteria set forth below. The application of such criteria is subject to the
discussion under "Underwriting-Retail Program; Underwriting Guidelines."
60% Combined Loan-to-Value Ratio -- Loans are made in an amount up to 60% of
the value of the Mortgaged Property for single family owner occupied resi-
dences. Purchases and refinancings are permitted under this category. Any ex-
isting senior mortgage on the property must be current with no delinquencies
over the prior twelve months.
55% Combined Loan-to-Value Ratio -- Loans are made in an amount up to 55% of
the value of the Mortgaged Property for single family owner occupied resi-
dences. Cash out refinances, home improvements and debt consolidations are
permitted under this category. Any existing senior mortgage on the property
must not be 30 days or more past due.
50% Combined Loan-to-Value Ratio -- Loans are made in an amount up to 50% of
the value of the Mortgaged Property for single family residences, condomini-
ums, and townhomes, in each case whether or not owner occupied. Cash out refi-
nances, home improvements and purchases are permitted under this category. Any
existing senior mortgage on the property must not be 60 days or more past due.
40% Combined Loan-to-Value Ratio -- Loans are made in an amount up to 40% of
the value of the Mortgaged Property for single family residences, condomini-
ums, mobile homes and townhomes, in each case whether or not owner occupied.
In addition, mobile homes that are less than 5 years old and are located in-
side mobile home parks are permitted within this category, provided that the
borrower owns the land underlying the mobile home. Cash out refinances, debt
consolidation, home improvements, purchases and new construction are permitted
under this category. Any existing senior mortgage on the property must not be
90 days or more past due.
25% Combined Loan-to-Value Ratio -- Loans are made in an amount up to 25% of
the value of the Mortgaged Property for single family residences, condomini-
ums, mobile homes and townhomes, in each case whether or not owner occupied.
In addition, mobile homes that are less than 5 years old and are located in-
side mobile home parks are permitted within this category, provided that the
borrower owns the land underlying the mobile home. In addition, all other mo-
bile homes are permitted within this category. Cash out refinances, debt con-
solidation, home improvements, purchases and new construction are permitted
under this category. The status of any existing senior mortgage on the prop-
erty is not considered.
Additional Guidelines
In certain instances, such as if the property (i) is for sale, (ii) is non-
owner occupied, (iii) was inherited within the last 12 months, (iv) is located
in a congested area, (v) is located behind a [privately held] first mortgage
or (vi) is located in an historic district or is very old, then the maximum
Combined Loan-to-Value Ratio may be reduced by 10%. Certain other circum-
stances may require prior approval from a senior executive at the
Subservicer's home office. These circumstances include the following: (a) all
loans where the borrower has been in bankruptcy within the prior year, (b) all
loans secured by buildings that do not conform to current zoning laws, (c) all
loans secured by property located in a flight path, (d) all loans secured by
property in foreclosure and all loans where the borrower is more than 90 days
past due on the first mortgage, (e) all loans secured by vacant or non-
buildable lots, (f) all construction loans and loans secured by commercial
property or property used for mixed commercial and residential purposes, and
(g) all loans secured by property with unique single purpose usage for the
area and luxury or estate homes.
C-1
<PAGE>
PROSPECTUS
TFC HOME EQUITY LOAN TRUSTS
TFC HOME EQUITY LOAN ASSET-BACKED CERTIFICATES
(ISSUABLE IN SERIES)
---------------
TRANSAMERICA MORTGAGE COMPANY
MASTER SERVICER
The TFC Home Equity Loan Asset-Backed Certificates (the "Certificates")
offered hereby may be sold from time to time in series (each, a "Series") as
described in the related Prospectus Supplement. Each Series of Certificates
will be issued by a separate trust (each, a "Trust").
The assets of each Trust will consist primarily of (i) a pool (a "Mortgage
Pool") of mortgage loans (each, a "Home Equity Loan") secured primarily by
mortgages, deeds of trust or other instruments (each, a "Mortgage") creating a
first, second or more junior lien on one- to four-family dwellings, units in
planned unit developments, condominium developments or cooperatives and mobile
or manufactured homes (each, a "Mortgaged Property") to be transferred to such
Trust by Transamerica Consumer Mortgage Receivables Corporation, as specified
in the related Prospectus Supplement (the "Seller") and (ii) all monies
received on the Home Equity Loans on and after the related Cut-Off Date (as
defined herein). All of the Home Equity Loans are closed-end Home Equity Loans
where the principal amount is disbursed in full at origination. The Home
Equity Loans will be master serviced by Transamerica Mortgage Company (in its
capacity as servicer, the "Master Servicer") and were originated or acquired
by Transamerica Mortgage Company or certain of its affiliates in the ordinary
course of business, as described in the related Prospectus Supplement. The
Home Equity Loans and other assets of each Trust as described herein and in
the related Prospectus Supplement will be held for the benefit of the holders
of the related Series of Certificates.
Each Series of Certificate may be issuable in one or more classes (each, a
"Class"), each of which may represent beneficial ownership interests in the
Home Equity Loans held by the related Trust. A Series may include one or more
Classes of Certificates entitled to principal distributions and
disproportionate, nominal or no interest distributions, or to interest
distributions and disproportionate, nominal or no principal distributions. The
rights of one or more Classes of Certificates of a Series may be senior or
subordinate to the rights of one or more of the other Classes of Certificates
of such Series. A Series may include two or more Classes of Certificates which
differ as to the timing, sequential order, priority of payment, interest rate
or amount of distributions of principal or interest or both.
If specified in the related Prospectus Supplement, one or more Classes of
Certificates of a Series may have the benefit of one or more of a letter of
credit, financial guaranty insurance policy, mortgage pool insurance policy,
special hazard insurance policy, reserve fund, spread account, cash collateral
account, overcollateralization or other form of credit enhancement. If
specified in the related Prospectus Supplement, the Home Equity Loans
underlying a Series of Certificates may be insured under one or more of a
mortgage pool insurance policy, bankruptcy bond, special hazard insurance
policy or similar credit enhancement. In addition to or in lieu of any or all
of the foregoing, credit enhancement with respect to one or more Classes of
Certificates of a Series may be provided through subordination. See
"Description of Credit Enhancement" in the related Prospectus Supplement.
The yield on each Class of Certificates of a Series will be affected by,
among other things, the rate of payment of principal (including prepayments)
on the Home Equity Loans in the related Trust and the timing of receipt of
such payments. See "Certain Yield and Prepayment Considerations" herein and in
the related Prospectus Supplement. A Trust may be subject to early termination
under the circumstances described herein and in the related Prospectus
Supplement.
Offers of the Certificates of a Series may be made through one or more
different methods, including offerings through underwriters, as described
under "Plan of Distribution" herein and "Underwriting" in the related
Prospectus Supplement. There will have been no secondary market for the
Certificates of any Series prior to the offering thereof. There can be no
assurance that a secondary market for any Class of Certificates of any Series
will develop or, if one does develop, that it will continue. None of the
Certificates will be listed on any securities exchange.
---------------
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE
CERTIFICATES, SEE "RISK FACTORS," WHICH BEGINS ON PAGE 12 HEREIN.
---------------
One or more elections will be made to treat the related Trust or a
designated portion of the assets of the related Trust as one or more "real
estate mortgage investment conduits" (each, a "REMIC") for federal income tax
purposes. For a description of certain tax consequences of owning the
Certificates, including, without limitation, original issue discount, see
"Certain Federal Income Tax Consequences" herein and in the related Prospectus
Supplement.
---------------
PROCEEDS OF THE ASSETS IN THE TRUST ARE THE SOLE SOURCE OF PAYMENTS ON
THE CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE SELLER, THE MASTER SERVICER OR ANY OF THEIR
AFFILIATES. EXCEPT AS EXPRESSLY SET FORTH IN THE RELATED PROSPECTUS
SUPPLEMENT, NEITHER THE CERTIFICATES NOR THE UNDERLYING HOME
EQUITY LOANS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR BY THE SELLER, THE MASTER SERVICER
OR ANY OF THEIR AFFILIATES. NONE OF SUCH ENTITIES WILL HAVE
ANY OBLIGATIONS IN RESPECT OF THE CERTIFICATES, EXCEPT AS
EXPRESSLY SET FORTH HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT.
---------------
THESE CERTIFICATES 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.
Prospective investors should refer to the "Index of Principal Definitions"
herein for the location of the definitions of capitalized terms that appear in
this Prospectus.
October 10, 1997
<PAGE>
No dealer, salesman, or any other person has been authorized to give any
information, or to make any representations, other than those contained in
this Prospectus or the related Prospectus Supplement and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Seller or any dealer, salesman, or any other person. Neither
the delivery of this Prospectus or the related Prospectus Supplement nor any
sale made hereunder or thereunder shall under any circumstances create an
implication that there has been no change in the information herein or therein
since the date hereof. This Prospectus and the related Prospectus Supplement
are not an offer to sell or a solicitation of an offer to buy any security in
any jurisdiction in which it is unlawful to make such offer or solicitation.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the related Certificates, whether or not
participating in the distribution thereof, may be required to deliver this
Prospectus and the related Prospectus Supplement. This delivery requirement is
in addition to the obligation of dealers to deliver a Prospectus Supplement
and Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus, which forms a part
of the Registration Statement, omits certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the
Commission. The Registration Statement and the exhibits thereto may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located as follows: Chicago Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of
such material may also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates, and electronically through the Commission's Electronic Data Gathering,
Analysis and Retrieval system at the Commission's Web site
(http://www.sec.gov).
REPORTS TO HOLDERS
Unless and until the Offered Certificates are no longer issued in book-entry
form, the Trust will provide to CEDE & Co., as nominee of The Depository Trust
Company ("DTC") and registered holder of the Offered Certificates and, upon
request, to Participants (as defined herein) of DTC, monthly and annual
reports concerning the Certificates pursuant to the Pooling and Servicing
Agreement. See "Description of the Certificates--Reports to Holders." Such
reports may be made available to the owners of the certificates (the
"Certificate Owners") upon request to their Participants. Such reports will
not constitute financial statements prepared in accordance with generally
accepted accounting principles. The Trust does not intend to provide any
financial information to any holder of the Certificates which has been
examined and reported upon, with an opinion expressed, by an independent
public accountant.
The Master Servicer will file with the Commission such periodic reports with
respect to each Trust as are required by the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the rules regulations or orders of the
Commission thereunder. Each Trust that issues a Series of Certificates may
discontinue filing periodic reports under the Exchange Act at the beginning of
the fiscal year following the issuance of such Certificates if there are fewer
than 300 holders of such Certificates.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Seller pursuant to Section
13(a), Section 13(c), 14 or 15(d) of the Exchange Act, subsequent to the date
of this Prospectus and prior to the termination of the offering of the
Certificates offered hereby shall be deemed to be incorporated by reference in
this Prospectus and to be part hereof. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Seller will provide without charge to each person to whom a copy of this
Prospectus is delivered, on the written or oral request of any such person, a
copy of any of or all the documents incorporated herein by reference (other
than exhibits to such documents). Requests for such copies should be directed
to Corporate Secretary, 1150 South Olive Street, Suite 2800, Los Angeles,
California 90015.
3
<PAGE>
SUMMARY OF PROSPECTUS
The following Summary of Prospectus 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 each Series of Certificates
contained in the related Prospectus Supplement. Capitalized terms used but not
defined in this Summary of Prospectus shall have the meanings ascribed to such
terms elsewhere in this Prospectus. The Index of Principal Definitions included
in this Prospectus sets forth the pages on which the definitions of certain
principal terms appear.
SELLER.............. Transamerica Consumer Mortgage Receivables Corporation, a
Delaware corporation (the "Seller") and a special
purpose, wholly owned indirect subsidiary of Transamerica
Finance Corporation, will sell and assign the Home Equity
Loans to the Trust. Each Home Equity Loan will be
serviced by the Master Servicer.
ISSUER.............. With respect to each Series of Certificates, a trust
entitled "TFC Home Equity Loan Trust" (the "Trust"), with
an additional designation to indicate the Series of
Certificates to which it relates. Each Trust will be
formed pursuant to a Pooling and Servicing Agreement
among the Seller, the Master Servicer (defined herein)
and the trustee named therein (the "Trustee").
MASTER SERVICER..... Transamerica Mortgage Company, a California corporation
(in its capacity as servicer, the "Master Servicer").
TRUSTEE............. The entity or entities named as trustee in the related
Prospectus Supplement.
CUT-OFF DATE........ The date specified in the related Prospectus Supplement
on and after which payments due or received on the
related Home Equity Loans, as specified in the related
Prospectus Supplement, are transferred to the related
Trust and available for payment to the holders of the
related Certificates (each, a "Cut-off Date").
CLOSING DATE........ The date on which the Certificates of any Series are
initially issued (each, a "Closing Date") as specified in
the related Prospectus Supplement.
DESCRIPTION OF
CERTIFICATES....... The Certificates of each Series may be issued in one or
more classes (each, a "Class") and will represent
beneficial interests in a segregated pool (each, a
"Mortgage Pool") of mortgage loans (the "Home Equity
Loans") originated or acquired by Transamerica Mortgage
Company or certain of its affiliates. See "Description of
the Mortgage Pools."
A Series of Certificates may include one or more Classes
entitled to distributions of principal and
disproportionate, nominal or no interest distributions or
distributions of interest and disproportionate, nominal
or no principal distributions. The principal amount of
any Certificate may be zero or may be a notional amount
as specified in the related Prospectus Supplement. A
Class of Certificates of a Series entitled to payments of
interest may receive interest at a specified rate (a
"Pass-Through Rate") which may be fixed, variable or
adjustable and may differ from other Classes of the same
Series,
4
<PAGE>
may receive interest based on the weighted average
interest rate on the underlying Home Equity Loans or may
receive interest as otherwise determined, all as
described in the related Prospectus Supplement. One or
more Classes of a Series may be Certificates upon which
interest will accrue but not be currently paid until
certain other Classes have received principal payments
due to them in full or until the happening of certain
events, as set forth in the related Prospectus
Supplement. One or more Classes of Certificates of a
Series may be entitled to receive principal payments
pursuant to a planned amortization schedule or may be
entitled to receive interest payments based on a notional
principal amount which reduces in accordance with a
planned amortization schedule. The rights of one or more
Classes of Certificates may be senior or subordinate to
the rights of one or more of the other Classes of
Certificates. A Series may include two or more Classes of
Certificates which differ as to the timing, sequential
order, priority of payment or amount of distributions of
principal or interest or both.
Except as expressly set forth in the related Prospectus
Supplement, neither the Certificates nor the underlying
Home Equity Loans will be guaranteed or insured by any
governmental agency or instrumentality or the Seller, the
Master Servicer or any of their affiliates.
PAYMENT DATE........ The monthly date specified in the related Prospectus
Supplement on which payments will be made to holders of
Certificates (each, a "Payment Date").
DETERMINATION
DATE................ With respect to each Payment Date the day (each, a
"Determination Date") specified in the related Prospectus
Supplement.
RECORD DATE......... The calendar day (each, a "Record Date") specified in the
related Prospectus Supplement.
INTEREST............ Unless otherwise specified in the related Prospectus
Supplement, interest on each Class of Certificates of a
Series (other than a Class of Certificates entitled to
receive only principal) will accrue during each period
specified in the related Prospectus Supplement (each, an
"Accrual Period") at the Pass-Through Rate for such Class
specified in the related Prospectus Supplement. Interest
accrued on each Class of Certificates at the applicable
Pass-Through Rate during each Accrual Period will be
paid, to the extent monies are available therefor, on
each Payment Date, commencing on the day specified in the
related Prospectus Supplement and will be distributed in
the manner specified in such Prospectus Supplement,
except for any Class of Certificates ("Accrual
Certificates") on which interest is to accrue and not be
paid until the interest and principal of certain other
Classes has been paid in full or until the occurrence of
certain events as specified in such Prospectus
Supplement. If so described in the related Prospectus
Supplement, interest that has accrued but is not yet
payable on any Accrual Certificates will be added to the
principal balance thereof on each Payment Date and will
thereafter bear interest at the applicable Pass-Through
Rate. Payments of interest with respect to any Class of
Certificates entitled to receive interest only or a
disproportionate amount of interest and principal will be
paid in the manner set forth in the related Prospectus
Supplement. Payments of interest (or accruals of
interest, in the case of Accrual Certificates) with
respect to any Series of Certificates or one
5
<PAGE>
or more Classes of Certificates of such Series, may be
reduced to the extent of interest shortfalls not covered
by Advances (defined herein), if any, or by any
applicable credit enhancement.
PRINCIPAL........... On each Payment Date, commencing with the Payment Date
specified in the related Prospectus Supplement, principal
with respect to the related Home Equity Loans during the
period specified in the related Prospectus Supplement
(each such period, a "Remittance Period") will be paid to
holders of the Certificates of the related Series (other
than a Class of Certificates of such Series entitled to
receive interest only) in the priority, manner and amount
specified in such Prospectus Supplement, to the extent
funds are available therefor. Unless otherwise specified
in the related Prospectus Supplement, such principal
payments will generally include (i) the principal portion
of all scheduled payments ("Monthly Payments") received
on the related Home Equity Loans during the related
Remittance Period, (ii) any principal prepayments of any
such Home Equity Loans in full ("Principal Prepayments")
and in part ("Curtailments") received during the related
Remittance Period or such other period (each, a
"Prepayment Period") specified in the related Prospectus
Supplement, (iii) the principal portion of (A) the
proceeds of any insurance policy relating to a Home
Equity Loan, a Mortgaged Property (defined herein) or a
REO Property (defined herein), net of any amounts applied
to the repair of the Mortgaged Property or released to
the Mortgagor (defined herein) and net of reimbursable
expenses (such net proceeds, "Insurance Proceeds"), (B)
proceeds received in connection with the liquidation of
any defaulted Home Equity Loans ("Liquidation Proceeds"),
net of fees and advances reimbursable therefrom ("Net
Liquidation Proceeds") and (C) proceeds received in
connection with a taking of a related Mortgaged Property
by condemnation or the exercise of eminent domain or in
connection with any partial release of any such Mortgaged
Property from the related lien ("Released Mortgaged
Property Proceeds"), (iv) the principal portion of all
amounts paid by the Seller or the Master Servicer in
connection with the purchase of or substitution for a
Home Equity Loan as to which there is defective
documentation or a breach of a representation or warranty
contained in the related Pooling and Servicing Agreement
and (v) the principal balance of each defaulted Home
Equity Loan or REO Property as to which the Master
Servicer has determined that all amounts expected to be
recovered have been recovered (each, a "Liquidated Home
Equity Loan"), to the extent not included in the amounts
described in clauses (i) through (iv) above (the
aggregate of the amounts described in clauses (i) through
(v), the "Basic Principal Payment"). Payments of
principal with respect to a Series of Certificates or one
or more Classes of such Series may be delayed or reduced
to the extent of delinquencies or losses not covered by
Advances, if any, or any applicable credit enhancement.
DENOMINATIONS....... Each Class of Certificates of a Series will be issued in
the minimum denominations set forth in the related
Prospectus Supplement. Each Certificate will represent a
percentage interest (a "Percentage Interest") in the
Certificates of the related Class determined by dividing
the original dollar amount (or Notional Principal Amount
(as defined below), in the case of Certificates entitled
to interest only and assigned a Notional Principal
Amount)
6
<PAGE>
represented by such Certificate by the original aggregate
principal balance (or original aggregate Notional
Principal Amount, if applicable). The related Prospectus
Supplement will set forth the amount or method of
calculating the Notional Principal Amount with respect to
any Certificate having a Notional Principal Amount.
REGISTRATION OF THE
CERTIFICATES....... Each or any Class of Certificates of a Series may be
issued in definitive form or may initially be represented
by one or more certificates registered in the name of
Cede & Co. ("Cede") ("Book-Entry Certificates"), the
nominee of The Depository Trust Company ("DTC"), and
available only in the form of book-entries on the records
of DTC, participating members thereof ("Participants")
and other entities, such as banks, brokers, dealers and
trust companies, that clear through or maintain custodial
relationships with a Participant, either directly or
indirectly ("Indirect Participants"). Certificateholders
may also hold Certificates of a Series through CEDEL or
Euroclear (in Europe), if they are participants in such
systems or indirectly through organizations that are
participants in such systems. Certificates representing
Book-Entry Certificates will be issued in definitive form
only under the limited circumstances described herein and
in the related Prospectus Supplement. With respect to the
Book-Entry Certificates, all references herein to
"holders" shall reflect the rights of owners of the Book-
Entry Certificates as they may indirectly exercise such
rights through DTC and Participants, except as otherwise
specified herein. See "Risk Factors" and "Description of
the Certificates--Registration and Transfer of the
Certificates" herein.
THE TRUST
PROPERTY............ Each Class of Certificates of a Series will represent an
interest in (i) a segregated pool (the "Mortgage Pool")
of fixed or adjustable rate mortgage loans originated or
acquired by Transamerica Mortgage Company or certain of
its affiliates and evidenced by promissory notes or other
evidence of indebtedness (the "Home Equity Loans")
secured primarily by mortgages, deeds of trust or other
instruments (each, a "Mortgage") creating a first, second
or more junior lien on one- to four-family dwellings,
units in condominium developments, planned unit
developments or cooperatives and mobile or manufactured
homes (each, a "Mortgaged Property"), with the aggregate
principal balance as of the Cut-off Date specified in the
related Prospectus Supplement, after giving effect to
payments due or received, as specified in the related
Prospectus Supplement, on or prior to the Cut-off Date
(the "Original Pool Principal Balance") and (ii) all
monies due or received, as specified in the related
Prospectus Supplement, on or with respect to the Home
Equity Loans on or after the Cut-off Date. All of the
Home Equity Loans are closed-end Home Equity Loans where
the principal amount is disbursed in full at origination.
One or more Classes of Certificates of any Series may, if
so specified in the related Prospectus Supplement, have
the benefit of one or more of a letter of credit,
financial guaranty insurance policy, mortgage pool
insurance policy, special hazard insurance policy, spread
account, reserve fund, cash collateral account,
overcollateralization, subordination or other credit
enhancement as described herein under "Description of the
Certificates--Description of Credit Enhancement."
7
<PAGE>
The Prospectus Supplement for each Series of Certificates
will specify certain information with respect to the
related Mortgage Pool including, without limitation, the
number of Home Equity Loans in the Mortgage Pool, the
Original Pool Principal Balance, the respective
percentages of the Home Equity Loans which are secured by
first Mortgages, second Mortgages and more junior
Mortgages, the minimum and maximum outstanding principal
balances of the Home Equity Loans, the weighted average
of the annual rates of interest on the Home Equity Loans
(each such annual rate of interest hereinafter referred
to as the "Mortgage Interest Rate"), the weighted average
original term to maturity, the weighted average remaining
term to maturity, the minimum and maximum remaining terms
to maturity and the range of origination dates. If so
specified in the related Prospectus Supplement, such
information may be approximate, based on the expected
Mortgage Pool, in which case the final information, to
the extent of any variances, will be contained in the
Current Report on Form 8-K referred to below. See
"Description of the Mortgage Pools--General" herein and
"Description of the Mortgage Pool" in the related
Prospectus Supplement.
A Current Report on Form 8-K will be available to
purchasers or underwriters of the related Series of
Certificates and will generally be filed, together with
the related primary documents, with the Securities and
Exchange Commission within fifteen days after the related
Closing Date.
OPTIONAL
TERMINATION......... The Master Servicer, the Seller or the holders of the
Class of Certificates specified in the related Prospectus
Supplement may cause the Trust to sell all of the Home
Equity Loans and all Mortgaged Properties acquired by
foreclosure or deed in lieu of foreclosure ("REO
Properties") when the Pool Principal Balance declines to
the percentage of the Original Pool Principal Balance
specified in the related Prospectus Supplement, the
proceeds of which will be applied to retire the related
Certificates. See "Description of the Certificates--
Optional Disposition of Home Equity Loans" herein.
MANDATORY
TERMINATION......... If so specified in the related Prospectus Supplement, the
Trustee, the Master Servicer or such other entities as
may be specified in such Prospectus Supplement, may be
required to effect early retirement of a Series of
Certificates by soliciting competitive bids for the
purchase of the assets of the related Trust or otherwise,
under the circumstances and in the manner specified under
"Description of the Certificates--Mandatory Disposition
of Home Equity Loans" herein.
YIELD AND
PREPAYMENT
CONSIDERATIONS..... The yield on each Class of Certificates of a Series will
be affected by, among other things, the rate of payment
of principal (including prepayments) on the Home Equity
Loans in the related Trust and the timing of receipt of
such payments. See "Certain Yield and Prepayment
Considerations" herein and in the related Prospectus
Supplement. The Prospectus Supplement for a Series may
specify certain yield calculations, based upon an assumed
rate or range of prepayment assumptions on the related
Home Equity Loans, for Classes receiving disproportionate
allocations of principal and interest. A higher level of
principal prepayments on the related Home Equity Loans
than anticipated is likely to have an adverse effect on
the yield of any Class of Certificates that
8
<PAGE>
is purchased at a premium and a lower level of principal
prepayments on the related Home Equity Loans than
anticipated is likely to have an adverse effect on the
yield of any Class of Certificates that is purchased at a
discount from its principal amount. It is possible under
certain circumstances that holders of Certificates
purchased at a premium (including Certificates entitled
to receive interest only) could suffer a lower than
anticipated yield or could fail to recoup fully their
initial investment. See "Certain Yield and Prepayment
Considerations" herein and in the related Prospectus
Supplement.
CREDIT
ENHANCEMENT......... If so specified in the related Prospectus Supplement,
credit enhancement may be provided by any one or a
combination of a letter of credit, financial guaranty
insurance policy, mortgage pool insurance policy, special
hazard insurance policy, reserve fund, spread account,
cash collateral account, overcollateralization or other
type of credit enhancement to provide full or partial
coverage for certain defaults and losses relating to the
underlying Home Equity Loans. Credit support may also be
provided by subordination. The amount of any credit
enhancement may be limited or have exclusions from
coverage and may decline or be reduced over time or under
certain circumstances, all as specified in the related
Prospectus Supplement. See "Description of the
Certificates--Description of Credit Enhancement" herein.
ADVANCES............ If so specified in the related Prospectus Supplement, on
each Payment Date the Master Servicer may be required to
make advances (each, an "Advance") to cover shortfalls in
the amount payable to Certificateholders resulting from
delinquent payments on the Home Equity Loans that remain
uncollected as of the end of the preceding Remittance
Period, to the extent the Master Servicer believes that
the amount so advanced will be recoverable from
subsequent payments and collections in respect of the
related Home Equity Loan. However, no Advances will be
made if after giving effect thereto the total amount of
such Advances with respect to a particular Home Equity
Loan outstanding at that time would exceed the total
amount of delinquent payments of principal and interest
on such Home Equity Loan as of the preceding Record Date,
plus the total amount of Servicing Advances made during
the preceding Remittance Period with respect to such Home
Equity Loan. On each Payment Date, the Master Servicer
will be entitled to a first priority reimbursement from
amounts paid by borrowers for previous Advances.
In addition, the related Prospectus Supplement will
specify whether the Servicer may advance funds to satisfy
or to keep current any Home Equity Loans secured by
senior liens, in order to preserve the Trust's interest
in such Home Equity Loans, or to pay taxes, legal
expenses and attorney fees, insurance premiums and
similar expenses relating to a Home Equity Loan, to the
extent that the Master Servicer believes that the amount
so advanced will be recoverable from subsequent payments
and collections on the related Home Equity Loan. The
Master Servicer will be entitled to a first priority
reimbursement from amounts paid by borrowers for such
previous advances. See "Description of the Certificates--
Advances; Servicing Advances" herein.
SERVICING FEE....... The Master Servicer will be entitled to receive a fee for
its servicing duties in the amount specified in the
related Prospectus Supplement (the "Servicing
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Fee"), payable monthly from payments and collections with
respect to the Home Equity Loans.
RATINGS............. At the date of issuance, as to each series, each class of
Certificates offered hereby will be rated at the request
of the Seller in one of the four highest rating
categories by one or more nationally recognized
statistical rating agencies (each, a "Rating Agency").
See "Ratings" in the related Prospectus Supplement.
A security rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or
withdrawal at any time. No person is obligated to
maintain any rating on any Certificate and, accordingly,
there can be no assurance that the ratings assigned to
any Class of Certificates upon initial issuance thereof
will not be lowered or withdrawn by a Rating Agency at
any time thereafter. If a rating of any Class of
Certificates of a Series is revised or withdrawn, the
liquidity of such Class of Certificates may be adversely
affected. In general, the ratings address credit risk and
do not represent any assessment of the likelihood or rate
of principal prepayments. See "Risk Factors Certificates
Limited Liquidity" and "Ratings" herein.
CERTAIN LEGAL
ASPECTS OF THE
HOME EQUITY
LOANS.............. The Home Equity Loans relating to a Series of
Certificates may be secured by second or more junior
Mortgages which are subordinate to one or more mortgage
liens on the related Mortgaged Property prior to the lien
of such Home Equity Loan (such senior lien, if any, a
"Senior Lien"). A primary risk with respect to a junior
Mortgage is that funds received in connection with a
foreclosure will not be sufficient to satisfy fully both
the Senior Lien and the junior Mortgage. See "Risk
Factors" and "Certain Legal Aspects of the Home Equity
Loans" herein.
TAX STATUS OF THE
CERTIFICATES....... One or more elections will be made to treat the Trust
relating to a Series of Certificates or one or more
segregated pools of assets comprising such a Trust as one
or more "real estate mortgage investment conduits" (each,
a "REMIC"). The Certificates will constitute "regular
interests" in a REMIC or "residual interests" in a REMIC,
as specified in the related Prospectus Supplement. See
"Certain Federal Income Tax Consequences" herein and in
the related Prospectus Supplement.
ERISA
CONSIDERATIONS...... A fiduciary of any employee benefit plan or other plan or
arrangement subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section
4975 of the Internal Revenue Code of 1986, as amended
(the "Code") (a "Plan"), or any insurance company
(whether through its general or separate accounts) or
other person investing "plan assets" of any Plan, should
carefully review with its legal advisors whether the
purchase or holding of any Class of Certificates could
give rise to a transaction prohibited or not otherwise
permissible under ERISA or Section 4975 of the Code.
Certain Classes of Certificates may not be permitted to
be acquired by, on behalf of or with "plan assets" of any
Plan, as specified in the related Prospectus Supplement.
See "ERISA Considerations" herein and in the related
Prospectus Supplement.
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LEGAL INVESTMENT.... Unless otherwise specified in the related Prospectus
Supplement, no Class of Certificates will constitute
"mortgage related securities" under the Secondary
Mortgage Market Enhancement Act of 1984 because the
related Mortgage Pool will include Home Equity Loans that
are secured by second or more junior mortgages. Investors
should consult their own legal advisers in determining
whether and to what extent the Certificates constitute
legal investments for such investors. See "Legal
Investment" herein and in the related Prospectus
Supplement.
USE OF PROCEEDS..... The Seller will use the net proceeds received from each
sale of Certificates to purchase Home Equity Loans from
its affiliates. Such affiliates will use such proceeds
for general corporate purposes.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of Certificates:
RISKS OF THE HOME EQUITY LOANS
General Economic Conditions. General economic conditions have an impact on
the ability of borrowers to repay mortgage loans. Loss of earnings, illness
and other similar factors may lead to an increase in delinquencies and
bankruptcy filings by borrowers. In the event of personal bankruptcy of a
borrower under a Home Equity Loan (a "Mortgagor"), it is possible that the
holders of the related Certificates could experience a loss with respect to
such Mortgagor's Home Equity Loan. In conjunction with a Mortgagor's
bankruptcy, a bankruptcy court may suspend or reduce the payments of principal
and interest to be paid with respect to such Home Equity Loan, thus delaying
the amount received by the holders of the related Certificates with respect to
such Home Equity Loan. Moreover, if a bankruptcy court prevents the transfer
of the related Mortgaged Property to the related Trust, any remaining balance
on such Home Equity Loan may not be recoverable.
Real Estate Market Conditions. An investment in securities such as the
Certificates which are secured by or represent interests in mortgage loans may
be affected by, among other things, a decline in real estate values. No
assurance can be given that values of the Mortgaged Properties will remain at
the levels existing on the dates of origination of the related Home Equity
Loans. If the residential real estate market should experience an overall
decline in property values such that the outstanding balances of the Home
Equity Loans, together with loans secured by Senior Liens (defined below), if
any, on the Mortgaged Properties, become equal to or greater than the value of
the Mortgaged Properties, the actual rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the mortgage
lending industry.
Geographic Concentration. Certain geographic regions of the United States
from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency on mortgage loans generally. Any concentration of the Home Equity
Loans relating to any Series of Certificates in such a region may present risk
considerations in addition to those generally present for similar mortgage-
backed securities without such concentration. See "Description of the Mortgage
Pool" in the related Prospectus Supplement for further information regarding
the geographic concentration of the Home Equity Loans underlying the
Certificates of any Series.
Junior Liens. The Home Equity Loans underlying the Certificates of a Series
may be secured by Mortgages junior or subordinate to one or more other
mortgages ("Senior Liens"), and the related Senior Liens will not be included
in the Mortgage Pool. The rate of default of second or more junior mortgage
loans may generally be expected to be greater than that of mortgage loans
secured by senior liens on comparable properties. A primary risk to holders of
Home Equity Loans secured by junior Mortgages is the possibility that adequate
funds will not be received in connection with a foreclosure of the related
Senior Lien to first satisfy fully the Senior Lien and then make any payment
in connection with the Home Equity Loan. A foreclosure sale by the holder of a
Senior Lien will extinguish the lien of the junior Mortgage and it is unlikely
that the holder of the junior Mortgage will receive any proceeds from such
foreclosure sale. Thus, in servicing junior Mortgages, the Master Servicer may
in certain circumstances desire to advance funds to keep the Senior Lien
current in the event the Mortgagor is in default thereunder in order to
forestall a foreclosure of the Senior Lien until after such time as the Master
Servicer is able to foreclose on the junior Mortgage (subject to the Senior
Lien). The related Prospectus Supplement will specify whether the Master
Servicer may advance such amounts. Unless such amounts are advanced by the
Master Servicer, the related Trust will have no source of funds to satisfy any
Senior Lien or make payments due to any senior mortgagee.
If the Master Servicer were to foreclose on any junior Home Equity Loan, it
would do so subject to any related Senior Lien. The amount received at any
such sale will therefore be reduced to reflect the fact that the interest in
the property conveyed will be subject to the Senior Lien. If such proceeds
from a foreclosure or similar
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sale of the related Mortgaged Property (subject to the Senior Lien) are
insufficient to satisfy the Home Equity Loan, the related Trust, as the holder
of the junior Mortgage and, accordingly, holders of the Certificates, would
bear (i) the risk of delay in distributions while a deficiency judgment
against the Mortgagor is obtained and (ii) the risk of loss if the deficiency
judgment is not realized upon. Moreover, deficiency judgments may not be
available in certain jurisdictions. The junior Mortgages securing the Home
Equity Loans are subject and subordinate to any Senior Liens affecting the
related Mortgaged Property, including negative amortization features that may
increase the outstanding balance secured by a Senior Lien and limitations and
prohibitions which may be contained in such Senior Liens upon subordinate
financing.
Delays in Liquidating Defaulted Home Equity Loans or Property. Even assuming
that the Mortgaged Properties provide adequate security for the Home Equity
Loans underlying a Series of Certificates, substantial delays could be
encountered in connection with the liquidation of defaulted Home Equity Loans
and corresponding delays in the receipt of related proceeds by the related
Trust could occur. An action to foreclose on a Mortgaged Property securing a
Home Equity Loan is regulated by state statutes and rules and is subject to
many of the delays and expenses of other lawsuits if defenses or counterclaims
are interposed, sometimes requiring several years to complete. Some states
allow a nonjudicial foreclosure proceeding which may proceed more swiftly than
a judicial foreclosure action. However, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a
Mortgaged Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the Master
Servicer to foreclose on or sell the Mortgaged Property or to obtain Net
Liquidation Proceeds sufficient to repay all amounts due on the related Home
Equity Loan. In addition, the Master Servicer will be entitled to deduct from
the amount of payments and collections received during the preceding
Remittance Period all expenses reasonably incurred in attempting to recover
amounts due and not yet repaid on Liquidated Home Equity Loans, including
payments to senior lienholders, legal fees and costs of legal action,
settlement costs, real estate taxes and maintenance and preservation expenses,
thereby reducing collections available to the related Trust. See "Certain
Legal Aspects of the Home Equity Loans--Foreclosure in General," and "--Rights
of Redemption" herein.
Likelihood of Disproportionate Liquidation Expenses. Some liquidation
expenses with respect to defaulted mortgage loans do not vary directly with
the outstanding principal balance of the loan at the time of default.
Therefore, assuming that the Master Servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as
it would in the case of a defaulted mortgage loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the outstanding principal balance of the small
mortgage loan than would be the case with the defaulted mortgage loan having a
large remaining principal balance. To the extent that the average outstanding
principal balance of the Home Equity Loans is small relative to the size of
the average outstanding principal balance of the loans in a pool consisting
only of conventional purchase-money mortgage loans, Net Liquidation Proceeds
on Liquidated Home Equity Loans may also be smaller as a percentage of the
principal balance of a Home Equity Loan than would be the case in a pool
consisting only of conventional purchase-money mortgage loans.
Risk of Early Defaults. Certain of the Home Equity Loans underlying a Series
of Certificates may be recently originated as of the date of inclusion in the
related Mortgage Pool. Defaults on mortgage loans may generally be expected to
occur with greater frequency in their early years.
Balloon Loans. Certain of the Home Equity Loans underlying a Series of
Certificates may provide for the payment of the unamortized principal balance
of the Home Equity Loan in a single payment at the maturity of the Home Equity
Loan that is significantly greater than the scheduled monthly payments
("Balloon Loans"). See "Description of the Mortgage Pools" herein and
"Description of the Mortgage Pool" in the related Prospectus Supplement.
Because borrowers under Balloon Loans are required to make a relatively large
payment upon maturity, it is possible that the default risk associated with
Balloon Loans is greater than that associated with fully-amortizing mortgage
loans. The ability of a Mortgagor on a Balloon Loan to repay the Home Equity
Loan upon maturity frequently depends upon, among other things, the borrower's
ability to refinance the Home Equity Loan, which will be affected by a number
of factors, including, without limitation, the level of mortgage rates
available in the primary mortgage market at the time, the Mortgagor's equity
in the related Mortgaged
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Property, the financial condition of the Mortgagor, the condition of the
Mortgaged Property, tax law, general economic conditions and the general
willingness of financial institutions to extend credit.
Although a low interest rate environment may facilitate the refinancing of a
balloon payment, the receipt and reinvestment by holders of the Certificates
of the proceeds in such an environment may produce a lower return than that
previously received in respect of the related Home Equity Loan. Conversely, a
high interest rate environment may make it more difficult for the Mortgagor to
accomplish a refinancing and may result in delinquencies or defaults.
Certain Home Equity Loans. Certain of the Home Equity Loans underlying a
Series of Certificates may be delinquent for a period not exceeding 59 days,
as specified in the related Prospectus Supplement. Such Home Equity Loans may
be subject to a greater risk of default. See "Description of the Mortgage
Pools" herein and "Description of the Mortgage Pool" in the related Prospectus
Supplement.
Legal and Regulatory Considerations. Applicable state laws generally
regulate interest rates and other charges, require certain disclosures and,
unless an exemption is available, require licensing of the originators of home
equity loans. In addition, most states have other laws, public policy and
general principles of equity relating to the protection of consumers, unfair
and deceptive practices and practices which may apply to the origination,
servicing and collection of the Home Equity Loans. Depending on the provisions
of the applicable law and the specific facts and circumstances involved, these
laws, policies and principles may limit the ability of the Master Servicer to
collect all or part of the principal of or interest on the Home Equity Loans,
may entitle the borrower to a refund of amounts previously paid and, in
addition, could subject the Master Servicer to damages and administrative
sanctions. See "Certain Legal Aspects of the Home Equity Loans" herein.
The Home Equity Loans are also subject to federal laws, including: (i) the
Federal Truth in Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the Mortgagors regarding the terms of the Home
Equity Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age,
race, color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the Mortgagor's
credit experience; and (iv) certain other laws and regulations.
Under environmental legislation and case law applicable in certain states,
it is possible that liability for environmental hazards in respect of real
property may be imposed on a holder of a mortgage note (such as the Trust)
secured by real property. See "Certain Legal Aspects of the Home Equity
Loans--Environmental Legislation" herein.
LIMITED OPERATING HISTORY OF MASTER SERVICER
The Master Servicer commenced originating and servicing mortgage loans in
June 1996 as part of TFC's strategy to build a centralized real estate-secured
lending operation. Accordingly, the Master Servicer has a limited operating
history, and no relevant delinquency or loss experience data is available.
Currently, the Master Servicer services a loan portfolio with an aggregate
principal amount of approximately $160 million, which consists primarily of
first mortgage loans.
CERTIFICATES
Limited Liquidity. There is no assurance that a secondary market for any of
the Certificates will develop or, if one does develop, that it will provide
the holders with liquidity of investment or that it will continue for the life
of such Certificates. None of the Certificates will be listed on any
securities exchange.
Issuance of any of the Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market because
investors may be unwilling to purchase Certificates for which they cannot
obtain physical certificates. See "Description of the Certificates--
Registration and Transfer of the Certificates" herein.
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Limited Obligations. No Class of Certificates of any Series will represent
an interest in or obligation of the Seller, the Master Servicer or any of
their affiliates. The only obligations of the foregoing entities with respect
to any of the Certificates or the related Home Equity Loans will be the Master
Servicer's servicing obligations under the Pooling and Servicing Agreement and
the obligations of the Seller to purchase, or substitute substantially similar
mortgage loans for any Home Equity Loans as to which there is defective
documentation or a breach of certain representations and warranties in the
Pooling and Servicing Agreement. Except as expressly set forth in the related
Prospectus Supplement, neither the Certificates nor the underlying Home Equity
Loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the Seller, the Master Servicer or any of their
affiliates.
ERISA Considerations. An investment in a Class of Certificates of any Series
by Plans may give rise to a prohibited transaction under Section 406 of ERISA
and/or be subject to tax under Section 4975 of the Code unless a statutory or
administrative exemption is available. Accordingly, fiduciaries of any
employee benefit plan or other plan or arrangement subject to ERISA or Section
4975 of the Code (a "Plan") or any insurance company (whether through its
general or separate accounts) or other person investing "plan assets" of any
Plan, should consult their counsel before purchasing any Class of
Certificates. Certain Classes of Certificates will not be eligible for
purchase by, on behalf of or with "plan assets" of Plans. See "ERISA
Considerations" herein and in the related Prospectus Supplement.
Limitations, Reduction and Substitution of Credit Enhancement. Credit
enhancement may be provided with respect to one or more Classes of
Certificates of a Series to cover certain types of losses on the underlying
Home Equity Loans. Credit enhancement may be provided by one or more forms,
including but not limited to subordination of one or more Classes of
Certificates of such Series, letter of credit, financial guaranty insurance
policy, mortgage pool insurance policy, special hazard insurance policy,
reserve fund, spread account, cash collateral account, overcollateralization
or other type of credit enhancement. The coverage of any credit enhancement
may be limited or have exclusions from coverage and may decline over time or
under certain circumstances, all as specified in the related Prospectus
Supplement. See "Description of the Certificates--Description of Credit
Enhancement" herein.
CREDITORS' RIGHTS AND BANKRUPTCY CONSIDERATIONS
Creditors' Rights Considerations. During the period that the related
Certificates are outstanding and so long as the ratings of the long-term
senior unsecured debt of TFC satisfy the ratings requirements specified in the
related Prospectus Supplement, assignments of the related Mortgages from the
entities that will sell Home Equity Loans to the Seller (collectively, the
"Prior Owners") to the Seller and from the Seller to the Trustee will not be
required to be recorded. The failure to record assignments of the Mortgages to
the Seller and to the Trustee in some states in which the Mortgaged Properties
are located may have the result of making the sale thereof potentially
ineffective against (i) creditors of a Prior Owner or the Seller, (ii) a
purchaser to whom a Prior Owner or the Seller fraudulently, negligently, or
inadvertently sells a Home Equity Loan, or (iii) any bankruptcy trustee or
similar official appointed for a Prior Owner or the Seller.
If TFC's long-term senior unsecured debt rating does not satisfy the ratings
requirements specified in the related Prospectus Supplement, assignments of
the Mortgages in favor of the Seller and the Trustee will be required to be
recorded (or opinions of counsel acceptable to the Rating Agencies will be
obtained to the effect that recording is not required to protect the Trust's
interest in and to the related Home Equity Loan). See "Description of the
Certificates--Assignment of the Home Equity Loans" herein.
Bankruptcy Related Matters. The transactions described herein and by the
related Prospectus Supplement will be structured such that the Seller is
unlikely to become the debtor in a case under the United States Bankruptcy
Code and so that, even if such a filing should occur, it should not result in
consolidation of the assets and liabilities of the Seller with those of the
Prior Owners. These steps include the creation of the Seller as a separate,
limited purpose corporation, the certificate of incorporation of which
contains limitations on the nature
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of its business and restrictions on the ability of the Seller to commence
voluntary or involuntary cases or proceedings under the Bankruptcy Code
without the prior unanimous affirmative vote of all its directors. The Seller
does not and will not engage in any activities other than the transactions
described herein and other similar transactions and activities incidental to,
or necessary or convenient to accomplish the foregoing. Each of the Seller and
the Prior Owners has no current intention of filing a voluntary petition under
the Bankruptcy Code. No assurance can be given, however, that the Seller or a
Prior Owner will not become a debtor in a case under the Bankruptcy Code, or
that the activities of the Seller would not result in a court concluding that
the assets and liabilities of the Seller should be consolidated with those of
the Prior Owners.
The Prior Owners will represent and warrant that the transfer of the Home
Equity Loans to the Seller will constitute a sale by each of the Prior Owners
to the Seller, and that the Prior Owners have taken and will take all actions
that are required to perfect the Seller's ownership interests in the Home
Equity Loans. Accordingly, it is intended that such Home Equity Loans will not
be part of the bankruptcy estate of any Prior Owner, and will not be available
to the creditors of any Prior Owner. However, in the event of the bankruptcy
of any Prior Owner, it is possible that such Prior Owner, a bankruptcy trustee
for such Prior Owner or a creditor of such Prior Owner may attempt to
recharacterize the transaction between the Prior Owner and the Seller as a
pledge of the Home Equity Loans in connection with a borrowing by such Prior
Owner rather than a true sale. This position, if asserted, could prevent
timely payments of amounts due on the related Certificates. If such an attempt
were successful, reductions in distributions of principal and interest on such
Certificates could result, or such a trustee in bankruptcy could elect to
accelerate payment of the obligation to the Seller and liquidate the Home
Equity Loans.
Furthermore, for so long as the ratings of the long-term senior unsecured
debt of TFC satisfy the ratings requirements specified in the related
Prospectus Supplement, the Master Servicer is entitled to commingle with its
own funds payments made with respect to the Home Equity Loans until the
relevant Payment Date. In the event of a bankruptcy by the Master Servicer,
the Trustee will likely not have a perfected interest in such payments and the
inclusion thereof in the bankruptcy estate of the Master Servicer may result
in delays in payment and failure to pay amounts due on the Certificates.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of each Class of Certificates of a Series will depend
on the rate and timing of payment of principal on the related Home Equity
Loans, including prepayments, liquidations due to defaults and repurchases due
to defective documentation or breaches of representations and warranties. Such
yield may be adversely affected by a higher or lower than anticipated rate of
prepayments on the Home Equity Loans. Prepayments are influenced by a number
of factors, including prevailing mortgage market interest rates, local and
regional economic conditions and homeowner mobility. The yield to maturity of
certain Classes of Certificates identified in the related Prospectus
Supplement may be particularly sensitive to the rate and timing of principal
payments (including prepayments, liquidations and repurchases) of the related
Home Equity Loans, which may fluctuate significantly from time to time.
Investors in a Class of Certificates offered at a discount from the principal
amount thereof or with no stated principal amount should fully consider the
associated risks, including the risk that an extremely rapid rate of principal
payments could result in the failure of such investors to recoup their initial
investments. See "Certain Yield and Prepayment Considerations" herein and in
the related Prospectus Supplement.
ORIGINAL ISSUE DISCOUNT
Certain Classes of Certificates of a Series may be treated as having been
issued with original issue discount for federal income tax purposes. As a
result, holders of such Certificates will be required to include amounts in
income without the receipt of cash corresponding to that income. See "Certain
Federal Income Tax Consequences--Original Issue Discount" herein and, if
applicable, in the related Prospectus Supplement.
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DESCRIPTION OF THE MORTGAGE POOLS
GENERAL
Each Mortgage Pool will consist of Home Equity Loans having the aggregate
principal balance outstanding as of the related Cut-off Date, after giving
effect to payments due or received prior to such date, specified in the
related Prospectus Supplement (the "Original Pool Principal Balance"). Unless
otherwise specified in the related Prospectus Supplement, each Mortgage Pool
will consist of fixed or adjustable rate Home Equity Loans (including both
fully amortizing Home Equity Loans and Balloon Loans) originated and
underwritten by or acquired by Transamerica Mortgage Company or certain of its
affiliates. This subsection describes generally certain characteristics of the
Home Equity Loans.
Each Home Equity Loan will be selected by the Seller for inclusion in a
Mortgage Pool from among those originated or acquired by Transamerica Mortgage
Company and its affiliates. If a Mortgage Pool includes Home Equity Loans
originated by entities other than Transamerica Mortgage Company or any of its
affiliates, the related Prospectus Supplement will specify the extent of Home
Equity Loans so acquired. The characteristics of the Home Equity Loans are as
described in the related Prospectus Supplement. Other mortgage loans available
for purchase by the Seller may have characteristics that would make them
eligible for inclusion in a Mortgage Pool but were not selected for inclusion
in such Mortgage Pool.
The related Prospectus Supplement will describe certain characteristics of
the related Home Equity Loans, including without limitation (i) the range of
dates of origination and the latest scheduled maturity date, (ii) the minimum
remaining term to maturity, the weighted average original term to maturity and
the weighted average remaining term to maturity, (iii) the range of Mortgage
Interest Rates and the weighted average Mortgage Interest Rate, (iv) the range
of principal balances outstanding, the range of original principal balances
and the weighted average outstanding principal balance, (v) the percentages of
Home Equity Loans secured by first Mortgages, second Mortgages and more junior
Mortgages, respectively, (vi) the maximum Combined Loan-to-Value Ratio at
origination (defined below), the weighted average Combined Loan-to-Value
Ratio, the maximum Home Equity Loan Ratio (defined below) at origination and
the weighted average Home Equity Loan Ratio, (vii) the percentage of Home
Equity Loans secured by fee simple interests in single-family dwelling units,
attached or detached two- to four-family dwelling units, units in planned unit
developments, condominiums or cooperatives, and manufactured or mobile homes,
respectively, and the percentage of Home Equity Loans secured by units in
cooperatives, (viii) the percentage of Home Equity Loans as to which the
related Mortgagor represented at the time of origination that the related
Mortgaged Property would be occupied by such Mortgagor as a primary or
secondary residence, (ix) certain summary information relating to the
geographic concentration of the Mortgaged Properties securing the Home Equity
Loans, (x) the percentage of Home Equity Loans that are Balloon Loans and the
dates after origination the balloon payment is due, (xi) the percentage of
Home Equity Loans that are 0-29 days and 30-59 days contractually delinquent.
If so specified in the related Prospectus Supplement, the characteristics of
the Home Equity Loans described in items (v) through (ix) above, inclusive,
may be based on a random sample of Home Equity Loans included in the related
initial Mortgage Pool (a "Sample Pool"). No assurance can be given, however,
that the characteristics of a Sample Pool are representative of the
characteristics of the initial Mortgage Pool. In addition, if so specified in
the related Prospectus Supplement, such information may be approximate based
on the expected characteristics of the Home Equity Loans to be included in the
related Mortgage Pool and any significant variations therefrom provided on the
related Current Report on Form 8-K, as described below.
For purposes of the foregoing, the "Combined Loan-to-Value Ratio" of any
Home Equity Loan is the ratio (expressed as a percentage) of (i) the sum of
(a) the original principal balance of such Home Equity Loan at the date of
origination (which, unless otherwise specified in the related Prospectus
Supplement, includes certain financed fees) plus (b) the outstanding balance
of the Senior Lien, if any, at such time divided by the value of the related
Mortgaged Property, based upon the appraisal or other valuation, such as a
real estate broker's price opinion, made at the time of origination of the
Home Equity Loan or not less than 12 months prior to the time of origination
of the Home Equity Loan. See "The Consumer Mortgage Loan Program--Credit
Policy and
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Procedures Relating to Consumer Mortgage Loans" herein. The "Home Equity Loan
Ratio" of any Home Equity Loan is the ratio (expressed as a percentage) of (i)
the original principal balance of such Home Equity Loan divided by (ii) the
lesser of (a) the value of the related Mortgaged Property, based upon the
appraisal, if any, or other valuation made at the time of origination of the
Home Equity Loan and (b) the purchase price of the Mortgaged Property if the
Home Equity Loan proceeds were used to purchase the Mortgaged Property. For
Home Equity Loans secured by a first Mortgage, the Combined Loan-to-Value
Ratio and the Home Equity Loan Ratio will be the same.
In addition, the related Prospectus Supplement or, if so specified therein,
the Current Report on Form 8-K to be filed within fifteen days after the
delivery of a Series of Certificates, will set forth in tabular form certain
more detailed information relating to the characteristics of the related Home
Equity Loans by number and outstanding principal balance and by percentage of
the Mortgage Pool including, without limitation, the outstanding principal
balances of the Home Equity Loans, the geographic distribution of the related
Mortgaged Properties (by state), the Combined Loan-to-Value Ratios, the Home
Equity Loan Ratios, the Mortgage Interest Rates, the remaining months to
stated maturity and the number of months since origination, in each case
(except for geographic distribution) within the ranges specified therein. If
so specified in the related Prospectus Supplement, some or all of this
information may be based on a Sample Pool.
PAYMENTS ON THE HOME EQUITY LOANS
The related Prospectus Supplement will specify the percentage of Home Equity
Loans underlying a Series of Certificates that provide for (a) payments that
are allocated to principal and interest according to the daily simple interest
method (a "Simple Interest Loan"), (b) payments in level monthly installments
(except, in the case of Balloon Loans, the final payment) consisting of
interest equal to one-twelfth of the applicable Mortgage Interest Rate times
the unpaid principal balance, with the remainder of such payment applied to
principal (an "Actuarial Loan") and (c) adjustable Mortgage Interest Rates
("ARM Loans").
A Simple Interest Loan provides for the amortization of the amount financed
under the Home Equity Loan over a series of equal monthly payments (except, in
the case of a Balloon Loan, the final payment). Each monthly payment consists
of an installment of interest which is calculated on the basis of the
outstanding principal balance of the Home Equity Loan multiplied by the stated
Mortgage Interest Rate and further multiplied by a fraction, the numerator of
which is the number of days in the period elapsed since the preceding payment
of interest was made and the denominator of which is the number of days in the
annual period for which interest accrues on such Home Equity Loan. As payments
are received under a Simple Interest Loan, the amount received is applied
first to interest accrued to the date of payment and the balance is applied to
reduce the unpaid principal balance. Accordingly, if a borrower pays a fixed
monthly installment on a Simple Interest Loan before its scheduled due date,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the
payment been made as scheduled, and the portion of the payment applied to
reduce the unpaid principal balance will be correspondingly greater. However,
the next succeeding payment will result in an allocation of a greater amount
to interest if such payment is made on its scheduled due date.
Conversely, if a borrower pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if
any, of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment under a Simple Interest Loan
is made on or prior to its scheduled due date, the principal balance of the
Home Equity Loan will amortize in the manner described in the preceding
paragraph. However, if the borrower consistently makes scheduled payments
after the scheduled due date the Home Equity Loan will amortize more slowly
than scheduled. If a Simple Interest Loan is prepaid, the borrower is required
to pay interest only to the date of prepayment.
ARM Loans generally will provide for a fixed initial Mortgage Interest Rate
until the first date on which such Mortgage Interest Rate is to be adjusted.
Thereafter, the Mortgage Interest Rate is subject to periodic adjustment as
described in the related Prospectus Supplement based on changes in the
relevant index (the
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"Index") described in the applicable Prospectus Supplement, to a rate equal to
the Index plus a fixed percentage spread over the Index established
contractually for each ARM Loan at the time of its origination (the "Gross
Margin"). The initial Mortgage Interest Rate on an ARM Loan may be lower than
the sum of the then-applicable Index and the Gross Margin for such ARM Loan.
ARM Loans have features that provide investment considerations different
from those for fixed rate loans. In particular, adjustable interest rates can
cause payment increases that may exceed some Mortgagors' capacity to cover
such payments. However, to the extent specified in the related Prospectus
Supplement, an ARM Loan may provide that its Mortgage Interest Rate may not be
adjusted to a rate above the applicable maximum Mortgage Interest Rate (the
"Maximum Mortgage Rate") or below the applicable minimum Mortgage Interest
Rate (the "Minimum Mortgage Rate"), if any, for such ARM Loan. In addition, to
the extent specified in the related Prospectus Supplement, certain of the ARM
Loans may provide for limitations on the maximum amount by which their
interest rates may adjust for any single adjustment period (the "Periodic
Cap"). Some ARM Loans provide for limitations on the amount of scheduled
payments of principal and interest.
Certain ARM Loans may be subject to negative amortization from time to time
prior to their maturity (such ARM Loans, "Neg-Am ARM Loans"). Such negative
amortization may result from either the adjustment of the Mortgage Interest
Rate on a more frequent basis than the adjustment of the scheduled payment or
the application of a cap on the size of the scheduled payment. In the first
case, negative amortization results if an increase in the Mortgage Interest
Rate occurs prior to an adjustment of the scheduled payment on the related
Home Equity Loan and such increase causes accrued monthly interest on the Home
Equity Loan to exceed the scheduled payment. In the second case, negative
amortization results if an increase in the Mortgage Interest Rate causes
accrued monthly interest on a Home Equity Loan to exceed the limit on the size
of the scheduled payment on such Home Equity Loan. In the event that the
scheduled payment is not sufficient to pay the accrued monthly interest on a
Neg-Am ARM Loan, the amount of accrued monthly interest that exceeds the
scheduled payment on such Home Equity Loans (the "Deferred Interest") is added
to the principal balance of such ARM Loan and is to be repaid from future
scheduled payments. Neg-Am ARM Loans do not provide for the extension of their
original stated maturity to accommodate changes in their Mortgage Interest
Rates. The related Prospectus Supplement will specify whether the ARM Loans
underlying a series are Neg-Am ARM Loans.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The rate of principal payments on each Class of Certificates of a Series
entitled to principal, the aggregate amount of each interest payment on each
Class of Certificates of a Series entitled to interest and the yield to
maturity of each Class of Certificates of a Series will be related to the rate
and timing of payments of principal on the related Home Equity Loans, which
may be in the form of scheduled and unscheduled payments. The rate of
prepayment on a pool of mortgage loans is affected by prevailing market rates
for mortgage loans of a comparable term and risk level. In general, when the
level of prevailing interest rates for similar loans significantly declines,
the rate of prepayment is likely to increase, although the prepayment rate is
influenced by a number of other factors, including general economic conditions
and homeowner mobility. Defaults on mortgage loans may generally be expected
to occur with greater frequency in their early years. The rate of default on
second or more junior mortgage loans may be greater than that of mortgage
loans secured by first liens on comparable properties. Prepayments,
liquidations and purchases of the Home Equity Loans will result in
distributions to the holders of amounts of principal which would otherwise be
distributed over the remaining terms of the Home Equity Loans.
In addition, unless otherwise specified in the related Prospectus
Supplement, the Master Servicer, the Seller or the holders of the Class of
Certificates of any Series specified in the related Prospectus Supplement may,
at their option, cause the related Trust to sell all of the outstanding Home
Equity Loans and REO Properties underlying the related Series of Certificates,
and thus effect the early retirement of the related Certificates, after the
date on which the Pool Principal Balance (as defined herein) is less than the
percentage of the Original Pool Principal Balance specified in the related
Prospectus Supplement. See "Description of the Certificates--Optional
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Disposition of Home Equity Loans" herein. Further, if so specified in the
related Prospectus Supplement, the Master Servicer or such other entities as
may be specified in such Prospectus Supplement may be required to effect early
retirement of a Series of Certificates by soliciting competitive bids for the
purchase of the assets of the related Trust or otherwise. See "Description of
the Certificates--Mandatory Disposition of Home Equity Loans" herein.
As described above, the rate of prepayment on a pool of mortgage loans is
affected by prevailing market rates for comparable mortgage loans. When the
market interest rate is below the mortgage coupon, mortgagors may have an
increased incentive to refinance their mortgage loans. Depending on prevailing
market rates, the future outlook for market rates and economic conditions
generally, some mortgagors may sell or refinance mortgaged properties in order
to realize their equity in the mortgaged properties, to meet cash flow needs
or to make other investments. No representation is made as to the particular
factors that will affect the prepayment of the Home Equity Loans underlying
any Series of Certificates, as to the relative importance of such factors, as
to the percentage of the principal balance of the Home Equity Loans that will
be paid as of any date or as to the overall rate of prepayment on the related
Home Equity Loans.
The yield to maturity of certain Classes of Certificates of a Series may be
particularly sensitive to the rate and timing of principal payments (including
prepayments) of the Home Equity Loans, which may fluctuate significantly from
time to time. The Prospectus Supplement relating to such Certificates will
provide certain additional information with respect to the effect of such
payments on the yield to maturity of such Certificates under varying rates of
prepayment, including the rate of prepayment, if any, which would reduce the
holder's yield to zero.
Greater than anticipated prepayments of principal will increase the yield on
Certificates purchased at a price less than par. Conversely, greater than
anticipated prepayments of principal will decrease the yield on Certificates
purchased at a price greater than par. The effect on an investor's yield due
to principal prepayments on the Home Equity Loans occurring at a rate that is
faster (or slower) than the rate anticipated by the investor in the period
immediately following the issuance of the Certificates will not be entirely
offset by a subsequent like reduction (or increase) in the rate of principal
payments. The weighted average life of each Class of Certificates of a Series
will also be affected by the amount and timing of delinquencies and defaults
on the related Home Equity Loans and the recoveries, if any, on defaulted Home
Equity Loans and foreclosed properties in the related Mortgage Pool.
The "weighted average life" of a Certificate refers to the average amount of
time that will elapse from the date of issuance to the date each dollar in
respect of principal of such Certificate is repaid. The weighted average life
of each Class of Certificates of a Series will be influenced by, among other
factors, the rate at which principal payments are made on the Home Equity
Loans, including final payments made upon the maturity of Balloon Loans.
THE TRUSTS
Each Trust will be formed under a Pooling and Servicing Agreement (a
"Pooling and Servicing Agreement") among the Seller, the Master Servicer and
the Trustee named therein (a "Trustee"). The property of each Trust will
include: (i) the related Home Equity Loans as from time to time are subject to
the related Pooling and Servicing Agreement and all proceeds thereof, (ii)
such assets as from time to time are identified as REO Property or are
deposited in the Collection Account (defined herein) or other accounts
established under any of the documents governing the Trust or the related
Certificates, including amounts on deposit in such accounts and invested in
Permitted Instruments, (iii) the Trustee's rights under all insurance policies
with respect to the Home Equity Loans required to be maintained pursuant to
the Pooling and Servicing Agreement and any Insurance Proceeds, (iv)
Liquidation Proceeds and (v) Released Mortgaged Property Proceeds.
The Master Servicer will service the Home Equity Loans either directly or
through Subservicers in accordance with the Pooling and Servicing Agreement
and generally in accordance with the first and second
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mortgage loan servicing standards and procedures accepted by prudent mortgage
lending institutions. See "The Consumer Mortgage Loan Program--Servicing of
Consumer Mortgage Loans" and "Description of the Certificates--Servicing
Standards" and "--Use of Subservicers" below for a further description of the
Master Servicer's servicing procedures and provisions of the Pooling and
Servicing Agreement relating to servicing standards and the use of
Subservicers.
TRANSAMERICA FINANCE CORPORATION
Transamerica Finance Corporation ("TFC") was incorporated in Delaware in
1931 and is a wholly owned subsidiary of Transamerica Corporation, a Delaware
corporation ("Transamerica"). TFC borrows money in wholesale markets and,
through its subsidiaries, provides a wide range of consumer and commercial
financing, including leasing, to individuals and businesses primarily in the
United States, Canada and Europe. Transamerica is a Delaware corporation with
approximately $49 billion in assets which, through its subsidiaries, engages
primarily in the finance and insurance business. TFC's principal executive
offices are located at 600 Montgomery Street, San Francisco, California, and
its telephone number is (415) 983-4000.
THE MASTER SERVICER AND ITS AFFILIATES
Transamerica Mortgage Company and its consumer lending affiliates, which are
all wholly owned indirect subsidiaries of TFC, originate mortgage loans
secured by residential dwellings, purchase such loans on a wholesale basis
from other lenders and service such loans. Transamerica Mortgage Company was
incorporated in Delaware in 1996 as part of TFC's strategy to build a
centralized real estate-secured lending operation. Transamerica Mortgage
Company generates its loans through independent loan brokers. Its underwriting
and servicing operations are located in Dallas, Texas.
Transamerica's consumer lending business is also conducted through
Transamerica Home Loan and Metropolitan Mortgage Company. Transamerica Home
Loan was incorporated in California in 1992 and was previously in the business
of originating and servicing unsecured loans to professionals. Transamerica
Home Loan commenced servicing and originating mortgage loans in June 1997,
following the sale in June 1997 of Transamerica's former consumer lending
business, Transamerica Financial Services Holding Company. Transamerica Home
Loan's loan underwriting and servicing operations are located in Lenexa,
Kansas. Metropolitan Mortgage Company was incorporated in Florida in 1953 and
was acquired by TFC in March 1997. Metropolitan Mortgage Company's
underwriting and servicing operations are located in Miami, Florida. Both
Transamerca Home Loan and Metropolitan Mortgage Company will subservice the
Home Equity Loans they have originated or acquired.
Transamerica is also establishing a federal savings bank, Transamerica
Federal Savings Bank ("Transamerica FSB"), to originate mortgage loans.
Transamerica may establish other affiliates from time to time to originate and
service mortgage loans. Such other affiliates, if any, will be described in
the related Prospectus Supplement.
THE SELLER
Transamerica Consumer Mortgage Receivables Corporation (the "Seller") was
incorporated in December 1995 in the State of Delaware, with the special
purpose of acquiring mortgage loans and selling them to the Trusts.
Transamerica Consumer Finance Holding Company, a Delaware corporation and
wholly owned subsidiary of TFC, owns all of the outstanding capital stock of
the Seller. The Seller's executive office is located at 1150 South Olive
Street, Suite 2800, Los Angeles, California 90015 and its telephone number is
(213) 742-4865.
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The Seller's charter limits the Seller's purpose to acquiring and selling
mortgage loans, acting as grantor of one or more trusts consisting primarily
of mortgage loans and other liens on and interests in real estate and related
activities incidental to and necessary to accomplish such activities.
In addition, the Seller's charter provides that the Seller will not, without
the consent of the Rating Agencies, undertake certain significant actions such
as liquidating or filing a bankruptcy petition. Furthermore, the related
Pooling and Servicing Agreement will require the Seller to obtain the approval
of the Rating Agencies prior to amending certain provisions in the Seller's
charter.
The Seller has no intent to file, and Transamerica Consumer Finance Holding
Company and TFC have advised the Seller that they have no intent to cause the
filing of, a voluntary petition for relief under the Bankruptcy Code with
respect to the Seller.
THE CONSUMER MORTGAGE LOAN PROGRAM
The following is a general discussion of the lending practices of
Transamerica Mortgage Company and its consumer lending affiliates
(collectively, "TMC"). If a Mortgage Pool includes Home Equity Loans that have
been originated under lending practices that vary materially from those
described below, the related Prospectus Supplement will describe such other
lending practices. In particular, the underwriting criteria applied by the
originators of Home Equity Loans included in a Mortgage Pool may vary
significantly. The related Prospectus Supplement will describe generally
certain aspects of the underwriting criteria, to the extent known by the
Company, that were applied by the originators of such Home Equity Loans. TMC's
portfolio of mortgage loans are secured by first, second and third mortgages
on residential dwellings. Such loans are referred to herein as the "Consumer
Mortgage Loans."
LENDING
Consumer Mortgage Loans are originated under several lending programs.
Potential borrowers may be identified based on a variety of factors and a
database of such borrowers is maintained. Potential borrowers may be contacted
by mail or by sales representatives based in sales offices located in key
metropolitan areas. In addition, borrowers contact TMC themselves in response
to media advertising.
Consumer Mortgage Loans are also originated under a correspondent program
with unaffiliated licensed mortgage lenders or other financial institutions.
Under this program, participating lenders identify borrowers who do not meet
such lenders' underwriting criteria but may qualify for a loan from TMC. When
such a borrower is identified, the lender may refer the borrower to TMC or may
complete the underwriting and documentation of a loan in conformance with
underwriting and documentation requirements specified by TMC. TMC will either
fund or purchase such a loan after TMC has re-underwritten the loan and
reviewed the documentation.
Consumer Mortgage Loans may also be originated by independent loan brokers
located throughout the United States who underwrite and document loans in
conformance with underwriting and documentation requirements specified by TMC.
These loans are underwritten again by TMC prior to their purchase by TMC.
In the State of Florida, Consumer Mortgage Loans are marketed through retail
branch offices and through television and radio advertising.
TMC may also acquire Consumer Mortgage Loans through acquisitions of
businesses or bulk purchases of such loans from unaffiliated financial
institutions. If a Mortgage Pool includes Home Equity Loans originated by
entities other than TMC, the related Prospectus Supplement will specify the
extent of Home Equity Loans so acquired.
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CREDIT POLICY AND PROCEDURES RELATING TO CONSUMER MORTGAGE LOANS
Underwriting standards utilized by TMC are less stringent than those used by
conventional mortgage loan lenders or purchase programs such as those
administered by FHLMC or FNMA. For example, Consumer Mortgage Loans are made
to borrowers who have a wide range of experiences in their recent credit
histories, including bankruptcy, or whose ratio of total monthly credit
payments may be 50% or more of income. In addition, the loan-to-value ratio of
a Consumer Mortgage Loan may exceed 80% without the benefit of private
mortgage insurance. The applicable Prospectus Supplement will specify the
number and principal amount of Home Equity Loans with loan-to-value ratios in
excess of 80% and, if available, the number and principal amount of Home
Equity Loans whose borrowers have been subject to bankruptcy proceedings. In
addition, if so specified in the related Prospectus Supplement, Home Equity
Loans included in a Mortgage Pool may have been originated in connection with
a governmental program under which underwriting standards were designed to
promote home ownership, such as loans partially guaranteed by the Veterans
Administration ("VA Loans") or insured by the Federal Housing Administration
("FHA Loans").
Unless a potential borrower qualifies for a "no documentation," "limited
documentation" or "limited income verification" loan described below,
potential borrowers generally complete an application designed to provide
pertinent information concerning assets, liabilities, income, credit history,
employment history and personal information. They also authorize TMC to obtain
credit reports from credit repositories, verification of deposits in financial
institutions, verification of employment from employers, and verification of
mortgage payment history from prior real estate lenders. Borrowers are
required to have sufficient credit history established to allow reliable
evaluation.
In order to arrive at a lending decision, TMC generally evaluates the
creditworthiness of the borrower, the sufficiency of projected income to total
fixed obligations, the adequacy of the property to serve as collateral and
economic conditions in the metropolitan area in which the property is located.
Income sufficiency on adjustable rate loans is underwritten at no less than 1%
below fully indexed rates. A title insurance policy sufficient to cover the
Consumer Mortgage Loan and payable to TMC is required along with properly
endorsed property casualty insurance.
In determining the value of the related Mortgaged Property, TMC relies on
written appraisal reports prepared by impartial state licensed or certified
residential property appraisers or, if so specified in the related Prospectus
Supplement, other acceptable valuation methods described in the Prospectus
Supplement such as a real estate broker's price opinion or an appraisal
prepared by a staff appraiser.
TMC's experience indicates that the presence of an individual high-risk loan
attribute historically generally does not result in an unacceptable level of
loan losses. However, when multiple high risk attributes are exhibited in the
same loan without sufficient compensating factors (commonly referred to as
"layering" of risk factors or "layered risks"), their cumulative effect
dramatically increases the observed loan losses. Thus, TMC generally bases
credit decisions on the existence of multiple risk attributes on the same loan
which combine to produce unacceptable levels of credit risk.
If so specified in the related Prospectus Supplement, certain Home Equity
Loans may have been originated under "limited documentation," "no
documentation" or "limited income verification" programs which generally
require less documentation and verification than do traditional "full
documentation" programs. Under such a program, underwriting may be based
primarily or entirely on an appraisal or other valuation of the Mortgaged
Property and the Loan-to-Value Ratio at origination, and minimal or no
investigation is undertaken as to a borrower's credit history and income
profile. Loans may be originated under these programs at lower Loan-to-Value
Ratios than loans originated with full documentation and full income
verification.
A Consumer Mortgage Loan is funded after a review by one or more loan
officers and, in certain cases, management personnel, confirming that the loan
conforms with established credit policies and procedures.
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TMC's management regularly reviews the quality of the Consumer Mortgage
Loans included in its portfolio and also periodically conducts audits to
ensure compliance with its established policies and procedures.
SERVICING OF CONSUMER MORTGAGE LOANS
TMC follows specific servicing and collection procedures. Servicing
includes, but is not limited to, post-origination loan processing, customer
service, payment handling, collections and liquidations.
It is TMC's policy to begin the collection process after a payment due under
a Consumer Mortgage Loan is between one and 30 days past due. TMC collection
representatives handling delinquent accounts attempt to initiate contact with
the delinquent borrower by telephone and/or through letters targeted to the
particular history of an account.
Foreclosure procedures begin when all collection methods have proved
ineffective. Typically, an account is between 60 to 120 days past due at this
point. The recommendation to initiate a foreclosure action is made by a
foreclosure specialist and approved by a manager. If TMC obtains title to the
property upon foreclosure, the account is placed in a "Real Estate Owned"
status until the property is liquidated.
TMC may not foreclose on the property securing a second mortgage loan unless
it forecloses subject to the first mortgage. If the first mortgage is in
default after TMC has initiated its foreclosure action, TMC may advance funds
to keep the mortgage current. In the event that foreclosure proceedings have
been instituted on the first mortgage prior to the initiation of TMC's
foreclosure action, TMC will either satisfy the first mortgage at or before
the time of the foreclosure sale or take other action to protect its interest
in the related property. See "Description of the Certificates--Advances;
Servicing Advances" herein.
Upon sale of a "Real Estate Owned" property, the proceeds are applied to the
loan balance and any collectible expenses due to TMC. If the sale proceeds do
not cover the existing balance due TMC, the remainder of the balance is
charged off to bad debts.
Payment extensions require special circumstances and must be approved by a
manager. In situations where a borrower is experiencing a temporary financial
difficulty (most commonly loss of employment), the payment schedule of a
Consumer Mortgage Loan may be modified if certain requirements relating to the
Consumer Mortgage Loan, such as minimum equity requirements, are satisfied.
DELINQUENCY AND LOSS EXPERIENCE
Because the Master Servicer commenced originating and servicing mortgage
loans only recently, no relevant delinquency or loan loss experience for home
equity loans serviced by the Master Servicer is available. Furthermore, with
respect to Home Equity Loans acquired from an originator other than TMC,
including as a result of the acquisition of or merger with such originator,
delinquency and loan loss experience with respect to home equity loans
serviced or owned by such originator is generally not available to the Master
Servicer. However, if such data is available with respect to purchased Home
Equity Loans included in a Mortgage Pool, it will be set forth in the related
Prospectus Supplement.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The following summary describes certain terms of the Certificates common to
each Pooling and Servicing Agreement. A form of the Pooling and Servicing
Agreement has been filed as an Exhibit to the Registration Statement of which
this Prospectus forms a part. The summary does not purport to be complete and
is subject to, and is qualified in its entirety by reference to, the
provisions of the Certificates, the Pooling and Servicing Agreement and the
related Prospectus Supplement. Where particular provisions or terms used in
any of such documents are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summaries.
The Certificates will represent beneficial interests in the assets of the
related Trust, including (i) the Home Equity Loans and all proceeds thereof,
(ii) REO Property, (iii) amounts on deposit in the funds and accounts
established with respect to the related Trust, including all investments of
amounts on deposit therein, and (iv) certain other property, if described in
the related Prospectus Supplement. If specified in the related Prospectus
Supplement, one or more Classes of Certificates of a Series may have the
benefit of one or more of a letter of credit, financial guaranty insurance
policy, mortgage pool insurance policy, special hazard insurance policy,
reserve fund, spread account, cash collateral account, overcollateralization
or other form of credit enhancement. If so specified in the related Prospectus
Supplement, a Series of Certificates may have the benefit of one or more of a
mortgage pool insurance policy, bankruptcy bond, special hazard insurance
policy of similar credit enhancement. Any such credit enhancement may be
included in the assets of the related Trust. See "Description of the
Certificates--Description of Credit Enhancement" herein.
A Series of Certificates may include one or more Classes entitled to
distributions of principal and disproportionate, nominal or no interest
distributions or distributions of interest and disproportionate, nominal or no
principal distributions. The principal amount of any Certificate may be zero
or may be a notional amount as specified in the related Prospectus Supplement.
A Class of Certificates of a Series entitled to payments of interest may
receive interest at a specified rate (a "Pass-Through Rate") which may be
fixed, variable or adjustable and may differ from other Classes of the same
Series, may receive interest based on the weighted average Mortgage Interest
Rate on the related Home Equity Loans, or may receive interest as otherwise
determined, all as described in the related Prospectus Supplement. One or more
Classes of a Series may be Certificates upon which interest will accrue but
not be currently paid until certain other Classes have received principal
payments due to them in full or until the occurrence of certain events, as set
forth in the related Prospectus Supplement. One or more Classes of
Certificates of a Series may be entitled to receive principal payments
pursuant to a planned amortization schedule or may be entitled to receive
interest payments based on a notional principal amount which reduces in
accordance with a planned amortization schedule. The rights of one or more
Classes of Certificates may be senior or subordinate to the rights of one or
more of the other Classes of Certificates. A Series may include two or more
Classes of Certificates which differ as to the timing, sequential order,
priority of payment or amount of distributions of principal or interest or
both.
Each Class of Certificates of a Series will be issued in the denominations
specified in the related Prospectus Supplement. Each Certificate will
represent a percentage interest (a "Percentage Interest") in the Certificates
of the respective Class, determined by dividing the original dollar amount (or
Notional Principal Amount (as defined below), in the case of certain
Certificates entitled to receive interest only) represented by such
Certificate by the Original Principal Balance of such Class. The related
Prospectus Supplement will set forth the amount or method of calculating the
Notional Principal Amount with respect to any Certificate.
One or more Classes of Certificates of a Series may be issuable in the form
of fully registered definitive certificates or, if so specified in the related
Prospectus Supplement, one or more Classes of Certificates of a Series (the
"Book-Entry Certificates") may initially be represented by one or more
certificates registered in the name of Cede & Co. ("Cede"), the nominee of The
Depository Trust Company ("DTC"), and available only in the form of book-
entries on the records of DTC, participating members thereof ("Participants")
and other entities,
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such as banks, brokers, dealers and trust companies, that clear through or
maintain custodial relationships with a Participant, either directly or
indirectly ("Indirect Participants"). Certificateholders may also hold
Certificates of a Series through CEDEL or Euroclear (in Europe), if they are
participants in such systems or indirectly through organizations that are
participants in such systems. Certificates representing the Book-Entry
Certificates will be issued in definitive form only under the limited
circumstances described herein and in the related Prospectus Supplement. With
respect to Book-Entry Certificates, all references herein to "holders" of
Certificates shall reflect the rights of owners of the Book-Entry
Certificates, as they may indirectly exercise such rights through DTC and
Participants, except as otherwise specified herein. See "--Registration and
Transfer of the Certificates" herein.
Unless otherwise specified in the related Prospectus Supplement, on each
Payment Date there shall be paid to each person in whose name a Certificate is
registered on the related Record Date (which in case of the Book-Entry
Certificates initially will be only Cede, as nominee of DTC), the portion of
the aggregate payment to be made to holders of such Class to which such holder
is entitled, if any, based on the Percentage Interest, held by such holder of
such Class.
INTEREST
Unless otherwise specified in the related Prospectus Supplement, interest
will accrue on each Class of Certificates of a Series (other than a Class of
Certificates entitled to receive only principal) during each period specified
in the related Prospectus Supplement (each, an "Accrual Period") at the Pass-
Through Rate for such Class specified in the related Prospectus Supplement.
Interest accrued on each Class of Certificates at the applicable Pass-Through
Rate during each Accrual Period will be paid, to the extent monies are
available therefor, on each Payment Date, commencing on the day specified in
the related Prospectus Supplement and will be distributed in the manner
specified in such Prospectus Supplement, except for any Class of Certificates
("Accrual Certificates") on which interest is to accrue and not be paid until
the interest and principal of certain other Classes has been paid in full or
the occurrence of certain events as specified in such Prospectus Supplement.
If so described in the related Prospectus Supplement, interest that has
accrued but is not yet payable on any Accrual Certificates will be added to
the principal balance thereof on each Payment Date and will thereafter bear
interest at the applicable Pass-Through Rate. Payments of interest with
respect to any Class of Certificates entitled to receive interest only or a
disproportionate amount of interest and principal will be paid in the manner
set forth in the related Prospectus Supplement. Payments of interest (or
accruals of interest, in the case of Accrual Certificates) with respect to any
Series of Certificates or one or more Classes of Certificates of such Series,
may be reduced to the extent of interest shortfalls not covered by Advances,
if any, or by any applicable credit enhancement.
PRINCIPAL
On each Payment Date, commencing with the Payment Date specified in the
related Prospectus Supplement, principal with respect to the related Home
Equity Loans during the period specified in the related Prospectus Supplement
(each such period, a "Remittance Period") will be paid to holders of the
Certificates of the related Series (other than a Class of Certificates of such
Series entitled to receive interest only) in the priority, manner and amount
specified in such Prospectus Supplement, to the extent funds are available
therefor. Unless otherwise specified in the related Prospectus Supplement,
such principal payments will generally include (i) the principal portion of
all scheduled payments ("Monthly Payments") received on the related Home
Equity Loans during the related Remittance Period, (ii) any principal
prepayments of any such Home Equity Loans in full ("Principal Prepayments")
and in part ("Curtailments") received during the related Remittance Period or
such other period (each, a "Prepayment Period") specified in the related
Prospectus Supplement, (iii) the principal portion of (A) the proceeds of any
insurance policy relating to a Home Equity Loan, a Mortgaged Property (defined
herein) or a REO Property (defined herein), net of any amounts applied to the
repair of the Mortgaged Property or released to the Mortgagor (defined herein)
and net of reimbursable expenses ("Insurance Proceeds"), (B) proceeds received
in connection with the liquidation of any defaulted Home Equity Loans
("Liquidation Proceeds"), net of fees and advances reimbursable therefrom
("Net Liquidation Proceeds") and (C) proceeds received in
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connection with a taking of a related Mortgaged Property by condemnation or
the exercise of eminent domain or in connection with any partial release of
any such Mortgaged Property from the related lien ("Released Mortgaged
Property Proceeds"), (iv) the principal portion of all amounts paid by the
Seller in connection with the purchase of or substitution for a Home Equity
Loan as to which there is defective documentation or a breach of a
representation or warranty contained in the related Pooling and Servicing
Agreement and (v) the principal balance of each defaulted Home Equity Loan or
REO Property as to which the Master Servicer has determined that all amounts
expected to be recovered have been recovered (each, a "Liquidated Home Equity
Loan"), to the extent not included in the amounts described in clauses (i)
through (iv) above (the aggregate of the amounts described in clauses (i)
through (v), the "Basic Principal Payment"). Payments of principal with
respect to a Series of Certificates or one or more Classes of such Series may
be reduced to the extent of delinquencies or losses not covered by advances or
any applicable credit enhancement.
ASSIGNMENT OF THE HOME EQUITY LOANS
At the time of issuance of a Series of Certificates, the Seller will assign
the Home Equity Loans to the Trust pursuant to a Pooling and Servicing
Agreement together with all principal and interest received on or with respect
to the Home Equity Loans, other than principal and interest due or received on
or before the related Cut-off Date, as specified in the related Prospectus
Supplement.
Each Home Equity Loan will be identified in a schedule included as an
exhibit to the related Pooling and Servicing Agreement (the "Home Equity Loan
Schedule"). The Home Equity Loan Schedule will set forth certain information
with respect to each Home Equity Loan, including, among other things, the
principal balance as of the Cut-off Date, the Mortgage Interest Rate, the
Index for ARM Loans, the scheduled monthly payment of principal and interest,
the maturity of the Mortgage Note, the Combined Loan-to-Value Ratio at
origination and, as applicable, the Home Equity Loan Ratio at origination.
Under the terms of each Pooling and Servicing Agreement, during the period
that the related Certificates are outstanding and so long as the ratings of
the long-term senior unsecured debt of TFC satisfy the rating conditions set
forth in the related Prospectus Supplement, assignments of the Mortgages in
favor of the Seller or the Trustee are not required to be recorded. If TFC's
long-term senior unsecured debt rating does not satisfy the above-described
conditions, assignments of the Mortgages in favor of the Trustee will be
required to be recorded (or opinions of counsel acceptable to the Rating
Agencies will be obtained to the effect that recording is not required to
protect the Trust's interest in and to the related Home Equity Loan). Under
the Pooling and Servicing Agreement, the Trustee is appointed attorney-in-fact
for the Seller with power to prepare, execute and record assignments of the
Mortgages in the event that the Seller fails to do so on a timely basis. See
"Risk Factors--Creditors' Rights and Bankruptcy Considerations" herein.
Since assignments of the Mortgages to the Seller and to the Trustee will not
be recorded, it might be possible for a Prior Owner and the Seller to transfer
the Home Equity Loans to third parties, notwithstanding and in derogation of
the rights of the Trustee. See "Risk Factors--Creditors' Rights and Bankruptcy
Considerations" herein.
The Trustee is required to review the original documentation delivered to it
relating to each Home Equity Loan, including the related Mortgage Note and
Mortgage (the "Mortgage File"), and if any document required to be included in
the Mortgage File is found to be defective in any material respect and such
defect is not cured within 90 days following written notification thereof to
the Master Servicer by the Trustee, the Seller will be required to repurchase
the related Home Equity Loan in the manner set forth below.
The Trustee will be authorized to appoint a custodian to review and maintain
possession of the Mortgage Files as the agent of the Trustee. The custodian
may not be an affiliate of the Master Servicer and shall meet certain other
criteria set forth in the Pooling and Servicing Agreement. Any such Custodian
will be required to release the Mortgage Files to the Master Servicer or to
any Subservicers in connection with its servicing activities or for review by
licensing authorities. Any such Custodial Agreement will be on such terms as
the Trustee, the Master Servicer and the Custodian shall agree.
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REPRESENTATIONS AND WARRANTIES OF THE SELLER
Unless otherwise specified in the related Prospectus Supplement, the Seller
will represent, among other things, that as to each Home Equity Loan conveyed
by the Seller as of the related Closing Date:
1. The information with respect to each Home Equity Loan set forth in the
Home Equity Loan Schedule is true and correct.
2. All of the original or certified documentation constituting the
Mortgage Files (including all material documents related thereto) has been
delivered to the Trustee or the custodian appointed to hold the Mortgage
Files, if any, on the Closing Date or as otherwise provided in the
Agreement.
3. Each Home Equity Loan is secured primarily by the related Mortgaged
Property. Each Mortgaged Property is improved by a one- to four-family
residential dwelling, including, if and to the extent specified in the
related Prospectus Supplement, cooperatives.
4. All of the Balloon Loans, if any, provide for monthly payments based
on an amortization schedule specified in the related Mortgage Note and have
a final balloon payment no earlier than the number of months following the
date of origination set forth in the related Prospectus Supplement and no
later than at the end of the year following the date of origination set
forth in the related Prospectus Supplement. Each other Mortgage Note will
provide for a schedule of substantially equal monthly payments which are,
if timely paid, sufficient to fully amortize the principal balance of such
Mortgage Note on or before its maturity date.
5. Each Mortgage is a valid and subsisting first, second or, if so
specified in the related Prospectus Supplement, more junior lien of record
on the Mortgaged Property subject, in the case of any second or more junior
Home Equity Loans, only to the Senior Lien or Liens on such Mortgaged
Property and subject in all cases to the exceptions to title set forth in
the title insurance policy, or the other evidence of title delivered
pursuant to the Pooling and Servicing Agreement, with respect to the
related Home Equity Loan, which exceptions are generally acceptable to
second mortgage lending companies, and such other exceptions to which
similar properties are commonly subject and which do not individually, or
in the aggregate, materially and adversely affect the benefits of the
security intended to be provided by such Mortgage.
6. Immediately prior to the transfer of the Home Equity Loans to the
Trust, the Seller held good and indefeasible title to, and was the sole
owner of, each Home Equity Loan conveyed by the Seller subject to no liens,
charges, mortgages, encumbrances or rights of others.
7. Each Home Equity Loan conforms, and all Home Equity Loans in the
aggregate conform, to the description thereof set forth in this Prospectus
and the related Prospectus Supplement.
Such Seller will also make representations in the related Prospectus
Supplement as to the percentage of all of the Home Equity Loans or of the Home
Equity Loans in the Sample Pool which are secured by an owner-occupied
Mortgaged Property, the percentage of Home Equity Loans which are Balloon
Loans and the percentage of Home Equity Loans secured by Mortgaged Properties
located within any single zip code area.
Upon the discovery by any of the Seller, the Master Servicer, any
Subservicer, the Custodian, if any, the Credit Provider, if any, the Trustee
or any other party specified in the Pooling and Servicing Agreement that any
of the representations and warranties described above have been breached in
any material respect as of the Closing Date, with the result that the
interests of the holders of the related Certificates in the related Home
Equity Loan or the interests of any Credit Provider or any other party
specified in such Pooling and Servicing Agreement are materially and adversely
affected, the party discovering such breach is required to give prompt written
notice to the other parties. Within 60 days (or such other period as may be
specified in the related Prospectus Supplement) of the earlier to occur of its
discovery or its receipt of notice of any such breach, the Seller is required
to (i) cure such breach in all material respects, (ii) remove each Home Equity
Loan which has given rise to the requirement for action, or substitute one or
more mortgage loans that meet certain criteria set forth in the related
Pooling and Servicing Agreement (each a "Qualified Substitute Home Equity
Loan") and, if the
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outstanding principal balance of such Qualified Substitute Home Equity Loans
plus accrued and unpaid interest thereon as of the date of such substitution
is less than the outstanding principal balance, plus accrued and unpaid
interest thereon, of the replaced Home Equity Loans as of the date of
substitution, deliver or cause to be delivered to the Trustee, the amount of
any such shortfall (a "Substitution Adjustment"), or (iii) purchase such Home
Equity Loan at a price equal to the outstanding principal balance of such Home
Equity Loan as of the date of purchase plus all accrued and unpaid interest on
such outstanding principal balance computed at the Mortgage Interest Rate, and
deposit such purchase price into the Collection Account on the next succeeding
Determination Date or other date specified in the related Pooling and
Servicing Agreement; provided, however, that no such purchase or substitution
may be made if such Home Equity Loan is not in default or no default as to
such Home Equity Loan is imminent and no substitution may be made more than
two years after the Closing Date, in each case unless there shall have been
delivered to the Trustee an opinion of counsel knowledgeable in federal income
tax matters which states that such a purchase or substitution would not
constitute a prohibited transaction under the REMIC Provisions (defined
herein) or cause the Trust to otherwise incur a tax liability or to fail to
qualify as a REMIC at any time the related Certificates are outstanding. The
obligation of the Seller to cure, substitute or purchase any Home Equity Loan
as described above will constitute the sole remedy respecting a material
breach of any such representation or warranty to the holders of the related
Certificates or the Trustee.
PAYMENTS ON THE HOME EQUITY LOANS
Unless otherwise specified in the related Prospectus Supplement, the Pooling
and Servicing Agreement will permit the Master Servicer to retain payments
received in respect of the Home Equity Loans and commingle them with its own
assets until the Payment Date of the month following the calendar date of
receipt for so long as the ratings on the short-term unsecured senior debt
obligations of TFC are at least the ratings specified in the related
Prospectus Supplement. On each Payment Date, the Master Servicer will be
required to deposit all amounts received in respect of the Home Equity Loans
during the preceding Remittance Period, net of the amounts specified in the
related Prospectus Supplement, into the Collection Account for distribution to
Certificateholders.
If the ratings criteria specified in the related Prospectus Supplement are
not met, the Master Servicer will be required to deposit payments received in
respect of the Home Equity Loans, not later than two Business Days following
the application of such amounts on the accounting system at its headquarter
office. Unless otherwise specified in the related Prospectus Supplement, all
funds in the Collection Account are required to be held (i) uninvested, either
in trust or insured by the Federal Deposit Insurance Corporation up to the
limits provided by law, (ii) invested in certain permitted investments, which
are generally limited to United States government securities and other high-
quality investments and repurchase agreements or similar arrangements with
respect to such investments or (iii) invested in certain asset management
accounts maintained by the Trustee (collectively, "Permitted Instruments").
Unless otherwise specified in the related Prospectus Supplement, any
investment earnings on funds held in the Collection Account will be for the
account of the Master Servicer.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer may make withdrawals from the Collection Account only for the
following purposes:
(i) to pay to the Trustee any fees and expenses payable under the Pooling
and Servicing Agreement;
(ii) to pay to the Credit Provider any premiums or fees for the credit
enhancement, if any;
(iii) to reimburse itself for any accrued unpaid Servicing Fees,
unreimbursed Servicing Advances and certain other expenses paid by the
Master Servicer, the Master Servicer's rights to such reimbursement being
prior to the rights of holders of the related Certificates;
(iv) for payment to Certificateholders, the aggregate excess, if any, of
interest collected on the related Home Equity Loans during the Remittance
Period over interest accrued on the related Certificates at the applicable
Pass-Through Rates on the related Payment Date (the "Excess Spread"), and
the Available Payment Amount for the related Remittance Period;
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(v) to withdraw any amount received from a Mortgagor that is recoverable
and sought to be recovered as a voidable preference by a trustee in
bankruptcy pursuant to the United States Bankruptcy Code in accordance with
a final, nonappealable order of a court having competent jurisdiction;
(vi) to make investments in Permitted Instruments and, after effecting
the remittance described in clause (iii) above, to pay itself interest
earned in respect of Permitted Instruments or on funds deposited in the
Collection Account;
(vii) to withdraw any funds deposited in the Collection Account that were
not required to be deposited therein (such as servicing compensation) or
were deposited therein in error;
(viii) to pay itself the Servicing Fee and any other permitted servicing
compensation to the extent not previously retained or paid;
(ix) to withdraw funds necessary for the conservation and disposition of
REO Property;
(x) to make Servicing Advances, as more fully described below; and
(xi) to clear and terminate the Collection Account upon the termination
of the Pooling and Servicing Agreement.
ADVANCES; SERVICING ADVANCES
If so specified in the related Prospectus Supplement, on each Payment Date
the Master Servicer may be required to make advances (each, an "Advance") to
cover shortfalls in the amount payable to Certificateholders resulting from
delinquent payments on the Home Equity Loans that remain uncollected as of the
end of the preceding Remittance Period, to the extent the Master Servicer
believes that the amount so advanced will be recoverable from subsequent
payments and collections in respect of the related Home Equity Loan. However,
no Advances will be made if after giving effect thereto the total amount of
such Advances with respect to a particular Home Equity Loan outstanding at
that time would exceed the total amount of delinquent payments of principal
and interest on such Home Equity Loan as of the preceding Record Date, plus
the total amount of Servicing Advances made with respect to such Home Equity
Loan during the preceding Remittance Period.
In the course of performing its servicing obligations, the Master Servicer
will pay certain out-of-pocket costs and expenses incurred in the performance
of its servicing obligations ("Servicing Advances"), including, but not
limited to, the cost of (i) maintaining REO Properties; (ii) any enforcement
or judicial proceedings, including foreclosures; and (iii) the management and
liquidation of Mortgaged Property acquired in satisfaction of the related
Mortgage, in each case to the extent that the Master Servicer believes that
the amount so advanced will be recoverable from subsequent payments and
collections in respect of the related Home Equity Loan.
On each Payment Date, the Master Servicer will be entitled to a first
priority reimbursement from amounts paid by borrowers for previous Advances
and Servicing Advances.
DISTRIBUTIONS
The Trustee is required to establish a trust account (referred to herein as
the "Collection Account," but which may have such other designation as is set
forth in the related Prospectus Supplement) into which there shall be
deposited collections with respect to the Home Equity Loans. The Collection
Account is required to be maintained as an Eligible Account. Amounts on
deposit in the Collection Account may be invested in Permitted Instruments and
other investments specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, on each
Payment Date the Trustee is required to withdraw from the Collection Account
and distribute the amounts set forth in the related Prospectus Supplement, to
the extent available, in the priority set forth therein, which generally will
include (in no particular order of priority):
(i) deposits into any account established for the purpose of paying
credit enhancement fees and premiums;
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(ii) if a Spread Account, Reserve Account or similar account is
established with respect to a Series of Certificates, deposits into such
fund or account of the Excess Spread or other amounts required to be
deposited therein;
(iii) payments to the holders of the Certificates on account of interest
and principal, in the order and manner set forth in the related Prospectus
Supplement;
(iv) reimbursement of the Master Servicer for amounts expended by the
Master Servicer and reimbursable thereto under the related Pooling and
Servicing Agreement but not previously reimbursed; and
(v) after the payments and deposits described above and in the related
Prospectus Supplement, the balance, if any, to the persons specified in the
related Prospectus Supplement.
The amount available to make the payments described above will generally
equal (a) the sum of (i) the Available Payment Amount for the related
Remittance Period and (ii) the amount available under any credit enhancement,
including amounts withdrawn from any Spread Account or Reserve Account, less
(b) the amount of the premiums or fees payable to the Trustee, the Master
Servicer and the Credit Provider, if any, during the related Remittance
Period.
Generally, to the extent a Credit Provider makes payments to holders of
Certificates, such Credit Provider will be subrogated to the rights of such
holders with respect to such payments and shall be deemed, to the extent of
the payments so made, to be a registered holder of such Certificates.
For purposes of the provisions described above, the following terms have the
respective meanings ascribed to them below, each determined as of any Payment
Date.
"Available Payment Amount" generally means the result of (a) collections on
or with respect to the Home Equity Loans received by the Master Servicer
during the related Remittance Period, net of the Servicing Fee paid to the
Master Servicer during the related Remittance Period and reimbursements for
accrued unpaid Servicing Fees and for certain expenses and Advances and
Servicing Advances paid by the Master Servicer during prior Remittance
Periods, fees and expenses payable to the Trustee and premiums and fees
payable to the Credit Provider, if any, plus (b) the amount of Advances, if
any, less, if so specified in the related Prospectus Supplement, plus (c) the
Excess Spread or other amounts specified in such Prospectus Supplement.
"Home Equity Loan Losses" means, for Home Equity Loans that become
Liquidated Home Equity Loans during the related Remittance Period, the amount,
if any, by which (i) the sum of the outstanding principal balance of each such
Home Equity Loan (determined immediately before such Home Equity Loan became a
Liquidated Home Equity Loan) and accrued and unpaid interest thereon at the
Mortgage Interest Rate to the date on which such Home Equity Loan became a
Liquidated Home Equity Loan exceeds (ii) the Net Liquidation Proceeds received
during such Remittance Period in connection with the liquidation of such Home
Equity Loan which have not theretofore been used to reduce the Principal
Balance of such Home Equity Loan.
"Payment Date" means the monthly date specified in the related Prospectus
Supplement on which payments will be made to holders of the related
Certificates.
OPTIONAL DISPOSITION OF HOME EQUITY LOANS
If so specified in the related Prospectus Supplement, the Master Servicer,
the Seller or the holders of the Class of Certificates or such other person
specified in such Prospectus Supplement may cause the Trust to sell all of the
Home Equity Loans and all REO Properties when the Pool Principal Balance
declines to the percentage of the Original Pool Principal Balance specified in
the related Prospectus Supplement, when the outstanding principal balance of a
Class of Certificates specified in the related Prospectus Supplement declines
to the percentage of the original principal balance of such Class specified in
the related Prospectus Supplement or at such other time as is specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, the related Pooling and Servicing Agreement will
establish a minimum price at which
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such Home Equity Loans and REO Properties may be sold. Such minimum price may
include certain expenses and other amounts or such party as is specified in
the related Prospectus Supplement may be required to pay all or a portion of
such expenses or other amounts at the time of sale. Unless otherwise specified
in the related Prospectus Supplement, the proceeds of any such sale will be
distributed to holders of the Certificates on the Payment Date next following
the date of disposition.
MANDATORY DISPOSITION OF HOME EQUITY LOANS
If so specified in the related Prospectus Supplement, the Master Servicer,
the Seller or such other entities as may be specified in such Prospectus
Supplement may be required to effect early retirement of a Series of
Certificates by soliciting competitive bids for the purchase of the assets of
the related Trust or otherwise, under the circumstances set forth in such
Prospectus Supplement. The procedures for the solicitation of such bids will
be described in the related Prospectus Supplement. Unless otherwise specified
in the related Prospectus Supplement, the Master Servicer and any Underwriter
(defined herein) will be permitted to submit bids. If so specified in the
related Prospectus Supplement, a minimum bid or reserve price may be
established. If so specified in the related Prospectus Supplement, or if the
Master Servicer or the Seller is the purchaser, the Underwriter or such other
entity specified in such Prospectus Supplement will be required to confirm
that the accepted bid will result in the sale of the assets of the Trust at
their fair market value.
REPORTS TO HOLDERS
On each Payment Date, there will be forwarded to each holder a statement
setting forth, among other things, the information as to such Payment Date
required by the related Pooling and Servicing Agreement, which generally will
include, except as otherwise provided therein, if applicable:
(i) the Available Payment Amount (and any portion of the Available
Payment Amount that has been deposited in the Collection Account but may
not be withdrawn therefrom pursuant to an order of a United States
bankruptcy court of competent jurisdiction imposing a stay pursuant to
Section 362 of the United States Bankruptcy Code);
(ii) the principal balance of each class of Certificates as reported in
the report for the immediately preceding Payment Date, or, with respect to
the first Payment Date for a Series of Certificates, the Original Principal
Balance of such Class;
(iii) the principal portion of all Monthly Payments received during the
related Remittance Period;
(iv) the amount of interest received on the Home Equity Loans during the
related Remittance Period;
(v) the aggregate amount of the Advances, if any, to be made with respect
to the Payment Date;
(vi) certain delinquency and foreclosure information as described more
fully in the related Pooling and Servicing Agreement, and the amount of
Home Equity Loan Losses during the related Remittance Period;
(vii) the amount of interest and principal due to the holders of each
Class of Certificates of such Series on such Payment Date;
(viii) the amount then available in any Spread Account or Reserve
Account;
(ix) the amount of the payments, if any, to be made from any credit
enhancement on the Payment Date;
(x) the amount to be distributed to the holders of any subordinated or
residual securities on the Payment Date;
(xi) the principal balance of each Class of Certificates of such Series
after giving effect to the payments to be made on the Payment Date;
(xii) with respect to the Mortgage Pool, the weighted average maturity
and the weighted average Mortgage Interest Rate of the Home Equity Loans as
of the last day of the related Remittance Period;
(xiii) the amount of all payments or reimbursements to the Master
Servicer for accrued unpaid Servicing Fees, unreimbursed Servicing Advances
and interest in respect of Permitted Instruments or funds on deposit in the
Collection Account and certain other amounts during the related Remittance
Period;
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(xiv) the Pool Principal Balance as of the immediately preceding Payment
Date, the Pool Principal Balance after giving effect to payments received
and Home Equity Loan Losses incurred during the related Remittance Period
and the ratio of the Pool Principal Balance to the Original Pool Principal
Balance. As of any Payment Date, the "Pool Principal Balance" equals the
aggregate outstanding principal balance of all Home Equity Loans, as
reduced by the aggregate Home Equity Loan Losses, at the end of the related
Remittance Period;
(xv) certain information with respect to the funding, availability and
release of monies from any Spread Account or Reserve Account;
(xvi) the number of Home Equity Loans outstanding at the beginning and at
the end of the related Remittance Period;
(xvii) the amounts that are reimbursable to the Master Servicer or the
Seller, as appropriate; and
(xviii) such other information as the holders may reasonably request in
writing.
The Master Servicer will also be required to furnish to any holder upon
request (i) annual audited financial statements of TFC (which include on a
consolidated basis the Master Servicer) for one or more of the most recently
completed three fiscal years for which such statements are available, and (ii)
interim unaudited financial statements of TFC (which include on a consolidated
basis the Master Servicer) relating to periods subsequent to the most recent
annual audited period.
DESCRIPTION OF CREDIT ENHANCEMENT
To the extent specified in the related Prospectus Supplement, credit
enhancement for one or more Classes of a Series of Certificates may be
provided by one or more of a letter of credit, financial guaranty insurance
policy, mortgage pool insurance policy, special hazard insurance policy,
reserve fund, spread account, cash collateral account, overcollateralization,
subordination or other type of credit enhancement. Credit enhancement may also
be provided by subordination of one or more Classes of Certificates of a
Series to one or more other Classes of Certificates of such Series. Any credit
enhancement will be limited in amount and scope of coverage. Unless otherwise
specified in the related Prospectus Supplement, credit enhancement for a
Series of Certificates will not be available for losses incurred with respect
to any other Series of Certificates. To the extent credit enhancement for any
Series of Certificates is exhausted, or losses are incurred which are not
covered by such credit enhancement, the holders of the Certificates will bear
all further risk of loss.
The amounts and types of credit enhancement, as well as the provider thereof
(the "Credit Provider"), if applicable, with respect to each Series of
Certificates will be set forth in the related Prospectus Supplement. To the
extent provided in the applicable Prospectus Supplement and the related
Pooling and Servicing Agreement, any credit enhancement may be periodically
modified, reduced or substituted for as the aggregate principal balance of the
related Mortgage Pool decreases, upon the occurrence of certain events or
otherwise. Unless otherwise specified in the related Prospectus Supplement, to
the extent permitted by the applicable Rating Agencies and provided that the
then current rating of the affected Certificates is not reduced or withdrawn
as a result thereof, any credit enhancement may be cancelled, reduced or
modified in amount or scope of coverage or both.
The descriptions of credit enhancement arrangements included in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
actual forms of governing documents, copies of which will be available upon
request.
To the extent that any credit enhancement represents a material asset of the
related Trust, additional disclosure regarding the provider of the credit
enhancement, including where appropriate financial statements of such
provider, will be included in the Prospectus Supplement. If the provider of
any such credit enhancement is subsequently replaced with another provider, or
if such credit enhancement is subsequently replaced with another form of
credit enhancement, similar additional disclosure will be included in the
periodic reports of the related Trust.
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Financial Guaranty Insurance Policy. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond (a
"Certificate Insurance Policy") may be obtained and maintained for a Class or
Series of Certificates. The issuer of the Certificate Insurance Policy (the
"Insurer") will be described in the related Prospectus Supplement and a copy
of the form of Certificate Insurance Policy will be filed with the related
Current Report on Form 8-K.
Unless otherwise specified in the related Prospectus Supplement, a
Certificate Insurance Policy will be unconditional and irrevocable and will
guarantee to holders of the applicable Certificates that an amount equal to
the full amount of distributions due to such holders will be received by the
Trustee or its agent on behalf of such holders for distribution on each
Payment Date. The specific terms of any Certificate Insurance Policy will be
set forth in the related Prospectus Supplement. A Certificate Insurance Policy
may have limitations and generally will not insure the obligation of the
Seller or the Master Servicer to purchase or substitute for a defective Home
Equity Loan and will not guarantee any specific rate of principal prepayments.
Unless otherwise specified in the related Prospectus Supplement, the Insurer
will be subrogated to the rights of each holder to the extent the Insurer
makes payments under the Certificate Insurance Policy.
Letter of Credit. If so specified in the related Prospectus Supplement, all
or a component of credit enhancement for a Class or a Series of Certificates
may be provided by a letter of credit (a "Letter of Credit") issued by a bank
or other financial institution (a "Letter of Credit Issuer") identified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, each Letter of Credit will be irrevocable. A Letter of
Credit may provide coverage with respect to one or more Classes of
Certificates or the underlying Home Equity Loans or, if specified in the
related Prospectus Supplement, may support a specified obligation or be
provided in lieu of the funding with cash of a Reserve Account or Spread
Account (each as defined below). The amount available, conditions to drawing,
if any, and right to reimbursement with respect to a Letter of Credit will be
specified in the related Prospectus Supplement. A Letter of Credit will expire
on the date specified in the related Prospectus Supplement, unless earlier
terminated or extended in accordance with its terms.
Mortgage Pool Insurance Policy. If so specified in the related Prospectus
Supplement, credit enhancement with respect to a Series of Certificates may be
provided by a mortgage pool insurance policy (a "Pool Insurance Policy")
issued by the insurer (a "Pool Insurer") specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
each Pool Insurance Policy will, subject to limitations described in such
Prospectus Supplement, insure against losses due to defaults in the payment of
principal or interest on the underlying Home Equity Loans up to the amount
specified in such Prospectus Supplement (or in a Current Report on Form 8-K).
The Pooling and Servicing Agreement with respect to any Series of Certificates
for which a Pool Insurance Policy is provided will require the Master Servicer
or other party specified therein to use reasonable efforts to maintain the
Pool Insurance Policy and to present claims to the Pool Insurer in the manner
required thereby. No Pool Insurance Policy will be a blanket policy against
loss and will be subject to the limitations and conditions precedent described
in the related Prospectus Supplement.
Special Hazard Insurance Policy. If so specified in the related Prospectus
Supplement, credit enhancement with respect to a Series of Certificates may be
provided in part by an insurance policy (a "Special Hazard Policy") covering
losses due to physical damage to a Mortgaged Property other than a loss of the
type covered by a standard hazard insurance policy or flood insurance policy
or losses resulting from the application of co-insurance clauses contained in
standard hazard insurance policies. The Prospectus Supplement relating to a
Series of Certificates for which a Special Hazard Policy is provided will
identify the issuer of such policy and any limitations on coverage. No Special
Hazard Policy will cover extraordinary losses such as those due to war, civil
insurrection, governmental action, errors in design or workmanship, chemical
contamination or similar causes. Each Special Hazard Policy will contain an
aggregate limit on claims specified in the related Prospectus Supplement. No
claim will be paid under any Special Hazard Policy unless hazard insurance on
the Mortgaged Property is in force and protection and preservation expenses
have been paid.
Spread Account and Reserve Account. If so specified in the related
Prospectus Supplement, all or any component of credit enhancement for a Series
of Certificates may be provided by a reserve account (a "Reserve
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Account") or a spread account (a "Spread Account"). A Reserve Account or
Spread Account may be funded by a combination of cash, one or more letters of
credit or one or more Permitted Instruments provided by the Seller or other
party identified in the related Prospectus Supplement, amounts otherwise
distributable to one or more Classes of Certificates subordinated to one or
more other Classes of Certificates or all or any portion of Excess Spread. If
so specified in the related Prospectus Supplement, a Reserve Account for a
Series of Certificates may be funded in whole or in part on the applicable
Closing Date. If so specified in the related Prospectus Supplement, cash
deposited in a Reserve Account or a Spread Account may be withdrawn and
replaced with one or more letters of credit or Permitted Instruments. A
Reserve Account or Spread Account may be pledged or otherwise made available
to a Credit Provider. If so specified in the related Prospectus Supplement, a
Reserve Account or Spread Account may not be deemed part of the assets of the
related Trust or may be deemed to be pledged or provided by one or more of the
Seller, the holders of the Class of Certificates otherwise entitled to the
amounts deposited in such account or such other party as is identified in such
Prospectus Supplement. If so specified in the related Prospectus Supplement, a
Spread Account or Reserve Account may also include an account (a "Yield
Supplement Account"). Funds on deposit in the Yield Supplement Account for any
Series may be applied to supplement interest payable on the related Home
Equity Loans if necessary to pay interest to holders of one or more classes of
Certificates of such Series at the applicable Pass-Through Rate.
Cash Collateral Account. If so specified in the related Prospectus
Supplement, all or any portion of credit enhancement for a Series of
Certificates may be provided by the establishment of a cash collateral account
(a "Cash Collateral Account"). A Cash Collateral Account will be similar to a
Reserve Account or Spread Account except that generally a Cash Collateral
Account is funded initially by a loan from a cash collateral lender (the "Cash
Collateral Lender"), the proceeds of which are invested with the Cash
Collateral Lender or other eligible institution. Unless otherwise specified in
the related Prospectus Supplement, the Cash Collateral Account will be
required to be maintained as an Eligible Account. The loan from the Cash
Collateral Lender will be repaid from Excess Spread, if any, or such other
amounts as are specified in the related Prospectus Supplement. Amounts on
deposit in the Cash Collateral Account will be available in generally the same
manner described above with respect to a Spread Account or Reserve Account. As
specified in the related Prospectus Supplement, a Cash Collateral Account may
be deemed to be part of the assets of the related Trust, may be deemed to be
part of the assets of a separate cash collateral trust or may be deemed to be
property of the party specified in the related Prospectus Supplement and
pledged for the benefit of the holders of one or more Classes of Certificates
of a Series.
Subordination. If so specified in the related Prospectus Supplement,
distributions of scheduled principal, Principal Prepayments, Curtailments,
interest or any combination thereof otherwise payable to one or more Classes
of Certificates of a Series ("Subordinated Certificates") may instead be
payable to holders of one or more other Classes of Certificates of such Series
("Senior Certificates") under the circumstances and to the extent specified in
such Prospectus Supplement. A Class of Certificates may be subordinated to one
or more Classes of Certificates and senior to one or more other Classes of
Certificates of a Series. If so specified in the related Prospectus
Supplement, delays in receipt of scheduled payments on the Home Equity Loans
and losses on defaulted Home Equity Loans will be borne first by the various
Classes of Subordinated Certificates and thereafter by the various Classes of
Senior Certificates, in each case under the circumstances and subject to the
limitations specified in such Prospectus Supplement. The aggregate losses in
respect of defaulted Home Equity Loans which must be borne by the Subordinated
Certificates by virtue of subordination and the amount of the distributions
otherwise distributable to the Subordinated Certificates that will be
distributable to Senior Certificates on any Payment Date may be limited as
specified in the related Prospectus Supplement or the availability of
subordination may otherwise be limited as specified in the related Prospectus
Supplement. If losses or delinquencies were to exceed the amounts payable and
available to holders of Subordinated Certificates of a Series or if such
amounts were to exceed any limitation on the amount of subordination
available, holders of Senior Certificates of such Series could experience
losses.
In addition, if so specified in the related Prospectus Supplement, amounts
otherwise payable to holders of Subordinated Certificates on any Payment Date
may be deposited in a Reserve Account or Spread Account, as described above.
Such deposits may be made on each Payment Date, on each Payment Date for a
specified period
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or to the extent necessary to cause the balance in such account to reach or
maintain a specified amount, as specified in the related Prospectus
Supplement, and thereafter, amounts may be released from such Reserve Account
or Spread Account in the amounts and under the circumstances specified in such
Prospectus Supplement.
Distributions may be allocated as among Classes of Senior Certificates and
as among Classes of Subordinated Certificates in order of their final
scheduled payment dates, in accordance with a schedule or formula or
otherwise, as specified in the related Prospectus Supplement. As between
Classes of Subordinated Certificates, payments to holders of Senior
Certificates on account of delinquencies or losses and deposits to any Reserve
Account or Spread Account will be allocated as specified in the related
Prospectus Supplement. Principal Prepayments and Curtailments may be paid
disproportionately to Classes of Senior Certificates pursuant to a "shifting
interest" structure or otherwise, as specified in the related Prospectus
Supplement.
Other Credit Enhancement. Credit enhancement may also be provided for a
Series of Certificates in the form of overcollateralization, surety bond,
insurance policy or other type of credit enhancement approved by the
applicable Rating Agencies to cover one or more risks with respect to the Home
Equity Loans or the Certificates, as specified in the related Prospectus
Supplement. In addition, if so specified in the related Prospectus Supplement,
the form or amount of credit enhancement may be changed after the issuance of
the related Certificates with the approval of the applicable Rating Agencies.
PAYMENT OF CERTAIN EXPENSES
If so specified in the related Prospectus Supplement, in order to provide
for the payment of the fees of the Credit Provider, if any, the Trustee may be
required to establish a credit enhancement account and to deposit therein on
the dates specified in the related Prospectus Supplement, from amounts on
deposit in the Collection Account, in the priority indicated, an amount that
is sufficient to pay the premiums or fees due to the Credit Provider.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will require the Trustee's fees and reasonable
expenses and disbursements to be paid prior to distributions to
Certificateholders.
SERVICING COMPENSATION
As compensation for servicing and administering the Home Equity Loans, the
Master Servicer is entitled to a fee in the amount specified in the related
Prospectus Supplement (the "Servicing Fee"), payable monthly from payments and
collections with respect to the Home Equity Loans. In addition to the
Servicing Fee, the Master Servicer will generally be entitled under the
related Pooling and Servicing Agreement to retain as additional servicing
compensation any assumption and other administrative fees (including bad check
charges, late payment fees and similar fees), the excess of any Net
Liquidation Proceeds over the outstanding principal balance of a Liquidated
Home Equity Loan, to the extent not otherwise required to be remitted to the
Trustee for deposit into the Collection Account, and interest paid on funds on
deposit in the Collection Account.
SERVICING STANDARDS
General Servicing Standards. The Master Servicer will agree to service the
Home Equity Loans in accordance with the Pooling and Servicing Agreement and,
in servicing and administering the Home Equity Loans, to employ or cause to be
employed procedures, including collection, foreclosure and REO Property
management procedures, and exercise the same care it customarily employs and
exercises in servicing and administering mortgage loans for its own account,
in accordance with accepted first and junior mortgage servicing practices of
prudent lending institutions and giving due consideration to the holders', and
any Credit Provider's reliance on the Master Servicer. The interests of the
holders of each Class of Certificates of any Series and the Credit Provider,
if any, may differ with respect to servicing decisions which may affect the
rate at which
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prepayments are received. For example, holders of certain Classes of
Certificates may prefer that "due-on-sale" clauses be waived in the event of a
sale of the underlying Mortgaged Property, that delinquent Mortgagors be
granted extensions or other accommodations and that liquidations of Home
Equity Loans be deferred, if an increase in the rate of principal prepayments
would have an adverse effect on the yield to investors in such Certificates.
Depending on the timing of such prepayments, holders of other classes of
Certificates may prefer that "due-on-sale" clauses be enforced or that other
actions be taken which would increase prepayments. No holder of a Certificate
will have the right to make any decisions with respect to the underlying Home
Equity Loans. The Master Servicer will have the right and obligation to make
such decisions in accordance with its normal servicing procedures and the
standards set forth in the related Pooling and Servicing Agreement. In certain
cases, the consent or approval of the Credit Provider, if any, may be
permitted or required. The interests of the Credit Provider, if any, with
respect to, among other things, matters which affect the timing of payments
and prepayments may not be the same as those of the holders of each Class of
Certificates of such Series.
Hazard Insurance. The Master Servicer will exercise its best reasonable
efforts to cause to be maintained fire and hazard insurance with extended
coverage (sometimes referred to as "standard hazard insurance") customary in
the area where the Mortgaged Property is located, in an amount which is at
least equal to the outstanding Principal Balance owing on the Home Equity
Loan; provided, however, that, if so specified in the related Prospectus
Supplement, standard hazard insurance may not be required for Home Equity
Loans where the principal amount is less than $5,000 or the unimproved land
valuation of the Mortgaged Property. In some states the Master Servicer's
ability to require such insurance coverage may be limited by law. The Master
Servicer will also be required to maintain on REO Property, to the extent such
insurance is available, fire and hazard insurance in the applicable amounts
described above, and liability insurance. Any amounts collected by the Master
Servicer under any such policies (other than amounts to be applied to the
restoration or repair of the Mortgaged Property, or to be released to the
Mortgagor in accordance with customary mortgage servicing procedures) will be
deposited in the Collection Account on the following Payment Date, subject to
retention by the Master Servicer to the extent such amounts constitute
servicing compensation or to withdrawal pursuant to the related Pooling and
Servicing Agreement.
If the Master Servicer obtains and maintains a blanket policy insuring
against fire and hazards of extended coverage on all of the Home Equity Loans
and/or the REO Properties, then, to the extent such policy names the Master
Servicer as loss payee and provides coverage in an amount equal to the
aggregate outstanding principal balance on the Home Equity Loans without co-
insurance, the Master Servicer will be deemed conclusively to have satisfied
its obligations with respect to fire and hazard insurance coverage.
In general, the standard hazard insurance policy covers physical damage to
or destruction of the improvements on the property by fire, lightning,
explosion, smoke, windstorm and hail, and riot, strike and civil commotion,
subject to the conditions and exclusions specified in each policy. Although
the policies relating to Home Equity Loans will be underwritten by different
insurers under different state laws in accordance with different applicable
state forms and therefore will not contain identical terms and conditions, the
basic terms thereof are dictated by respective state laws, and most such
policies typically do not cover any physical damage resulting from war,
revolution, governmental actions, floods and other water related causes, earth
movement (including earthquakes, landslides, and mudflows), nuclear reactions,
wet or dry rot, rodents, insects or domestic animals, theft and, in certain
cases, vandalism. The foregoing list is merely indicative of certain kinds of
uninsured risks and is not intended to be all-inclusive. No other insurance
coverage (other than title insurance as specified herein) is required under
the Home Equity Loan or the Pooling and Servicing Agreement.
Since, as a general matter, the cost of construction of residential
properties has increased in recent years, if the amount of hazard insurance
maintained on the improvements securing a Home Equity Loan were to decline as
its principal balance decreased, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a loss.
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Enforcement of Due on Sale Clauses. When a Mortgaged Property has been or is
about to be conveyed by the Mortgagor, the Master Servicer, on behalf of the
Trustee, may, but is not required to, enforce the rights of the Trustee as the
mortgagee of record to accelerate the maturity of the related Home Equity Loan
under a "due-on-sale" clause, if any, contained in the related Mortgage or
Mortgage Note; provided, however, that the Master Servicer will not be
permitted to exercise any such right if the "due-on-sale" clause, in the
reasonable belief of the Master Servicer, is not enforceable under applicable
law. The Master Servicer may enter into an assumption and modification
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Mortgage Note
and, unless prohibited by applicable law or the Mortgage Note or Mortgage, the
Mortgagor remains liable thereon. The Master Servicer will also be authorized
(with the prior approval of any Credit Provider, if required) to enter into a
substitution of liability agreement with such person, pursuant to which the
original Mortgagor is released from liability and such person is substituted
as Mortgagor and becomes liable under the Mortgage Note.
Realization Upon Defaulted Home Equity Loans. The Master Servicer is
required to foreclose upon or otherwise comparably effect the ownership in the
name of the Trustee on behalf of the holders of the related Certificates of
Mortgaged Properties relating to defaulted Home Equity Loans as to which no
satisfactory arrangements can be made for collection of delinquent payments;
provided, however, that the Master Servicer will not be required to foreclose
if it determines that foreclosure would not be in the best interests of the
holders or any Credit Provider. In connection with such foreclosure or other
conversion, the Master Servicer is required to exercise collection and
foreclosure procedures with the same degree of care and skill in its exercise
or use as it would exercise or use under the circumstances in the conduct of
its own affairs.
Collection of Home Equity Loan Payments. Each Pooling and Servicing
Agreement will require the Master Servicer to make reasonable efforts to
collect all payments called for under the terms and provisions of the Home
Equity Loans. Consistent with the foregoing, the Master Servicer may at its
own discretion waive any late payment charge, assumption fee or any penalty
interest in connection with the prepayment of a Home Equity Loan or any other
fee or charge which the Master Servicer would be entitled to retain as
servicing compensation and may waive, vary or modify any term of any Home
Equity Loan or consent to the postponement of strict compliance with any such
term or in any matter grant indulgence to any Mortgagor, subject to the
limitations set forth in the related Pooling and Servicing Agreement.
USE OF SUBSERVICERS
The Master Servicer will be permitted under each Pooling and Servicing
Agreement to enter into subservicing agreements ("Subservicing Agreements")
for any servicing and administration of Home Equity Loans with any institution
that is in compliance with the laws of each state necessary to enable it to
perform its obligations under such Subservicing Agreement (a "Subservicer")
and is either (i) designated by Federal National Mortgage Association ("FNMA")
or the Federal Home Loan Mortgage Corporation ("FHLMC") as an approved Seller-
Master Servicer for first and second mortgage loans, (ii) approved by the
United States Department of Housing and Urban Development ("HUD") as a
mortgagee or (iii) an affiliate or a wholly owned subsidiary of the Master
Servicer.
Notwithstanding any Subservicing Agreement, unless otherwise specified in
the related Prospectus Supplement, the Master Servicer will not be relieved of
its obligations under a Pooling and Servicing Agreement, and the Master
Servicer shall be obligated to the same extent and under the same terms and
conditions as if it alone were servicing and administering the Home Equity
Loans. The Master Servicer will be entitled to enter into any agreement with a
subservicer for indemnification of the Master Servicer by such subservicer and
nothing contained in any Pooling and Servicing Agreement shall be deemed to
limit or modify such indemnification.
SERVICING CERTIFICATES AND AUDITS
The Master Servicer is required to deliver, not later than the last day of
the fourth month following the end of the Master Servicer's fiscal year,
commencing in the year specified in the related Pooling and Servicing
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Agreement, an officers' certificate stating that (i) the Master Servicer has
fully complied with the provisions of the Pooling and Servicing Agreement
which relate to the servicing and administration of the Home Equity Loans,
(ii) a review of the activities of the Master Servicer during such preceding
year and of performance under the Pooling and Servicing Agreement has been
made under such officers' supervision, and (iii) to the best of such officers'
knowledge, based on such review, the Master Servicer has fulfilled all its
obligations under the Pooling and Servicing Agreement for such year, or, if
there has been a default in the fulfillment of any such obligation, specifying
each such default known to such officers and the nature and status thereof
including the steps being taken by the Master Servicer to remedy such default.
The Master Servicer is required to cause to be delivered, not later than the
last day of the fourth month following the end of the Master Servicer's fiscal
year, commencing in the year set forth in the related Pooling and Servicing
Agreement, a letter or letters of a firm of independent certified public
accountants reasonably acceptable to the Trustee stating that such firm has,
with respect to the Master Servicer's overall servicing operations, examined
such operations in accordance with the requirements of the Uniform Single
Audit Program for Mortgage Bankers, and stating such firm's conclusions
relating thereto.
LIMITATIONS ON LIABILITY OF THE MASTER SERVICER AND ITS AGENTS
Each Pooling and Servicing Agreement will provide that the Master Servicer
and any director, officer, employee or agent of the Master Servicer may rely
on any document of any kind that is reasonably and in good faith believed to
be genuine and adopted or signed by the proper authorities respecting any
matters arising under the Pooling and Servicing Agreement. In addition, the
Master Servicer will not be required to appear with respect to, prosecute or
defend any legal action that is not incidental to the Master Servicer's duty
to service the Home Equity Loans in accordance with the related Pooling and
Servicing Agreement, other than certain claims made by third parties with
respect to such Pooling and Servicing Agreement.
REMOVAL AND RESIGNATION OF MASTER SERVICER
Unless otherwise specified in the related Prospectus Supplement, any Credit
Provider or the holders of Certificates of a Series representing a majority in
principal amount of Certificates of such Series, voting as a single class (a
"Majority in Aggregate Voting Interest"), with the consent of any Credit
Provider, may, pursuant to the related Pooling and Servicing Agreement, remove
the Master Servicer only upon the occurrence and continuation beyond the
applicable cure period of any of the following events (each a "Master Servicer
Termination Event"):
(a) the failure by Master Servicer to make any payment, transfer or
deposit, or to give instructions to the Trustee to make any payment,
transfer or deposit, on the date the Master Servicer is required to do so
under the Pooling and Servicing Agreement, which is not cured within a five
business day grace period;
(b) the Master Servicer assigns its duties under the Pooling and
Servicing Agreement, except as specifically permitted thereunder, or
failure on the part of the Master Servicer duly to observe or perform in
any material respect any other covenants or agreements of the Master
Servicer in the Pooling and Servicing Agreement which has a material
adverse effect on the Certificateholders and which continues unremedied for
a period of sixty days after written notice or knowledge of such default;
(c) any representation, warranty or certification made by the Master
Servicer in the Pooling and Servicing Agreement or in any certificate
delivered pursuant to the Pooling and Servicing Agreement proves to have
been incorrect in any material respect when made, which has a material
adverse effect on the rights of the Certificateholders, and which material
adverse effect continues for a period of sixty days after written notice;
or
(d) the occurrence of certain events of bankruptcy with respect to the
Master Servicer, although this provision may not be enforceable.
No removal of the Master Servicer shall be effective until the appointment
and acceptance of a successor Master Servicer other than the Trustee (unless
the Trustee agrees to serve) meeting the requirements described
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below and otherwise acceptable to any Credit Provider and majority in
Percentage Interest of each Class of Certificates of such Series.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer may not assign the related Pooling and Servicing Agreement nor resign
from the obligations and duties thereby imposed on it except by mutual consent
of the Master Servicer, any Credit Provider, the Trustee and the Majority in
Aggregate Voting Interest or upon the determination that the Master Servicer's
duties thereunder are no longer permissible under applicable law and such
incapacity cannot be cured by the Master Servicer. No such resignation shall
become effective until a successor has assumed the Master Servicer's
responsibilities and obligations in accordance with the Pooling and Servicing
Agreement.
Unless otherwise specified in the related Prospectus Supplement, upon
removal or resignation of the Master Servicer other than as described in the
second preceding paragraph, the Trustee will be the successor servicer (the
"Successor Master Servicer"). The Trustee, as Successor Master Servicer, is
obligated to make Servicing Advances and certain other advances unless it
determines reasonably and in good faith that such advances would not be
recoverable. If, however, the Trustee is unwilling or unable to act as
Successor Master Servicer, or if the Majority in Aggregate Voting Interest or
any Credit Provider so requests in writing, the Trustee may appoint, or
petition a court of competent jurisdiction to appoint, any established
mortgage loan servicing institution acceptable to such Credit Provider having
a net worth of not less than the amount set forth in the related Pooling and
Servicing Agreement and which is either approved as a servicer by FNMA and
FHLMC or approved as a mortgagee by HUD as the Successor Master Servicer in
the assumption of all or any part of the responsibilities, duties or
liabilities of the Master Servicer.
The Trustee and any other Successor Master Servicer in such capacity is
entitled to the same reimbursement for advances and other Servicing
Compensation as the Master Servicer. See "Servicing Compensation" above.
REGISTRATION AND TRANSFER OF THE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more Classes of
Certificates of a Series will be issued in definitive certificated form and
will be transferable and exchangeable at the office of the registrar
identified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, no service charge will be made for any such
registration or transfer of such Certificates, but the owner may be required
to pay a sum sufficient to cover any tax or other governmental charge.
If so specified in the related Prospectus Supplement, one or more Classes of
Certificates of a Series ("Book-Entry Certificates") may be initially
represented by one or more certificates registered in the name of The
Depository Trust Company ("DTC") or other securities depository and be
available only in the form of book-entries. Any Book-Entry Certificates will
initially be registered in the name of Cede, the nominee of DTC.
Certificateholders may also hold Certificates of a Series through CEDEL or
Euroclear (in Europe), if they are participants in such systems or indirectly
through organizations that are participants in such systems. CEDEL and
Euroclear will hold omnibus positions on behalf of their participants through
customers' certificates accounts in CEDEL's and Euroclear's names on the books
of their respective Depositaries which in turn will hold such positions in
customers' certificates accounts in the Depositaries' names on the books of
DTC. Citibank, N.A. ("Citibank"), will act as depositary for CEDEL and Morgan
Guaranty Trust Company of New York ("Morgan") will act as depositary for
Euroclear (in such capacities, the "Depositaries").
Transfers between DTC participants will occur in the ordinary way in
accordance with DTC rules. Transfers between CEDEL Participants and Euroclear
Participants will occur in the ordinary way in accordance with their
applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL or
Euroclear Participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing
system by its Depositary;
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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 its Depositary to take action to effect final
settlement on its behalf by delivering or receiving certificates in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of certificates received in CEDEL
or Euroclear as a result of a transaction with a DTC participant will be made
during subsequent certificates settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in
such certificates settled during such processing will be reported to the
relevant Euroclear or CEDEL participant on such business day. Cash received in
CEDEL or Euroclear as a result of sales of certificates by or through a CEDEL
Participant or a Euroclear Participant to a DTC Participant will be received
with value on the DTC settlement date but will be available in the relevant
CEDEL or Euroclear cash account only as of the business day following
settlement in DTC. For information with respect to tax documentation
procedures relating to the Certificates, see "Certain Federal Income Tax
Consequences--Foreign Investors in REMIC Certificates" herein.
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
Certificates Exchange Act of 1934, as amended. 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").
Beneficial owners ("Owners") that are not Participants but desire to
purchase, sell or otherwise transfer ownership of Book-Entry Certificates may
do so only through Participants (unless and until Definitive Certificates, as
defined below, are issued). In addition, Owners will receive all distributions
of principal of, and interest on, the Book-Entry Certificates from the Trustee
or any Trustee, as the case may be, through DTC and Participants. Owners will
not receive or be entitled to receive certificates representing their
respective interests in the Book-Entry Certificates, except under the limited
circumstances described below.
Unless and until Definitive Certificates (as defined below) are issued, it
is anticipated that the only "holder" of Book-Entry Certificates of any Series
will be Cede, as nominee of DTC. Owners will only be permitted to exercise the
rights of holders indirectly through Participants and DTC.
While any Book-Entry Certificates of a Series 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 Book-Entry Certificates and is required to receive
and transmit distributions of principal of, and interest on, the Book-Entry
Certificates. Participants with whom Owners have accounts with respect to
Book-Entry Certificates are similarly required to make book-entry transfers
and receive and transmit such distributions on behalf of their respective
Owners. Accordingly, although Owners will not possess certificates, the Rules
provide a mechanism by which Owners will receive distributions and will be
able to transfer their interests.
Unless and until Definitive Certificates are issued, Owners who are not
Participants may transfer ownership of Book-Entry Certificates of a Series
only through Participants by instructing such Participants to transfer Book-
Entry Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such Book-Entry
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Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Book-Entry Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the respective Participants will make debits or credits, as the
case may be, on their records on behalf of the selling and purchasing Owners.
Book-Entry Certificates of a Series will be issued in registered form to
Owners, or their nominees, rather than to DTC (such Book-Entry Certificates
being referred to herein as "Definitive Certificates") only under the
circumstances provided in the related Pooling and Servicing Agreement, which
generally will include, except if otherwise provided therein, if (i) DTC or
the Master Servicer advises the Trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates of such Series and the
Master Servicer is unable to locate a qualified successor, (ii) the Master
Servicer, at its sole option, elects to terminate the book-entry system
through DTC or (iii) after the occurrence of a Master Servicer Termination
Event, a majority of the aggregate Percentage Interest of any Class of
Certificates of such Series advises DTC in writing that the continuation of a
book-entry system through DTC (or a successor thereto) to the exclusion of any
physical certificates being issued to Owners is no longer in the best
interests of Owners of such Class of Certificates. Upon issuance of Definitive
Certificates of a Series to Owners, such Book-Entry Certificates will be
transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee with respect to
transfers, notices and distributions.
DTC has advised the Master Servicer and the Seller that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by a holder only at the direction of one or more Participants to whose
DTC accounts the Certificates are credited. DTC has advised the Master
Servicer and the Seller that DTC will take such action with respect to any
Percentage Interests of the Book-Entry Certificates of a Series only at the
direction of and on behalf of such Participants with respect to such
Percentage Interests of the Book-Entry Certificates. DTC may take actions, at
the direction of the related Participants, with respect to some Book-Entry
Certificates which conflict with actions taken with respect to other Book-
Entry Certificates.
Centrale de Livraison de Valeurs Mobilieres S.A. ("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
securities. Transactions may be settled in CEDEL in any of 28 currencies,
including United States dollars. CEDEL provides to its Participants, among
other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. CEDEL interfaces with domestic markets in several countries. As a
professional depository, CEDEL is subject to regulation by the Luxembourg
Monetary Institute. CEDEL Participants are recognized financial institutions
around the world including underwriters, securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations
and may include any underwriters, agents or dealers with respect to a Series
of Certificates offered hereby. Indirect access to CEDEL is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a CEDEL Participant, either directly
or indirectly.
The Euroclear System ("Euroclear") was created in 1968 to hold securities
for participants of the Euroclear System ("Euroclear Participants") and to
clear and settle transactions between Euroclear Participants through
simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. Transactions may now be
settled in any of 27 currencies, including United States dollars. The
Euroclear System includes various other services, including securities lending
and borrowing, and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. The Euroclear System is operated by Morgan Guaranty Trust
Company of New York, Brussels, Belgium office (the "Euroclear Operator"),
under contract with Euroclear Clearance System S.C., a Belgian cooperative
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corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers with respect to a Series of Certificates
offered hereby. 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 that 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.
Certificates 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 Euroclear 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
the 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.
Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant systems' rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences" herein. CEDEL or
the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Certificateholder under the Pooling and Servicing
Agreement or the relevant Supplement on behalf of a CEDEL Participant or
Euroclear Participant only in accordance with its relevant rules and
procedures and subject to its Depositary's ability to effect such actions on
its behalf through DTC.
CERTAIN LEGAL ASPECTS OF THE HOME EQUITY LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by applicable state laws (which laws may differ substantially
from one another), 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 Mortgaged Properties may be situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Home Equity Loans.
GENERAL
The Home Equity Loans will be secured by either deeds of trust or mortgages,
depending upon the prevailing practice in the state in which the Mortgaged
Property subject to a Home Equity Loan is located. A mortgage conveys legal
title to or creates a lien upon the property to the mortgagee subject to a
condition subsequent, i.e., the payment of the indebtedness secured thereby.
There are two parties to a mortgage, the mortgagor, who is the borrower and
homeowner, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
has three parties, the borrower-homeowner called the trustor (similar to a
mortgagor), a lender called the beneficiary (similar to a mortgagee), and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. The
trustee's authority under a deed of trust and the mortgagee's authority under
a mortgage are governed by law, the express provisions of the deed of trust or
mortgage, and, in some cases, the directions of the beneficiary. Some states
use a security deed or deed to
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secure debt which is similar to a deed of trust except that it has only two
parties: a grantor (similar to a mortgagor) and a grantee (similar to a
mortgagee). Mortgages, deeds of trust and deeds to secure debt are not prior
to liens for real estate taxes and assessments and other charges imposed under
governmental police powers. Priority between mortgages, deeds of trust and
deeds to secure debt and other encumbrances depends on their terms in some
cases and generally on the order of recordation of the mortgage, deed of trust
or the deed to secure debt in the appropriate recording office.
If so specified in the related Prospectus Supplement, a Mortgage Pool may
include loans on units in cooperatives ("Cooperative Loans"). Cooperative
Loans are evidenced by notes secured by security interests in shares issued by
cooperatives, which are corporations entitled to be treated as housing
cooperatives under federal tax law, and in the related proprietary leases or
occupancy agreements granting rights to occupy specific dwelling units within
the cooperative buildings. The security agreement will create a lien upon or
grant a title interest in the property which it covers, the priority of which
lien will depend on the terms of the agreement and the order of recordation in
the appropriate recording office. Ownership of a unit in a cooperative is held
through the ownership of stock in the corporation, together with the related
proprietary lease or occupancy agreement. Such ownership interest is generally
financed through a cooperative share loan evidenced by a promissory note and
secured by an assignment of and a security interest in the proprietary lease
or occupancy agreement and a security interest in the related cooperative
shares.
Each cooperative owns in fee or has a leasehold interest in the real
property and improvements, including all separate dwelling units therein. The
cooperative is responsible for property management and generally for the
payment of real estate taxes, insurance and similar charges, the cost of which
is shared by the owners. The cooperative building or underlying land may be
subject to one or more mortgages (generally incurred in connection with the
construction or purchase of the building) for which the cooperative is
responsible. The interest of an occupant under proprietary leases or occupancy
agreements is generally subordinate to that of the holder of such a mortgage
or land lease. If the cooperative is unable to meet the payment obligations
under such mortgage or any land lease, the holder of such mortgage or land
lease could foreclose the mortgage or terminate the land lease, which may have
the effect of terminating all proprietary leases or occupancy agreements. In
the event of such foreclosure or termination, the value of any collateral held
by a lender which financed the purchase by a tenant/shareholder of cooperative
shares or, in the case of the Home Equity Loans, the collateral securing the
Cooperative Loans could be eliminated or significantly reduced.
FORECLOSURE IN GENERAL
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having
an interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties defendant.
Judicial foreclosure proceedings are often not contested by any of the parties
defendant.
Foreclosure of a deed of trust or a security deed is generally accomplished
by a non-judicial trustee's sale under a specific provision in the deed of
trust or security deed which authorizes the sale of the property upon default
by the borrower under the terms of the note, deed of trust or security deed.
In some states, the trustee must record a notice of default and send a copy to
the borrower-trustor and to any person who has recorded a request for a copy
of such notice. In addition, the trustee must provide notice in some states to
any other individual having an interest in the real property, including any
junior lienholders. The borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligations. Generally, state laws require that a
copy of the notice of sale be posted on the property and sent to all parties
having an interest in the real property.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is often a public
sale. Because of the difficulty a potential buyer at the sale would have in
determining the exact status of title and because the physical condition of
the property subject to the lien of
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the mortgage or the deed of trust may have deteriorated during the foreclosure
proceedings, a third party may be unwilling to purchase the property at a
foreclosure sale.
For these reasons, it is common for the lender to purchase the property from
the trustee or referee with a "credit bid" in an amount less than or equal to
the principal amount of the indebtedness secured by the mortgage or deed of
trust, accrued and unpaid interest and the expenses of foreclosure. The lender
thereby assumes the burdens of ownership, including the obligation to pay
taxes, obtain casualty insurance and to make such repairs at its own expense
as are necessary to render the property suitable for sale. In some states
there is a statutory minimum purchase price which the lender may offer for the
property. The lender will commonly obtain the services of a real estate broker
and pay the broker's commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property.
Under the Pooling and Servicing Agreement (and the REMIC Provisions of the
Code), the Master Servicer may hire an independent contractor to operate any
REO Property. The costs of such operation may be significantly greater than
the cost of direct operation by the Master Servicer.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the unpaid portion of the debt from
the mortgagor. See "--Anti-Deficiency Legislation and Other Limitations on
Lenders" herein.
JUNIOR MORTGAGES
Some of the Home Equity Loans may be secured by second or more junior
mortgages or deeds of trust, which are subordinate to first or more senior
mortgages or deeds of trust held by other lenders. The rights of the holders,
as the holders of a junior deed of trust or a junior mortgage, are subordinate
in lien and in payment to those of the holder of the senior mortgage or deed
of trust, including the prior rights of the senior mortgagee or beneficiary to
receive and apply hazard insurance and condemnation proceeds and, upon default
of the mortgagor, to cause a foreclosure on the property. Upon completion of
the foreclosure proceedings by the holder of the senior mortgage the junior
mortgagee's or junior beneficiary's lien will be extinguished unless the
junior mortgagee satisfies the defaulted senior loan or asserts its
subordinate interest in a property in foreclosure proceedings. See "--
Foreclosure in General" herein.
Furthermore, the terms of the second or more junior mortgage or deed of
trust are subordinate to the terms of the first or senior mortgage or deed of
trust. In the event of a conflict between the terms of the senior mortgage or
deed of trust and the junior mortgage or deed of trust, the terms of the
senior mortgage deed of trust will govern generally. Upon a failure of the
mortgagor or trustor to perform any of its obligations, the senior mortgagee
or beneficiary, subject to the terms of the senior mortgage or deed of trust,
may have the right to perform the obligation itself. Generally, all sums so
expended by the mortgagee or beneficiary become part of the indebtedness
secured by the mortgage or deed of trust. To the extent a senior mortgagee
expends such sums, such sums will generally have priority over all sums due
under the junior mortgage. See "Risk Factors--Risks of the Home Equity Loans--
Junior Liens" herein for a further discussion of certain risks associated with
junior mortgage loans.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The rights of
redemption would defeat the title of any purchaser from the
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lender subsequent to foreclosure or sale under a deed of trust. Consequently,
the practical effect of the redemption right is to force the lender to retain
the property and pay the expenses of ownership until the redemption period has
expired.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In
some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following a nonjudicial
foreclosure or sale under a deed of trust. In addition, some states prohibit a
deficiency judgment where the loan proceeds were used to purchase a dwelling
occupied by the borrower. A deficiency judgment is a personal judgment against
a borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. Finally, other statutory provisions limit any deficiency judgment
against the borrower following a judicial sale to the excess of the
outstanding debt over the "fair value" of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a
beneficiary or a mortgagee from obtaining both the property (or the proceeds
therefrom) and a large deficiency judgment against the borrower as a result of
low or no bids at the foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state
laws affording relief to debtors, may interfere with or affect the ability of
the secured mortgage lender to realize upon collateral and/or enforce a
deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within
a reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final
judgment of foreclosure had been entered in state court provided no sale of
the residence had yet occurred prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the bankruptcy case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of
each monthly payment, changing the rate of interest, altering the repayment
schedule, forgiving all or a portion of the debt and reducing the lender's
security interest to the value of the residence, thus leaving the lender a
general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan. Generally, however, the
terms of a mortgage loan secured only by a mortgage on real property that is
the debtor's principal residence may not be modified pursuant to a plan
confirmed pursuant to Chapter 11 or Chapter 13 except with respect to mortgage
payment arrearages, which may be cured within a reasonable time period.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws
include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act, and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail
to comply with the provisions of the applicable laws. In some cases, this
liability may affect assignees of the Home Equity Loans.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless otherwise specified in the related Prospectus Supplement, all of the
Home Equity Loans will include a debt-acceleration clause, which permits the
lender to accelerate the debt upon a monetary default of the
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borrower, after the applicable cure period. Courts of all states will
generally enforce clauses providing for acceleration in the event of a
material payment default. However, courts may refuse to allow a lender to
foreclose a mortgage or deed of trust when an acceleration of the indebtedness
would be inequitable or unjust and the circumstances would render the
acceleration unconscionable.
Some courts have imposed general equitable principles to limit the remedies
available in connection with foreclosure. These equitable principles are
generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. For example, some courts have required that
the lender undertake affirmative and expensive actions to determine the causes
for the borrower's default and the likelihood that the borrower will be able
to reinstate the loan. In some cases, courts have substituted their judgment
for the lenders' judgment and have required that lenders reinstate loans or
recast payment schedules in order to accommodate borrowers who are suffering
from temporary financial disability. In other cases, courts have limited the
right of the lenders to foreclose if the default under the mortgage instrument
or deed of trust is not monetary, such as the borrower's failure to maintain
adequately the property or the borrower's execution of a second mortgage or
deed of trust affecting the property. Finally, some courts have been willing
to relieve a borrower from the consequences of the default if the borrower has
not received adequate notice of the default.
The Home Equity Loans may contain due-on-sale clauses, which permit the
lender to accelerate the maturity of the Home Equity Loan if the borrower
sells, transfers, or conveys the related Mortgaged Property. The
enforceability of these clauses has been the subject of legislation or
litigation in many states. Some jurisdictions automatically enforce such
clauses, while others require a showing of reasonableness and hold, on a case-
by-case basis, that a "due-on-sale" clause may be invoked only where a sale
threatens the legitimate security interests of the lender.
The Garn-St Germain Depository Institutions Act of 1982 purports to preempt
state laws which prohibit the enforcement of "due-on-sale" provisions in
certain loans made after October 15, 1982. The Master Servicer may thus be
able to accelerate the Home Equity Loans that were originated after that date
and contain a "due-on-sale" provision, upon transfer of an interest in the
related Mortgaged Property, regardless of its ability to demonstrate that a
sale threatens its legitimate security interest. Each Pooling and Servicing
Agreement will provide that the Master Servicer, on behalf of the Trustee,
may, but is not required to, enforce any right of the Trustee as the mortgagee
of record to accelerate a Home Equity Loan in the event of a sale or other
transfer of the related Mortgaged Property.
RELIEF ACT LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a Mortgagor who enters military service
after the origination of such Mortgagor's Home Equity Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Home Equity Loan and is later called to active
duty) may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. It is possible that
such action could have an effect, for an indeterminate period of time, on the
ability of the Master Servicer to collect full amounts of interest on certain
of the Home Equity Loans underlying a Series of Certificates. In addition, the
Relief Act imposes limitations which would impair the ability of the Master
Servicer to foreclose on an affected Home Equity Loan during the Mortgagor's
period of active duty status. Thus, in the event that such a Home Equity Loan
goes into default, there may be delays and losses occasioned by the inability
to realize upon the related Mortgaged Property in a timely fashion.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property that
is the subject of a cleanup action by the state on account of hazardous wastes
or hazardous substances released or disposed of on the property. Such a lien
will generally have priority over all subsequent liens on the property and, in
certain of these states,
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will have priority over prior recorded liens including the lien of a mortgage.
In addition, under federal environmental legislation and possibly under state
law in a number of states, a secured party which takes a deed in lieu of
foreclosure, acquires a mortgaged property at a foreclosure sale or which has
been involved in decisions which may lead to contamination of a property may
be liable for the costs of cleaning up a contaminated site. Although such
costs could be substantial, it is unclear whether they would be imposed on a
secured lender (such as the related Trust).
The Federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA"), as well as some similar state laws, contains an
exemption from liability for holders of security interests in property. The
scope of that exemption was uncertain until the recent passage of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996
(the "Asset Conservation Act"). The Asset Conservation Act, which was passed
on September 30, 1996, clarifies that in order to be considered to have
"participated in the management" of a property a lender must actually
participate in the environmental management of the property. The Asset
Conservation Act also provides that most conventional activities by a lender,
taken to protect its security interest, will not subject the lender to CERCLA
liability.
It should be noted that liability for certain cleanup costs may be governed
by state law or may fall outside of CERCLA. CERCLA does not apply to petroleum
products and the security interest exemption, therefore will not apply to many
properties. There is a similar lender liability provision, however, in the
Resource Conservation and Recovery Act ("RCRA"), which applies to underground
storage tanks (other than heating oil tanks).
The Pooling and Servicing Agreement requires that the Master Servicer, in
making a determination to foreclose on or otherwise acquire a Mortgaged
Property, take into account (and the Master Servicer is not required to
foreclose or otherwise acquire a Mortgaged Property in the case of) the
existence of hazardous wastes or hazardous substances on such Mortgaged
Property. If title to a Mortgaged Property securing a Home Equity Loan is
acquired by a Trust and cleanup costs are incurred in respect of the Mortgaged
Property, the holders of the Certificates might incur a loss if such costs
were required to be paid by the Trust and sufficient funds were not available
from any Reserve Account, Spread Account or similar account or from
collections on the Home Equity Loans.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of certain anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Certificates offered hereunder. This discussion is directed solely to
Certificateholders that hold the Certificates as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the
"Code") and does not purport to discuss all federal income tax consequences
that may be applicable to particular categories of investors, some of which
(such as banks, insurance companies and foreign investors) 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 (including those filed by any REMIC or other issuer) 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 should consult their own tax
advisors and tax return preparers regarding the preparation of any item on a
tax return, even where the anticipated tax treatment has been discussed
herein. In addition to the federal income tax consequences described herein,
potential investors should consider the state and local tax consequences, if
any, of the purchase, ownership and disposition of the Certificates. See
"State and Other Tax Consequences" herein. Certificateholders are advised to
consult their own tax advisors concerning the federal, state, local or other
tax consequences to them of the purchase, ownership and disposition of the
Certificates offered hereunder.
The following discussion addresses securities ("REMIC Certificates")
representing interests in a Trust, or a portion thereof, which the Master
Servicer will covenant to elect to have treated as a REMIC under Sections 860A
through 860G (the "REMIC Provisions") of the Code. The Prospectus Supplement
for each series of Certificates will indicate whether a REMIC election (or
elections) will be made for the related Trust and, if such an election is to
be made, will identify all "regular interests" and "residual interests" in the
REMIC. For purposes of this tax discussion, references to a
"Certificateholder" or a "holder" are to the beneficial owner of a
Certificate.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code
and in the Treasury regulations issued thereunder (the "OID Regulations"), and
in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC Regulations"). The OID Regulations, which are effective
with respect to debt instruments issued on or after April 4, 1994, do not
adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Certificates.
REMICS
Classification of REMICs
Upon the issuance of each series of REMIC Certificates, the special tax
counsel to the Seller identified in the related Prospectus Supplement ("Tax
Counsel"), will deliver their opinion generally to the effect that, assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the related Trust (or each applicable portion thereof) will qualify as a REMIC
and the REMIC Certificates offered with respect thereto will be considered to
evidence ownership of "regular interests" ("REMIC Regular Certificates") or
"residual interests" ("REMIC Residual Certificates") in that REMIC within the
meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for such year and thereafter. In that event, such entity may be taxable as a
separate corporation under Treasury regulations, and the related REMIC
Certificates may not be accorded the status or given the tax treatment
described below. Although the Code authorizes the Treasury Department to issue
regulations providing
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relief in the event of an inadvertent termination of REMIC status, no such
regulations have been issued. Any such relief, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of
the Trust's income for the period in which the requirements for such status
are not satisfied. The Pooling and Servicing Agreement with respect to each
REMIC will include provisions designed to maintain the Trust's status as a
REMIC under the REMIC Provisions. It is not anticipated that the status of any
Trust as a REMIC will be terminated.
Characterization of Investments in REMIC Certificates
In general, the REMIC Certificates will be "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
underlying such Certificates would be so treated. Moreover, if 95% or more of
the assets of the REMIC qualify for any of the foregoing treatments at all
times during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and
income allocated to the class of REMIC Residual Certificates will be interest
described in Section 856(c)(3)(B) of the Code to the extent that such
Certificates are treated as "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code. In addition, the REMIC Regular Certificates will be
"qualified mortgages" within the meaning of Section 860G(a)(3)(C) of the Code
if transferred to another REMIC on its startup day in exchange for regular or
residual interests therein. The determination as to the percentage of the
REMIC's assets that constitute assets described in the foregoing sections of
the Code will be made with respect to each calendar quarter based on the
average adjusted basis of each category of the assets held by the REMIC during
such calendar quarter. The Master Servicer will report those determinations to
Certificateholders in the manner and at the times required by applicable
Treasury regulations.
The assets of the REMIC will include, in addition to Home Equity Loans,
payments on Home Equity Loans held pending distribution on the REMIC
Certificates and property acquired by foreclosure held pending sale, and may
include amounts in reserve accounts. It is unclear whether property acquired
by foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the Home Equity Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the Home Equity Loans for purposes of all
of the foregoing sections. In addition, in some instances Home Equity Loans
may not be treated entirely as assets described in the foregoing sections. If
so, the related Prospectus Supplement will describe the Home Equity Loans that
may not be so treated. The REMIC Regulations do provide, however, that
payments on Home Equity Loans held pending distribution are considered part of
the Home Equity Loans for purposes of Section 856(c)(5)(A) of the Code.
Tiered REMIC Structures
For certain series of REMIC Certificates, two or more separate elections may
be made to treat designated portions of the related Trust as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of REMIC Certificates, Tax Counsel will deliver their opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling
and Servicing Agreement, the Tiered REMICs will each qualify as a REMIC and
the REMIC Certificates issued by the Tiered REMICs, respectively, will be
considered to evidence ownership of REMIC Regular Certificates or REMIC
Residual Certificates in the related REMIC within the meaning of the REMIC
Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code
and "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code, and whether the income on such Certificates is
interest described in Section 856(c)(3)(B) of the Code, the Tiered REMICs will
be treated as one REMIC.
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TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General
Except as otherwise stated in this discussion, REMIC Regular Certificates
will be treated for federal income tax purposes as debt instruments issued by
the REMIC and not as ownership interests in the REMIC or its assets. Moreover,
holders of REMIC Regular Certificates that otherwise report income under a
cash method of accounting will be required to report income with respect to
REMIC Regular Certificates under an accrual method.
Original Issue Discount
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount generally will
be required to include original issue discount in income as it accrues, in
accordance with the method described below, in advance of the receipt of the
cash attributable to such income. In addition, Section 1272(a)(6) of the Code
provides special rules applicable to REMIC Regular Certificates and certain
other debt instruments issued with original issue discount. Regulations have
not been issued under that section.
The Code requires that a prepayment assumption be used with respect to Home
Equity Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner
prescribed in Treasury regulations; as noted above, those regulations have not
been issued. The Conference Committee Report accompanying the Tax Reform Act
of 1986 (the "Committee Report") indicates that the regulations will provide
that the prepayment assumption used with respect to a REMIC Regular
Certificate must be the same as that used in pricing the initial offering of
such REMIC Regular Certificate. The prepayment assumption used by the Master
Servicer in reporting original issue discount for each series of REMIC Regular
Certificates (the "Prepayment Assumption") will be consistent with this
standard and will be disclosed in the related Prospectus Supplement. However,
neither the Seller nor the Master Servicer will make any representation that
the Home Equity Loans will in fact prepay at a rate conforming to the
Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price.
The issue price of a particular class of REMIC Regular Certificates will be
the first cash price at which a substantial amount of REMIC Regular
Certificates of that class is sold (excluding sales to bond houses, brokers
and underwriters). If less than a substantial amount of a particular class of
REMIC Regular Certificates is sold for cash on or prior to the date of their
initial issuance (the "Closing Date"), the issue price for such class will be
treated as the fair market value of such class on the Closing Date. Under the
OID Regulations, the stated redemption price of a REMIC Regular Certificate is
equal to the total of all payments to be made on such Certificate other than
"qualified stated interest." "Qualified stated interest" includes interest
that is unconditionally payable at least annually at a single fixed rate, or
in the case of a variable rate debt instrument, at a "qualified floating
rate," 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 generally does not operate in a
manner that accelerates or defers interest payments on such REMIC Regular
Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest rates,
the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner
in which such rules will be applied by the Master Servicer with respect to
those Certificates in preparing information returns to the Certificateholders
and the Internal Revenue Service (the "IRS").
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Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined below) for original issue discount is each monthly period that ends on
a Payment Date, in some cases, as a consequence of this "long first accrual
period," some or all interest payments may be required to be included in the
stated redemption price of the REMIC Regular Certificate and accounted for as
original issue discount. Because interest on REMIC Regular Certificates must
in any event be accounted for under an accrual method, applying this analysis
would result in only a slight difference in the timing of the inclusion in
income of the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Payment Date is
computed with respect to a period that begins prior to the Closing Date, a
portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns to the
Certificateholders and the IRS will be based on the position that the portion
of the purchase price paid for the interest accrued with respect to periods
prior to the Closing Date is treated as part of the overall cost of such REMIC
Regular Certificate (and not as a separate asset the cost of which is
recovered entirely out of interest received on the next Payment Date) and that
portion of the interest paid on the first Payment Date in excess of interest
accrued for a number of days corresponding to the number of days from the
Closing Date to the first Payment Date should be included in the stated
redemption price of such REMIC Regular Certificate. However, the OID
Regulations state that all or some portion of such accrued interest may be
treated as a separate asset the cost of which is recovered entirely out of
interest paid on the first Payment Date. It is unclear how an election to do
so would be made under the OID Regulations and whether such an election could
be made unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, 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 (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the
amount of the payment, and the denominator of which is the stated redemption
price at maturity of such REMIC Regular Certificate. Under the OID
Regulations, original issue discount of only a de minimis amount (other than
de minimis original issue discount attributable to a so-called "teaser"
interest rate or an initial interest holiday) will be included in income as
each payment of stated principal is made, based on the product of the total
amount of such de minimis original issue discount and a fraction, the
numerator of which is the amount of such principal payment and the denominator
of which is the outstanding stated principal amount of the REMIC Regular
Certificate. The OID Regulations also would permit a Certificateholder to
elect to accrue de minimis original issue discount into income currently based
on a constant yield method. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" herein for a description of such election under
the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for
each day during its taxable year on which it held such REMIC Regular
Certificate, including the purchase date but excluding the disposition date.
In the case of an original holder of a REMIC Regular Certificate, the daily
portions of original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the related
Prospectus Supplement, each period that ends on a date that corresponds to a
Payment Date and begins on the first day following the immediately preceding
accrual period (or in the case of the first such period, begins on the Closing
Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original
issue discount that accrues in any accrual period will equal the excess, if
any, of (i) the sum of (A) the present value, as of the end of the accrual
period, of all of the distributions remaining to be made on the REMIC Regular
Certificate, if any, in future periods and (B) the distributions made on such
REMIC
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Regular Certificate during the accrual period of amounts included in the
stated redemption price, over (ii) the adjusted issue price of such REMIC
Regular Certificate at the beginning of the accrual period. The present value
of the remaining distributions referred to in the preceding sentence will be
calculated (i) assuming that distributions on the REMIC Regular Certificate
will be received in future periods based on the Home Equity Loans being
prepaid at a rate equal to the Prepayment Assumption and (ii) using a discount
rate equal to the original yield to maturity of the Certificate. For these
purposes, the original yield to maturity of the Certificate will be calculated
based on its issue price and assuming that distributions on the Certificate
will be made in all accrual periods based on the Home Equity Loans being
prepaid at a rate equal to the Prepayment Assumption. The adjusted issue price
of a REMIC Regular Certificate at the beginning of any accrual period will
equal the issue price of such Certificate, increased by the aggregate amount
of original issue discount that accrued with respect to such Certificate in
prior accrual periods, and reduced by the amount of any distributions made on
such REMIC Regular Certificate in prior accrual periods of amounts included in
its stated redemption price. The original issue discount accruing during any
accrual period, computed as described above, will be allocated ratably to each
day during the accrual period to determine the daily portion of original issue
discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of
any original issue discount with respect to such Certificate. However, each
such daily portion will be reduced, if such cost is in excess of such
Certificate's "adjusted issue price," in proportion to the ratio such excess
bears to the aggregate original issue discount remaining to be accrued on such
REMIC Regular Certificate. The adjusted issue price of a REMIC Regular
Certificate 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
Certificate at the beginning of the accrual period which includes such day and
(ii) the daily portions of original issue discount for all days during such
accrual period prior to such day.
Market Discount
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount, that is, in the case of a REMIC Regular Certificate issued without
original issue discount, at a purchase price less than its remaining stated
principal amount, or in the case of a REMIC Regular Certificate issued with
original issue discount, at a purchase price less than its adjusted issue
price will recognize income upon receipt of each distribution representing
stated redemption price. In particular, under Section 1276 of the Code such a
Certificateholder generally will be required to allocate the portion of each
such distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income
to that extent. A Certificateholder may elect to include market discount in
income currently as it accrues 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 on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium
in income as interest, based on a constant yield method. If such an election
were made with respect to a REMIC Regular Certificate 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 or thereafter, and possibly previously acquired
instruments. Similarly, a Certificateholder that made this election for a
Certificate that is 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. See "--
Taxation of Owners of REMIC Regular Certificates--Premium" herein. Each of
these elections to accrue interest, discount and premium with respect to a
Certificate on a constant yield method or as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate will be
considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on
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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. If market discount is treated as de minimis under this
rule, it appears that the actual discount would be treated in a manner similar
to original issue discount of a de minimis amount. See "--Taxation of Owners
of REMIC Regular Certificates--Original Issue Discount" herein. Such treatment
would result in discount being included in income at a slower rate than
discount would be required to be included in income using the method described
above.
Section 1276(b)(3) of the Code specifically authorizes 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 regulations are issued by the Treasury Department,
certain rules described in the Committee Report apply. The Committee Report
indicates that in each accrual period market discount on REMIC Regular
Certificates should accrue, at the Certificateholder's option: (i) on the
basis of a constant yield method, (ii) in the case of a REMIC Regular
Certificate issued without original issue discount, 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 amount of stated interest
remaining to be paid on the REMIC Regular Certificate as of the beginning of
the accrual period, or (iii) in the case of a REMIC Regular Certificate issued
with original issue discount, in an amount that bears the same ratio to the
total remaining market discount as the original issue discount accrued in the
accrual period bears to the total original issue discount remaining on the
REMIC Regular Certificate at the beginning of the accrual period. Moreover,
the Prepayment Assumption used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. 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 REMIC Regular Certificate purchased at a discount in the
secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includable in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC
Regular Certificate generally will be required to treat a portion of any gain
on the sale or exchange of such Certificate as ordinary income to the extent
of the market discount accrued to the date of disposition under one of the
foregoing methods, less any accrued market discount previously reported as
ordinary income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includable in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year
or thereafter, the interest deferral rule described above will not apply.
Premium
A REMIC Regular Certificate purchased at a cost (excluding any portion of
such cost attributable to accrued qualified stated interest) greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of such a REMIC Regular Certificate may elect under
Section 171 of the Code to amortize such premium under the constant yield
method over the life of the Certificate. If made, such an election will apply
to all debt instruments having amortizable bond premium that the holder owns
or subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related REMIC Regular Certificate, rather than as a
separate interest deduction. The OID Regulations also permit
Certificateholders to elect to include all interest, discount and premium in
income based on a constant yield method, further treating the
Certificateholder as having made the election to amortize premium generally.
See "--Taxation of Owners of REMIC Regular Certificates--Market Discount"
herein. The Committee Report states that the same rules that
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apply to accrual of market discount (which rules will require use of a
Prepayment Assumption in accruing market discount with respect to REMIC
Regular Certificates without regard to whether such Certificates have original
issue discount) will also apply in amortizing bond premium under Section 171
of the Code.
Realized Losses
Under Section 166 of the Code, both corporate holders of the REMIC Regular
Certificates and noncorporate holders of the REMIC Regular Certificates that
acquire such Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their Certificates become wholly or partially worthless as the
result of one or more realized losses on the Home Equity Loans. However, it
appears that a noncorporate holder that does not acquire a REMIC Regular
Certificate in connection with a trade or business will not be entitled to
deduct a loss under Section 166 of the Code until such holder's Certificate
becomes wholly worthless (i.e., until its outstanding principal balance has
been reduced to zero) and that the loss will be characterized as a short-term
capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Home Equity Loans or the Underlying Certificates until it
can be established that any such reduction ultimately will not be recoverable.
As a result, the amount of taxable income reported in any period by the holder
of a REMIC Regular Certificate could exceed the amount of economic income
actually realized by the holder in such period. Although the holder of a REMIC
Regular Certificate eventually will recognize a loss or reduction in income
attributable to previously accrued and included income that, as the result of
a realized loss, ultimately will not be realized, the law is unclear with
respect to the timing and character of such loss or reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
General
As residual interests, the REMIC Residual Certificates will be subject to
tax rules that differ significantly from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Home Equity Loans or as debt instruments issued by
the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days
per quarter/360 days per year" convention unless otherwise disclosed in the
related Prospectus Supplement. The daily amounts will then be allocated among
the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
allocation will be treated as ordinary income or loss. The taxable income of
the REMIC will be determined under the rules described below in "--Taxable
Income of the REMIC" and will be taxable to the REMIC Residual
Certificateholders without regard to the timing or amount of cash
distributions by the REMIC. Ordinary income derived from REMIC Residual
Certificates will be "portfolio income" for purposes of the taxation of
taxpayers subject to limitations under Section 469 of the Code on the
deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily portion of the
taxable income (or net loss) of the REMIC for each day that it holds such
REMIC Residual Certificate. These daily portions generally will equal the
amounts of taxable income or net loss determined as described above. The
Committee Report indicates that certain modifications of the general rules may
be made, by regulations, legislation or otherwise, to reduce (or increase) the
income or loss of a holder of a REMIC Residual
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Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations,
however, do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be
taken into account in determining the income of such holder for federal income
tax purposes. Although it appears likely that any such payment would be
includable in income immediately upon its receipt, the IRS might assert that
such payment should be included in income over time according to an
amortization schedule or according to some other method. Because of the
uncertainty concerning the treatment of such payments, holders of REMIC
Residual Certificates should consult their tax advisors concerning the
treatment of such payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC Residual Certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC Residual Certificates or unrelated deductions against
which income may be offset, subject to the rules relating to "excess
inclusions," residual interests without "significant value" and "noneconomic"
residual interests discussed below. The fact that the tax liability associated
with the income allocated to REMIC Residual Certificateholders may exceed the
cash distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders' after-tax rate of return.
Taxable Income of the REMIC
The taxable income of the REMIC will equal the income from the Home Equity
Loans and other assets of the REMIC plus any cancellation of indebtedness
income due to the allocation of realized losses to REMIC Regular Certificates,
less the deductions allowed to the REMIC for interest (including original
issue discount and reduced by the amortization of any premium received on
issuance) on the REMIC Regular Certificates (and any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered
hereby), amortization of any premium on the Home Equity Loans, bad debt
deductions with respect to the Home Equity Loans and, except as described
below, for servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to their fair market value
immediately after their transfer to the REMIC. For this purpose, the Master
Servicer intends to treat the fair market value of the Home Equity Loans as
being equal to the aggregate issue prices of the REMIC Regular Certificates
and REMIC Residual Certificates. Such aggregate basis will be allocated among
the Home Equity Loans collectively and the other assets of the REMIC in
proportion to their respective fair market values. The issue price of any
REMIC Certificates offered hereby will be determined in the manner described
above under "--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount." Accordingly, if one or more classes of REMIC Certificates are
retained initially rather than sold, the Master Servicer may be required to
estimate the fair market value of such interests in order to determine the
basis of the REMIC in the Home Equity Loans and other property held by the
REMIC.
Subject to the possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Home Equity Loans that it holds will be equivalent to
the method of accruing original issue discount income for REMIC Regular
Certificateholders (that is, under the constant yield method taking into
account the Prepayment Assumption). However, a REMIC that acquires loans at a
market discount must include such discount in income currently, as it accrues,
on a constant interest basis. See "--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method of accruing discount income that
is analogous to that required to be used by a REMIC as to Home Equity Loans
with market discount that it holds.
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A Home Equity Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated
redemption price. Any such discount will be includable in the income of the
REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing
original issue discount on the REMIC Regular Certificates. It is anticipated
that each REMIC will elect under Section 171 of the Code to amortize any
premium on the Home Equity Loans. Premium on any Home Equity Loan to which
such election applies may be amortized under a constant yield method,
presumably taking into account a Prepayment Assumption.
The REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of
REMIC Certificates constituting "regular interests" in the REMIC not offered
hereby) equal to the deductions that would be allowed if the REMIC Regular
Certificates (including any other class of REMIC Certificates constituting
"regular interests" in the REMIC not offered hereby) were indebtedness of the
REMIC. Original issue discount will be considered to accrue for this purpose
as described above under "--Taxation of Owners of REMIC Regular Certificates--
Original Issue Discount," except that the de minimis rule and the adjustments
for subsequent holders of REMIC Regular Certificates (including any other
class of Certificates constituting "regular interests" in the REMIC not
offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess, "Issue Premium"), the
net amount of interest deductions that are allowed the REMIC in each taxable
year with respect to the REMIC Regular Certificates of such class will be
reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of the REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions and Other Possible REMIC
Taxes" below. Further, the limitation on miscellaneous itemized deductions
imposed on individuals by Section 67 of the Code (which allows such deductions
only to the extent they exceed in the aggregate two percent of the taxpayer's
adjusted gross income) will not be applied at the REMIC level so that the
REMIC will be allowed deductions for servicing, administrative and other non-
interest expenses in determining its taxable income. All such expenses will be
allocated as a separate item to the holders of REMIC Certificates, subject to
the limitation of Section 67 of the Code. See "--Possible Pass-Through of
Miscellaneous Itemized Deductions" herein. If the deductions allowed to the
REMIC exceed its gross income for a calendar quarter, such excess will be the
net loss for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions
The adjusted basis of a REMIC Residual Certificate will be equal to the
amount paid for such REMIC Residual Certificate, increased by amounts included
in the income of the REMIC Residual Certificateholder and decreased (but not
below zero) by distributions made, and by net losses allocated, to such REMIC
Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of such calendar quarter (determined without
regard to such net loss). Any loss that is not currently deductible by reason
of this limitation may be carried forward indefinitely to future calendar
quarters and, subject to the same limitation, may be used only to offset
income from the REMIC Residual Certificate. The ability of REMIC Residual
Certificateholders to deduct net losses may be subject to additional
limitations under the Code, as to which REMIC Residual Certificateholders
should consult their tax advisors.
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Any distribution on a REMIC Residual Certificate will be treated as a non-
taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a
distribution on a REMIC Residual Certificate exceeds such adjusted basis, it
will be treated as gain from the sale of such REMIC Residual Certificate.
Holders of certain REMIC Residual Certificates may be entitled to
distributions early in the term of the related REMIC under circumstances in
which their bases in such REMIC Residual Certificates will not be sufficiently
large that such distributions will be treated as nontaxable returns of
capital. Their bases in such REMIC Residual Certificates will initially equal
the amount paid for such REMIC Residual Certificates and will be increased by
their allocable shares of taxable income of the Trust. However, such basis
increases may not occur until the end of the calendar quarter, or perhaps the
end of the calendar year, with respect to which such REMIC taxable income is
allocated to the REMIC Residual Certificateholders. To the extent such REMIC
Residual Certificateholders' initial bases are less than the distributions to
such REMIC Residual Certificateholders, and increases in such initial bases
either occur after such distributions or (together with their initial bases)
are less than the amount of such distributions, gain will be recognized to
such REMIC Residual Certificateholders on such distributions and will be
treated as gain from the sale of their REMIC Residual Certificates.
The effect of these rules is that a Residual Certificateholder may not
amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of its share of any net
losses of the REMIC or upon the sale of its REMIC Residual Certificate. See
"--Sales of REMIC Certificates" herein. For a discussion of possible
modifications of these rules that may require adjustments to income of a
holder of a REMIC Residual Certificate other than an original holder in order
to reflect any difference between the cost of such REMIC Residual Certificate
to such holder and the adjusted basis such REMIC Residual Certificate would
have had in the hands of the original holder, see "--Taxation of Owners of
REMIC Residual Certificates--General" herein.
Excess Inclusions
Any "excess inclusions" with respect to a REMIC Residual Certificate will,
with an exception discussed below for certain REMIC Residual Certificates held
by thrift institutions, be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
sum of the daily portions of REMIC taxable income allocable to such REMIC
Residual Certificate over (ii) the sum of the "daily accruals" (as defined
below) for each day during such quarter that such REMIC Residual Certificate
was held by such REMIC Residual Certificateholder. The daily accruals of a
REMIC Residual Certificateholder will be determined by allocating to each day
during a calendar quarter its ratable portion of the product of the "adjusted
issue price" of the REMIC Residual Certificate at the beginning of the
calendar quarter and 120% of the "long-term Federal rate" in effect on the
Closing Date. For this purpose, the adjusted issue price of a REMIC Residual
Certificate as of the beginning of any calendar quarter will be equal to the
issue price of the REMIC Residual Certificate, increased by the sum of the
daily accruals for all prior quarters and decreased (but not below zero) by
any distributions made with respect to such REMIC Residual Certificate before
the beginning of such quarter. The issue price of a REMIC Residual Certificate
is the initial offering price to the public (excluding bond houses and
brokers) at which a substantial amount of the REMIC Residual Certificates were
sold. The "long-term Federal rate" is an average of current yields on Treasury
securities with a remaining term of greater than nine years, computed and
published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates" below.
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Although it has not done so, the Treasury also has authority to issue
regulations that would treat the entire amount of income accruing on a REMIC
Residual Certificate as an excess inclusion if the REMIC Residual Certificates
are considered not to have "significant value." The REMIC Regulations provide
that in order to be treated as having significant value, the REMIC Residual
Certificates must have an aggregate issue price at least equal to two percent
of the aggregate issue prices of all of the related REMIC's Regular and
Residual Certificates. In addition, based on the Prepayment Assumption, the
anticipated weighted average life of the REMIC Residual Certificates must
equal or exceed 20 percent of the anticipated weighted average life of the
REMIC, based on the Prepayment Assumption and on any required or permitted
clean up calls or required qualified liquidation provided for in the REMIC's
organizational documents. The related Prospectus Supplement will disclose
whether offered REMIC Residual Certificates may be considered to have
"significant value" under the REMIC Regulations; provided, however, that any
disclosure that a REMIC Residual Certificate will have "significant value"
will be based upon certain assumptions, and the Seller will make no
representation that a REMIC Residual Certificate will have "significant value"
for purposes of the above-described rules.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of
the Code, excluding any net capital gain), will be allocated among the
shareholders of such trust in proportion to the dividends received by such
shareholders from such trust, and any amount so allocated will be treated as
an excess inclusion with respect to a REMIC Residual Certificate as if held
directly by such shareholder. Treasury regulations yet to be issued could
apply a similar rule to regulated investment companies, common trust funds and
certain cooperatives; the REMIC Regulations currently do not address this
subject.
Noneconomic REMIC Residual Certificates
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If such transfer is disregarded, the
purported transferor will continue to remain liable for any taxes due with
respect to the income on such "noneconomic" REMIC Residual Certificate. The
REMIC Regulations provide that a REMIC Residual Certificate is noneconomic
unless, based on the Prepayment Assumption and on any required or permitted
clean up calls, or required qualified liquidation provided for in the REMIC's
organizational documents, (1) the present value of the expected future
distributions (discounted using the "applicable Federal rate" for obligations
whose term ends on the close of the last quarter in which excess inclusions
are expected to accrue with respect to the REMIC Residual Certificate, which
rate is computed and published monthly by the IRS) on the REMIC Residual
Certificate equals at least the present value of the expected tax on the
anticipated excess inclusions, and (2) the transferor reasonably expects that
the transferee will receive distributions with respect to the REMIC Residual
Certificate at or after the time the taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. Accordingly,
all transfers of REMIC Residual Certificates that may constitute noneconomic
residual interests will be subject to certain restrictions under the terms of
the related Pooling and Servicing Agreement that are intended to reduce the
possibility of any such transfer being disregarded. Such restrictions will
require each party to a transfer to provide an affidavit that no purpose of
such transfer is to impede the assessment or collection of tax, including
certain representations as to the financial condition of the prospective
transferee, as to which the transferor also is required to make a reasonable
investigation to determine such transferee's historic payment of its debts and
ability to continue to pay its debts as they come due in the future. Prior to
purchasing a REMIC Residual Certificate, prospective purchasers should
consider the possibility that a purported transfer of such REMIC Residual
Certificate by such a purchaser to another purchaser at some future date may
be disregarded in accordance with the above-described rules which would result
in the retention of tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain
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assumptions, and the Seller will make no representation that a REMIC Residual
Certificate will not be considered "noneconomic" for purposes of the above-
described rules. See "--Foreign Investors in REMIC Certificates" below for
additional restrictions applicable to transfers of certain REMIC Residual
Certificates to foreign persons.
MARK-TO-MARKET RULES
Treasury regulations provide that any REMIC Residual Certificate acquired
after January 4, 1995 will not be treated as a security and therefore
generally may not be marked to market.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS
Fees and expenses of a REMIC generally will be allocated to the holders of
the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single
class grantor trust, all or a portion of such fees and expenses should be
allocated to the holders of the related REMIC Regular Certificates. Unless
otherwise stated in the related Prospectus Supplement, such fees and expenses
will be allocated to holders of the related REMIC Residual Certificates in
their entirety and not to the holders of the related REMIC Regular
Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate
or trust, or a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts, (i) an amount equal to such individual's,
estate's or trust's share of such fees and expenses will be added to the gross
income of such holder and (ii) such individual's, estate's or trust's share of
such fees and expenses will be treated as a miscellaneous itemized deduction
allowable subject to the limitation of Section 67 of the Code, which permits
such deductions only to the extent they exceed in the aggregate two percent of
a taxpayer'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 REMIC Certificateholders that are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Furthermore, in determining the alternative minimum taxable income of such a
holder of a REMIC Certificate that is an individual, estate or trust, or a
"pass-through entity" beneficially owned by one or more individuals, estates
or trusts, no deduction will be allowed for such holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount equal to the amount of such fees and other deductions will be
included in such holder's gross income. Accordingly, such REMIC Certificates
may not be appropriate investments for individuals, estates, or trusts, or
pass-through entities beneficially owned by one or more individuals, estates
or trusts. Such prospective investors should consult carefully with their tax
advisors prior to making an investment in such Certificates.
SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the selling Certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale
and its adjusted basis in the REMIC Certificate. The adjusted basis of a REMIC
Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to such REMIC Regular Certificate (including
original issue discount and market discount income) and reduced (but not below
zero) by distributions on such REMIC Regular Certificate received by such
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described under "--Taxation of
Owners of REMIC Residual Certificates--Basis Rules, Net Losses and
Distributions" herein. Except as described below, any such gain or loss
generally will be capital gain or loss.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does
not exceed the excess, if any, of (i) the amount that would have
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been includable in the seller's income with respect to such REMIC Regular
Certificate had income accrued thereon at a rate equal to 110% of the
"applicable Federal rate" (generally, a rate based on an average of current
yields on Treasury securities having a maturity comparable to that of the
Certificate, which rate is computed and published monthly by the IRS),
determined as of the date of purchase of such REMIC Regular Certificate, over
(ii) the amount of ordinary income actually includable in the seller's income
prior to such sale. In addition, gain recognized on the sale of a REMIC
Regular Certificate by a seller who purchased such REMIC Regular Certificate
at a market discount will be taxable as ordinary income to the extent of any
accrued and previously unrecognized market discount that accrued during the
period the Certificate was held. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" herein.
REMIC Certificates will be "evidences of indebtedness" within the meaning of
Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the
extent that such 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
Certificates 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 so
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 the taxable year, for purposes
of the limitation on the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires the Certificate, any other
residual interest in a REMIC or any similar interest in a "taxable mortgage
pool" (as defined in Section 7701(i) of the Code) within six months of the
date of such sale, the sale will be subject to the "wash sale" rules of
Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead
will be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (a "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions a prohibited transaction means the
disposition of a Home Equity Loan, the receipt of income from a source other
than a Home Equity Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Home Equity Loans for temporary investment pending
distribution on the REMIC Certificates. It is not anticipated that any REMIC
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax
on the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would
be subject to such tax.
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REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property," determined by reference to the
rules applicable to real estate investment trusts. "Net income from
foreclosure property" generally means gain from the sale of a foreclosure
property that is inventory property and gross income from foreclosure property
other than qualifying rents and other qualifying income for a real estate
investment trust. Unless otherwise disclosed in the related Prospectus
Supplement, it is not anticipated that any REMIC will recognize "net income
from foreclosure property" subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne
by the related Master Servicer or Trustee in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling and Servicing Agreement and in respect of
compliance with applicable laws and regulations. Any such tax not borne by the
Master Servicer or the Trustee will be payable out of the related Trust
resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the
present value (discounted using the "applicable Federal rate" for obligations
whose term ends on the close of the last quarter in which excess inclusions
are expected to accrue with respect to the Certificate, which rate is computed
and published monthly by the IRS) of the total anticipated excess inclusions
with respect to such REMIC Residual Certificate for periods after the transfer
and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. Such a tax
generally would be imposed on the transferor of the REMIC Residual
Certificate, except that where such transfer is through an agent for a
disqualified organization, the tax would instead be imposed on such agent.
However, a transferor of a REMIC Residual Certificate would in no event be
liable for such tax with respect to a transfer if the transferee furnishes to
the transferor an affidavit that the transferee is not a disqualified
organization and, as of the time of the transfer, the transferor does not have
actual knowledge that such affidavit is false. Moreover, an entity will not
qualify as a REMIC unless there are reasonable arrangements designed to ensure
that (i) residual interests in such entity are not held by disqualified
organizations and (ii) information necessary for the application of the tax
described herein will be made available. Restrictions on the transfer of REMIC
Residual Certificates and certain other provisions that are intended to meet
this requirement will be included in the Pooling and Servicing Agreement.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the
amount of excess inclusions on the REMIC Residual Certificate that are
allocable to the interest in the pass-through entity held by such disqualified
organization and (ii) the highest marginal federal income tax rate imposed on
corporations. A pass-through entity will not be subject to this tax for any
period, however, if each record holder of an interest in such pass-through
entity furnishes to such pass-through entity (i) such holder's social security
number and a statement under penalties of perjury that such social security
number is that of the record holder or (ii) a statement under penalties of
perjury that such record holder is not a disqualified organization.
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For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government,
any international organization, or any agency or instrumentality of the
foregoing (but would not include instrumentalities described in Section
168(h)(2)(D) of the Code or the Federal Home Loan Mortgage Corporation), (ii)
any organization (other than a cooperative described in Section 521 of the
Code) that is exempt from federal income tax, unless it is subject to the tax
imposed by Section 511 of the Code or (iii) any organization described in
Section 1381(a)(2)(C) of the Code. For these purposes, a "pass-through entity"
means any regulated investment company, real estate investment trust, trust,
partnership or certain other entities described in Section 860E(e)(6) of the
Code. In addition, a person holding an interest in a pass-through entity as a
nominee for another person will, with respect to such interest, be treated as
a pass-through entity.
TERMINATION
A REMIC will terminate immediately after the Payment Date following receipt
by the REMIC of the final payment in respect of the Home Equity Loans or upon
a sale of the REMIC's assets following the adoption by the REMIC of a plan of
complete liquidation. The last distribution on a REMIC Regular Certificate
will be treated as a payment in retirement of a debt instrument. In the case
of a REMIC Residual Certificate, if the last distribution on such REMIC
Residual Certificate is less than the REMIC Residual Certificateholder's
adjusted basis in such Certificate, such REMIC Residual Certificateholder
should be treated as realizing a loss equal to the amount of such difference,
and such loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
Solely for purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and Residual Certificateholders will be
treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Master Servicer will file REMIC federal income tax returns on
behalf of the related REMIC, will be designated as and will act as the "tax
matters person" with respect to the REMIC in all respects, and generally will
hold at least a nominal amount of REMIC Residual Certificates.
As the tax matters person, the Master Servicer will, subject to certain
notice requirements and various restrictions and limitations, generally have
the authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review
of items of income, deduction, gain or loss of the REMIC, as well as the
REMIC's classification. REMIC Residual Certificateholders will generally be
required to report such REMIC items consistently with their treatment on the
related REMIC's tax return and may in some circumstances be bound by a
settlement agreement between the Master Servicer, as tax matters person, and
the IRS concerning any such REMIC item. Adjustments made to the REMIC tax
return may require a REMIC Residual Certificateholder to make corresponding
adjustments on its return, and an audit of the REMIC's tax return, or the
adjustments resulting from such an audit, could result in an audit of a REMIC
Residual Certificateholder's return. No REMIC will be registered as a tax
shelter pursuant to Section 6111 of the Code because it is not anticipated
that any REMIC will have a net loss for any of the first five taxable years of
its existence. Any person that holds a REMIC Residual Certificate as a nominee
for another person may be required to furnish to the related REMIC, in a
manner to be provided in Treasury regulations, the name and address of such
person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
generally are required to be sent to individual holders of REMIC Regular
Interests and the IRS; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and certain other non-individuals
will be provided interest and original issue discount income information and
the information set forth in the following paragraph upon request in
accordance with the requirements of the applicable regulations. The
information must be provided by the later of 30 days after the end of the
quarter for which the information was requested, or two weeks after the
receipt of the request. The REMIC must also comply with rules requiring a
REMIC Regular Certificate issued with original issue discount to disclose on
its face certain information
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including the amount of original issue discount and the issue date, and
requiring such information to be reported to the IRS. Reporting with respect
to the REMIC Residual Certificates, including income, excess inclusions,
investment expenses and relevant information regarding qualification of the
REMIC's assets will be made as required under the Treasury regulations,
generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular
Certificate at the beginning of each accrual period. In addition, the reports
will include information required by regulations with respect to computing the
accrual of any market discount. Because exact computation of the accrual of
market discount on a constant yield method requires information relating to
the holder's purchase price that the Master Servicer will not have, such
regulations only require that information pertaining to the appropriate
proportionate method of accruing market discount be provided. See "--Taxation
of Owners of REMIC Regular Certificates--Market Discount" herein.
The responsibility for complying with the foregoing reporting rules will be
borne by the Trustee. Certificateholders may request any information with
respect to the returns described in Section 1.6049-7(e)(2) of the Treasury
regulations. Such request should be directed to the Trustee at First National
Bank of Chicago, One First National Plaza, Suite 0126, Chicago, Illinois
60670-0126, Attn: Corporate Trust Services Division.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES
Payments of interest and principal, as well as payments of proceeds from the
sale of REMIC Certificates, may be subject to the "backup withholding tax"
under Section 3406 of the Code at a rate of 31% if recipients of such payments
fail to furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient
would be allowed as a credit against such recipient's federal income tax.
Furthermore, certain penalties may be imposed by the IRS on a recipient of
payments that is required to supply information but that does not do so in the
proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES
A REMIC Regular Certificateholder that is not a "United States person" (as
defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its
ownership of a REMIC Regular Certificate will not be subject to United States
federal income or withholding tax in respect of a distribution on a REMIC
Regular Certificate, provided that the holder complies to the extent necessary
with certain identification requirements (including delivery of a statement,
signed by the Certificateholder under penalties of perjury, certifying that
such Certificateholder is not a United States person and providing the name
and address of such Certificateholder). For these purposes, "United States
person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in, or under the laws of, the
United States or any political subdivision thereof, or an estate or trust
whose income from sources without the United States is includable in gross
income for United States federal income tax purposes regardless of its
connection with the conduct of a trade or business within the United States.
It is possible that the IRS may assert that the foregoing tax exemption should
not apply with respect to a REMIC Regular Certificate held by a REMIC Residual
Certificateholder that owns directly or indirectly a 10% or greater interest
in the REMIC Residual Certificates. If the holder does not qualify for
exemption, distributions of interest, including distributions in respect of
accrued original issue discount, to such holder may be subject to a tax rate
of 30%, subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
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Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States Persons
will be prohibited under the related Pooling and Servicing Agreement.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences" herein, 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 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
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section
4975 of the Code imposes similar prohibited transaction restrictions on tax-
qualified retirement or annuity plans described in Section 401(a) or 403(a) of
the Code ("Qualified Plans") and on individual retirement accounts ("IRAs")
described in Section 408 of the Code (collectively, "Tax-Favored Plans").
Generally, any person who has discretionary authority or control respecting
the management or disposition of "plan assets" of any ERISA Plan or Tax-
Favored Plan (collectively, "Plans"), and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the Plan
involved.
Any fiduciary or other Plan investor considering whether to purchase any
Certificates on behalf of or with "plan assets" of any Plan should consult
with its counsel and refer to the applicable Prospectus Supplement for
guidance regarding the ERISA Considerations applicable to the Certificates
offered thereby.
Certain employee benefit plans, such as 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 the requirements of ERISA or Section 4975 of the
Code. Accordingly, assets of such plans may be invested in the Certificates
without regard to the ERISA considerations described herein and in the
applicable Prospectus Supplement, subject to the provisions of other
applicable federal and state law. However, any such plan that is a Qualified
Plan and exempt from taxation under Section 501(a) of the Code is subject to
the prohibited transaction rules set forth in Section 503(b) of the Code.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that an ERISA
Plan's investments be made in accordance with the documents governing the
Plan, Section 406 of ERISA and Section 4975 of the Code prohibit a broad range
of transactions involving "plan assets" of Plans and persons (referred to as
"parties in interest" in ERISA or "disqualified persons" in Section 4975 of
the Code) (collectively, "Parties in Interest") who have certain specified
relationships to the Plans, unless a statutory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to a penalty or an excise tax imposed pursuant to
Section 502 of ERISA or Section 4975 of the Code, unless a statutory or
administrative exemption is available.
PLAN ASSET REGULATION
An investment of Plan Assets (as defined below) in Certificates may cause
the Home Equity Loans and other assets of the related Trust to be deemed "plan
assets" of all Plans involved. Section 2510.3-101 of the U.S. Department of
Labor (the "DOL") regulations (the "DOL Regulation") addresses whether or not
a Plan's
65
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assets would be deemed to include an interest in the underlying assets of an
entity (such as a Trust), for purposes of applying the general fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions
of ERISA and Section 4975 of the Code, when such Plan acquires an "equity
interest" (such as a Certificate) in such entity. Because of the indefinite
nature of certain of the rules set forth in the DOL Regulation, the assets of
a Plan which acquires Certificates of any Class may be deemed to include
merely its interest in the Certificates or both such interest and an undivided
interest in the assets of the related Trust. Therefore, Plan Assets should not
be used to acquire or hold Certificates in reliance upon the availability of
any exception under the DOL Regulation. For purposes of the sections of this
Prospectus and any Prospectus Supplement headed "ERISA Considerations," the
terms "Plan Assets" and "assets of a Plan" have the meaning specified in the
DOL Regulation and include an undivided interest in the underlying assets of
certain entities in which a Plan invests.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust and cause the Seller, the Master
Servicer, any Subservicer, the Trustee, the obligor under any credit
enhancement mechanism and certain affiliates thereof, to be considered or
become Parties in Interest with respect to the assets of any Plan that are
invested in Certificates issued by the Trust. If so, the acquisition or
holding of Certificates by or on behalf of a Plan or with Plan Assets could
also give rise to a prohibited transaction under ERISA and Section 4975 of the
Code, unless a statutory or administrative exemption is available.
Certificates acquired by a Plan would be assets of that Plan. Under the DOL
Regulation, the Home Equity Loans and other assets held in the Trust may also
be deemed to be assets of each Plan that acquires Certificates. Special
caution should be exercised before Plan Assets are used to acquire a
Certificate in such circumstances, especially if, with respect to such Plan
Assets, a Seller, the Master Servicer, a Subservicer, the Trustee, the obligor
under any credit enhancement mechanism or an affiliate thereof either (1) has
investment discretion with respect to the investment of Plan Assets, or (2)
has authority or responsibility to give (or regularly gives) investment advice
with respect to Plan Assets for a fee pursuant to an agreement or
understanding that such advice will serve as a primary basis for investment
decisions with respect thereto.
Any person who has discretionary authority or control with respect to the
management or disposition of the assets of a Plan, and any person who provides
investment advice with respect to such assets for a fee (in the manner
described above), is a fiduciary with respect to such Plan. If the Home Equity
Loans and other Trust assets were deemed to be Plan Assets, any party
exercising management or discretionary control regarding those assets may be
deemed to be a "fiduciary" with respect to all Plans involved and, therefore,
subject to the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code with respect to such Plans.
In addition, if the Home Equity Loans and other Trusts assets were deemed to
be Plan Assets, the acquisition or holding of Certificates by or on behalf of
a Plan or with Plan Assets, as well as the normal operations of the Trust, may
constitute or result in a prohibited transaction under ERISA and Section 4975
of the Code.
PROHIBITED TRANSACTION EXEMPTIONS
Underwriters' Exemptions. The DOL has issued individual exemptions (each, an
"Exemption") to a large number of investment banking firms, broker-dealers and
banks or their affiliates (each, an "Underwriter"), which generally exempt
from the application of the prohibited transaction provisions of Section 406
of ERISA, and the excise taxes imposed on prohibited transactions pursuant to
Section 4975(a) and (b) of the Code, certain transactions (among others)
relating to the servicing and operation of mortgage pools and the purchase,
sale and holding of mortgage pass-through certificates issued by a trust as to
which an Underwriter to whom the DOL has issued an Exemption (or any of its
affiliates) is the sole underwriter or the manager or co-manager of the
underwriting syndicate, or a selling or placement agent, with respect to such
certificates, provided that certain conditions set forth in the applicable
Exemption are satisfied. The Prospectus Supplement for each Series will state
(in the section headed "ERISA Considerations") whether or not the DOL has
issued an Exemption to an Underwriter with respect that Series and identify
the Classes of Certificates of that Series to which any such Exemption may
apply.
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<PAGE>
General Conditions. Each Exemption sets forth six general conditions which
must be satisfied for a transaction involving the purchase, sale and holding
of Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of Certificates with Plan Assets must be on terms that are at
least as favorable to the Plans involved as they would be in an arm's-length
transaction with an unrelated party. Second, an Exemption only applies to
Certificates evidencing rights and interests that are not subordinated to the
rights and interests evidenced by the other Certificates of the same Trust.
Third, the Certificates, at the time of their acquisition with Plan Assets,
must be rated in one of the three highest generic rating categories by S&P,
Moody's, D&P or Fitch. Fourth, the Trustee must not be an affiliate of any
member of the "Restricted Group," which consists of any Underwriter, the
Seller, the Master Servicer, any Subservicer and any mortgagor with respect to
Home Equity Loans constituting more than 5% of the aggregate unamortized
principal balance of the Home Equity Loans held in the related Trust as of the
date of initial issuance of the Certificates. Fifth, the sum of all payments
made to and retained by the Underwriters must represent not more than
reasonable compensation for underwriting or placing the Certificates; the sum
of all payments made to and retained by the Seller pursuant to the assignment
of the Home Equity Loans and other Trust assets to the related Trust must
represent not more than the fair market value of such obligations; and the sum
of all payments made to and retained by the Master Servicer and any
Subservicers must represent not more than reasonable compensation for such
persons' services under the related Pooling and Servicing Agreement and
reimbursement of such persons' reasonable expenses in connection therewith.
Sixth, each Exemption states that the investing Plan must be an accredited
investor as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
A Plan fiduciary or other investor of Plan Assets contemplating purchasing a
Certificate must make its own determination that the general conditions
described above will be satisfied with respect to such Certificate.
If the general conditions of an applicable Exemption are satisfied, the
Exemption may provide exemptive relief from the restrictions imposed by
Section 406(a) of ERISA, and the excise taxes imposed by Section 4975(a) and
(b) by reason of Section 4975(c)(1)(A) through (D) of the Code, in connection
with the direct or indirect sale, exchange, transfer, holding or the direct or
indirect acquisition or disposition in the secondary market of Certificates by
a Plan or with Plan Assets. However, no exemption is provided from the
restrictions of Section 406(a)(1)(E) and 406(a)(2) of ERISA for the
acquisition or holding of a Certificate by or with Plan Assets of an Excluded
Plan by any person who has discretionary authority or renders investment
advice with respect to Plan Assets of such Excluded Plan. For purposes of the
sections of this Prospectus and any Prospectus Supplement headed "ERISA
Considerations," the term "Excluded Plan" means a Plan sponsored by any member
of the Restricted Group (as defined above).
Specific Conditions. If certain specific conditions of an applicable
Exemption are also satisfied, the Exemption may provide exemptive relief from
the restrictions imposed by Section 406(b)(1) and (2) of ERISA, and the excise
taxes imposed by Section 4975(a) and (b) by reason of Section 4975(c)(1)(E) of
the Code, in connection with (1) the direct or indirect sale, exchange or
transfer of Certificates, in the initial issuance of Certificates between a
Seller or an Underwriter and an investor of Plan Assets, when the person who
has discretionary authority or renders investment advice with respect to the
investment of the relevant Plan Assets in the Certificates is a mortgagor with
respect to 5% or less of the fair market value of the Home Equity Loans or
other assets held in the Trust (or an affiliate of such a person), and (2) the
direct or indirect acquisition or disposition in the secondary market and
holding of Certificates by a Plan or with Plan Assets.
Further, if certain specific conditions of an applicable Exemption are
satisfied, the Exemption may provide exemptive relief from the restrictions
imposed by Section 406(a) and (b) of ERISA, and the excise taxes imposed by
Section 4975(a) and (b) by reason of Section 4975(c) of the Code, for
transactions in connection with the servicing, management and operation of the
Mortgage Pools. The Seller expect that those specific conditions of an
applicable Exemption will be satisfied with respect to the Certificates so
that the Exemption would provide exemptive relief from those restrictions and
excise taxes for transactions in connection with the servicing, management and
operation of the Mortgage Pools, provided that the general conditions of the
Exemption are satisfied.
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An applicable Exemption also may provide exemptive relief from the
restrictions imposed by Section 406(a) of ERISA, and the excise taxes imposed
by Section 4975(a) and (b) by reason of Section 4975(e)(1)(A) through (D) of
the Code, if such restrictions are otherwise deemed to apply merely because a
person is deemed to be a Party in Interest with respect to a Plan (or the
investing entity holding Plan Assets) by virtue of providing services to the
Plan(s) involved, or by virtue of having certain specified relationships to
such a person, solely as a result of the ownership of Certificates by a Plan
or with Plan Assets.
Advance Determinations. Before purchasing any Class of Certificates of any
Series, a Plan fiduciary or other investor of Plan Assets should itself
determine that (1) the DOL has issued an Exemption to an Underwriter with
respect that Series, (2) the Exemption applies to Certificates of that Class,
(3) the Certificates constitute "certificates" as defined in the Exemption,
and (4) the specific and general conditions and any other requirements set
forth in the Exemption would be satisfied. In addition to making its own
determination as to the availability of the exemptive relief provided by an
applicable Exemption, the Plan fiduciary or other investor of Plan Assets
should consider its general fiduciary obligations under ERISA in determining
whether to purchase any Certificates with Plan Assets.
Any Plan fiduciary or other of Plan Assets investor who proposes to purchase
Certificates with Plan Assets should consult with its counsel with respect to
the potential applicability of ERISA and Section 4975 of the Code to such
investment and the availability of exemptive relief under an Exemption or any
other prohibited transaction exemption in connection therewith. In particular,
in connection with a contemplated purchase of Certificates representing a
beneficial ownership interest in a pool of single-family residential mortgage
loans, any fiduciary or other Plan investor should consider the availability
of an Exemption or Prohibited Transaction Class Exemption ("PTCE") 83-1 for
certain transactions involving mortgage pool investment trusts. The Prospectus
Supplement for any Series of Certificates may contain additional information
regarding the application of an Exemption, PTCE 83-1 or any other prohibited
transaction exemption with respect to the Certificates offered thereby.
However, PTCE 83-1 does not provide exemptive relief with respect to
Certificates evidencing interests in Trusts which include Cooperative Loans.
In addition, such fiduciary or other Plan Asset investor should consider the
availability of other class exemptions granted by the DOL, which provide
relief from certain of the prohibited transaction provisions of ERISA and the
related excise tax provisions of Section 4975 of the Code, including Sections
I and III of PTCE 95-60, regarding transactions by insurance company general
accounts. The applicable Prospectus Supplement may contain additional
Information regarding the application of the Exemption, PTCE 83-1, PTCE 95-60
or other DOL class exemptions with respect to the Certificates offered
thereby. There can be no assurance that any of these exemptions will apply
with respect to any particular Plan's or other Plan Asset investor's
investment in the Certificates or, even if an exemption were deemed to apply,
that any exemption would apply to all prohibited transactions that may occur
in connection with such an investment.
INSURANCE COMPANY GENERAL ACCOUNTS
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Certificates 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 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 Section 4975 of 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 ("the 401(c) Regulations") no later
than December 31, 1997 which are to provide guidance for the purpose of
determining, in cases where insurance policies or annuity contracts 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
68
<PAGE>
account which support insurance policies or annuity contracts 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
Certificates should consult with their legal counsel with respect to the
applicability of Sections I and III of PTCE 95-60 and Section 401(c) of ERISA,
including the general account's ability to continue to hold the Certificates
after the date which is 18 months after the date the 401(c) Regulations become
final.
REPRESENTATION FROM INVESTING PLANS
The exemptive relief afforded by the Exemption will not apply to the
purchase, sale or holding of any class of Subordinated Certificates. To the
extent Certificates are Subordinated Certificates, transfers of such
Certificates to a Plan, to a trustee or other person acting on behalf of any
Plan, or to any other person using Plan Assets to effect such acquisition will
not be registered by the Trustee unless the transferee provides the Seller,
the Trustee and the Master Servicer with an opinion of counsel satisfactory to
the Seller, the Trustee and the Master Servicer, which opinion will not be at
the expense of the Seller, the Trustee or the Master Servicer, that the
purchase of such Certificates by or on behalf of such Plan is permissible
under applicable law, will not constitute or result in any non-exempt
prohibited transaction under ERISA or Section 4975 of the Code and will not
subject the Seller, the Trustee and the Master Servicer to any obligation in
addition to those undertaken in the Pooling and Servicing Agreement. In lieu
of such opinion of counsel, the transferee may provide a certification of
facts substantially to the effect that the purchase of such Certificates by or
on behalf of such Plan is permissible under applicable law, will not
constitute or result in a non-exempt prohibited transaction under ERISA or
Section 4975 of the Code, will not subject the Seller, the Trustee or the
Master to any obligation in addition to those undertaken in the Pooling and
Servicing Agreement, and the following conditions are met: (a) the source of
funds used to purchase such Certificates is an "insurance company general
account" (as such term is defined in PTCE 95-60), and (b) the conditions set
forth in Sections I and III of PTCE 95-60 have been satisfied as of the date
of the acquisition of such Certificates.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section
501(a) of the Code (a "Tax Exempt Investor") nonetheless will be subject to
federal income taxation to the extent that its income is "unrelated business
taxable income" ("UBTI") (within the meaning of Section 512 of the Code). All
"excess inclusions" of a REMIC allocated to a REMIC Residual Certificate held
by a Tax-Exempt Investor will be considered UBTI and, therefore, will be
subject to federal income tax. See "Certain Federal Income Tax Consequences--
Taxation of Owners of REMIC Residual Interests--Excess Inclusions" herein.
CONSULTATION WITH COUNSEL
There can be no assurance that the Exemption or any other DOL exemption will
apply with respect to any particular Plan that acquires the Certificates or,
even if all of the conditions specified therein were satisfied, that the
exemption would apply to transactions involving a Trust. Prospective Plan
investors should consult with their legal counsel concerning the impact of
ERISA and the Code and the potential consequences to their specific
circumstances prior to making an investment in the Certificates.
Any fiduciary or other investor of Plan Assets that proposes to acquire or
hold Certificates on behalf of or with Plan Assets of any Plan should consult
with its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions
of ERISA and Section 4975 of the Code to the proposed investment and the
Exemption, the availability of exemptive relief under PTCE 83-1, Sections I
and III of PTCE 95-60 or any other DOL class exemption.
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LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, no Class of
Certificates of a Series will constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") because the
related Mortgage Pool will include Home Equity Loans that are secured by
second or more junior Mortgages. Investors should consult their own legal
advisers in determining whether and to what extent any Class of Certificates
of a Series constitutes legal investments for such investors.
USE OF PROCEEDS
The Seller will use the net proceeds received from each sale of Certificates
to purchase Home Equity Loans from its affiliates. Such affiliates will use
such proceeds for general corporate purposes.
PLAN OF DISTRIBUTION
The Certificates of each Series may be sold to or through Underwriters by a
negotiated firm commitment underwriting and public reoffering by the
Underwriters or such other underwriting arrangement as may be specified in the
related Prospectus Supplement or may be offered or placed either directly or
through agents. The Seller intends that Certificates will be offered through
such various methods from time to time and that offerings may be made
concurrently through more than one of such methods or that an offering of a
particular Series of Certificates may be made through a combination of such
methods.
The distribution of Certificates may be effected from time to time in one or
more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
In connection with the sale of the Certificates, Underwriters or agents may
receive compensation in the form of discounts, concessions or commissions.
Underwriters may sell Certificates to certain dealers at prices less a
concession. Underwriters may allow and such dealers may reallow a concession
to certain other dealers. Underwriters, dealers and agents that participate in
the distribution of the Certificates of a Series may be deemed to be
underwriters and any discounts or commissions received by them from the Seller
or the related Trust and any profit on the resale of the Certificates by them
may be deemed to be underwriting discounts and commissions under the
Securities Act of 1933. Any such Underwriters or agents will be identified,
and any such compensation received from the Seller or the related Trust will
be described, in the related Prospectus Supplement.
Under agreements which may be entered into by the Seller, Underwriters and
agents who participate in the distribution of the Certificates may be entitled
to indemnification by the Seller against certain liabilities, including
liabilities under the Securities Act of 1933.
The Underwriters may, from time to time, buy and sell Certificates, but
there can be no assurance that an active secondary market will develop and
there is no assurance that any such market, if established, will continue.
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RATINGS
Each Class of Certificates of a Series offered hereby will be rated at their
initial issuance in one of the four highest categories by at least one Rating
Agency.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
Rating Agency. No person is obligated to maintain the rating on any
Certificate, and, accordingly, there can be no assurance that the ratings
assigned to a Certificate upon initial issuance will not be lowered or
withdrawn by a Rating Agency at any time thereafter. In general, ratings
address credit risk and do not represent any assessment of the likelihood or
rate of principal prepayments.
LEGAL MATTERS
Certain legal matters relating to the Certificates and certain federal
income tax consequences of the issuance of the Certificates will be passed
upon by Orrick, Herrington & Sutcliffe LLP, counsel to the Seller, the Master
Servicer and TFC.
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Accrual Certificates....................................................... 5
Accrual Period............................................................. 5
Actuarial Loan............................................................. 18
Advance.................................................................... 9
ARM Loans.................................................................. 18
Asset Conservation Act..................................................... 48
Available Payment Amount................................................... 31
Balloon Loans.............................................................. 13
Basic Principal Payment.................................................... 6
Book-Entry Certificates.................................................... 7
Cash Collateral Account.................................................... 35
Cash Collateral Lender..................................................... 35
Cede....................................................................... 7
CEDEL...................................................................... 42
CEDEL Participants......................................................... 42
CERCLA..................................................................... 48
Certificate Insurance Policy............................................... 34
Certificate Owners......................................................... 2
Certificateholder.......................................................... 49
Certificates............................................................... 1
Citibank................................................................... 40
Class...................................................................... 1
Closing Date............................................................... 4
Code....................................................................... 10
Collection Account......................................................... 30
Combined Loan-to-Value Ratio............................................... 17
Commission................................................................. 2
Committee Report........................................................... 51
Consumer Mortgage Loans.................................................... 22
Contributions Tax.......................................................... 61
conversion transaction..................................................... 61
Cooperative................................................................ 43
Cooperative Loans.......................................................... 44
Credit Provider............................................................ 33
Curtailments............................................................... 6
Cut-off Date............................................................... 4
Deferred Interest.......................................................... 19
Definitive Certificates.................................................... 42
Depositaries............................................................... 40
Determination Date......................................................... 5
DOL........................................................................ 65
DOL Regulation............................................................. 65
DTC........................................................................ 2
ERISA...................................................................... 10
ERISA Considerations....................................................... 66
ERISA Plans................................................................ 65
Euroclear.................................................................. 42
Euroclear Operator......................................................... 42
</TABLE>
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<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Euroclear Participants..................................................... 42
Excess Spread.............................................................. 29
Exchange Act............................................................... 2
Excluded Plan.............................................................. 67
Exemption.................................................................. 66
FHA Loans.................................................................. 23
FHLMC...................................................................... 38
FNMA....................................................................... 38
Gross Margin............................................................... 19
Home Equity Loan........................................................... 1
Home Equity Loan Losses.................................................... 31
Home Equity Loan Ratio..................................................... 18
Home Equity Loan Schedule.................................................. 27
Home Equity Loans.......................................................... 4
HUD........................................................................ 38
Index...................................................................... 19
Index of Principal Definitions............................................. 1
Indirect Participants...................................................... 7
Insurance Proceeds......................................................... 6
Insurer.................................................................... 34
IRAs....................................................................... 65
IRS........................................................................ 51
Issue Premium.............................................................. 57
Letter of Credit........................................................... 34
Letter of Credit Issuer.................................................... 34
Liquidated Home Equity Loan................................................ 6
Liquidation Proceeds....................................................... 6
Majority in Aggregate Voting Interest...................................... 39
Master Servicer............................................................ 1
Master Servicer Termination Event.......................................... 39
Maximum Mortgage Rate...................................................... 19
Minimum Mortgage Rate...................................................... 19
Monthly Payments........................................................... 6
Morgan..................................................................... 40
Mortgage................................................................... 1
Mortgage File.............................................................. 27
Mortgage Interest Rate..................................................... 8
Mortgage Pool.............................................................. 1
mortgage related securities................................................ 11
Mortgaged Property......................................................... 1
Mortgagor.................................................................. 12
Neg-Am ARM Loans........................................................... 19
Net Liquidation Proceeds................................................... 6
OID Regulations............................................................ 49
Original Pool Principal Balance............................................ 7
Owners..................................................................... 41
Participants............................................................... 7
Parties in Interest........................................................ 65
Pass-Through Rate.......................................................... 25
Payment Date............................................................... 5
Percentage Interest........................................................ 6
</TABLE>
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<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Periodic Cap............................................................... 19
Permitted Instruments...................................................... 29
Plan....................................................................... 10
plan assets................................................................ 10
Plans...................................................................... 65
Pool Insurance Policy...................................................... 34
Pool Insurer............................................................... 34
Pool Principal Balance..................................................... 33
Pooling and Servicing Agreement............................................ 20
Prepayment Assumption...................................................... 51
Prepayment Period.......................................................... 6
Principal Prepayments...................................................... 6
Prior Owners............................................................... 15
Prohibited Transactions Tax................................................ 61
PTCE....................................................................... 68
PTCE 83-1.................................................................. 68
Qualified Plans............................................................ 65
Qualified Substitute Home Equity Loan...................................... 28
Rating Agency.............................................................. 10
RCRA....................................................................... 48
real estate assets......................................................... 50
Real Estate Owned.......................................................... 24
Record Date................................................................ 5
regular interests.......................................................... 10
Released Mortgaged Property Proceeds....................................... 6
Relief Act................................................................. 47
REMIC...................................................................... 1
REMIC Certificates......................................................... 49
REMIC Provisions........................................................... 49
REMIC Regular Certificates................................................. 49
REMIC Regulations.......................................................... 49
REMIC Residual Certificates................................................ 49
Remittance Period.......................................................... 6
REO Properties............................................................. 8
Reserve Account............................................................ 34
residual interests......................................................... 10
Rules...................................................................... 41
Sample Pool................................................................ 17
Seller..................................................................... 1
Senior Certificates........................................................ 35
Senior Lien................................................................ 12
Series..................................................................... 1
Servicing Advances......................................................... 30
Servicing Fee.............................................................. 9
Simple Interest Loan....................................................... 18
SMMEA...................................................................... 70
Special Hazard Policy...................................................... 34
Spread Account............................................................. 35
Subordinated Certificates.................................................. 35
Subservicer................................................................ 38
Subservicing Agreements.................................................... 38
</TABLE>
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<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Substitution Adjustment.................................................... 29
Successor Master Servicer.................................................. 40
Tax Counsel................................................................ 49
Tax Exempt Investor........................................................ 69
Tax-Favored Plans.......................................................... 65
Terms and Conditions....................................................... 43
TFC........................................................................ 21
TFC Home Equity Loan Trust................................................. 4
Tiered REMICs.............................................................. 50
Transamerica............................................................... 21
Transamerica FSB........................................................... 21
Trust...................................................................... 1
Trustee.................................................................... 4
UBTI....................................................................... 69
Underwriter................................................................ 66
VA Loans................................................................... 23
weighted average life...................................................... 20
Yield Supplement Account................................................... 35
</TABLE>
iv
